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https://www.courtlistener.com/api/rest/v3/opinions/4618967/	JOHN AND ESTHER C. ALCALA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAlcala v. CommissionerDocket No. 379-83.United States Tax CourtT.C. Memo 1984-664; 1984 Tax Ct. Memo LEXIS 9; 49 T.C.M. 363; T.C.M. (RIA) 84664; December 26, 1984. John Alcala, for the petitioners. Gary A. Benford, for the respondent. KORNER MEMORANDUM FINDINGS OF FACT AND OPINION "KORNER, Judge: For the calendar years 1979 and 1980, respondent determined deficiencies in income tax against petitioners in the respective amounts of $6,245 and $6,523. All such amounts were placed in issue by the petition herein. Although some eleven issues were raised by the pleadings, as the result of negotiations and concessions by the parties prior to and at trial, the issues remaining for determination are: a. The amount of petitioners' allowable charitable deductions for 1979 and 1980; b. Whether petitioners are entitled to a theft loss deduction for 1980, and the amount thereof; c. Whether petitioners are entitled to business expense deductions for 1980 in connection with an alleged "Amway" activity, and the amount thereof; d. Whether petitioners are entitled to business deductions for 1979 and 1980 in connection with an alleged welding business, and the amount thereof; and e. Whether petitioners, under the provisions of section 6653(a), 1 are liable for additions to tax in1984 Tax Ct. Memo LEXIS 9">11 each year. 2At the time the petition herein was filed, petitioners were residents of Farmington, New Mexico. Petitioners, husband and wife, filed joint Federal income tax returns for the calendar years 1979 and 1980. For each year, petitioner John Alcala (hereinafter sometimes "John") was employed by the Public Service Company of New Mexico, and petitioner Esther C. Alcala (hereinafter sometimes "Esther") was employed by the Mountain States Telephone and Telegraph Company. For convenience, our findings and opinion on each issue will be grouped together. 1. Charitable Deductions - 1979 and 1980.The returns filed by petitioners claimed $4,695 and $6,290, respectively, for various charitable contributions in the years 1979 and 1980. Respondent disallowed the entire amounts in his statutory notice of deficiency, but now concedes that allowable contributions by petitioners1984 Tax Ct. Memo LEXIS 9">12 were made in the respective years in the amounts of $2,272.85 and $2,025.90. Petitioners contend that they contributed additional amounts in each year to their church, both in cash and in property, but presented no evidence to substantiate the same, either as to the amount of cash nor as the value of the property. Petitioners have the burden of proof on this issue, Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioners' allowable deductions for the years 1979 and 1980 must accordingly be limited to the above amounts which respondent has conceded. 2. Theft Loss Deduction - 1980.In their 1980 return, petitioners claimed a casualty loss of $500 which, after reduction by the mandatory $100 deductible, section 165(h), produced a net claimed casualty loss of $400, which respondent disallowed in full. At trial, John attempted to support this claimed deduction by testifying that this casualty loss resulted from the theft of a tool box containing various types of tools, which he said was stolen from the back of his pickup truck while it was "parked in town." John was unable to state exactly when the theft occurred, except that it was sometime1984 Tax Ct. Memo LEXIS 9">13 in the summer of 1980. He stated that he did not report the theft for insurance purposes, because he was informed by his insurance company that his insurance did not cover the loss. No police report or other corroboration of the fact of the loss was put in evidence, and, although petitioners claimed a value of $500 for the tools, petitioners were unable to establish the original cost of the tools or their value at the time they were allegedly stolen. 3In order to be entitled to a theft loss under section 165, a taxpayer must prove that a theft actually occurred and the amount of the loss, with the latter amount being the taxpayer's adjusted cost basis of the property. Section 165(b), (c). Petitioners had the burden of proof to establish these elements, Elliot v. Commissioner,40 T.C. 304">40 T.C. 304 (1963). Aside from John's very brief and very vague testimony on this1984 Tax Ct. Memo LEXIS 9">14 subject, there is no evidence in the record to prove either the fact of the loss, that such loss was due to theft, the value of the articles allegedly stolen, or petitioners' cost basis therein. We must accordingly sustain respondent's determination because of petitioners' failure of proof. 3. The Amway Activity - 1980.For the year 1980, petitioners filed a Schedule C with their tax return for an alleged Amway Products distributorship, in which they reported no gross income but claimed expenses in the total amount of $7,385 for various items including, inter alia, depreciation on an auto, car expenses, travel and entertainment, car insurance and the like. Respondent disallowed these expenses in their entirety, on the grounds that neither the amount nor the deductibility of the items had been established. Section 162 provides, in pertinent part: (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * . In order to achieve deductibility of claimed business expenses, therefore, a taxpayer must satisfy a two-pronged test: (a) the expense1984 Tax Ct. Memo LEXIS 9">15 must be incurred in the conduct of a trade or business, and (b) must be ordinary and necessary in nature, for the type of business involved. The burden of proof in these matters is on the taxpayer. 290 U.S. 111">Welch v. Helvering,supra; Rule 142(a). As described by John in his testimony at trial, petitioners undertook to become Amway distributors by first buying a "kit" (contents undisclosed) for $75. It was then their task to maintain samples of Amway merchandise and to display these items to friends and other prospective customers whom they could induce to come in and make purchases, and whom they could further induce to go out and recruit other prospective customers to come in and purchase Amway products. By becoming Amway distributors, John testified that petitioners would not only be able to purchase Amway products themselves, but would receive credits on the purchase price through the purchases were made by their friends and others whom they had recruited. Although both petitioners had full-time employment during the years in question, John testified that petitioners pursued this activity several days each week, for one or two hours a night, from time1984 Tax Ct. Memo LEXIS 9">16 to time inviting people into their home, giving promotion talks, and serving drinks and cookies to their prospective customers. Before becoming involved in the alleged Amway distributorship in 1979, John testified that he had had no prior experience in retail sales, had no particular knowledge about running a small business, and had never recruited salesmen. The only investigation or research which he did into the potential profitability of the Amway distributorship was in "talking to different other people." The principal asset which he claimed he used in the business was a 1978 Cadillac, which he said he bought in that year at a price of $16,000, and for which he claimed depreciation of $4,000 in the year 1980, as well as expenses in connection with said car of $2,000. He stated that principal use of this vehicle was to bring the prospective clients to his promotion meetings and to attend out-of-town "Amway rallies." In the years 1979 and 1980, he testified that he purchased goods from Amway for purposes of resale in the amount of between $500 and $600 per year. In spite of these alleged efforts, John testified that he only recruited two people to be Amway distributors1984 Tax Ct. Memo LEXIS 9">17 in 1979 and perhaps one in 1980. He admitted that he made no sales in 1979 (and no Schedule C reporting this claimed business activity was filed by petitioners for that year) and made sales of less than $5 in 1980. John gave the following significant testimony: Q. How many sales did you make in 1980? A. Sales - 1980 - Probably not even $5 worth, because we did not get any new people coming in, you see. We just mostly went in for ourselves and then get the other people coming in with us. Q. So it is your testimony that your total income from Amway in 1979 and 1980 was less than $5? A. Yes. Q. Are you still in the Amway business? A. Yes. We like the products and you can't get them any other way. On this record, there arises the strong suspicion that petitioners became Amway distributors primarily for the purpose of providing themselves with Amway merchandise which they could not otherwise obtain, while, at the same time, providing themselves with considerable tax deductions. Compare Barcus v. Commissioner,T.C. Memo. 1973-138, affd. 492 F.2d 1237">492 F.2d 1237 (2d Cir. 1974). We make no such finding herein, but we do hold that petitioners1984 Tax Ct. Memo LEXIS 9">18 have failed to carry their necessary burden of proof to establish that they entered into a bona fide business enterprise with the intention and objective of making a profit. McCormick v. Commissioner,T.C. Memo. 1969-261. Having so held, the claimed deductions in connection with this activity must fail, and need not be examined in detail. Respondent is sustained on this issue. 4.The Welding Activity Expenses - 1979 and 1980.For both years here in issue, petitioners filed Schedule C with their income tax returns for an alleged welding business conducted by John, in which they reported no gross income, but claimed for each year deductions in the respective amounts of $9,515 and $7,230 including, inter alia, depreciation on a truck and auto expenses in the respective amounts of $2,500 and $2,000, travel and entertainment of $1,500, insurance, interest, utilities, supplies and the like. Respondent disallowed these expenses in their entirety, on the grounds that neither the amount nor the deductibility of the items had been established. The only evidence given in support of these deductions at trial was John's testimony. No books and records1984 Tax Ct. Memo LEXIS 9">19 of this alleged welding business activity were produced. John admitted at trial that the amounts claimed for these deductions were not precise, but were "rounded" for convenience. John, who was employed full time in the years in question as a mechanic by the Public Service Company of New Mexico, testified that he started this "business" in 1979 by buying a welding machine, installing it on a used Chevrolet pickup truck which he already owned, and purchasing miscellaneous welding materials. Although he admitted he was not a trained welder, he testified that he prepared and passed out small "flyers" advertising his services in performing minor and miscellaneous welding tasks, such as welding metal stairways and trailer hitches. No specimen of his advertising was introduced into evidence. Although John admitted that he received less than $100 for these services in 1979, which he did not report, and received no income from this activity in 1980, he stated that he did enjoy the welding business, particularly the trips to various shows and exhibits that he made in connection therewith. He devoted "a couple of hours" a week in each year to this enterprise, in the evenings after his1984 Tax Ct. Memo LEXIS 9">20 regular work. The situation here parallels closely the situation previously discussed herein with respect to the alleged Amway enterprise, and no extensive discussion is required. Whether deductions of the type claimed here are allowable as business deductions depends in the first instance upon a finding that the taxpayer is truly engaged in carrying on a trade or business with the objective of profit. Sections 162, 183. The Code contains no clear-cut definition by which one can measure the existence or nonexistence of a profit motive, but certain guidelines or tests are provided by respondent's regulations which are frequently helpful in resolving the problem. Although no one or all of said tests are determinative, they are useful testing points in making the necessary factual determination of a profit motive. Section 1.183-2(b), Income Tax Regs., provide nine indicia or tests which can be considered in determining whether the necessary profit motive exists: 1. The manner in which the taxpayer carries on the alleged business activity; 2. The expertise of the taxpayer or his advisors; 3. The time and effort expended by the taxpayer in carrying on the activity; 1984 Tax Ct. Memo LEXIS 9">21 4. The expectation that assets used in the activity may appreciate in value; 5. The success of the taxpayer in carrying on other similar or dissimilar activities; 6. The taxpayer's history of income or losses with respect to the activity; 7. The amount of occasional profits, if any, which are earned; 8. The financial status of the taxpayer; and 9. Any elements of personal pleasure or recreation which are involved with the activity. Tested by the above standards, and reviewing the scanty record herein as a whole, it is clear that petitioners have failed to carry their necessary burden of proof that John entered into his welding activity with the serious intent of carrying on a trade or business for profit. The absence of any reported income from the enterprise, compared to the extensive deductions which were claimed, including travel and entertainment, suggests strongly that the generation of tax deductions which could be offset against petitioners' income from their regular employment was more important than the prospects of generating any profit from welding. See Davis v. Commissioner,T.C. Memo. 1982-82. We hold, therefore, that1984 Tax Ct. Memo LEXIS 9">22 petitioners have failed to prove that the alleged welding activity carried on by John in 1979 and 1980 was the conduct of a trade or business carried on with reasonable objective of profit. McCormick v. Commissioner,supra. This eliminates the necessity for our considering the various items of deduction which were claimed by petitioners in their returns with respect to this alleged activity, with the exception of one item. For 1979, a deduction for interest in the amount of $250 was claimed. Although such interest would be deductible, if established, without regard to whether John was carrying on a trade or business, Section 163, petitioners presented no proof at all establishing that any such amount was paid, or what it was paid for. As with the other claimed deductions, therefore, this too must be disallowed, and respondent's determination with respect to this issue must be approved. 5. Additions to Tax Under Section 6653(a)-1979 and 1980.By amendment to his answer herein at the time of trial, which was allowed by the Court, respondent amended his answer to assert additions to tax under section 6653(a) for both years, alleging that petitioners1984 Tax Ct. Memo LEXIS 9">23 were negligent or in deliberate disregard of respondent's rules and regulations in connection with the preparation and filing of their returns. Although petitioners would have had the burden of proof on this issue if it had been contained in respondent's statutory notice of deficiency, Enoch v. Commissioner,57 T.C. 781">57 T.C. 781 (1972); Rule 142(a), where such additional issue is raised by respondent in his answer or amended answer, the shoe is on the other foot, and the burden of proof with respect to the issue is upon respondent. Rule 142(a). Upon consideration of the record as a whole, we are satisfied that respondent has met his necessary burden of proof on this issue. The failure to present any relevant books and records at trial with respect to petitioners' two alleged business enterprises suggests either that such books and records did not exist, or, if they did, would not support petitioners' claimed deductions. 4 The rounding of figures for the alleged business expenses; the lack of any identification in the returns as to what the items were for, in some cases; and the failure of petitioners to keep adequate records forces the conclusion that petitioners1984 Tax Ct. Memo LEXIS 9">*24 were negligent, to say the least, in complying with their record-keeping and return-filing duties. We accordingly hold that imposition of additions to tax under section 6653(a) for each year herein is warranted. Due to concessions and partial concessions by the parties herein with respect to other issues, Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the years in issue, and all Rule references are to the Rules of Practice and Procedure of the Tax Court, except as otherwise noted. ↩2. This issue was raised by respondent by amendment to his answer.↩3. John's only testimony on this subject was that he had bought the tools "at least a couple of years before [1980]" for "about $400 or $500 somewhere in there," and at the time of the alleged theft, "they are not going to be worth the original. That is the best of what I figure is around $400."↩4. At trial, petitioners introduced into evidence various canceled checks which they claimed supported some of the alleged business deductions. Such canceled checks principally showed payments to insurance companies, gasoline stations, food stores and the like, contained nothing on their faces would identify them with any business activity, and could just as easily have been for personal expenditures as for any allowable business expense. John's testimony with respect thereto was singularly unconvincing.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618968/	ESTATE OF JACK H. LEVIN, DECEASED, JEFFERSON NATIONAL BANK OF MIAMI BEACH, CO-PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Levin v. CommissionerDocket No. 22646-92United States Tax CourtT.C. Memo 1995-81; 1995 Tax Ct. Memo LEXIS 81; 69 T.C.M. 1951; February 23, 1995, Filed 1995 Tax Ct. Memo LEXIS 81">81 Decision will be entered under Rule 155. For petitioner: S. George Trager. For respondent: Kathleen L. Donohue. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINIONCOLVIN, Judge: Respondent determined a deficiency of $ 75,272 in petitioner's Federal estate tax. After concessions, the only issue for decision is whether petitioner may deduct, as a claim against the estate under section 2053(a)(3), payments made to several charitable organizations and individuals pursuant to promises made by decedent before his death. We hold that it may not. References to decedent are to Jack H. Levin. References to petitioner are to his estate. Unless otherwise provided, section references are to the Internal Revenue Code in effect during the time relevant to this case. Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT All of the facts have been stipulated and are so found. Decedent was a resident of Florida when he died on November 22, 1988. At the time the petition was filed, Jefferson National Bank of Miami Beach had its principal place of business in Miami Beach, Florida. Decedent held a party to celebrate his 90th birthday. Friends, family, 1995 Tax Ct. Memo LEXIS 81">82 and representatives of 20 charitable organizations attended the party. At the party, decedent announced that he would establish a $ 10,000 charitable remainder annuity trust for each charity represented at the party, with family members and nonfamily members as the income beneficiaries. Decedent died testate before he established the trusts. On January 9, 1989, decedent's will was admitted to probate in Dade County, Florida. Donald Stern (Stern) and Jefferson National Bank of Miami Beach were appointed as copersonal representatives of the estate. Stern's wife and children are beneficiaries of a revocable trust executed by decedent before his death. The revocable trust, which was created for the benefit of individuals and charitable organizations, was the residual beneficiary of decedent's will. Of the 20 charitable organizations for which decedent promised to establish a trust, 19 filed claims beginning in March 1989, for payment in the probate proceedings. Some of the charities attached letters to their claims that decedent had written to them after the party in which decedent reaffirmed his intent to make gifts to the charities. The personal representative paid $ 10,0001995 Tax Ct. Memo LEXIS 81">83 to each of 17 of the charities in March 1991. The remaining three charities and six individuals which had filed claims entered into a settlement agreement with petitioner. The settlement agreement provided for a total payment of $ 30,000 plus accrued interest in satisfaction of the trusts contemplated but not established by decedent, $ 13,575 of which was paid to the three charities and $ 22,039 of which was paid to the six individuals. The settlement agreement was entered by order of the Probate Court of Dade County, Florida, on March 26, 1991. Petitioner deducted the $ 200,000 of claims that arose from the promises decedent made at his birthday party as debts of decedent. OPINION 1. Background: Deduction of Claims Made Against an Estate Based on Decedent's Promise to Contribute to a Charitable OrganizationThe parties have both cited two related statutory provisions to be applied in this case. Under one of the provisions, payment by an estate of a claim made by a charitable organization, based on a promise by the decedent during his or her lifetime to contribute to the charitable organization, is deductible by the estate if the claim is "allowable" under applicable1995 Tax Ct. Memo LEXIS 81">84 law. Sec. 2053(a). Under the second provision, a claim based on a promise to contribute to a charitable organization need not have been contracted for full consideration to be deductible if it would have been deductible under section 2055 if the promise had constituted a bequest. Sec. 2053(c)(1)(A). If we decide under the first of these provisions that decedent's promise to contribute to the 20 charitable organizations is not allowable under Florida law, then we need not decide whether the second provision -- waiving the requirement of consideration -- applies. We next discuss the background and development of these two provisions. Section 2053(a)1 allows a deduction for claims against the estate "as are allowable by the laws of the jurisdiction". An allowable claim is one that is enforceable under State law. Propstra v. United States, 680 F.2d 1248">680 F.2d 1248, 680 F.2d 1248">1254-1255 (9th Cir. 1982). Respondent contends that the claims in issue were not allowable under Florida law. 1995 Tax Ct. Memo LEXIS 81">85 The predecessors to section 2053 included section 303(a)(1) of the Revenue Act of 1926, ch. 27, 44 Stat. 9, 72, and section 812(b) of the Internal Revenue Code of 1939, 53 Stat. 123. Before 1942, section 812(b) of the Internal Revenue Code of 1939 required that all claims arising from a promise be allowable under State law and have been contracted bona fide for adequate and full consideration in money or money's worth in order to be deductible. S. Rept. 1622, 83d Cong., 2d Sess. 473-474 (1954); H. Rept. 2333, 77th Cong., 2d Sess. 165 (1942). The purpose of section 812(b) was to prevent deductions, under the guise of claims, for gifts to the natural objects of the decedent's bounty. Estate of Pollard v. Commissioner, 52 T.C. 741">52 T.C. 741, 52 T.C. 741">744-745 (1969). In Taft v. Commissioner, 304 U.S. 351">304 U.S. 351, 304 U.S. 351">354-355 (1938), the Supreme Court held that, under section 303(a)(1) of the Revenue Act of 1926, a decedent's promise to make a charitable gift that was enforceable under State law was not deductible by her estate because of lack of consideration. In response to Taft, in 1942, Congress amended section 812(b) of the Internal Revenue1995 Tax Ct. Memo LEXIS 81">86 Code of 1939, which was a successor statute to section 303(a)(1) of the Revenue Act of 1926. Revenue Act of 1942, ch. 619, 56 Stat. 798; H. Rept. 2333, 77th Cong., 2d Sess. 165 (1942). Under the 1942 amendment, claims based on a promise or agreement were deductible only to the extent that they were contracted bona fide for adequate and full consideration in money or money's worth; however, a claim based on a promise to make a charitable gift was not required to be contracted bona fide for adequate and full consideration if it would be allowable as a charitable deduction by the estate if it constituted a bequest. Sec. 2053(c)(1)(A). 2 In adopting the change in 1943, Congress stated: At the present time a claim founded upon a promise or agreement of the decedent to make a contribution or gift to or for the use of any donee described in section 812(d) or section 861(a)(3), and enforceable against the estate of the decedent, is not deductible to the extent that such claim was not contracted for an adequate and full consideration in money or money's worth ( Taft v. Comm., 304 U.S. 351">304 U.S. 351 (1938)). Section 812(b), as amended by this section, permits the1995 Tax Ct. Memo LEXIS 81">87 deduction of such claim to the extent that it would be allowable as a deduction under section 812(d) if the promise or agreement constituted a bequest. * H. Rept. 2333, 77th Cong., 2d Sess. 165 (1942). 1995 Tax Ct. Memo LEXIS 81">88 Section 2053(c)(1)(A)3 limits the deduction for claims to those which are "contracted bona fide and for an adequate and full consideration". However, this limit does not apply if the claim is based on a promise of the decedent to make a contribution to any donee described under section 2055 if the contribution would have been allowable as a deduction under section 2055 if it constituted a bequest. Sec. 2053(c)(1)(A); sec. 20.2053-5, Estate Tax Regs. Similarly, the regulations under section 2053(c)(1)(A) provide that payment of a claim based on a promise to contribute to a charity is deductible to the extent that the claim "would have constituted an allowable deduction under section 2055 (relating to charitable, etc., deductions) if it had been a bequest." Sec. 20.2053-5(b), Estate Tax Regs. Bequests to religious, charitable, etc., organizations are generally deductible for estate tax purposes. Sec. 2055. 1995 Tax Ct. Memo LEXIS 81">89 2. Requirement That Claims Against an Estate be Allowable by the Laws of the JurisdictionWe first decide whether decedent's promises to contribute to 20 charitable organizations were allowable, i.e., enforceable, under Florida law. Sec. 2053(a); 680 F.2d 1248">Propstra v. United States, supra at 1254-1255; sec. 20.2053-4, Estate Tax Regs. Respondent contends that the claims were not allowable under Florida law. Under Florida law, a promise to contribute to a charitable organization is enforceable under the doctrine of promissory estoppel if the promisor makes a promise which the promisor reasonably expects to induce action or forbearance of a substantial character by the promisee. Mount Sinai Hosp. of Greater Miami, Inc. v. Jordan, 290 So. 2d 484">290 So. 2d 484, 290 So. 2d 484">486-487 (Fla. 1974). Mount Sinai involved a claim made by a charitable organization against an estate to enforce a promise made by the decedent. In Mount Sinai, the decedent had promised in writing to make a gift to a hospital but died before he completed the gift. The hospital filed a claim against the estate to enforce the gift. The court held that the promise1995 Tax Ct. Memo LEXIS 81">90 was not enforceable because the decedent did not receive consideration for his promise and because there was no evidence that the hospital detrimentally relied on the promise. The situation before us is like that in Mount Sinai because in the instant case there is no indication that the decedent expected to induce the donee organizations to take or forbear from taking any action of a substantial character in response to his promises. Thus, petitioner has not satisfied the burden of proving that the claims were enforceable under Florida law. In Dorman v. Publix-Saenger-Sparks Theatres, Inc., 184 So. 886">184 So. 886, 184 So. 886">889 (Fla. 1938), a movie theater held a lottery. Promisees were required to be present at the theater (inside or outside) to qualify for the prize. In holding that the promise to pay the prize was enforceable, the court found that the theater benefited from the presence of the promisees at the theater, that the theater hoped or expected to increase its box office receipts, and that the promisees incurred a detriment by attending the lottery drawing. 184 So. 886">Dorman v. Publix-Saenger-Sparks Theatres, Inc., supra.It1995 Tax Ct. Memo LEXIS 81">91 is true that representatives of the 20 donees attended decedent's 90th birthday party, but petitioner has not argued and we do not think that decedent had an expectation of benefit analogous to that of the theater owner in Dorman. The case of Estate of Sochalski v. Commissioner, T.C. Memo. 1955-19, is analogous to the instant case. In Estate of Sochalski, a decedent promised in writing to make a gift to a church organization. The decedent died before he made the gift. His wife, as executrix, gave the church the gift that her husband had promised and deducted the gift under section 812(b)(3) (1939 Code). We held that the estate was not entitled to a deduction because the decedent's promise was not an enforceable obligation in the State in which the estate was administered. We conclude that petitioner may not deduct as a claim against the estate payment made to the charitable organizations because those claims were not enforceable under Florida law. 3. Payments Made to Six Individuals to Whom Decedent Promised an Income Interest in the Charitable Remainder TrustPetitioner paid $ 22,039 to six individuals to whom the decedent had1995 Tax Ct. Memo LEXIS 81">92 promised an income interest in the charitable remainder trusts which he had intended to establish. Petitioner may deduct the $ 22,039 if decedent's promise was enforceable under Florida law and contracted bona fide for adequate and full consideration in money or money's worth. Sec. 2053(c)(1)(A). Respondent contends that decedent's promise did not meet these requirements. We agree. Adequate and full consideration in money or money's worth is consideration that: (a) Augmented the decedent's estate, (b) bestowed a right or privilege not previously held by the decedent, or (c) discharged an existing claim of the decedent. Glaser v. Commissioner, 69 F.2d 254">69 F.2d 254, 69 F.2d 254">256 (8th Cir. 1934), affg. 27 B.T.A. 313">27 B.T.A. 313 (1932). Petitioner bears the burden of showing that decedent's promise was contracted bona fide for adequate and full consideration in money or money's worth. Estate of Tiffany v. Commissioner, 47 T.C. 491">47 T.C. 491, 47 T.C. 491">497 (1967). Petitioner must prove both prongs of this test. Estate of Scholl v. Commissioner, 88 T.C. 1265">88 T.C. 1265, 88 T.C. 1265">1279 (1987). Petitioner acknowledges that decedent1995 Tax Ct. Memo LEXIS 81">93 did not receive adequate consideration to satisfy the Glaser test. Thus, petitioner may not deduct the $ 22,039 it paid to the individuals. Therefore, we conclude that petitioner may not deduct any of the $ 200,000 it paid to the charities and individuals. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. Sec. 2053(a) provides in pertinent part: (a) General Rule. -- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts -- * * (3) for claims against the estate, * * * * * * as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.↩2. Sec. 2053(c)(1)(A) provides: (c) Limitations. -- (1) Limitations applicable to subsections (a) and (b). -- (A) Consideration for claims. -- The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; except that in any case in which any such claim is founded on a promise or agreement of the decedent to make a contribution or gift to or for the use of any donee described in section 2055 for the purposes specified therein, the deduction for such claims shall not be so limited, but shall be limited to the extent that it would be allowable as a deduction under section 2055↩ if such promise or agreement constituted a bequest.3. Sec. 812(d) was the predecessor to sec. 2055, which provides a deduction for transfers for public, charitable, and religious uses. S. Rept. 1622, 83d Cong., 2d Sess. 474 (1954)..↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618973/	KALTENBACH & STEPHENS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kaltenbach & Stephens, Inc. v. CommissionerDocket Nos. 9426, 19702, 22231.United States Board of Tax Appeals12 B.T.A. 1009; 1928 BTA LEXIS 3420; June 29, 1928, Promulgated 1928 BTA LEXIS 3420">3420 In the year 1916 the petitioner purchased the assets of a partnership and issued shares of its capital stock therefor in the amounts of $1,553,688.59 for the tangible assets and $325,000 for the good will. Under the evidence, held that the actual cash values of the tangible assets and good will of the partnership were $1,553,688.59 and $325,000, respectively; that the petitioner is entitled to include them in its invested capital at those amounts, and to compute the annual deduction for depreciation of the tangible property on the basis of $1,553.688.59. Victor House, Esq., and Abbott P. Mills, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. MARQUETTE 12 B.T.A. 1009">1009 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $31,021.09 for the year 1919, $3,177.78 for the year 1920, and $12,207.56 for the year 1923. Only so much of the deficiencies is in controversy as arises from the exclusion by the respondent from the petitioner's invested capital of the amount of $161,200.47 claimed on account of tangible property paid in for stock, the exclusion1928 BTA LEXIS 3420">3421 from invested capital of the amount of $198,028.74 claimed on account of good will paid in for stock, and the partial disallowance of deductions taken by the petitioner in each year for depreciation of its tangible property. The proceedings were consolidated for hearing and decision. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of Delaware with its principal office at Newark, N.J. It is 12 B.T.A. 1009">1010 and has been since its incorporation engaged in manufacturing silk ribbon. In the year 1891 Ernest J. Kaltenbach and James B. Stephens formed a partnership for the purpose of engaging in the manufacture of silks in Brooklyn, N.Y. The capital of the firm was $5,000, the greater part of which was expended in the acquisition of some secondhand looms. After a short time the firm turned to the manufacture of narrow silk ribbon, to which it devoted itself exclusively during the remainder of its existence. No additional capital was ever paid in to the firm, its increased worth being due entirely to earnings. The firm occupied leased premises in Brooklyn until 1907, when it acquired a site and erected a weaving plant in Allentown, Pa., and1928 BTA LEXIS 3420">3422 in 1911 it acquired a site and constructed a finishing plant in Newark, N.J. The partnership manufactured its goods and conducted its business in these two plants until the year 1916, when they were turned over to the petitioner as hereinafter set forth. The partnership of Kaltenbach & Stephens prospered and by 1910 its assets as shown by its balance sheets had reached a value of $683,223 in excess of its liabilities. By the year 1916 the firm was twice the size of its largest competitor, and it produced about one-third of the narrow silk ribbon output of the United States. On January 1, 1916, its net worth as shown by its balance sheets was $1,335,152.43. In the fall of 1916, largely at the instance of Charles E. Kaltenbach, a son of Ernest J. Kaltenbach, and now president of the petitioner, the petitioner was formed to take over the business of the partnership. The two original partners, Ernest J. Kaltenbach and James B. Stephens, though men of ability, conducted their business by rule-0f-thumb methods. They kept no books or records of account other than memoranda of the most temporary sort. From these memoranda, consisting of check stubs, a copy book list of accounts1928 BTA LEXIS 3420">3423 payable, loose inventory sheets, and copies of invoices, Stephens, from time to time, constructed balance sheets of the business for submission to banks. These balance sheets, which were on file with the banks, were in 1916, at the time of the proposed incorporation, the only records of the operations of the partnership except for such of the memoranda mentioned as had been preserved, and sales records kept by Frederick, Vietor & Achelis of New York City, who had acted as factors for the partnership since 1899. Ernest J. Kaltenbach and James B. Stephens conducted their business as a personal venture, closely bound by social as well as business ties, and from time to time they used the earnings of the partnership, which was their sole source of income, in real estate and other speculative ventures, practically all of which turned out to be unprofitable. 12 B.T.A. 1009">1011 In the annual balance sheets of the partnership prepared for the banks, none of the income invested in these outside ventures was reflected, except in so far as the withdrawals depleted the surplus shown. The balance sheets showed only the assets and liabilities of the ribbon business, and when the petitioner was formed1928 BTA LEXIS 3420">3424 only the ribbon business and its assets were turned in to the petitioner, none of the outside investments being included. No accurate record of these outside investments was ever kept. They included a phonograph company, a gold mine, several real estate ventures, a steel foundry, and some stock purchases. During the period July 1, 1915, to June 30, 1916, $134,590.80 was withdrawn by Kaltenbach and Stephens from the partnership and invested in these outside ventures. The total amount withdrawn by the partners during the years 1911 to June 30, 1916, and invested in other enterprises was probably more than $350,000. In the year 1916 the petitioner was formed with an authorized capital stock of $2,500,000, of which $500,000 was preferred stock and $2,000,000 was common stock, and in November, 1916, the petitioner acquired the ribbon-manufacturing plants and properties of Kaltenbach & Stephens by a written contract dated as of September 1, 1916, and paid therefor its capital stock of the par value of $2,100,000. When the acquisition by the petitioner of the partnership property was under discussion, the directors of the petitioner held many meetings to determine the valuations1928 BTA LEXIS 3420">3425 at which both the tangible property and the good will of the partnership should be purchased. In order to arrive at a proper valuation of the business the parties to the transaction had an appraisal made of the physical assets of the partnership. The appraisers reported that the assets had a reproduction cost, new, as of September 1, 1916, of $1,553,688.59, and a "sound value" of $1,392,488.12. This sound value represented the reproduction cost less depreciation for the time the assets had been in use. The reproduction cost and sound value were allocated to the partnership tangible assets as follows: Reproduction costSound valueDifferenceAllentown:Land$36,100.00$36,100.00Buildings318,764.69295,916.33$22,848.36Machinery and equipment840,937.15728,839.81112,097.34Newark:Land20,000.0020,000.00Buildings173,985.95164,999.388,986.57Machinery and equipment163,900.80146,632.6017,268.201,553,688.59392,488.12161,200.47The Allentown plant consisted of four major buildings and also a garage, repair shop, and boiler house. The machinery consisted 12 B.T.A. 1009">1012 almost entirely of looms, although there were1928 BTA LEXIS 3420">3426 some winders and other weaving equipment. The Newark plant consisted of a three-story-and-basement main building where the finishing process was carried on, and also the drying house and heating department and boiler house. The appraiser was not asked, in making the appraisal of the partnership property, to report the market or actual cash value of the plants, which included additional elements such as supply and demand, time required to build up and equip the plants and getting them running smoothly, etc. It would have taken at least two years to build up and equip the plants beginning in the fall of 1916, and some of the machinery, which was specially made in Germany, could not then be procured at all. Between September 1, 1916, and November 23, 1916, the date the petitioner acquired the assets of the partnership, prices of building material and of machinery had advanced materially. The petitioner's officers at that time determined that in view of the fact that the partnership was a going concern and that prices of material and equipment were increasing, the actual cash value of the plants was at least equal to the reproduction cost of $1,553,688.59 determined by the appraiser, 1928 BTA LEXIS 3420">3427 and that in addition the good will of the partnership was worth at least $325,000. Other items not material here brought the total net value of the partnership, as determined by the petitioner's officers, up to $2,100,000, for which it issued its capital stock in that amount in full payment. The partnership balance sheets show that its average net earnings from 1911 to 1915, inclusive, were $109,006.66. The balance sheets as above stated did not reflect the amounts withdrawn by the partners and invested in outside ventures. The average net value of the tangible assets during the years 1911 to 1915, inclusive, as shown by the balance sheets, amounts to $1,124,387.10. The average net earnings of the business for the years 1916 to 1920, inclusive, were $321,000. The actual cash values of the tangible assets and good will which the petitioner purchased from the partnership of Kaltenbach & Stephens were $1,553,688.59 and $325,000, respectively. The respondent, upon audit of the petitioner's income and profits-tax returns for the years 1919, 1920, and 1923, included the tangible assets and good will acquired by the petitioner from the partnership of Kaltenbach & Stephens in1928 BTA LEXIS 3420">3428 the petitioner's invested capital at the amounts of $1,392,488.12 and $126,971.26, respectively. The respondent computed the value of the good will as follows: Average earnings for five years 1911-1915, inclusive, as shown by balance sheets of the partnership ofKaltenbach & Stephens$109,006.66Average net assets for five years, 1911-1915, inclusive, as shown by balance sheets1,124,387.108% of the net assets equals $89,950.97 or the amount of earnings applicable to tangible property.The difference between this amount and the total earnings represents the earnings attributable to intangible assets and amounts to$19,045.69This amount capitalized at 15% amounts to126,971.2612 B.T.A. 1009">1013 The respondent also added to the petitioner's income for each year the amount of $11,210.21 depreciation taken on the disallowed value of the tangible property. OPINION. MARQUETTE: The issues that we are called upon to consider relate to the amounts at which the petitioner may include in its invested capital the tangible assets and good will it purchased from the predecessor partnership of Kaltenbach & Stephens, and the basis for computing the annual1928 BTA LEXIS 3420">3429 deduction for depreciation of the tangible property. It is the contention of the petitioner that it acquired from the partnership tangible property of the actual cash value of $1,553,688.59 and good will of the actual cash value of $325,000, for which it issued its capital stock in the amounts of $1,553.688.59 and $325,000, respectively, and that it is therefore entitled to include them in its invested capital at those amounts. The respondent has heretofore determined that the tangible property so acquired by the petitioner had an actual cash value at the date of acquisition of $1,335,152.43, and the good will an actual cash value of $126,971.26, and he has included them in the petitioner's invested capital at those amounts. However, the respondent now urges that the good will in question had no value and that the petitioner's invested capital as heretofore determined by him should be reduced by the amount of good will allowed. The depreciation which the respondent has disallowed is the depreciation on the difference between the values of the tangible assets as claimed by the petitioner and allowed by the respondent. Upon consideration of the evidence presented to us we are1928 BTA LEXIS 3420">3430 of the opinion that the tangible assets acquired by the petitioner from the partnership of Kaltenbach & Stephens had an actual cash value at the date of acquisition of at least $1,553,688.59 as claimed by the petitioner, and that it is entitled to include them in its invested capital at that amount. The evidence shows that these assets were appraised on September 1, 1916, and their reproduction cost on that date determined to be $1,553,688.59, and their sound value, which represented reproduction cost with allowances for depreciation, at $1,335,152.43. The appraisers were, however, not asked to determine the actual cash value of the plant as a going concern and did not 12 B.T.A. 1009">1014 attempt so to do. In addition to the sound value of the assets, there were certain elements such as the fact that Kaltenbach & Stephens was a going concern; that it would take two years to reproduce the plant even if the material and machinery could be acquired at the so-called sound value, and the fact that certain machinery was made in Germany and could not then be procured at all. Furthermore, in November, 1916, the date the transaction was actually consummated, prices of material and machinery had1928 BTA LEXIS 3420">3431 materially increased over the prices obtaining on September 1, 1916. The officers of the partnership and of the petitioner considered that the actual cash value of the tangible assets on that date was at least equal to their reproduction cost as shown by the appraisal, and the petitioner took them over at that value and issued its capital stock in amount therefor. The testimony of all the witnesses, one of whom made the appraisal mentioned, is to the effect that the actual cash value of the partnership plant as a going concern was at least the value now claimed by the petitioner, and we are satisfied that that value is conservative and that it should be allowed. We are also satisfied from the evidence that the good will acquired by the petitioner from the partnership had an actual cash value of at least $325,000. The evidence shows that the partnership was formed in the year 1891 with a capital of $5,000; that no additional capital was ever invested therein, and that in January, 1916, the net value of its tangible assets as shown by its balance sheets was $1,335,152.43, all of which had been acquired out of earnings. The average earnings for the five years 1911 to 1915, inclusive, 1928 BTA LEXIS 3420">3432 as shown by the balance sheets were $109,006.66. In addition to the earnings as shown by the balance sheets, large amounts had been withdrawn by the partners during that period. The exact amount of these withdrawals can not be ascertained, but the record does show that $134,590.80 were withdrawn during the period July 1, 1915, to June 30, 1916. Adding to the earnings as shown by the balance sheets only the amount withdrawn between July 1, 1915, and June 30, 1916, and capitalizing the earnings thus determined on the same basis adopted by the respondent, the good will would be of the value of $306,000. We are satisfied, however, that considerably more than $134,590.80 was withdrawn from earnings during the five-year period; that the average net earnings of the partnership during that period were at least $150,000, and that the good will was of the value of at least $325,000. This is the value placed on the good will by the petitioner and the partnership at the time of the transaction mentioned and it is, we think, entirely justified by the prior earnings in relation to the tangible assets, and the reasonable expectation for the future. That the value so determined at that time1928 BTA LEXIS 3420">3433 was reasonable, is borne out by 12 B.T.A. 1009">*1015 the fact that the earnings of the petitioner averaged $325,000 per year during the years 1916 to 1920, inclusive. It is our opinion, and we so hold, that the good will in question had an actual cash value of at least $325,000 when the petitioner acquired it. The petitioner in computing its invested capital for the years 1919, 1920, and 1923, is entitled to include the tangible property and the good will involved herein in its invested capital at the amounts of $1,553,688.59 and $325,000, respectively, with proper adjustments for depreciation of the tangible assets. The basis for computing depreciation of the tangible assets is $1,553,688.59. Other errors on the part of the respondent were alleged by the petitioner but they were abandoned at the hearing. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618975/	LESTER KISSKA and VIRGINIA B. KISSKA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKisska v. CommissionerDocket No. 2258-80.United States Tax CourtT.C. Memo 1981-655; 1981 Tax Ct. Memo LEXIS 87; 42 T.C.M. 1651; T.C.M. (RIA) 81655; November 10, 1981. Mitchell J. Olejko, C. James Judson, and Richard E. Cassard, for the petitioners. Jeannette A. Cyphers, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $ 4,676 in petitioners' Federal income1981 Tax Ct. Memo LEXIS 87">88 tax for 1977. The issues for decision are: 1. Whether a payment by petitioners for the release from liability on a promissory note which arose from the prior purchase of certain property constitutes a reduction of the capital gain recognized on the sale of that property, as contended by respondent, or an ordinary business expense deduction under section 162(a)1 or business loss under section 165(a), as contended by petitioners. 2. Whether all or part of certain legal fees constitute an expense of selling the property or an ordinary business expense. FINDINGS OF FACT Some of the facts are stipulated and are found accordingly. Petitioners Lester Kisska (hereinafter petitioner) and Virginia B. Kisska, husband and wife during the pertinent period, were legal residents of Ferndale, Washington, when they filed their petition. They timely filed their joint Federal income tax return for 1977 with the Internal Revenue Service Center, Ogden, Utah. In 1973, petitioners purchased an apartment building in Seattle, Washington, from Michael R. Mastro (Mastro) and Joan1981 Tax Ct. Memo LEXIS 87">89 K. Mastro 2 and Isaac S. and Nancy Gamel and as part of the consideration gave a promissory note secured by a deed of trust. The principal amount of the promissory note was $ 430,000. The building was used by petitioner for rental purposes. At the time of the purchase, petitioner was involved in various other businesses. Diversified Investors, Limited, which managed the apartment building, collected all of the rents and made all of the required payments under the promissory note and deed of trust. Approximately 1-1/2 to 2 years after the purchase of the building, petitioner was notified by Mastro that he was late in the mortgage payments. Petitioner terminated the management contract with Diversified Investors, Limited, and hired a second management company. This company quit after 4 months, declaring the building to be unmanageable. Petitioner attempted once again to employ an individual to collect rents, but this attempt failed. After being notified of his delinquency in mortgage payments, petitioner1981 Tax Ct. Memo LEXIS 87">90 began to pay Mastro from his own funds rather than money collected from the rental of the apartment building. He also spent many weekends attempting to repair the building, a task he found nearly impossible due to extensive vandalism. The building continued to deteriorate and, consequently, many tenants refused to pay that on the damaged building. In early 1977, petitioner decided to stop making mortgage payments and to allow Mastro to repossess the building. Mastro commenced an action in the Superior Court of King County, Washington, to collect on the promissory note and to foreclose on the deed of trust. When payments became delinquent, Mastro began to telephone petitioners, often late at night, so frequently that petitioners sought and obtained on March 23, 1977, a temporary restraining order forbidding Mastro to contact petitioners. Petitioners also counterclaimed in the foreclosure suit, alleging injury to petitioner's health, as well as harassment and misrepresentation as to the building. Pending the foreclosure proceeding, other buyers expressed interest in the building, and negotiations for the sale of the apartment building took place among petitioners, the Mastros, 1981 Tax Ct. Memo LEXIS 87">91 the Gamels, James J. Boyd and Earnell M. Boyd, N. Robert Nakao and Eiko P. A. Nakao, and Liem E. Tuai and Winnie J. Tuai. Petitioners refused to sign an agreement drafted among these parties because it lacked a provision releasing them from any future liability; without such a clause, if the new purchasers failed to make the requisite payments, petitioners would be liable for the payments during the years remaining on the promissory note and deed of trust. On May 19, 1977, an agreement was entered into among petitioners, the Mastros, the Gamels, and the Boyds. Under this agreement, petitioners conveyed the apartment building to the Boyds in consideration for the Boyds' assumption of the remaining liability on the promissory note and deed of trust. Petitioners agreed to pay Gamel and Mastro the sum of $ 17,200 for installment payments in arrears plus $ 4,547.64 in tax reserve payments. In addition to these delinquent payments, petitioners also agreed to pay Gamel and Mastro $ 25,000 to be released from any personal liability on the original deed of trust and promissory note. In addition to the release clause in the agreement, a separate release document was executed whereby Gamel1981 Tax Ct. Memo LEXIS 87">92 and Mastro again agreed to look for payment on the promissory note and deed of trust from only the Boyds or the building. Gamel and Mastro also agreed to dismiss their foreclosure action in the Superior Court while petitioners agreed to dismiss their counterclaims. Petitioners paid $ 1,380 to an attorney to represent them in the foreclosure suit and the negotiation of the settlement agreement pursuant to which the building was conveyed to the Boyds. Petitioners deducted the $ 25,000 payment as a liability release expense incurred in the operation of the apartment building. They also deducted the $ 1,380 payment to the attorney as legal fees incurred in the apartment rental business. In the notice of deficiency, respondent disallowed these deductions and, instead, applied the payments to reduce petitioners' capital gain by $ 13,190. OPINION Petitioners contend that they are entitled to deductions for the $ 25,000 payment to Mastro and the $ 1,380 payment of legal fees under section 162(a)3 as ordinary and necessary business expenses incurred in operating the apartment building. Alternatively, they contend that these items are deductible under section 165(a)4 as losses1981 Tax Ct. Memo LEXIS 87">93 incurred in the apartment building venture. On one of these grounds petitioners would have us hold that they are entitled to current deductions for the full amount of their payments. Release of Obligation on Promissory NoteWe agree with respondent that petitioners' liability to make this disputed payment had its origin in a transaction involving the acquisition and disposition of the apartment building, a capital asset. Amounts expended in the acquisition or disposition of a capital asset are nondeductible1981 Tax Ct. Memo LEXIS 87">94 and must be added to the asset's basis or offset against its selling price. Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 397 U.S. 572">578 (1970); Spangler v. Commissioner, 323 F.2d 913">323 F.2d 913, 323 F.2d 913">916 (9th Cir. 1963), affg. a Memorandum Opinion of this Court; see Boagni v. Commissioner, 59 T.C. 708">59 T.C. 708, 59 T.C. 708">712 (1973). 5 Therefore, the $ 25,000 payment for release from liability on the note is not deductible under sections 162(a) or 165(a) but is a capital expenditure. Anchor Coupling v. United States, 427 F.2d 429">427 F.2d 429, 427 F.2d 429">433-434 (7th Cir. 1970); DeMink v. United States, 448 F.2d 867">448 F.2d 867, 448 F.2d 867">867, (9th Cir. 1971); Eisler v. Commissioner, 59 T.C. 634">59 T.C. 634, 59 T.C. 634">639 (1973). 1981 Tax Ct. Memo LEXIS 87">95 We think it clear that the $ 25,000 was paid to settle petitioner's liability on the note given on his investment to the mortgage property. If, however, the payment can be considered unrelated to his investment in the apartment building, there is no foundation on which to predicate a deductible expense. If the payment was not related to that investment, petitioners merely settled their personal nonbusiness, noncapital liability on the promissory note by a $ 25,000 payment, and a deduction is not allowable for a personal expense. See Diamond v. Commissioner, 43 B.T.A. 809">43 B.T.A. 809, 43 B.T.A. 809">812 (1941). Petitioners further maintain that the payment was a deductible business expenses under section 162(a) because it was made for the purpose of protecting a separate ongoing business, petitioner's tractor business. In advancing this argument, petitioners rely on a discarded test. 6 Petitioners' "primary purpose" is irrelevant in determining the nature of the payment. The "origin and character of the claim * * , rather than its potential consequences on the business operations of a taxpayer" 1981 Tax Ct. Memo LEXIS 87">96 controls, 427 F.2d 429">Anchor Coupling, supra at 433; the instant claim's origin is a capital transaction. 7Petitioners contend that the payment is a noncapital expenditure1981 Tax Ct. Memo LEXIS 87">97 made to obtain a release from contingent liability in the nature of a guaranty. Such payments, they argue, have been held to be deductible from ordinary income, citing Commissioner v. Condit, 333 F.2d 585">333 F.2d 585 (10th Cir. 1964) and Commissioner v. Shea, 327 F.2d 1002">327 F.2d 1002 (5th Cir. 1964), affg. 36 T.C. 577">36 T.C. 577 (1961); but see and compare Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956). Petitioners argue that they would be required to pay the promissory note only if the purchasers failed to discharge their obligation on the assumed mortgage and, therefore, they occupy a position analogous to that of a guarantor. The payment, they urge, was not an integral part of the sale but was rather a separate payment made to terminate their status as guarantors. On this theory, they argue that the $ 25,000 payment reflects a loss under section 165(a). We agree with respondent that petitioners were not guarantors. Although it is true that, absent the release, petitioners night have been called upon to make payments if the purchasers had failed to meet their obligations, petitioners paid the $ 25,000 to terminate their obligations arising from their1981 Tax Ct. Memo LEXIS 87">98 own liability on a promissory note which they had signed in a capital transaction. Thus, they were not guarantors in any sense of the word. Petitioners further contend that had the $ 25,000 been paid some time after the sale, it would not have been in connection with the foreclosure litigation and would have constituted a payment in discharge of a guaranty. Petitioners' contention is erroneous. Whenever paid, the payment required to discharge the note would be made to terminate a claim of potential liability arising from petitioners' promissory note secured by a deed of trust on the apartment building. 8Legal FeesIt has been stipulated that $ 1,380 was paid to an attorney with regard to the foreclosure suit and for his review of the agreement. Because the suit and the agreement involved the disposition of a capital asset, they were capital transactions, and the accompanying legal fees must be capitalized. Petitioners argue, however, 1981 Tax Ct. Memo LEXIS 87">99 that a more precise assessment must be made. Although the suit started as a foreclosure action, they state, its scope expanded to include a request for the appointment of a receiver and counterclaims alleging harassment, injury to health, and misrepresentation as to the building's condition These, petitioners maintain, fall under the rubric of ordinary and necessary expenses. 9Petitioners correctly state that is appropriate cases, allocations may be made between deductible expenses and capital ones involved in the same litigation or payment. 59 T.C. 708">Boagni v. Commissioner, supra; 59 T.C. 634">Eisler v. Commissioner, supra. In both of these cases, however, allocation was effected between two quite distinct claims, both with a business or capital origin. 10 Petitioners fail to distinguish between the allegedly deductible claims and the nondeductible claims, and provide no evidence which would allow us to allocate. 11 Although, as we have held, the foreclosure suit involved a capital transaction, the injury to1981 Tax Ct. Memo LEXIS 87">100 health and personal harassment claims appear to have been of a personal rather than business or capital in nature. Moreover, as petitioners bear the burden of proving respondent's over, as petitioners bear the burden of proving respondent's error in determining the deficiencies, Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure, we hold that petitioners have not met their burden. Respondent's determination will be sustained. 1981 Tax Ct. Memo LEXIS 87">101 Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. The name "Mastro" appears in petitioners' briefs and the stipulation of facts as "Maestro," while respondent's brief and the various agreements refer to "Mastro."↩3. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * ↩4. SEC. 165. LOSSES. (a) General Rule.--There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.↩5. The fact that the asset involved here is a sec. 1231 asset rather than a capital asset per se does not serve to exclude the building from treatment under the origin-of-the-claim test. "Conceptually, [sec. 1231] assets used in the trade or business clearly seem to constitute capital assets in that by definition, they are used for the further production of goods and services." J. Mertens, Law of Federal Income Taxation, Code Commentary to ch. 1, subch. P, sec. 1231, at 45 (1979). The root transaction here involves the acquisition and disposition of an income producing asset; whether the asset is termed capital or sec. 1231 is irrelevant for purposes of assessing the capital or noncapital nature of the transaction.↩6. Consideration of the "primary purpose" for a payment was the prevailing test before it was rejected in United States v. Gilmore, 372 U.S. 39">372 U.S. 39 (1963); United States v. Hilton Hotels, 397 U.S. 580">397 U.S. 580 (1970); Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572 (1970); and Anchor Coupling v. United States, 427 F.2d 429">427 F.2d 429↩ (7th Cir. 1970). 7. This origin distinguishes the present case from Poole v. Commissioner, a Memorandum Opinion of this Court dated Mar. 14, 1942, which petitioners cite. In Poole, decided before Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82 (1956), a loss was permitted for a payment in release of a guaranty. This release was obtained, however, for what was undisputedly a true guaranty, taken on property purchased nearly 2 years earlier. The taxpayer had no personal liability on the property at the time of purchase. Thus, the release in Poole↩ neither originated in nor derived its character from a capital transaction.8. Under the Arrowsmith doctrine, Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6↩ (1952), a court can take a backward look at transactions in prior taxable years in order to characterize a later related payment.9. Even if an allocation were to be made, it is unclear why expenses related to an injury to personal health would be a business expenses.↩10. In Boagni v. Commissioner, 59 T.C. 708">59 T.C. 708 (1973), allocation was made between two separate and distinct suits, one a declaratory judgment suit, the other a concursus action, for which two separate opinions were entered in trial and appellate courts. In Eisler v. Commissioner, 59 T.C. 634">59 T.C. 634↩ (1973), the two claims were also discrete, one relating to a claim by an employer to re-acquire employee's stock, the other to a threatened negligence action by employer against employee. 11. As an aid in allocation, petitioners include a copy of the lawyer's account sheets. The explanation of charges in these sheets, however, does not provide a convincing basis for allocation since the charges combine the purportedly distinct claims; for example, preparation of the temporary restraining order is combined with "Conferences" and preparation of an answer, affirmative defenses and counterclaim. Even if we were to find the temporary restraining order costs to be business costs, a finding by no means certain, we would have no guidance in dividing the charge.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618977/	Cropland Chemical Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentCropland Chem. Corp. v. CommissionerDocket No. 11260-78United States Tax Court75 T.C. 288; 1980 U.S. Tax Ct. LEXIS 26; November 25, 1980, Filed 1980 U.S. Tax Ct. LEXIS 26">26 Decision will be entered under Rule 155. Petitioner, with another corporation, formed a joint venture to acquire, produce, and sell agricultural products. Petitioner's president and sole shareholder, T, entered into an employment contract with the joint venture, under which he was compensated for services rendered thereto. Held, amounts paid to T by petitioner as compensation for services actually rendered to the joint venture are not deductible by petitioner since they were not ordinary and necessary expenses of petitioner and T was not acting as petitioner's agent in rendering services to the joint venture. Held, further, petitioner is allowed to deduct amounts necessary to reasonably compensate T for services actually rendered to petitioner during the current year and previous years when T was not compensated. David J. Duez, for the petitioner.Mitchell S. Fuerst, for the respondent. Nims, Judge. NIMS75 T.C. 288">288 Respondent determined deficiencies in petitioner's income tax for its fiscal years ended February 28, 1974, and February 28, 1975, in the amounts of $ 34,501 and $ 130,181, respectively. The issues for decision are whether petitioner may deduct as compensation amounts paid to Robert A. Trowbridge and Delores S. Trowbridge and amounts contributed on behalf of said individuals to a pension plan and profit-sharing plan maintained by petitioner. The parties agree that the resolution of the first issue will automatically dispose of the second issue.75 T.C. 288">289 FINDINGS OF FACTSome of the facts have been stipulated. The stipulation and the attached exhibits are incorporated herein by reference.Petitioner Cropland Chemical Corp. was incorporated in March 1970, as an Arizona corporation. At the time of filing its petition in this case, the petitioner's principal place of business was Latham, Ill. At all times material herein, all of petitioner's issued and outstanding stock1980 U.S. Tax Ct. LEXIS 26">28 was owned by Robert A. and Delores S. Trowbridge; they owned 500 shares which were issued at a fixed value of $ 10 per share. Robert A. Trowbridge (Trowbridge) was president and general manager of petitioner.Morrison Coal Co., Inc. (Morrison Coal), is an Arkansas corporation with its principal place of business in Salina, Kans. Morrison Grain Co., Inc., is a Kansas corporation with its principal place of business at Salina, Kans. Morrison Coal is a wholly owned subsidiary of Morrison Grain Co., Inc. Milton Morrison (Morrison) is president of Morrison Coal.During the year 1970, Trowbridge developed the concept of marketing surplus and scrap chemicals as agricultural products. Yet, he lacked the financial reserves necessary for purchases of large quantities of surplus chemicals. He contacted Morrison and proposed a business venture.On November 16, 1970, petitioner and Morrison Coal entered into a joint venture agreement which formed Agro Marketing Co. (referred to as Agro or the joint venture). The principal office of Agro was located in Latham, Ill., during the years in issue. The joint venture was organized for the sole purpose of purchasing surplus agricultural chemicals, 1980 U.S. Tax Ct. LEXIS 26">29 fertilizers, insecticides, and other products for resale and the processing, packaging, and distribution of agricultural chemicals, fertilizers, insecticides and other products for sale at wholesale or retail. Agro filed partnership income tax returns on a calendar year basis.The joint venture agreement provided for a basic 50-50 split of income and expense between the cojoint venturers, petitioner and Morrison Coal. Each made initial contributions of cash and property to Agro in equal amounts. Each contributed property having a value of approximately $ 25,000. The joint venture agreement required that the capital accounts of the coventurers remain in proportion to their respective 50-percent interests. In the event a coventurer failed to maintain a capital account balance equal to its proportionate interest, the portion of the 75 T.C. 288">290 other coventurer's capital account which was in excess of the 50-percent interest was deemed to be an interest-bearing indebtedness of the joint venture to the other venturer.The joint venture agreement required the performance of services by Trowbridge for Agro. The value of the services rendered by Trowbridge to Agro was not part of petitioner's1980 U.S. Tax Ct. LEXIS 26">30 contribution to the joint venture's capital. The agreement provided that no salary or compensation for services rendered to the joint venture would be received by either of the parties to the agreement unless mutually agreed upon in writing by the parties. Attached to and incorporated into the joint venture agreement was an employment agreement under which Trowbridge was to be compensated for services rendered to Agro. Trowbridge's salary was computed on the basis of a monthly draw of $ 1,500 from 1970 through 1973, and $ 2,000 per month thereafter, plus 2 percent of the net income of Agro.During the years 1970 through 1975, Trowbridge was general manager of Agro. He received the following salary for services performed for Agro during these years:SalaryYearfrom Agro1970$ 1,500197118,750197218,0001973$ 18,000197428,119197568,825Delores S. Trowbridge was the office manager of Agro during the years in issue. She performed bookkeeping and other activities for the joint venture. She devoted a substantial amount of her working hours performing services for Agro and was compensated by Agro as follows:CompensationYearfrom Agro197001971019720197301974$ 3,77019751,0151980 U.S. Tax Ct. LEXIS 26">31 As general manager of Agro, Trowbridge traveled around the United States to investigate potential plant and surplus chemical purchases by Agro. From 1971 through 1974, Agro purchased a number of plants in different locations in the United States, designed specialized equipment, and developed a system of manufacturing salvage and surplus chemicals into usable agricultural 75 T.C. 288">291 products. Both petitioner, represented by Trowbridge, and Morrison Coal, represented by Morrison, participated in the major transactions and policy decisions which pertained to the affairs of Agro. Both petitioner and Morrison Coal made loans to and guaranteed the indebtedness of Agro. All transactions engaged in by petitioner and Morrison Coal, jointly, during the years in issue were conducted through the joint venture.Agro developed into a highly successful marketing operation during the years 1973, 1974, and 1975, producing net income in those years of $ 320,129, $ 2,231,494, and $ 584,309, respectively. As a partner in Agro, petitioner, due to Agro's success, had increased amounts of income during these years. Petitioner's increased income was a direct result of Agro's success, since Agro was 1980 U.S. Tax Ct. LEXIS 26">32 the only operating activity of petitioner during these years. Petitioner's business affairs exclusively pertained to its interest in Agro.Robert A. and Delores S. Trowbridge were the directors of petitioner. Trowbridge was president and treasurer of petitioner; Delores S. Trowbridge was secretary of petitioner. The payments they received from petitioner during the tax years in issue were based upon a resolution adopted at a special meeting of shareholders on February 28, 1974. At that meeting, it was recognized that "Robert A. Trowbridge spends all of his time working for AGRO Marketing Co., a joint venture in which CROPLAND CHEMICAL CO. owns a 50% interest." It was further recognized that "Delores S. Trowbridge spends much of her working time performing office management and general secretarial work for AGRO Marketing Co." The resolution adopted provided that Trowbridge would be paid 40 percent of the net profits of petitioner before taxes and deferred compensation payments. It was further resolved that Delores S. Trowbridge would be paid $ 5,000 per year. The following payments were received by Trowbridge from petitioner for the fiscal year ended on February 28 of the following1980 U.S. Tax Ct. LEXIS 26">33 years:PaymentsYearfrom petitioner1971019720197301974$ 63,5051975222,96775 T.C. 288">292 The following payments were received by Delores S. Trowbridge from petitioner for the fiscal year ended on February 28 of the following years:PaymentsYearfrom petitioner1971019720197301974$ 5,00019755,000For the fiscal years ended the last day of February 1974 and 1975, petitioner deducted as compensation on its corporate income tax returns the amounts paid to Robert A. and Delores S. Trowbridge. Respondent allowed petitioner a deduction for a portion of the amounts paid to Robert A. and Delores S. Trowbridge as follows:Compensation deductionOfficerClaimedAllowedDisallowed1974:Robert A. Trowbridge$ 63,505$ 10,000$ 53,505Delores S. Trowbridge5,0001,0004,000Total for 197468,50511,00057,5051975:Robert A. Trowbridge222,96710,000212,967Delores S. Trowbridge5,0001,0004,000Total for 1975227,96711,000216,967In addition, because petitioner's contribution to its pension plan and profit-sharing plan for employees was based upon a percentage of compensation, respondent1980 U.S. Tax Ct. LEXIS 26">34 disallowed the portion of the contribution to each plan which was attributable to the officers' salaries which he disallowed.OPINIONPetitioner Cropland Chemical Corp. was formed in March 1970. Robert A. and Delores S. Trowbridge have always been the sole stockholders of petitioner. During the fiscal years ending February 28, 1974, and February 28, 1975, the years in issue, they were the directors and principal officers of petitioner.On November 16, 1970, petitioner and Morrison Coal entered 75 T.C. 288">293 into a joint venture agreement which formed Agro. Agro was formed to engage in the production, acquisition, and sale of agricultural chemicals and fertilizers. The agreement provided that petitioner and Morrison Coal each had a 50-percent interest in Agro. All income and expense of the joint venture would be split equally by petitioner and Morrison Coal, and each contributed equal amounts to the joint venture.The joint venture agreement required the performance of services by Trowbridge for Agro. Incorporated into the agreement was an employment agreement under which Trowbridge would be compensated by Agro for services rendered to Agro. Trowbridge was general manager of Agro1980 U.S. Tax Ct. LEXIS 26">35 during the years in issue.Trowbridge received a salary from Agro during the years 1970 through 1975, inclusive. Agro became highly profitable and, as a result, petitioner's income increased. Petitioner paid Trowbridge $ 63,505 for its fiscal year ended February 28, 1974, and $ 222,967 for its fiscal year ended February 28, 1975. Petitioner paid Delores S. Trowbridge $ 5,000 in both such fiscal years. Petitioner deducted these amounts on its corporate income tax returns as compensation. Petitioner deducted corresponding amounts for contributions to a pension plan and profit-sharing plan for Robert A. and Delores S. Trowbridge.Respondent denied the compensation deductions, except for $ 10,000 in each year to Trowbridge and $ 1,000 in each year to Delores S. Trowbridge, with corresponding allowances for contributions to the pension and profit-sharing plans.The issues for decision are whether petitioner may deduct as compensation the amounts paid to Robert A. and Delores S. Trowbridge and the amounts contributed to the pension and profit-sharing plans. Resolution of the first issue will automatically dispose of the second issue.Section 162(a)(1) 1 allows as a business expense1980 U.S. Tax Ct. LEXIS 26">36 deduction "a reasonable allowance for salaries or other compensation for personal services actually rendered." Petitioner contends that the deduction claimed should be allowed under any or all of three separate retionales. First, petitioner relies upon Daily Journal Co. v. Commissioner, 135 F.2d 687">135 F.2d 687 (9th Cir. 1943), revg. a 75 T.C. 288">294 Memorandum Opinion of this Court, to support the deduction. (See discussion infra.) Second, petitioner argues that although the general rule is that a partner cannot deduct expenses of the partnership on its personal return, there is an exception to the rule where the agreement between the parties places the economic burden of a partnership expense solely on one of the partners. Third, petitioner argues that the joint venture agreement constitutes a special allocation of the additional compensation deduction entirely to petitioner.1980 U.S. Tax Ct. LEXIS 26">37 Respondent does not contend that the amounts paid to Robert A. or Delores S. Trowbridge exceed a reasonable allowance for salaries. Rather, respondent contends that the amounts paid by petitioner to Robert A. and Delores S. Trowbridge were in recognition of services rendered to Agro and are not trade or business expenses of petitioner deductible under section 162.We will address each of petitioner's arguments. First, petitioner relies heavily on 135 F.2d 687">Daily Journal Co. v. Commissioner, supra, to support the deductions. Petitioner's reliance on this case is misplaced since it is distinguishable from the case at bar.In Daily Journal Co., four competing newspaper publishing corporations entered into an agreement to consolidate their publishing businesses and formed a corporation, called Consolidated, to publish the four papers. Each corporation continued in business and held shares in Consolidated. It was specifically understood and agreed by all parties that the new enterprise was to be managed by Daily Journal Co., acting, as a corporation must, through its agents. Wilson, president of Daily Journal Co., managed the business of Consolidated during1980 U.S. Tax Ct. LEXIS 26">38 the tax years in question, acting as president of Consolidated. All four papers were published under their former names.The agreement in Daily Journal Co. specifically provided that the new enterprise, Consolidated, would pay no salary to any officer without the consent of all the directors. No salary was paid to Daily Journal Co.'s president, Wilson, by Consolidated. The only salary Wilson received for managing Consolidated was paid by Daily Journal Co. Daily Journal Co. deducted the amounts paid to Wilson as ordinary business expenses.The Court of Appeals, reversing the Tax Court, found that Daily Journal Co.'s managerial activities in Consolidated were extensive, varied, continuous, and regular, and allowed Daily Journal Co. the salary deduction. The court held that the salary 75 T.C. 288">295 paid to Daily Journal Co.'s agent, Wilson, was a usual and ordinary expenditure made in the course of Daily Journal Co.'s business, pursuant to an agreement to provide managerial services.The facts in the instant case are clearly distinguishable from those in Daily Journal Co. and render its holding of little aid to petitioner. The joint venture agreement in the present case did1980 U.S. Tax Ct. LEXIS 26">39 not require petitioner to perform any managerial services for Agro. Rather, it required Trowbridge to perform services for Agro and specifically provided, in the employment agreement incorporated therein, the amount of compensation Agro would pay Trowbridge for such services. This arrangement was agreed to by petitioner and Morrison Coal as co-joint venturers in Agro. Agro was obligated to pay, and did pay, Trowbridge the agreed upon compensation for services he rendered to Agro.Daily Journal Co. involved a different arrangement. There, Daily Journal Co. was required to provide managerial services to the new enterprise. Consolidated was not obligated to pay Daily Journal Co.'s agent, Wilson, any compensation for services rendered to Consolidated. We find that the Daily Journal Co. case does not support the claim that amounts paid by petitioner to Trowbridge are deductible as compensation.Second, petitioner argues that an exception to a general rule of partnership taxation applies in this case allowing petitioner the compensation deductions. The parties agree that Agro is subject to the partnership taxation provisions of subchapter K of the Internal Revenue Code. Sec. 7611980 U.S. Tax Ct. LEXIS 26">40 (a). The general rule is well established that a partner cannot directly deduct on his income tax return the expenses of the partnership. Wilson v. Commissioner, 17 B.T.A. 976">17 B.T.A. 976 (1929); Klein v. Commissioner, 25 T.C. 1045">25 T.C. 1045 (1956); Farnsworth v. Commissioner, 29 T.C. 1131">29 T.C. 1131 (1958), affd. 270 F.2d 660">270 F.2d 660 (3d Cir. 1959). The exception to this rule is where there is an agreement among the partners that such partnership expenses shall be borne by particular partners out of their own funds. Wallendal v. Commissioner, 31 T.C. 1249">31 T.C. 1249 (1959); Lewis v. Commissioner, 65 T.C. 625">65 T.C. 625 (1975). Where the exception applies, the partner is entitled to deduct the amount of the expense from his individual gross income.Petitioner contends that the joint venture agreement between itself and Morrison Coal places the economic burden of a joint venture expense, i.e., compensating Trowbridge, solely on petitioner. 75 T.C. 288">296 We need look no further than the joint venture agreement itself to dismiss petitioner's argument. The agreement specifically1980 U.S. Tax Ct. LEXIS 26">41 states what the expense of compensating Trowbridge will be: $ 1,500 per month from 1970 through 1973, and $ 2,000 per month thereafter, plus 2 percent of the net income of Agro. Except for the original salary agreement and the $ 500 per month adjustment, petitioner and Morrison Coal never discussed, agreed upon, or contemplated the payment by Agro of any other compensation to Trowbridge. The payments to Trowbridge by petitioner were not amounts that Agro was obligated to pay. Therefore, the basic premise of petitioner's argument fails since its payments to Trowbridge were not expenses of the joint venture that petitioner had to bear out of its own funds.The joint venture agreement obligated Agro to pay Trowbridge according to the formula adopted therein. Trowbridge was so compensated, and this expense was shared equally by petitioner and Morrison Coal on a 50-50 basis. We find that the amounts petitioner paid Trowbridge were a result of a unilateral decision by petitioner to make such payments. That petitioner claims it paid Trowbridge for services rendered to Agro does not alter the tax consequences flowing from the joint venture agreement.Finally, petitioner argues that, 1980 U.S. Tax Ct. LEXIS 26">42 under the joint venture agreement, there is an unstated special allocation of the additional compensation deduction entirely to petitioner. Petitioner contends such special allocation is an implicit provision of the agreement. After reviewing the facts of record, we find this argument without merit.Subchapter K of the Internal Revenue Code affords partners wide latitude to specify in the partnership agreement what each partner's distributive share of items of income and deduction will be. However, petitioner cannot now rewrite the terms of the agreement it voluntarily entered into.The evidence clearly indicates that there was no special allocation of a deduction in this case. The partnership returns filed by Agro show no special allocation; the proportionate interest of the coventurers was stated at 50 percent in every return filed by Agro. The income tax returns filed by petitioner show no special allocation and state a proportionate interest in Agro of 50 percent. The testimony of Trowbridge and Morrison 75 T.C. 288">297 further supports the conclusion that no special allocation existed or was ever proposed.Petitioner has failed to sustain its burden of proving that it is entitled1980 U.S. Tax Ct. LEXIS 26">43 to deduct as compensation amounts paid to Robert A. and Delores S. Trowbridge. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142 (a), Tax Court Rules of Practice and Procedure. Petitioner's sole business activities related to its investment in Agro. Petitioner had no other business. In the minutes of a special meeting of shareholders of petitioner, the sole shareholders being Robert A. and Delores S. Trowbridge, it was reported that Robert A. Trowbridge spent all of his time working for Agro, and Delores S. Trowbridge spent much of her time working for Agro. For such services, both were compensated directly by Agro. Accordingly, since the amounts paid by petitioner to these individuals were for services rendered to Agro, we hold that they are not deductible as ordinary and necessary business expenses of petitioner.Respondent allowed petitioner to deduct $ 10,000 in each year in issue as compensation to Trowbridge and $ 1,000 in each year as compensation to Delores S. Trowbridge. Respondent argues that these amounts sufficiently recognize any efforts of said individuals in seeing to the affairs of petitioner. We are inclined to agree with respondent. 1980 U.S. Tax Ct. LEXIS 26">44 Trowbridge performed services directly to petitioner in seeing to its corporate affairs, and he also represented petitioner in its activities as a joint venturer in Agro. Delores S. Trowbridge also rendered some services to petitioner.However, petitioner argues that part of the $ 222,967 paid to Trowbridge in the fiscal year ended February 28, 1975, constituted compensation for past services rendered during the fiscal years ended on February 28 of 1971, 1972, and 1973. At a board of directors meeting held on February 26, 1975, petitioner resolved to compensate Trowbridge in the current fiscal year for services rendered in past years where Trowbridge was never compensated. We find that Trowbridge performed services during those past years similar to the services he rendered to petitioner in the years before the Court. Compensation paid in one tax year for past services may be deducted even if the amount paid exceeds a reasonable allowance for current services. Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115 (1930); R.J. Nicoll Co. v. Commissioner, 59 T.C. 37">59 T.C. 37 (1972). We think that the 75 T.C. 288">298 amount respondent has allowed1980 U.S. Tax Ct. LEXIS 26">45 petitioner to deduct as compensation to Trowbridge during each of the years in issue should also be allowed as compensation deductions for past services rendered in years where petitioner did not compensate Trowbridge (1971, 1972, and 1973). Therefore, we hold that for the taxable year ended February 28, 1974, petitioner is entitled to deduct as compensation, $ 11,000; for the taxable year ended February 28, 1975, petitioner is entitled to deduct as compensation, $ 41,000. Petitioner is entitled to corresponding deductions for amounts contributed on behalf of Robert A. and Delores S. Trowbridge to a pension and profit-sharing plan maintained by petitioner. The excess payments made by petitioner to Robert A. and Delores S. Trowbridge during these years are dividends to shareholders out of earnings from petitioner's participation in the joint venture.Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, unless otherwise specifically indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618978/	PERCY C. MADEIRA, AND HIS WIFE, ELISE D. MADEIRA, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Madeira v. CommissionerDocket No. 82512.United States Board of Tax Appeals36 B.T.A. 456; 1937 BTA LEXIS 710; August 19, 1937, Promulgated 1937 BTA LEXIS 710">710 Loss. - The determination of respondent, that the transaction evidenced by the record was a gift of and not a sale of stock, and therefore no deductible loss occurred, is sustained. William R. Spofford, Esq., for the petitioners. D. A. Taylor, Esq., for the respondent. LEECH36 B.T.A. 456">456 This proceeding involves an income tax deficiency for the calendar year 1932 in the amount of $3,333.84. Its determination resulted from the respondent's disallowance of an asserted loss in petitioner's return for that year. The propriety of that disallowance is the only matter in controversy. From the stipulation and evidence, we make the following findings of fact. FINDINGS OF FACT. The petitioners were, during the tax year, husband and wife, and filed joint income tax returns for that year. Prior to November 22, 1932, Percy C. Madeira, one of the petitioners, decided to sell 1,500 shares of class "A" common stock of Madeira, Hill & Co., which was the only asset then at his disposal, at 36 B.T.A. 456">457 public auction, in order to support a claim of a loss deduction for income tax purposes. Upon the suggestion of one Schryock, secretary of that company, who1937 BTA LEXIS 710">711 had prepared petitioners' proposed income tax return for 1932, and because of his own desire that the stock, which had been held in the family for many years, should not go to the public, he decided to create a trust for the benefit of his wife and children, for the purpose of acquiring the stock. Percy C. Madeira, Jr., a son, advised of these intentions of his father, Percy C. Madeira, petitioner, and at his direction, drew an irrevocable trust for those beneficiaries, in which, Percy C. Madeira, Jr., and another son, Lewis Madeira, III, who also knew of his father's purposes, were named trustees. The corpus of the trust was to be $3,100. The trust instrument contained a provision purporting to grant the trustees absolute discretion in the investment of its corpus, without liability therefor. The trust was executed by petitioner, Percy C. Madeira, on November 22, 1932, and accepted by the trustees after Percy C. Madeira, Jr., and Percy C. Madeira, his father, had orally purportedly denied the existence of any obligation, legal or otherwise, on the part of the trustees, to buy the father's stock, to which Percy C. Madeira stated his assent. Percy M. Madeira, the petitioner, 1937 BTA LEXIS 710">712 on the same day gave his check for the $3,100 corpus to the trustees and they deposited it in bank to their credit as such. On November 23, 1932, the trustees submitted a written offer of $2 per share for 1,500 shares of class A stock of Madeira, Hill & Co. to petitioner, Percy C. Madeira, who forthwith purported to accept it. The trustees, on the same day, gave their check, as such, for $3,000 to petitioner, Percy C. Madeira, which he deposited to his account in bank and the 1,500 shares of stock were delivered to the trustees and transferred to their names as such on the records of the company. No change has since occurred in the ownership of that stock except that caused by a reorganization of the company, nor has there been any change in the account of the trustees. The fair market value of the 1,500 shares of Madeira, Hill & Co. stock, involved here, as of March 1, 1913, was not less than $52,470. The trust has not acquired since its creation any other property than the above 1,500 shares of Madeira, Hill & Co. class A common stock. That stock has not paid or declared dividends since 1925. The petitioners here, during the tax year, were husband and wife, and filed1937 BTA LEXIS 710">713 joint income tax returns for that year, in which they deducted a loss alleged to have resulted from the above detailed acquisition of 1,500 shares of Madeira, Hill & Co. class A common stock from petitioner, Percy C. Madeira. Respondent disallowed the deduction on the ground that it was a gift and not a sale of the stock. The disputed transaction, in which the above trust acquired 1,500 shares of class A common stock of Maderia, Hill & Co., was not a 36 B.T.A. 456">458 bona fide sale but was a gift thereof. Petitioners, nor either of them, within 30 days before or after the date of such transaction, entered into a contract or option to acquire substantially identical property. OPINION. LEECH: Since the allowance of a deduction from gross income is a matter of legislative grace, a taxpayer seeking such advantage must bring himself squarely within the law authorizing it. . The right to the disputed deduction is claimed under section 23 of the Revenue Act of 1928. The existence of the loss in question, and thus its deductibility, depend upon whether the transaction detailed in the findings of fact constituted1937 BTA LEXIS 710">714 a bona fide sale of stock by petitioner, Percy C. Madeira, to the trust. Petitioners argue that Percy C. Madeira intended and completed a gift of the $3,100 he passed to the trust as its corpus, which the trust then used in a bona fide purchase of the stock. Respondent disputes that premise and contends that such petitioner did not intend or consummate a gift of the $3,100 to the trust but that he intended to and did retain the right of return of that money in exchange for the 1,500 shares of Madeira, Hill & Co. stock, and that the transfer of the stock and not the money constituted a gift. He takes the additional position, apparently, that, assuming there was a gift of $3,100, there was no bona fide sale of the stock. In this discussion, the latter position is not considered. The inquiry thus involves only an issue of fact. Respondent's determination is presumed to be correct, and the petitioners have the burden of proving it incorrect. . We have decided that petitioners have not overcome this presumption and that the transfer in question was a gift and not a sale of the stock. 1937 BTA LEXIS 710">715 In describing a gift, the court in ; , states what we believe is the law, as follows: There must be on the part of the donor an intent to give, and a delivery of the thing given, to or for the donee, in pursuance of such intent, and on the part of the donee, acceptance. * * But delivery by the donor, either actual or constructive, operating to divest the donor of possession of and dominion over the thing, is a constant and essential factor in every transaction which takes effect as a completed gift. Anything short of this strips it of the quality of completeness which distinguishes an intention to give, which alone amounts to nothing, from the consummated act, which changes the title. * * * Little, if anything, is left to the imagination by this record. The petitioner, Percy C. Madeira, and his son, Percy C. Madeira, Jr., one of the trustees, testified openly and rather fully. The picture, thus presented, is clear. 36 B.T.A. 456">459 The only purpose for the creation of the trust was its acquisition of 1,500 shares of Madeira, Hill & Co. stock, which Percy C. Madeira wished to transfer, within1937 BTA LEXIS 710">716 his family, in the form of a sale in order to support a loss deduction for income tax purpose. Of course, the purpose of tax avoidance does not vitiate the legal consequences of the transaction. . But, when such purpose is admittedly present and the transaction is between the immediate members of a family, as here, such transaction is subject to careful scrutiny to determine whether it be, in fact as well as in legal form, what its participants name it. ; ; ; . Here, the purpose of the creation of the trust, before its execution and acceptance, was known not only to petitioner, Percy C. Madeira, but to both of his sons, who were named its trustees at the father's direction. The trust instrument, although providing that its distributions until termination of the trust should be made from income, did not limit the trustees in any manner in the investment of the corpus, and left them free from responsibility in the exercise of1937 BTA LEXIS 710">717 their discretion in that investment. Cf. . Then, despite the trust provision that its distribution should be made from income, and without consideration of any other use of the corpus, the trustees, on the day following the execution and acceptance of the trust invested $3,000 of the $3,100 corpus in a common stock that had paid or declared no dividends since 1925. No other property has ever been acquired by the trust. This so-called investment was made with money, all of which was furnished by Percy C. Madeira, petitioner, the alleged seller, not for the convenience of the parties but out of necessity. Cf. , affirming . And the price at which the stock is alleged to have been sold is said to have been fixed by the statements of the secretary of the company that at some indefinite time in the past, under circumstances, none of which were mentioned, a sale of such stock, the amount of which is likewise not stated, occurred at that price. True, this statement was supplemented by the observation of Percy C. Madeira, 1937 BTA LEXIS 710">718 Jr., one of the trustees and the son of the petitioners, who was also one of the vice presidents of the company, from his general knowledge of the company's condition, that that amount reflected the "true value" of the stock. But it should not be forgotten that it is clearly proven that the amount of loss which Percy C. Madeira desired to establish, the number of shares he should sell to support that loss and the amount of the corpus of the trust, which was so 36 B.T.A. 456">460 significantly similar to the sum used in the alleged stock purchase, were all decided before the execution and acceptance of the trust. From this it is difficult, if not impossible, to believe that the price per share at which the stock should be purportedly sold was not definitely fixed before the creation of the trust and the trustees' receipt of its corpus. Confirming this conclusion is the testimony of Percy C. Madeira that the amount of the corpus was fixed at $3,100 so that there "should be some unexpended balance in that [the trust's] bank account." The manner in which the so-called selling price of this stock was fixed, is significant, particularly in view of the intimate relationship of the parties1937 BTA LEXIS 710">719 to the transaction, the substantial size of the block of stock involved and the fact that all the funds with which the alleged sale was effected were furnished by the petitioner, Percy C. Madeira, the seller. Cf. And, a circumstance not present in any cited case, and of particular significance, is the testimony of Percy C. Madeira, Jr., one of the trustees and the son of petitioners, and Percy C. Madeira, the petitioner, the only reasonable effect of which is, that the creation of the trust and the contested acquisition of the 1,500 shares of Madeira, Hill & Co. stock from petitioner, Percy C. Madeira, constituted a single, inseparable plan and transaction to which the petitioner, Percy C. Madeira, and the trustees, were parties. That is the premise of respondent's determination. We think it is not disturbed here. From this, it follows that the implied obligation of the trustees to use the corpus of the trust in its acquisition of the Percy C. Madeira stock, the consideration for which was the creation of the trust, was essentially an inherent part of that one plan and transaction, and became effective upon the acceptance of1937 BTA LEXIS 710">720 the trust and its corpus by the trustees. See ; ; . Nor do we think, in view of this entire record, this obligation was nullified or affected by the trust provisions granting the trustees absolute discretion in the investment of the corpus of the trust. This conclusion is strengthened rather than weakened by the oral reiteration of that provision and its purported acceptance by Percy C. Madeira, before the execution and acceptance of the trust and the transfer of its corpus. Since the obligation of the trustees to use the corpus of the trust in the purchase of the stock of Percy C. Madeira, petitioner, unquestionably reflected a corresponding retained right of that petitioner in the $3,100 transferred to the trust as its corpus, Percy C. Madeira did not thus intend to nor did he divest himself of nor deliver to the trust dominion or control over that money. The transfer was a gift, 36 B.T.A. 456">461 not of the money but of stock. 1937 BTA LEXIS 710">*721 Cf. ; affd., . The cases cited by the petitioner are distinguishable on their respective facts. The facts in each of them are measurably stronger for the position of the petitioners here than those revealed in the present record. As heretofore stated, the controlling question here is one of fact. Thus, after a careful consideration of the stipulation and the evidence, we have concluded that the presumption favoring respondent's determination has not been overcome, and have therefore found that the transaction giving rise to the present controversy, in which the trust acquired 1,500 shares of Madeira, Hill & Co. stock from the petitioner, Percy C. Madeira, was a gift and not a bona fide sale of that stock. It follows that no deductible loss was sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618979/	JOHN F. BUEHLER, TRANSFEREE OF THE ASSETS OF B & B COMMODITIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JOHN F. BUEHLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBuehler v. CommissionerDocket Nos. 2674-85; 2675-85.United States Tax CourtT.C. Memo 1987-416; 1987 Tax Ct. Memo LEXIS 413; 54 T.C.M. 232; T.C.M. (RIA) 87416; August 24, 1987. 1987 Tax Ct. Memo LEXIS 413">413 P was president and majority shareholder of B & B, a corporation engaged in the trade or business of soliciting customers to trade in commodity contracts. Pursuant to a written agreement, B & B's customers' trades were cleared through RBH, a clearinghouse member of the Chicago Mercantile Exchange. P traded commodity contracts through B & B on an arm's-length basis. P had a large deficit in his trading accounts. RBH, as allowed pursuant to the written agreement, transferred the credit balances in some of B & B's other customers' trading accounts to reduce, inter alia, the deficit in P's trading accounts. B & B, as required pursuant to the written agreement, transferred real property to RBH to reduce, inter alia, the deficit in P's trading accounts. Held: P is not liable, as a transferee of the assets of B & B, for B & B's tax liability. Cole v. Commissioner, 2997 F.2d 174 (8th Cir. 1961), revg. T.C. Memo. 1960-278, followed. Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), applied. Held, further: The transfers made by RBH and the transfer made by B & B were not made primarily for the benefit of P and are not constructive dividends to P. Held, 1987 Tax Ct. Memo LEXIS 413">414 further: the losses incurred by P with respect to his commodity contract trades are capital losses. Paul R. Hodgson, for the petitioner. Thomas J. Miller, for the respondent. FAYFAY, Judge: These related cases were consolidated for the purposes of trial, briefing, and opinion. In docket number 2674-85, respondent determined that petitioner was liable as transferee of assets of B & B Commodities, Inc., for B & B Commodities, Inc.'s liability for Federal income tax and additions to tax, as indicated below: Corporate TaxableLiabilityLiability for Year EndedFor TaxAddition To TaxTotalOctober 31, 1978$ 3,923.00$ 0 $ 3,923.00October 31, 1979157,351.9413,511.44170,863.38October 31, 19802,171.32642.402,813.72TOTAL$ 163,446.26$ 14,153.84$ 177,600.10In docket number 2675-85, respondent determined deficiencies in petitioner's Federal income tax, as indicated below: Taxable Year EndedDeficiencyDecember 31, 1979$ 54,805December 31, 1980233,459Respondent filed an amended answer in docket number 2675-85 seeking an increase in the deficiency in petitioner's Federal income tax for 1979 from $ 54,805 to $ 229,924. 1 After concessions, the issues are (1) whether petitioner is liable, as a transferee 1987 Tax Ct. Memo LEXIS 413">415 of the assets of B & B Commodities, Inc., for B & B Commodities, Inc.'s tax liability, including liability for additions to tax, (2) whether petitioner received constructive dividends, and (3) whether commodity contracts traded by petitioner were capital assets. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by reference. Petitioner, John F. Buehler, resided in St. Joseph, Missouri, at the time the petitions were filed in these cases. Petitioner incorporated J.L. Commodities Corporation on June 1, 1976. On July 7, 1976, J.L. Commodities Corporation changed its name to B & B Commodities, Inc. (hereinafter J.L. Commodities Corporation and B & B Commodities, Inc. will be collectively referred to as "B & B"). At all relevant times, petitioner was president of B & B and the stock ownership of B & B was as follows: Petitioner52%Ann Buehler 21987 Tax Ct. Memo LEXIS 413">416 24%Trusts for the benefit ofpetitioner's children24%Petitioner received compensation as an employee of B & B equal to a salary plus 10 percent of all commissions earned by B & B. For B & B's five taxable years ended October 31, 1976, to 1980, petitioner's compensation, salary plus commissions, from B & B was as follows: B & B's TaxableYear EndedCompensationOctober 31, 1976$ 55,636October 31, 1977140,011October 31, 1978176,875October 31, 1979177,851October 31, 198058,074B & B forfeited its corporate charter on January 1, 1983. B & B was engaged in the trade or business of soliciting customers to trade in commodity contracts, 31987 Tax Ct. Memo LEXIS 413">418 pursuant to a June 30, 1976, written agreement ("agreement") with Rufenacht, Bromagen & Hertz, Inc. ("RBH"), a clearinghouse member of the Chicago Mercantile Exchange. The agreement established B & B as a branch office of RBH. RBH would, according to the agreement, execute and clear all of B & B's customers' commodity contract trades on the Chicago Mercantile Exchange. The commissions earned on such trades would be split 55% to B & B and 45% to RBH. B & B was solvent as of the date it entered into the agreement and was not rendered insolvent by entering into the agreement. 1987 Tax Ct. Memo LEXIS 413">417 RBH and B & B maintained from one to several trading accounts for each customer. Pursuant to the agreement, B & B and petitioner severally granted to RBH a first lien against any funds otherwise due B & B from RBH in the event that any customer's account had a debit balance. Further, pursuant to the agreement, B & B and petitioner severally guaranteed to RBH the accounts of all of B & B's customers. Petitioner, as president of B & B, did not expect that B & B's grant of the first lien and guaranty of its customers' accounts would be utilized by RBH to cover deficits in petitioner's own trading accounts. Petitioner was B & B's best customer, accounting for approximately 75 percent of all of B & B's business. Petitioner engaged in many "day trades." A day trade occurs when a commodity contract is established and offset on the same day and will be successful or unsuccessful according to the daily fluctuation of the commodity contracts markets. Petitioner engaged in 1987 Tax Ct. Memo LEXIS 413">419 the day trades through B & B to increase B & B's and his income from commissions and to capitalize on the daily fluctuations of the market. Petitioner expected to make a profit in trading commodity contracts, from both day trades and otherwise, for his own account and, from time to time, did make profits for his own account. Petitioner expended, as an employee of B & B and on his own account, between 60 and 70 hours a week tracking the commodity contracts markets. 4 Petitioner paid the same commission on each of his trades as did other customers of B & B. B & B and RBH split the commissions from petitioner's trades just as they split the commissions from other customers' trades. The commissions generated solely by petitioner's trades for B & B's five taxable years ended October 31, 1976, to 1980, are indicated below: B & B'sTaxableTotalYear EndedCommissionsOctober 31, 1976$ 128,786October 31, 1977426,694October 31, 1978693,903October 31, 19791,219,316October 31, 1980698,275TOTAL$ 3,166,974B & B's taxable income and its taxable income excluding the commissions generated solely from petitioner's own 1987 Tax Ct. Memo LEXIS 413">420 trades, for B & B's five taxable years ended October 31, 1976, to 1980, are indicated below: B & B'sB & B's Taxable IncomeB & B's TaxableTaxableExcluding CommissionsYear EndedIncomeGenerated by Petitioner 5October 31, 1976$ 63,382($ 367)October 31, 197734,236( 176,978)October 31, 1978202,035( 141,447)October 31, 1979509,809( 93,752)October 31, 19803,995( 341,651)During 1979 and 1980, petitioner incurred substantial losses from commodity trading. As of November 30, 1979, the deficit in petitioner's trading accounts exceeded $ 500,000. As a result of President Carter's Russian grain embargo in early 1980, which had a devastating effect on the Chicago Mercantile Exchange, petitioner's deficit in his trading accounts increased by $ 600,000 to $ 700,000. Further, several other customers of B & B also experienced deficits in their trading accounts at this time. In response to the huge deficit in petitioner's trading accounts and the deficits in some 1987 Tax Ct. Memo LEXIS 413">421 of B & B's other customers' trading accounts, and pursuant to B & B's agreement with RBH whereby B & B and petitioner severally guaranteed the accounts of B & B's customers and severally granted to RBH a first lien on all funds otherwise owing to B & B from RBH: (1) RBH transferred the credit balances of some of B & B's customers' trading accounts to reduce the deficits in petitioner's and some of B & B's other customers' trading accounts ("RBH's book transfers"); (2) B & B transferred real estate to RBH having a fair market value of $ 99,427 to further reduce the deficits in petitioner's and some of B & B's other customers' trading accounts ("B & B's real property transfer"); (3) petitioner transferred real estate, his personal home having a fair market value of $ 90,363, to RBH to further reduce the deficits in petitioner's and/or some of B & B's other customers' trading accounts ("petitioner's real property transfer"); (4) petitioner paid $ 42,500 to RBH to further reduce the deficits in petitioner's and/or some of B & B's other customers' trading accounts ("petitioner's cash transfers"). 61987 Tax Ct. Memo LEXIS 413">422 To the extent that RBH's book transfers and B & B's real property transfer decreased the deficit in petitioner's trading accounts, B & B accounted for them as debt due from petitioner. In partial satisfaction of this debt, petitioner paid $ 281,846 to B & B in 1979 and 1980. Petitioner's financial situation did not allow petitioner to pay any more money to B & B: he was broke. Even after all of the above described transfers and the payment of $ 281,846, the deficit in petitioner's trading accounts and the amount of his debt to B & B were still quite substantial. As a result of RBH's book transfers and B & B's real property transfer, B & B was rendered insolvent and unable to pay its income tax liability for its taxable years ending October 31, 1978, 1979, and 1980. Neither party contests that B & B's total tax liability for such years, which includes its liability for additions to tax, is $ 177,600.10, exclusive of interest. This amount has not been paid. Because B & B is no longer in existence, B & B's tax liability is not collectible 1987 Tax Ct. Memo LEXIS 413">423 from B & B. In June of 1980, B & B transferred an automobile with a fair market value of $ 8,500 to Violet Beavers. Violet Beavers later married petitioner. The automobile was used by Violet Beavers' children in a manner having no connection with B & B's trade or business. B & B accounted for the transfer by establishing a receivable due from Violet Beavers. Petitioner claimed short-term capital losses of $ 430,503 and $ 546,303 for his 1979 and 1980 taxable years, respectively. The parties have stipulated that the correct amount of the loss for 1979 was $ 378,896 and for 1980 was $ 546,303. The parties did not, however, stipulate to the character of the losses. In the notice of transferee liability sent to petitioner as transferee of the assets of B & B, respondent determined that RBH's book transfers and B & B's real property transfer made petitioner a transferee of B & B and liable for B & B's unpaid tax liability. In the notice of deficiency sent to petitioner as an individual taxpayer (hereinafter the "individual notice of deficiency"), respondent determined that the yearly excesses of the amount of RBH's book transfers which reduced petitioner's deficit in his trading accounts 1987 Tax Ct. Memo LEXIS 413">424 over the amount of the payments made by petitioner to B & B were constructive dividends to petitioner. These yearly excesses, as determined in the notice of deficiency, amended answer, and stipulation of facts are as follows: TaxableStatutoryAmended 7StipulationYear EndedNoticeAnswerOf FactsDecember 31, 1979$ 89,033$ 341,917$ 341,917December 31, 1980264,025264,0257,719Respondent further determined in the individual notice of deficiency that the value of the real property transferred by B & B to RBH in 1980 also constituted a constructive dividend to petitioner. The parties have, however, stipulated that only $ 12,497 of the value of the real property was applied by RBH to reduce the deficit in petitioner's trading accounts. Respondent also determined in the individual notice of deficiency that the fair market value of the automobile transferred by B & B to Violet Beavers in 1980 constituted a constructive dividend to petitioner. Respondent also determined 1987 Tax Ct. Memo LEXIS 413">425 in the individual notice of deficiency that the short term capital loss from commodity contract trades claimed by petitioner for 1979 was excessive. As stated earlier, the parties have stipulated to the correct amount of petitioner's 1979 loss from commodity contract trades. Petitioner alleges in his petition that losses from his commodity contract trades for 1979 and 1980 are ordinary losses, rather than short-term capital losses as originally reported on his 1979 and 1980 federal income tax returns. All other issues raised by respondent in the individual notice of deficiency have been unchallenged by petitioner or settled by the parties. OPINION The first issue is whether petitioner is liable for the tax and additions to tax owed by B & B. As previously found, B & B's tax liability is not collectible from B & B. Section 6901 8 provides a method of collecting from a transferee of property the tax liability 9 of the transferor of such property. Whether a transferee is liable for the transferor's indebtedness is determined under the laws of the state in which the property transfer occurred. Commissioner v. Stern,357 U.S. 39">357 U.S. 39, 357 U.S. 39">42 (1958). Section 6902 provides that in cases before 1987 Tax Ct. Memo LEXIS 413">426 this Court the burden is upon respondent to show that petitioner is liable as a transferee, but not to show that the transferor is liable for the tax. The parties agree that Missouri law is controlling in this case and have stipulated the amount B & B tax liability. Respondent argues that RBH's book transfers and B & B's real property transfer made petitioner a transferee of B & B's property and liable for B & B's tax liability under Section 6901. Petitioner argues, inter alia, that under Missouri State law an insolvent debtor has the right to pay one of his creditors in preference to paying his other creditors and that, to the extent B & B's contract with RBH 1987 Tax Ct. Memo LEXIS 413">427 had this effect, respondent is without recourse against petitioner as a beneficiary of B & B's choice to pay RBH in preference to paying the United States. We hold for petitioner on this issue. Mo. Ann. Stat. section 428.020 (Vernon 1952) provides that conveyances or assignments made with the intent to defraud creditors are void. It is well settled, however, that conveyances and assignments are not void where a debtor merely chooses to pay a particular creditor in preference to paying other creditors. See Land Red-E-Mixed Concrete Co. v. Cash Whitman, Inc.,425 S.W.2d 919">425 S.W.2d 919 (Mo. 1968); Kinsella v. Gibson,307 S.W.2d 491">307 S.W.2d 491, 307 S.W.2d 491">494 (Mo. 1957); Farmers & Merchants Bank of Festus v. Funk,338 Mo. 508">338 Mo. 508, 92 S.W.2d 587">92 S.W.2d 587 (1936); Van Raalte v. Harrington,101 Mo. 602">101 Mo. 602, 14 S.W. 710">14 S.W. 710 (1890). The Eighth Circuit, to which an appeal in this case lies, has on at least two occasions recognized a debtor's right to pay a particular creditor in preference to paying other creditors. See Cole v. Commissioner,297 F.2d 174">297 F.2d 174 (8th Cir. 1961), revg. T.C. Memo. 1960-278; and Koenig v. Oswald,82 F.2d 85">82 F.2d 85 (8th Cir. 1936). In 82 F.2d 85">Koenig v. Oswald, supra at 88, the Eighth Circuit stated: The statute of Missouri has been frequently 1987 Tax Ct. Memo LEXIS 413">428 passed on by its Supreme Court and it is settled that an insolvent debtor has the right to prefer and pay one of his creditors, though such payment exhausts his resources and leaves him without means to pay any others. * * * In Cole v. Commissioner, supra, the taxpayer ("Mrs. Cole") and her husband ("Mr. Cole") were severally liable on a loan, the unpaid balance of which was $ 12,000. The loan was secured by property owned solely by Mrs. Cole. Mr. Cole paid the loan in full at a time when he was insolvent and liable for Federal income tax. Under section 6901's predecessor, the Commissioner argued that Mrs. Cole was a transferee of Mr. Cole by virtue of his paying off the loan for which she was also liable. The Eighth Circuit after quoting the passage from 82 F.2d 85">Koenig v. Oswald, supra at 88, reproduced above, concluded: [Mr. Cole] having paid the $ 12,000 to satisfy his bona fide indebtedness on the note, the payment was not in fraud of his creditors under Missouri law and his wife was not liable to assessment as a transferee of his assets under [section 6901's predecessor]. 101987 Tax Ct. Memo LEXIS 413">429 Cole v. Commissioner, supra at 176. The facts of Cole v. Commissioner, supra, are very similar to the facts sub judice. Petitioner and B & B, like Mr. and Mrs. Cole, were severally liable on the same obligation. Petitioner and B & B were severally liable on the same obligation. Petitioner and B & B were severally liable on their guaranty to RBH and their grant of a first lien and Mr. and Mrs. Cole were severally liable on their loan. B & B, like Mr. Cole, was liable for unpaid Federal income tax and chose to pay another creditor in preference to paying the United States.11 Petitioner, like Mrs. Cole, was the beneficiary of the preferential payment. Under these facts, we follow Cole and hold that petitioner is not liable for B & B's tax liability as a transferee under section 6901. 121987 Tax Ct. Memo LEXIS 413">430 See Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). 13 The next issue is whether petitioner received constructive dividends from B & B. The parties have stipulated that B & B had sufficient earnings and profits to require dividend treatment for all alleged constructive distributions. Respondent argues that petitioner received constructive dividends from (1) RBH's book transfers to the 1987 Tax Ct. Memo LEXIS 413">431 extent they reduced the deficits in petitioner's trading accounts (the "book transfers/constructive dividend issue"); (2) B & B's real property transfer to the extent it reduced the deficit in petitioner's trading accounts (the "real property/constructive dividend issue"), and (3) B & B's transfer of an automobile to Violet Beavers (the "automobile/constructive dividend issue"). We will first consider the book transfers/constructive dividend issue. In Magnon v. Commissioner,73 T.C. 980">73 T.C. 980, 73 T.C. 980">993-994 (1980), we stated Where a corporation confers an economic benefit on a shareholder without the expectation of repayment, that benefit becomes a constructive dividend, taxable to the shareholder, even though neither the corporation nor the shareholder intended a dividend. However, "not every corporate expenditure which incidentally confers economic benefit on a shareholder is a constructive dividend." The crucial test of the existence of a constructive dividend is whether "the distribution was primarily for the benefit of the shareholder." [Citation omitted.]We will thus consider whether RBH's book transfers authorized by its agreement with B & B were made primarily for the benefit of petitioner. 1987 Tax Ct. Memo LEXIS 413">432 Shortly after B & B's incorporation, it entered into the agreement with RBH. There is no indication in the record that B & B had any business activity other than the business activity conducted pursuant to the agreement. The agreement was essential to B & B's trade or business. As consideration for RBH's entering into the agreement, B & B (1) granted to RBH a first lien against any funds otherwise due B & B from RBH should any customer's trading account have a deficit and (2) guaranteed all of its customers' trading accounts. RBH's book transfers were made pursuant to its first lien on funds it otherwise owed B & B. Thus, we must consider whether B & B granted the first lien primarily for petitioner's benefit. We are convinced that B & B granted the first lien primarily, if not exclusively, for business reasons. The agreement executed by B & B and RBH was a form contract, with RBH's name printed and B & B's name typed in blanks. The agreement established B & B as a branch office of RBH. RBH apparently desired to have, more or less, a similar legal relationship to all of its branch offices. The form contract reflects this desire and indicates that RBH entered into similar agreements 1987 Tax Ct. Memo LEXIS 413">433 with other solicitors on a rather typical or normal basis. At the time B & B entered into the agreement, petitioner, as president of B & B, did not expect that B & B's grant of a first lien would be exercised by RBH to cover deficits in petitioner's trading accounts. Further, it appears as though the granting of a first lien by a solicitor to a clearinghouse is a common business practice in the context of business relationships such as the one shared by B & B and RBH. On the facts presented, we hold that B & B granted a first lien to RBH primarily for business purposes, not primarily for the benefit of petitioner. RBH's book transfers, even those made to reduce the deficits in petitioner's trading accounts, were made pursuant to B & B's grant of a first lien to RBH and were not made primarily for the benefit of petitioner. Accordingly, we hold that petitioner received no constructive dividend as a result of RBH's book transfers. We turn now to the real property/constructive dividend issue. Our analysis of this issue is identical to our analysis of the book transfers/constructive dividend issue. B & B transferred the real property to RBH pursuant to its agreement with RBH, particularly 1987 Tax Ct. Memo LEXIS 413">434 its guaranty of its customers' trading accounts. As stated earlier, the contract was essential to B & B's trade or business. For the reasons we held that B & B's grant of a first lien to RBH was primarily if not exclusively for business reasons, and was not primarily for the benefit of petitioner, we likewise hold with respect to B & B's guaranty of its customers' accounts. B & B's transfer of real property to RBH, even to the extent it reduced the deficit in petitioner's trading accounts, was made pursuant to B & B's guaranty of its customer's trading accounts, and was not made primarily for the benefit of petitioner. Accordingly, we hold that petitioner received no constructive dividend as a result of B & B's transfer of the real property to RBH. 141987 Tax Ct. Memo LEXIS 413">435 We next consider the automobile/constructive dividend issue. Petitioner argues that he paid $ 53,500 to B & B subsequent to the time B & B transferred to Violet Beavers the automobile, which then had an $ 8,500 fair market value. Thus, petitioner apparently argues that he purchased the automobile from B & B. Petitioner has the burden of proof with respect to this issue. Rule 142(a). The $ 53,500 paid by petitioner was not for the automobile but was rather to satisfy his debt to B & B attributable to the deficit in his trading accounts. Accordingly, we reject petitioner's argument. Petitioner makes no other argument with respect to the automobile/constructive dividend issue. We sustain respondent's determination that petitioner received a constructive dividend with respect to B & B's transfer of the automobile to Violet Beavers. The final issue is whether petitioner's losses from trading commodity contracts were capital losses. Characterization of a gain or loss as a capital gain or loss requires the presence of 1987 Tax Ct. Memo LEXIS 413">436 two elements: (1) a sale or exchange (2) of a capital asset. Sec. 1222. Petitioner effectively conceded that the sale or exchange element is here present. Cf. Vickers v. Commissioner,80 T.C. 394">80 T.C. 394 (1983). Thus, our focus is on whether the commodity contracts were capital assets. This Court has on several occasions held that commodity contracts are capital assets. See 80 T.C. 394">Vickers v. Commissioner, supra;Muldrow v. Commissioner,38 T.C. 907">38 T.C. 907 (1962); Battelle v. Commissioner,47 B.T.A. 117">47 B.T.A. 117 (1942); Covington v. Commissioner,42 B.T.A. 601">42 B.T.A. 601 (194), affd. on this issue 120 F.2d 768">120 F.2d 768 (5th Cir. 1941). Other courts have also held that commodity contracts are capital assets. See Oringderff v. Commissioner,48 AFTR 2d 81-5908, 8- 1-2 USTC para. 9642 (10th Cir. 1981), affg. a Memorandum Opinion of this Court; 15United States v. Rogers,286 F.2d 277">286 F.2d 277 (6th Cir. 1961); Faroll v. Jarecki,231 F.2d 281">231 F.2d 281 (7th Cir. 1956); Commissioner v. Farmers and Ginners Cotton Oil Co.,120 F.2d 772">120 F.2d 772 (5th Cir. 1941), revg. on other grounds 41 B.T.A. 255">41 B.T.A. 255 (1940). Petitioner attempts to avoid the application of the above-cited cases under two theories. First, petitioner argues 1987 Tax Ct. Memo LEXIS 413">437 that the commodity contracts are not capital assets within the meaning of section 1221. The burden of proof is on petitioner with respect to this issue. Rule 142(a). Section 1221 defines capital assets as all property, excepting, inter alia, "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." (Emphasis added.) Sec. 1221(a). Petitioner argues specifically that he held the commodity contracts for sale to customers in the ordinary course of his trade or business of buying and selling commodity contracts and, accordingly, the commodity contracts are not capital assets. We reject petitioner's first argument. All of petitioner's commodity contract trades were made through B & B. B & B was not petitioner's customer, but rather petitioner was one of B & B's customers. Petitioner does not argue otherwise. Petitioner would have us look through B & B and RBH to the nameless members of the Chicago Mercantile Exchange who ultimately purchased the commodity contracts petitioner sold and sold the commodity contracts petitioner purchased. Even were we to so look through B & B and RBH, petitioner would fare no better as members of 1987 Tax Ct. Memo LEXIS 413">438 an organized exchange who buy and sell securities from a taxpayer are not the taxpayer's "customers" within the meaning of section 1221(a). See Faroll v. Jarecki,231 F.2d 281">231 F.2d 281, 231 F.2d 281">2887 (7th Cir. 1956); Kemon v. Commissioner,16 T.C. 1026">16 T.C. 1026, 16 T.C. 1026">1032 (1951). Accordingly, we hold that petitioner's commodity contracts do not qualify for the section 1221(1) exception to the definition of capital assets because petitioner has no "customers." 16Petitioner next argues that his commodity contracts are not capital assets pursuant to the Corn Products doctrine. 17 Under the Corn Products doctrine, prima facie capital assets purchased and held by a taxpayer as an integral and necessary part of the conduct of his business are treated as assets other than capital assets, thus making any gain or loss derived therefrom an ordinary gain or loss. However, if a substantial investment motive for the purchase or holding of such assets is present, such assets are treated as capital assets and any gain or loss derived therefrom shall be a capital gain or loss. W. W. Windle Co. v. Commissioner,65 T.C. 694">65 T.C. 694 (1976). 1987 Tax Ct. Memo LEXIS 413">439 The burden of proof is on petitioner with respect to this issue. Rule 142(a). Petitioner was B & B's best customer, accounting for approximately 75 percent of all of B & B's business. Had petitioner not engaged in his substantial trading activities, which generated substantial commission income to B & B, B & B would have incurred losses in its five fiscal years ending October 31 1976, to 1980. Petitioner argues, therefore, that his primary motivation for engaging in his substantial trading activity was to generate income to B & B from which his compensation, salary plus 10 percent of the commissions earned by B & B, could be paid. Even if one of petitioner's motivations to trade commodity contracts were to generate income to B & B from which his compensation could be paid, an examination of petitioner's trading activities indicates that this motivation was, at best, minimal. Petitioner's trading activity generated substantial commission expenses. For B & B's five fiscal years ending October 31, 1976, to 1980, petitioner's compensation from B & B was significantly less than the commission expense 1987 Tax Ct. Memo LEXIS 413">440 incurred from his trading: B & B's Fiscal Year EndedCommission ExpensesCompensationOctober 31, 1976$ 128,786$ 55,636October 31, 1977426,694140,011October 31, 1978693,903176,875October 31, 19781,219,316277,851October 31, 1980698,27558,0745 year total$ 3,166,974$ 708,447We do not believe that petitioner was motivated to any significant extent to pay $ 3,166,974 in commissions to receive compensation of $ 708,447. We are left with the clear impression that petitioner's trading activities were motivated primarily by his expectation of appreciation in the value of the commodity contracts he purchased. As stated in our findings of fact, petitioner expected to make a profit in trading commodity contracts for his own account and, from time to time, did make profits for his own account. 18 Accordingly, we hold that the commodity contracts are not excepted from the definition of capital assets pursuant to the Corn Products doctrine because a substantial investment motive was present. See 65 T.C. 694">W. W. Windle Co. v. Commissioner, supra. Petitioner's losses incurred in trading such contracts are capital losses. 191987 Tax Ct. Memo LEXIS 413">*441 To reflect the foregoing and concessions of the parties, Decision will be entered for the petitioner in docket number 2674-85, and Decision will be entered under Rule 155 in docket number 2675-85.Footnotes1. Respondent's amend answer relates solely to the book transfers/constructive dividend issue, which issue is discussed infra.↩2. Ann Buehler was petitioner's wife from November 25, 1959, until divorced on January 15, 1979.3. Commodity contracts were accurately described in Moody v. Commissioner,T.C. Memo. 1985-20, as follows: A commodity futures contract is an executory contract representing a commitment to deliver or to receive a specified quantity and grade of a commodity during a specified month in the future with the price being designated by the trading participants. Futures contracts are standardized as to the quantity of the commodity, the location, the time of delivery of the commodity and the grade or standards that are acceptable for delivery. In the United States, futures contracts are traded on an organized and federally regulated commodity exchange. The two parties to a futures contract are the seller and the buyer. The seller takes a short position and the buyer takes a long position. Futures contracts are satisfied only by delivery or offset. An offset occurs when a trader executes an equal and opposite position to an earlier position, which eliminates the position in the market. For example, a seller would offset a short position in a given commodity by entering into a long position in the same commodity for the same number of contracts and for the same delivery month. Futures contracts cannot be disposed of in a secondary market, unlike the underlying commodity. Therefore, most are terminated by offset prior to delivery with only a small percentage, 1 to 3 percent, being satisfied by actual delivery. 4. The record does not reflect that this Mr. Buehler took a day off, other than Sunday.↩5. B & B's taxable income excluding commission income generated by petitioner also excludes the deduction for that portion of petitioner's compensation equal to 10 percent of the commissions earned by B & B generated by petitioner's trades. ↩6. The record is not clear whether petitioner's real property transfer and petitioner's cash transfers reduced the deficit balance in petitioner's trading accounts only, other B & B customers' trading accounts only, or a combination of the two. 7. In his amended answer, respondent determined that several of RBH's book transfers and petitioner's payments to B & B, which he originally determined in the individual notice of deficiency to have occurred in 1980, occurred in 1979.↩8. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩9. The transferor's tax liability for which the transferee may become liable under section 6901 also includes additions to tax determined by respondent with respect to the transferor as well as statutory interest. Estate of Glass v. Commissioner,55 T.C. 543">55 T.C. 543, 55 T.C. 543">575 (1970), affd. 453 F.2d 1375">453 F.2d 1375↩ (5th Cir. 1972). 10. Section 6901's predecessor, under which Cole v. Commissioner,297 F.2d 174">297 F.2d 174 (8th Cir. 1961), was decided, section 311 of the Internal Revenue Code of 1939, is, as is here relevant, substantially similar to section 6901. 11. B & B entered into a contract with RBH, the effect of which was to pay RBH in preference to paying the United States.↩12. The relationship of petitioner to B & B, president and majority shareholder, is somewhat different from the relationship of Mrs. Cole to Mr. Cole, wife. However, this difference does not affect our holding, see Land Red-E-Mixed Concrete Co. v. Cash Whitman, Inc.,425 S.W.2d 919">425 S.W.2d 919, 425 S.W.2d 919">923↩ (Mo. 1968), where it was held that preferential payments by a corporation to its shareholders or directors in their capacity as creditors could not be voided by other creditors.13. Respondent did not determine in the notice of transferee liability nor argue on brief that B & B's transfer of an automobile to Violet Beavers made petitioner a transferee of assets of B & B. We therefore do not consider this issue. See Money v. Commissioner, 89 T.C. (July 6, 1987) (slip op. at 4); Atlee v. Commissioner,67 T.C. 395">67 T.C. 395, 67 T.C. 395">396 n.2 (1976); Hedrick v. Commissioner,63 T.C. 395">63 T.C. 395, 63 T.C. 395">396-397 (1974); Alexander v. Commissioner,61 T.C. 278">61 T.C. 278, 61 T.C. 278">288 n.6 (1973); and Estate of Juster v. Commissioner,25 T.C. 669">25 T.C. 669↩ (1955). 14. We further note that with respect to the book transfers/constructive dividend issue and the real property/constructive dividend issue, that any benefits received by petitioner was qua customer of B & B, not qua shareholder of B & B. Thus, RBH's book transfers and B & B's transfer of property cannot be considered constructive dividends because they were not made with respect to petitioner's stock in B & B. See section 301. In this regard, the record amply supports petitioner's intention and endeavor to repay B & B. Petitioner paid $ 281,846 to B & B and would have paid more if not broke. 15. Oringderff v. Commissioner,T.C. Memo. 1979-93↩. 16. See also Kozikowski v. Commissioner,T.C. Memo. 1986-364 and Huebschman v. Commissioner,T.C. Memo. 1980-537↩. 17. See Corn Products Refining Co. v. Commissioner,350 U.S. 46">350 U.S. 46↩ (1955) and its progency. 18. We note that this finding of fact is based on petitioner's own testimony. ↩19. This case, as previously indicated, is appealable to the Eighth Circuit Court of Appeals. The Eighth Circuit in Arkansas Best Corp. v. Commissioner,800 F.2d 215">800 F.2d 215 (8t Cir. 1986), revg. in part and affg. in part 83 T.C. 640">83 T.C. 640 (1984), cert. granted U.S. (March 23, 1987), recently purported to limit the Corn Products doctrine, which it described as "misbegotten," to its facts. The Eighth Circuit stated, "[w]e believe that the judiciary lacks authority to create exceptions to section 1221 that Congress did not choose to make." 800 F.2d 215">800 F.2d at 221. Since the result reached under our analysis of the Corn Products doctrine is the same as the result which would be reached under the Eighth Circuit's analysis of that doctrine, we are not compelled to and do not apply Golsen v. Commissioner,54 T.C. 742">54 T.C. 742, (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). See Myers v. Commissioner,T.C. Memo. 1986-518↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618981/	MORTON Z. OLKEN AND ESTHER OLKEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentOlken v. CommissionerDocket No. 5161-83.United States Tax CourtT.C. Memo 1987-589; 1987 Tax Ct. Memo LEXIS 588; 54 T.C.M. 1172; T.C.M. (RIA) 87589; November 30, 1987; As amended December 2, 1987 Morton Z. Olken, pro se. Dennis Perez, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: This case was assigned to Special Trial Judge Helen A. Buckley pursuant to section 7456(d) of the Code (redesignated sec. 7443A(b) by sec. 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rules 180, 181 and 183. 1 The Court agrees with and adopts her findings of fact and opinion which are set forth below. 1987 Tax Ct. Memo LEXIS 588">591 OPINION OF THE SPECIAL TRIAL JUDGE BUCKLEY, Special Trial Judge: By notice of deficiency mailed December 10, 1982, respondent determined deficiencies in and additions to Federal income tax against petitioners as follows: Additions to TaxTax YearDeficiencySec. 6653(b)1973$ 41,339$ 20,6701974469,714234,85619763,3082,035197739,89920,806Respondent also mailed on December 10, 1982, separate notices of deficiency to each petitioner for the 1975 tax year in which he determined deficiencies in and additions to each petitioner's Federal income tax as follows: Additions to TaxPetitionerDeficiencySecs. 6653(b)6654Morton Z. Olken$ 108,182$ 54,091$ 4,671Esther Olken107,06853,5344,623Respondent's deficiency notices are based upon his determinations that petitioners received unreported income as follows: 2DeterminedSource ofIncome19731974197519761977Commissions$ 97,020$ 134,720-0--0--0-Salary-0--0--0-$ 18,000$ 18,000Embezzlement-0-549,261$ 71,2503,82968,853Net RentalIncome-0-190,081209,839-0--0-PartnershipIncome-0-9,96547,199-0--0-Net Long-Term CapitalGain-0--0-119,248-0--0-1987 Tax Ct. Memo LEXIS 588">592 In addition to that which he determined in his notices of deficiency, respondent, by way of a second amendment to his answer asserted an increased deficiency in tax for 1973 of $ 2,942.50 together with a corresponding increase in the section 6653(b) addition. This is based upon respondent's assertion that petitioners received an additional unreported commission of $ 11.700 in 1973. In the same amendment to his answer respondent also recharacterized $ 1,660.77 of the asserted unreported wage income in 1977 as additional unreported embezzlement income for the same year. 3The issues for decision are as follows: (1) Whether petitioners received unreported income in the taxable years in issue and, if so, the amounts of such income; (2) Whether petitioners are liable for the addition to tax under section 6654(a) for failure to pay estimated tax for the 1975 taxable year; 1987 Tax Ct. Memo LEXIS 588">593 (3) Whether petitioners are liable for the addition to tax under section 6653(b) for fraud for any or all of the taxable years in issue; (4) Whether the statute of limitations operates to bar assessment and collection of any deficiencies in and additions to tax for any of the taxable years in issue; (5) Whether petitioners are entitled to carry back a loss resulting in a tax year subsequent to those in issue, when that loss is the result of restitution of embezzled funds; 4 and (6) Whether the innocent spouse provisions of section 6013(e) are applicable to petitioner Esther Olken for any or all liability for deficiencies in and/or additions to tax. Procedural BackgroundFor the years in issue, petitioners filed Federal income tax returns as follows: Tax YearDate Return Filed1973June 10, 19771974 5September 19, 19751975 6No Return Filed1976July 18, 19771977June 12, 19781987 Tax Ct. Memo LEXIS 588">594 The parties executed Consents to Extend the Time to Assess Tax as follows: Date Consent FormAssessment TimeTax YearExecutedExtended To1973May 28, 1981December 31, 19821974May 28, 1981December 31, 19821975No Consent FormExecuted-0-1976June 6, 1980December 31, 19811976 7April 3, 1981December 31, 19821977April 3, 1981December 31, 1982As stated, the notices of deficiency were mailed to petitioners on December 10, 1982. Petitioners timely filed their petition for redetermination with this Court. At the time they filed their petition, petitioners resided at Sherman Oaks, California. Shortly after trial in this matter commenced, petitioners, who were represented by Morton Olken, 8 orally moved for leave to file an amendment to their petition. The motion was granted and the amendment was filed raising a new issue. 1987 Tax Ct. Memo LEXIS 588">595 At the close of trial the Court ordered that simultaneous opening briefs be filed. Petitioners did not file an opening brief, despite the fact that they were granted extensions of time to do so. We allowed petitioners to file a brief in reply to respondent's brief because of their unrepresented status. 9 Respondent timely filed his reply thereto. FINDINGS OF FACT There have been extensive stipulations of facts (both written and oral) and these facts are so found. The stipulations of facts 10 and exhibits attached thereto are incorporated herein by this reference. Most of the activities of concern1987 Tax Ct. Memo LEXIS 588">596 in this matter are those of petitioner Morton Z. Olken. Henceforth, reference to petitioner in the singular will be to petitioner Morton Z. Olken.Petitioner's BackgroundPetitioner attended various colleges and universities. He attended Roosevelt University for two years where he majored in Business Administration. He also spent three years at the University of Illinois, where he majored in Architectural Engineering. At about the time of trial he was attending classes in accounting at the University of California at Los Angeles, Extension Division. In 1947, petitioner was licensed by the State of Illinois as a real estate broker and his license appears to have been effective through the time of trial. During the late 1950's through 1960, petitioner was a Junior Real Estate Appraiser and also attended and completed Casualty Property Underwriters School. During the early 1960's, petitioner served as a member of loan committees for several banks. Sometime after this, but prior to 1973, petitioner worked in the insurance business with his father administering a large casualty insurance business in which he dealt with many large corporations. Although not entirely clear, 1987 Tax Ct. Memo LEXIS 588">597 the record seems to indicate that during the entire aforementioned time period, petitioner resided in or around Chicago, Illinois. One thing that is clear from the record is that petitioner has much experience and is sophisticated in matters pertaining to real estate, real estate financing and various aspects of the insurance business. Sometime prior to the summer of 1973, petitioners relocated to southern California. It is not clear what petitioner's occupation was when he first relocated, but apparently he was involved in some aspect of the real estate business. The facts in this matter cover a significant time frame and generate from numerous activities in which petition engaged. For the sake of simplicity, we have outlined the discussion of the facts according to the type and source of income involved. I. Commission IncomeA. 16200 Ventura Boulevard Building TransactionDuring the summer of 1973, petitioner began negotiations for the purchase of an office building in Encino, California, known as the 16200 Ventura Boulevard Building (hereinafter "the 16200 Building"), which was owned by Dr. and Mrs. Seymour Matanky (hereinafter the Matankys). Since the1987 Tax Ct. Memo LEXIS 588">598 16200 Building was not profitable at that time the Matankys were quite interested in selling it. The parties negotiated throughout the summer. During the negotiations petitioner represented to the Matankys that he was a licensed real estate broker in Illinois and had a reciprocal license in California. This was not true. Petitioner acted as the broker for the sale, represented both himself and the Matankys, and structured the entire transaction. The building was purchased for $ 1,214,007, net of a $ 49,500 commission transaction. Petitioner received a commission on this transaction of $ 49,500 in 1973 which amount was used as a credit by him in the purchase of the building. It was, in effect, his down payment. Petitioner contends that he did not purchase the building for his own account, that the actual buyer of the 16200 Building was a fictitious Illinois corporation formed and entirely controlled by petitioners named Great Northern Industries (hereinafter "GNI-Ill."). 11 Petitioner claims that he acted as the broker in the transaction representing the buyer GNI-Ill. but Mrs. Matanky, a very credible witness, testified that petitioner made no representations that he was1987 Tax Ct. Memo LEXIS 588">599 representing any corporation and that she and her husband were operating under the assumption that the Olkens were purchasing the 16200 Building as individuals. At no time did petitioner hold himself out as a representative of a corporation. Petitioners were the purchasers of the building in their individual capacity. The record does not indicate that GNI-Ill. was in existence in 1973. As a result of the negotiations, the Matankys became very impressed with petitioner's knowledge of real estate 12 and his creativity in structuring financing for the transaction. They were most impressed by petitioner's ability to consummate the purchase of the 16200 Building without providing any cash for the down payment. The broker's commission payable to petitioner was $ 49,500, and he instructed the escrow company to credit this amount to his account for the down payment. 1987 Tax Ct. Memo LEXIS 588">600 On October 10, 1973, the escrow for this transaction was closed. On that date a Grant Deed, which had been executed by the Matankys on September 26, 1973, was recorded. The Grant Deed indicated GNI-Ill. as the grantee, although the property had been sold to petitioners as individuals. Petitioner prepared most of the documents in regard to the sale and presented them to the Matankys for their signatures, which they provided fairly routinely as they trusted him. Although the deed listed GNI-Ill. as the grantee in the transaction, we find that the 16200 Building was sold to petitioners as individuals. Petitioner took possession and control of the building and operated it in his individual capacity. There was no corporation GNI-Ill. in existence. Petitioner earned $ 49,500 as a real estate commission on this transaction. B. Ranch TransactionsThe Matankys were impressed by petitioner's business acumen and apparent honesty and they early developed great faith in his integrity. Petitioner suggested that the Matankys invest in the farming business. Petitioner told the Matankys that he had knowledge of farming and that he had studied farm engineering. This was not true. 1987 Tax Ct. Memo LEXIS 588">601 Neither of the Matankys had any knowledge of farming. Nevertheless, toward the end of 1973 they agreed to enter the farming business. At that time they entered into an oral agreement whereby petitioner would locate, acquire and manage potentially profitable ranches and the Matankys would purchase them. The arrangement was that petitioner's broker's fees were to be credited to the purchase price. Then, once the Matankys recouped their initial investment, petitioners were to be entitled to a 50 percent ownership interest in the ranches and the remaining 50 percent interest would be retained by the Matankys. Petitioner was not to receive any compensation for managing the ranches until the Matankys recouped their investment. Their oral understanding was that there would be a partnership in which petitioners and the Matankys would be equal partners. In practice, however, petitioner received some of the commissions in the form of unsecured promissory notes from the Matankys, and one commission in cash. Pursuant to this agreement, between December 1973 and February 1974, the Matankys purchased four ranches. Petitioner undertook the management of each of the ranches under the name1987 Tax Ct. Memo LEXIS 588">602 of Southwest Enterprises. The facts surrounding the acquisition of each ranch will be discussed separately; however, there are some facts common to the acquisition of all four ranches. These are: 1. Petitioner represented the Matankys as their real estate broker; 2. As broker petitioner negotiated the terms of the acquisition of each ranch, transferred funds into escrow and handled all of the paperwork; 3. Petitioner maintained the records of each acquisition and supplied copies to the Matankys; 4. Petitioner managed each ranch acquired; 5. The understanding between petitioner and the Matankys concerning profits and ownership sharing was consistent with their oral agreement; and 6. Petitioner was not to receive a broker's fee or compensation for managing the ranches until the Matankys recouped their capital. Almondoz RanchOn or about December 11, 1973, the Matankys purchased the Almondoz Ranch for $ 390,000. Petitioner received an unsecured promissory note from the Matankys in the amount of $ 11,700 with interest at 8 percent per annum as a broker's commission from this transaction. 13 This note was dated December 11, 1973, and due on February 15, 1974. 1987 Tax Ct. Memo LEXIS 588">603 Its value was $ 11,700. Kelly RanchOn or about December 26, 1973, the Matankys purchased the Kelly Ranch 14 for $ 1,619,000. The escrow instructions originally indicated that petitioner was to receive an unsecured promissory note of $ 47,520 as a commission. Subsequently, petitioner's name was crossed out and Great Northern Industries was replaced as the recipient of the note. Petitioner altered the escrow document and placed Great Northern Industries on it as recipient of the note. It was common practice for petitioner to alter documents. 15 The note was executed on December 26, 1973, for $ 47,520 at 8 percent interest per annum payable to either petitioner or Great Northern Industries 16 and was due on July 1, 1974. Its value was $ 47,520. It was consideration for petitioner's services as a broker and was received by him in 1973. Petitioner represented to the Matankys that they would recoup their investment in the Kelly Ranch within nine months to a year, the length of time it would take to have three to four harvests of alfalfa, which1987 Tax Ct. Memo LEXIS 588">604 was the principal crop grown on the Kelly Ranch. This did not happen. Wright RanchIn January of 1974, the Matankys purchased for $ 700,000 the Wright Ranch which was located in Imperial County, California. On this transaction petitioner received a $ 21,000 cash commission in 1974 even though he was not supposed to receive any commissions according to his understanding with the Matankys. Tullos RanchOn or about February 25, 1974, the Matankys1987 Tax Ct. Memo LEXIS 588">605 purchased the Tullos Ranch for $ 550,000. Petitioner received an unsecured promissory note at 8 percent interest dated February 25, 1974, and due May 1, 1974, payable to Morton Z. Olken as commission from this transaction for $ 16,500. 17 The value of this note was $ 16,500. C. Encino Medical Towers TransactionIn 1974 the Matankys and petitioners entered into an agreement to form the M & O Enterprises partnership (hereinafter "M & O"). This partnership was formed to acquire and develop a medical office building known as the Encino Medical Towers, which was located just down the street from the 16200 Building. On June 1, 1974, the Matankys and the Olkens executed the partnership agreement, which provided for an arrangement almost identical to that governing the acquisition and development of the ranch properties. The Matankys were to purchase the Encino Medical Towers and petitioner was to manage the property. Although petitioner acted as the broker on behalf of the Matankys in acquiring the property, he was not to be compensated for assuming this role. The Encino1987 Tax Ct. Memo LEXIS 588">606 Medical Towers was purchased through the United States Bankruptcy Court. Originally title was passed to Great Northern Industries, Inc., a California corporation (hereinafter GNI-Cal.) and on August 26, 1974, GNI-Cal., by way of a quitclaim deed, transferred title to M & O. GNI-Cal. acted solely as a conduit for funds transferred by the Matankys to the Bankruptcy Court for the purchase of the property. Regardless of the title holder, however, it is clear that commissions received on the sale were for the services of petitioner. He received a $ 30,000 commission in cash from this transaction in 1974. II. Embezzlement Income for 1974 and 1975A. Southwest EnterprisesOn June 20, 1974, the Matankys and the Olkens executed the Southwest Enterprises partnership agreement. In essence, the agreement memorialized in writing the oral agreement under which petitioner and the Matankys were operating in regard to their farming ventures. In addition to the provisions dealing with the acquisition of the properties and the sharing of ownership and profits after the Matankys recovered their investment, the agreement provided in relevant part as follows: 1. The Matankys were1987 Tax Ct. Memo LEXIS 588">607 entitled to a 100 percent allocation of net profits and losses from Southwest Enterprises until such time that they received distributions from the partnership equal to their aggregate capital contributions; 2. The partnership would have its place of business at the 16200 Building; 3. No portion of the partnership capital could be withdrawn without the unanimous written consent of all partners; 4. No partner was entitled to any salary or compensation for services to the partnership; 5. Each partner was to have an equal voice in the management of the partnership and have authority to bind the partnership in making contracts and incurring certain obligations in the name and on the credit of the firm. However, no partner was to incur any obligation in the name or on the credit of the partnership exceeding $ 5,000 without the express written consent of the other partners. Any obligation incurred in violation of this provision was to be charged to and collected from the individual partner incurring such obligation. This limitation on obligations was subject to change by agreement of the partners; 6. Obligations of the partnership paid out of personal funds were subject1987 Tax Ct. Memo LEXIS 588">608 to reimbursement; and 7. No partner might draw funds for personal use without the written consent of the other partners. The Matankys contributed 100 percent of the capital contributions to Southwest Enterprises. Their contributions took two basic forms: first, they contributed their interest in the ranches which they had acquired as individuals and second, they contributed substantial amounts of cash to the partnership purportedly for operating expenses. The cash was generally turned over at the suggestion of petitioner who told the Matankys that the partnership needed the sum he requested to cover partnership expenses. Since the Matankys trusted petitioner implicitly, they never questioned the propriety of any request for funds by him. If cash was requested by petitioner, either Dr. or Mrs. Matanky wrote out a check. In certain cases (which will be detailed more specifically, infra), the checks were not issued to Southwest Enterprises but to other entities or individuals. During 1974, petitioner undertook the management of the Almondoz, Kelly, Wright and Tullos ranches on behalf of Southwest Enterprises. The ranches were principally engaged in the cultivation of1987 Tax Ct. Memo LEXIS 588">609 hay, alfalfa, cotton and wheat. Some of the ranch land was leased to an independent sheepherder for grazing of his flock. The ranches were not in the business of owning or raising any type of farm or ranch animals. During 1974 and 1975, petitioner maintained Southwest Enterprises' checking accounts at the following banks: Wells Fargo Bank in Encino, California, Bank of America in Van Nuys, California, and Manufacturers Bank in Encino, California. Petitioner had signatory authority over all of the accounts and was entirely responsible for overseeing deposits and disbursements of funds into and from the accounts. As the manager of the ranches and the partnership petitioner had complete, unrestricted control over partnership assets. In theory, of course, petitioner was limited by the terms of the partnership agreement, but in reality, because the Matankys trusted petitioner and did not question his actions, petitioner had complete autonomy concerning the operation of the partnership and its assets. The Matankys rarely, if ever, involved themselves with the operation of the partnership. Petitioner did, however, have some help in managing Southwest Enterprises. On April 3, 1974, petitioner1987 Tax Ct. Memo LEXIS 588">610 hired Sally Schoonover to work as a secretary/bookkeeper for the partnership. 18 Ms. Schoonover performed various functions, such as handling payroll, accounts receivable, and correspondence; maintaining a journal; reconciling bank accounts; depositing and disbursing funds into and from business bank accounts and petitioner's personal bank accounts; 19 and answering the telephone. In virtually every phase of his activities involving Southwest Enterprises petitioner was assisted by Ms. Schoonover. Eventually, she became a confidante of petitioner's. Through her own personal observation and through what petitioner had told her, she became aware that petitioner was embezzling funds from Southwest Enterprises, inter alia. She eventually reported this to the Matankys. 1987 Tax Ct. Memo LEXIS 588">611 The procedure for paying partnership bills was that petitioner would indicate to Ms. Schoonover which bills were to be paid and from which bank account. She would then prepare the checks for petitioner's signature. In addition to paying partnership expenses from the partnership accounts, many checks were issued in payment of petitioner's personal expenses. Petitioner forbade Ms. Schoonover to discuss partnership business or answer any questions about the actual operation of the partnership with the Matankys, or anyone else for that matter. Once, when Ms. Schoonover questioned petitioner about his signing Dr. Matanky's name to a document, petitioner told her he had permission to sign for the doctor anytime. Petitioner had no such signatory authority. During 1974, petitioner embezzled substantial amounts of cash from Southwest Enterprises. Petitioner did this by directing Ms. Schoonover to prepare checks on Southwest Enterprises' accounts payable to himself, an entity which he controlled (GNI-Cal. or the 16200 Building), his wife (Esther Olken), or to some third party in payment of personal, nonpartnership expenses. Through this mechanism petitioner embezzled $ 107,570.761987 Tax Ct. Memo LEXIS 588">612 and $ 14,043,32 during 1974 and 1975, respectively. 20Checks totaling $ 15,637.50 were drawn in 1974 on Southwest Enterprises accounts payable to Great Northern Industries, California. These were used to cover overdrafts in GNI-Cal.'s accounts, and they were used for the personal benefit of petitioners. From the same accounts checks totaling $ 21,369.26 were drawn to Morton Olken in 1974 and deposited by him into petitioner's 16200 Building's checking account. There is no evidence that these checks were for reimbursement of Southwest Enterprises' expenses other than petitioner's uncorroborated claim. 211987 Tax Ct. Memo LEXIS 588">613 In addition petitioner had 5 checks of $ 250 each, totaling $ 1,250, drawn and deposited to the 16200 Building account in 1974. Petitioner claims that these were for rental of office space. However, petitioner was not supposed to charge Southwest Enterprises rent. We include them within the embezzlement income, but note that they constitute income to petitioners no matter how we characterize the nature of the income. Checks were drawn to Esther Olken in 1974 in various amounts totaling $ 438.98, purportedly for secretarial work she provided. Petitioner had a $ 40 check written to the Conejo Valley Veterinary Clinic in 1974 for the examination of a horse petitioner was planning to purchase for his daughter. 22During 1974 checks in the total amount of $ 41,351.98 were drawn to the Ashley Company 23 in payment for construction of petitioners' personal residence. 1987 Tax Ct. Memo LEXIS 588">614 Two checks were drawn to cash, totaling $ 400. Both were cashed by petitioner in 1974. Checks were drawn in 1974 to Crestview Escrow, Inc., totaling $ 7,532. The first, for $ 7,032, was for closing escrow on petitioners' personal residence. The second, in the amount of $ 500, was a down payment on petitioner's effort to purchase the escrow company. Checks totaling $ 11,150 were drawn in 1974 payable to Mark Hayworth, 24 who installed the sprinkler system in petitioners' personal residence. Petitioner alleged, untruthfully, that these checks were for irrigation work on the ranches but Mr. Hayworth did not do any such work. Petitioner had checks drawn representing costs for his family's personal automobiles totaling $ 1,019.37 during 1974. Various payments totaling $ 853.01 were made in 1974 on oil company credit card accounts, all for petitioner's personal benefit. Payments were made on petitioner's charge cards in 1974 in the amount of $ 2,103.99, representing personal expenses of petitioners and their family. Other miscellaneous1987 Tax Ct. Memo LEXIS 588">615 checks were drawn in 1974 for the personal benefit of petitioner totaling $ 4,424.67. 25 Three of these checks were to pay petitioners' TWA charge card. Petitioner testified that the flights were on partnership business but that was not true. Petitioner's embezzlements from Southwest Enterprises during 1975 totaled $ 14,043.32. These were broken down as follows: Checks payable to petitioner in the amount of $ 4,179.38. Checks payable to the 16200 Building in the total amount of $ 750. Petitioner was not entitled to charge Southwest Enterprises rent. These checks we have characterized as embezzlement income. $ 28 to Esther Olken for secretarial services and1987 Tax Ct. Memo LEXIS 588">616 $ 230.65 for the lease payment on her automobile. A check to GMAC totaling $ 666.92, of which $ 147 represented payment on petitioners' daughter's automobile. Checks payable to Mobil Oil in the amount of $ 618.67 and to Standard Oil in the amount of $ 954.68, all of which represented personal expenditures of petitioners and their family. Personal charge card payments were made totaling $ 1,714. TWA charge card payments totaling $ 351.17 were made;; a payment of $ 224.21 for vending machines in the 16200 Building, one for $ 243.80 for petitioner's personal automobile, $ 101.76 for a life insurance premium for Esther Olken, and $ 4,500 in payment of a personal debt of petitioner. B. Monies Embezzled Directly From the MatankysIn 1974, petitioner maintained and had complete control over the following bank accounts: 1. Great Northern Industries at Wells Fargo Bank; 2. Great Northern Industries at Crocker National Bank; 3. M. Olken, 16200 Ventura Building at Wells Fargo Bank; and 4. M. Olken, 162000 Ventura Building at Crocker National Bank.Throughout the year petitioner requested the Matankys to write checks to various entities. These entities included MOF1987 Tax Ct. Memo LEXIS 588">617 (an informal partnership which was a forerunner of Southwest Enterprises), the Rottman Company (a drilling company unrelated to petitioner), Southwest Enterprises, the 16200 Building, GNI-Cal. and M. Olken. Petitioner always provided a facially reasonably request for the check. Generally, he would say that he needed the money for various business expenses. When he asked that checks be issued to himself or some entity which he controlled, he would tell the Matankys that he had already paid business expenses out of one of his accounts on their behalf and the checks were for his reimbursement. However, with one exception, there is no evidence in the record that petitioner ever advanced funds on behalf of any partnership in which the Matankys had an interest or on behalf of the Matankys themselves. 26 Instead petitioner would deposit the funds received into one of the various bank accounts outlined above. Where the checks were made out to an entity not controlled by petitioner, such as the Rottman Company, he forged the endorsements. 1987 Tax Ct. Memo LEXIS 588">618 Through this mechanism, petitioner embezzled $ 114,850 from the Matankys during 1974. 27The Matankys wrote a check dated January 17, 1974, to MOF 28 in the amount of $ 5,000. This sum was used by petitioner for his own purposes and was not used on behalf of the Matankys or any of their interests. Further, they wrote a check in 1974 for $ 12,000 payable to the Rottman Company, ostensibly for drilling costs on one of the ranches. Petitioner endorsed the Rottman Company's name to the check and deposited it, as he had the $ 5,000 check, in his 16200 account. Petitioner claimed he had previously paid the drilling company and that he was therefore entitled to the check as reimbursement. This claim was not true. The Rottman Company had not been paid. Petitioner also deposited checks payable to Southwest Enterprises totaling $ 16,550 into his own accounts and used these amounts for his own purposes. He was not entitled to do so and the Matankys believed that the checks were deposited into a Southwest Enterprises' 1987 Tax Ct. Memo LEXIS 588">619 account. Also during 1974 the Matankys wrote several checks at petitioner's request which they were told represented reimbursements paid on their behalf. Thus, $ 30,750 was paid to the 16200 Building, $ 27,250 to GNI-Cal. and $ 23,300 to petitioner. Of the amount paid to petitioner $ 9,300 was intended by the Matankys to be a loan to him. It was never repaid and petitioner never intended to repay it. Petitioner was not able to show that any of these amounts represented reimbursements for payments he had made on behalf of the Matankys. C. Lancaster Ranches' Note (Kelly Ranch)When the Matankys purchased the Kelly Ranch on or about December 26, 1973, they executed a note in the amount of $ 17,500 in favor of Lancaster Ranches, Inc., the seller of the ranch, for farm equipment on the ranch. On January 15, 1974, Mrs. Matanky gave petitioner a check for $ 17,500 payable to Lancaster Ranches, Inc., to satisfy this promissory note. Petitioner did not remit the check but instead endorsed it by forgery and deposited the check into the M. Olken, 16200 Ventura Building account at Wells Fargo Bank. Petitioner had no authority to endorse the check and deposit it into the 162001987 Tax Ct. Memo LEXIS 588">620 Building account. Subsequently, petitioner had two checks issued on the Southwest Enterprises account payable to Lancaster Ranches, Inc., in payment of the December 26, 1973, note. 29 There is no evidence that petitioner ever repaid Southwest Enterprises or the Matankys. Accordingly, we find that through this mechanism petitioner embezzled $ 17,500 from the Matankys during 1974. D. M & O EnterprisesM & O was formed for the purpose of acquiring and developing the Encino Medical Towers. On June 1, 1974, a partnership agreement was executed by petitioners and the Matankys which was virtually identical to the Southwest Enterprises partnership agreement, 30 and the same basic relationship between petitioner and the Matankys applied. The Matankys were to acquire the Encino Medical Towers and supply all other necessary capital. Petitioner was to manage the building and receive no compensation, profits or ownership interest until the Matankys recovered their initial investment. 1987 Tax Ct. Memo LEXIS 588">621 Petitioner engaged in a pattern of deceit and misappropriation of funds with respect to M & O similar to that regarding Southwest Enterprises. As the manager of the medical building he had complete and unbridled control over the partnership's bank accounts. During 1974 and 1975, M & O maintained the following bank accounts: 1. M & O Enterprises at Wells Fargo Bank; 2. M & O Enterprises at Crocker National Bank; and 3. M & O Enterprises at City National Bank.Petitioner had signatory authority over these accounts. Bills were paid in the same manner as they were for Southwest Enterprises, with petitioner directing Ms. Schoonover (who performed similar tasks for M & O as for Southwest Enterprises) to prepare the checks for his signature. It was up to petitioner to decide which bills were to be paid. As with Southwest Enterprises, the Matankys had little to do with the day-to-day operations of the partnership. They left this to petitioner, whom they trusted and admired. At the direction of petitioner, Ms. Schoonover prepared a series of checks in 1974 and 1975 out of the M & O accounts payable to either petitioner, a member of his family, an entity which he controlled1987 Tax Ct. Memo LEXIS 588">622 or some unrelated third party in payment for personal services rendered or goods sold to petitioners. These checks all represented payments for nonpartnership expenses and went to the personal use and enjoyment of petitioners. During 1974 and 1975, petitioner embezzled $ 45,289.84 and $ 11,036.17, respectively, through the diversion of M & O Enterprises' checks. 31During 1975, petitioner developed and engaged in another scheme to divert funds from M & O Enterprises and put them to his personal use and enjoyment. Petitioner commenced diverting the rent checks coming into the partnership from tenants in the Encino Medical Towers, the partnership's principal asset, into his personal account, the M. Olken 16200 Ventura Building account at Crocker National Bank. Petitioner had no authority to deposit rent checks from the Encino Medical Towers into this account. There is no evidence of any repayment of these funds by petitioner to M & O. During 1975, petitioner diverted rental payments due to M & O totaling $ 30,430.11 into his 16200 Building account. 321987 Tax Ct. Memo LEXIS 588">623 E. CEIR Building TransactionSometime late in 1974, M & O attempted to acquire another office building commonly known as the CEIR Building. On November 15, 1974, Dr. Matanky and petitioner, as general partners of M & O, executed a mortgage loan application with American International Mortgage Corporation (hereinafter "American"). On that same date and in connection with the loan application, John D. Kramer (an employee of Great Northern Industries) submitted a $ 27,750 check as a good faith deposit on behalf of M & O. The check was drawn on the GNI-Cal. account at Crocker National Bank. On November 19, 1974, the Matankys delivered to American a cashier's check drawn on Continental Bank payable to American in the amount of $ 27,750. This check was to replace the November 15, 1974, check of GNI-Cal., which was then returned to John Kramer and received by him on November 22, 1974. The Matankys and a Mr. Charles Bluth borrowed the $ 27,750 from Continental Bank. The arrangement with American was that if the purchase of the CEIR Building was not consummated, the cashier's check from Continental Bank was to be returned to that bank. The purchase eventually fell through. 1987 Tax Ct. Memo LEXIS 588">624 On January 21, 1975, petitioner requested American to return the $ 27,750 deposit to M & O Enterprises, and American complied by sending a cashier's check in the amount of $ 27, 750 on January 23, 1975, but it was payable to GNI-Cal. John Kramer acknowledged receipt of the funds. The check was deposited into the GNI-Cal. bank account at Crocker National Bank. The release provided to American to obtain the return of the $ 27,750 deposit contained a signature of Dr. Matanky that was forged by petitioner. The Matankys did not know that their funds were returned to GNI-Cal. nor did petitioner ever inform the Matankys of this. Continental Bank was not repaid its $ 27,750 loan and eventually sued the Matankys and Mr. Bluth for repayment. We find that petitioner embezzled this $ 27,750 during 1975. F. Bankruptcy of Southwest EnterprisesDuring April 1975, Southwest Enterprises filed a petition in bankruptcy. Shortly thereafter, Ms. Schoonover advised the Matankys about some of the irregularities regarding Southwest Enterprises and M & O. During May 1975, Ms. Schoonover obtained Southwest Enterprises partnership's records (as well as M & O records) from petitioner's office1987 Tax Ct. Memo LEXIS 588">625 in the 16200 Building. It is unclear whether the records were obtained prior to or pursuant to a Bankruptcy Court order. They eventually were turned over to the trustee in bankruptcy, Sam Jonas. Commingled with Southwest Enterprises' records were some of petitioner's personal records. These were returned to petitioner in the same month. On November 7, 1977, the trustee made the records of Southwest Enterprises available to the Matankys and petitioners. It was not until Southwest Enterprises filed in bankruptcy that the Matankys became aware of the extent of petitioner's illegal activities. On September 12, 1975, the Matankys filed a suit in Los Angeles Superior Court against petitioner alleging 10 different causes of action, including fraud, conversion and negligent misrepresentation and requesting the imposition of a constructive trust in favor of the Matankys. In connection with the suit the Matankys filed a Lis Pendens to give prospective transferees of the 16200 Building notice of the law suit and the fact that the Matankys asked for a constructive trust in regard to that building. During April of 1976, the Matankys filed a complaint with the Los Angeles County District1987 Tax Ct. Memo LEXIS 588">626 Attorney's office (hereinafter "LADA") alleging that petition had engaged in acts of grand theft by fraud, forgery and filing of fraudulent documents. The LADA investigated the complaint, in the course of which several search warrants were executed. Many of petitioner's personal documents were seized pursuant to these warrants. 33Criminal charges were eventually brought against petitioner in regard to his embezzlement of funds from Southwest Enterprises, M & O and the Matankys. Petitioner pleaded nolo contendere, was convicted and served approximately seven months in various facilities maintained by the California Department of Corrections for his Matanky activities. Petitioner was incarcerated on October 18, 1978, and released December 25, 1982. (His time after the first 7 months related to a subsequent criminal conviction which will be discussed later.) III. Rental IncomeAs previously discussed, on September 26, 1973, the Matankys executed a Grant Deed transferring title to the 16200 Building to petitioner. That deed listed GNI-Ill. as the1987 Tax Ct. Memo LEXIS 588">627 grantee; however, GNI-Ill. was nonexistent. 34 Petitioner claims that GNI-Ill. was a viable corporation but placed no testimony in evidence to support his contention. The record reveals otherwise. Essentially, on the date of transfer (the escrow closed on October 10, 1973 and the deed was recorded on the same date) petitioners as individuals took control of the 16200 Building. On October 24, 1973, petitioners (as "officers" of GNI-Ill.) executed a quitclaim deed for the 16200 Building quitclaiming it to "Morton Z. Olken and Esther Oklen, as community property." This deed was not recorded until December 23, 1974. On December 19, 1973, petitioner (as president of the nonexistent GNI-Ill.) executed a Grant Deed granting title to the 16200 Building back to the Matankys, who then executed a Grant Deed granting title to "Great Northern Industries, Inc. -- a California Corporation," which had become incorporated on November 15, 1973. It was formed and entirely controlled by petitioner. On February 3, 1975, GNI-Cal. was suspended from operating as a California corporation and was restored on April 11, 1975. GNI-Cal. was permanently suspended from1987 Tax Ct. Memo LEXIS 588">628 operating as a California corporation on December 1, 1976. The corporation maintained no books, minutes 35 or records, except for a couple of checking accounts. There was no initial capitalization of GNI-Cal. when it was formed nor did it show any gross receipts in 1974. The corporation did not file a Federal Corporate Income Tax Return for 1973 and returns filed for subsequent years showed absolutely no corporate activity. GNI-Cal. was nothing more than a tool used by petitioner to facilitate his deception of the Matankys and anyone else who was or might have been the target of his deceit. 36On July 11, 1975, petitioners as individuals executed a deed of trust respecting the 16200 Building in favor of the Title Insurance and Trust Company and Douglas Eve, in regard to a loan to petitioners. On September 22, 1975, petitioner1987 Tax Ct. Memo LEXIS 588">629 executed an Individual Grant Deed granting title to the 16200 Building to GNI-Cal. 37 That corporation on December 30, 1975, executed (by petitioners as officers) a Corporation Grant Deed granting title to "The Rock, Ltd. a Limited Partnership." The Rock was unrelated to petitioners. We find that GNI-Cal. never operated as a business in 1973, 1974 or 1975 and existed only to facilitate petitioner's fraudulent activities. Despite GNI-Cal.'s having been listed as the grantee of the 16200 Building on numerous deeds, we find that the 16200 Building was from October 10, 1973, until its sale to the Rock, Ltd., owned by petitioners as individuals. 381987 Tax Ct. Memo LEXIS 588">630 During 1974 and 1975, while petitioners owned and operated the 16200 Building, there were schedules prepared of the building's rental receipts and rental disbursements. 39Petitioner included numerous personal expenses on these schedules so that the expenses would appear as legitimate rental expenses. Some of the mischaracterizations are as follows: 1. Petitioner listed a $ 950 expense from "Las Virgenes Water" on the February 1974 expense schedule. This expense was for a water bill and sewage fee for petitioners' personal residence; 2. Petitioner listed $ 3,683 as "office furniture" expenses from Ashley Furniture and Ashley Interiors, on the February 1974 expense schedule. These expenses were for interior decorating at petitioners' personal residence; 3. Petitioner listed a $ 20,000 expense for "construction of Suite 213" by Ashley Construction on the September 1974 expense schedule. Ashley Construction did not do any construction work at the 16200 Building during 1974. This expense was incurred for the construction of petitioners' 1987 Tax Ct. Memo LEXIS 588">631 personal residence; 4. Petitioner listed a $ 208.33 expense as a "fee" to Stuart Hackel on the November 1974 expense schedule. This expense represents a monthly payment to Stuart Hackel on a second deed of trust on petitioners' personal residence. Stuart Hackel did not render any services to the 16200 Building; 5. Petitioner listed a $ 5,454.74 "machine rental" expense from Carwell Corporation on the December 1974 expense schedule. This expense represents the down payment petitioner submitted on the lease of his personal Mercedes Benz automobile; 6. Petitioner listed a $ 100 expenses for "outside secretarial" work by his daughter, Melody Olken, on the December 1974 expense schedule. Melody Olken never rendered any secretarial services to the 16200 Building; 7. Petitioner listed a $ 233.80 "car rental" expense from City National Bank on the January 1975 expense schedule. The expense represents a monthly payment for petitioner's personal Mercedes Benz automobile; 8. Petitioner listed a $ 125 "gardening" expense from Tom Ryono on the February 1975 expense schedule. This expense was for gardening at petitioners' personal residence. Tom Ryono never rendered any services1987 Tax Ct. Memo LEXIS 588">632 to the 16200 Building; and 9. Petitioner listed a $ 200 expense from "Kyoka" on the February 1975 expense schedule. The amount was paid to petitioners' personal housekeeper, Kyoka Tochimura. During 1974 and 1975, the 16200 Building operated at a profit. When only properly deductible expenses are taken into account, the Building had net rental income of $ 63,379.46 and $ 61,832.85 for 1974 and 1975, respectively. These figures are computed as follows: 19741975Gross rental receipts$ 207,358.00 $ 229,441.00 Less (properlysubstantiated rentalexpense)(123,626.54)40(148,006.15)Less (allowabledepreciation)( 19,602.00)( 19,602.00)Net rental income$ 64,129.46 $ 61,832.85 Less (duplicated amount)750.00 $ 63,379.46 The net rental income for 1974 must be reduced in order to avoid duplication by three payments of $ 250 each from Southwest Enterprises which have already been included in petitioner's 1974 income as amounts embezzled by petitioner. These three payments were shown as rentals on the 16200 Building schedules and we delete1987 Tax Ct. Memo LEXIS 588">633 them here to avoid duplication. Petitioners failed to substantiate any allowable deductions in addition to those allowed above. Since petitioners were the owners of the 16200 Building the net rental income during 1974 and 1975 is income to them in the amounts of $ 63,379.46 and $ 61,832.85, respectively. IV. Partnership IncomeOn their 1974 income tax return, petitioners reported no income from either Southwest Enterprises or M & O Enterprises. For 1974 a partnership return was filed for M & O Enterprises which indicated that petitioners received $ 9,965 in partnership income and respondent included this figure in his computation of unreported income. Respondent also included partnership income of $ 47,199 in the unreported income for 1975. Petitioner placed no specific evidence into the record in regard to these items. Both the M & O and Southwest Enterprises partnership agreements, however, made it clear that petitioner did not have such income. V. Capital Gain IncomeOn December 30, 1975, the Rock, Ltd. (hereinafter "Rock") partnership purchased the 16200 Building. Herb Halpern, a partner in Rock, negotiated the transfer on behalf of Rock. 41 Petitioner1987 Tax Ct. Memo LEXIS 588">634 represented himself as the president of GNI-Cal. and indicated that GNI-Cal. was the owner of the 16200 Building. The escrow for this transactions closed on December 31, 1975. Although the parties treated GNI-Cal. as the seller of the 16200 Building, it was petitioner who actually received the compensation paid by Rock. The purchase price was $ 1,504,000. Petitioners' adjusted basis in the property was $ 1,220,004. 42 Petitioners' gain on this sale was $ 283,996. 1987 Tax Ct. Memo LEXIS 588">635 Throughout the negotiations, petitioner made numerous material misrepresentations prior to the close of the escrow. 43 Eventually, Rock discontinued payments on its notes to GNI-Cal. and in 1976 brought an injunction action to prevent default being declared on the notes. In 1981 a default judgment was entered by the Los Angeles Superior Court granting judgment to plaintiffs in the amount of $ 680,000 plus costs, an amount substantially in excess of the note obligations. 1987 Tax Ct. Memo LEXIS 588">636 VI. Victor Lundin & AssociatesDuring 1976, petitioner began working for his cousin Victor Lundin, who at the time owned an insurance brokerage business called V. R. Lundin & Associates Insurance Marketing (hereinafter "VLA"). 44 Lundin was engaged in the business of selling all forms of health and life insurance and the establishing of self-insurance and reinsurance programs as provided for under the Employee Retirement IncomeSecurity Act (ERISA). It is unclear whether Lundin was aware of petitioner's pending criminal matter regarding the Matanky embezzlements at the time petitioner began working with him. Petitioner continued to be associated with this business until February 1978. Victor Lundin (hereinafter "Lundin") brought petitioner into these businesses because he knew of petitioner's experience in insurance administration. Lundin was more familiar with the sales and marketing aspects of an insurance business and therefore was appreciative of petitioner's background in administration. 1987 Tax Ct. Memo LEXIS 588">637 As the administrator of these various businesses, 45 petitioner managed the office. His duties included depositing and disbursing company funds, bookkeeping, training new employees and maintaining the company's checking accounts, over which he had signatory authority. 46 During 1976, petitioner also went out in the field on weekends to sell insurance with Lundin. During 1977, when the business was more heavily involved with self-insurance under ERISA, petitioner established procedures for the administration of claims. This required setting up premiums with various actuaries, contacting the insurance carriers on a regular basis and handling premium payments and refunds on the various policies. During the years in issue, most of the mail1987 Tax Ct. Memo LEXIS 588">638 received by VLA, UWIM and GNA was handled by petitioner. This mail included checks for refunds of insurance premiums. Petitioner had his own office in the company offices. He had a private lock on his office door and granted no one, not even Lundin, access to his office. Sometime towards the end of 1977, Lundin gained access to petitioner's office and found a $ 50,000 check drawn by petitioner on the GNA account. This check apparently represented a deposit in a real estate transaction and never cleared the bank. Petitioner had forged Lundin's signature on this check. At no time was petitioner given authority to sign Lundin's name to checks or other insurance company documents. Lundin consulted with his attorney and was advised to watch petitioner carefully. During the early part of 1978, Lundin again gained access to petitioner's office. This time he discovered deposit slips, canceled checks and other funds from VLA, UWIM and GNA. After this discovery Lundin arranged a meeting with petitioner and their respective attorneys. Petitioner admitted to stealing money from the companies. He told his cousin he needed the money. Petitioner's fraudulent misappropriation of funds1987 Tax Ct. Memo LEXIS 588">639 took three basic forms. One scheme involved the issuance of VLA, UWIM or GNA checks to companies or persons who did business with petitioner or to fictitious persons. Petitioner would forge Lundin's name to these checks. He would also forge the endorsements on these checks. These checks would then be deposited into either petitioner's personal checking account at Lloyds Bank of California or his wife's checking account at Security Pacific Bank. Through this mechanism, petitioner embezzled $ 2,069.46 and $ 65,108.97 in 1976 and 1977, respectively. 47Some of these checks were made payable to Mr. or Mrs. Olken. Many others were made payable to various insurance companies with which the Lundin companies did business, such as Colony Charter Life (forged checks totaling $ 16,479.60), Republic National Insurance Company (forged checks totaling $ 18,100.48) and Director's Life Insurance Company (forged checks totaling $ 3,118.66). Petitioner also had checks drawn payable to Tex Ritter, the owner of a printing firm which did business with the Lundin companies. These checks, to which petitioner forged Mr. Ritter's name, totaled1987 Tax Ct. Memo LEXIS 588">640 $ 4,021.50. Similarly, petitioner had checks drawn to an attorney, Barry Resnick, totaling $ 3,275. As with the other checks in this group, petitioner forged Mr. Resnick's name and deposited the checks into petitioner's account. The Hansen Company is an actuarial consulting firm. Petitioner had checks totaling $ 2,975 drawn to A. S. Hansen. He then forged the endorsements and deposited them into his personal account. Petitioner started but did not complete the process of forming California Travelers Life Insurance Company in Arizona. Petitioner had checks drawn on Lundin accounts totaling $ 6,750 which he deposited into an account which he maintained in that company's name. There was no business purpose for issuing checks to this entity, which was not in existence. A group of checks were issued to insureds and some fictitious payees, totaling $ 1,192.05. Petitioner endorsed these checks and deposited them into his personal account. Yet another group of checks was drawn to various salesmen for the Lundin companies and other persons totaling $ 5,884.84. Petitioner forged endorsements on these checks and deposited them in his personal account. Petitioner also had1987 Tax Ct. Memo LEXIS 588">641 drawn a group of checks on various Lundin companies' accounts which he used for his own personal purposes. These checks were not deposited by petitioners in their own accounts, but had no relation to the Lundin businesses. 48 These totaled $ 1,725.41 in 1976 and $ 368.75 in 1977. Another of petitioner's schemes involved checks received by VLA, UWIM or GNA from clients or related businesses. Petitioner would forge the endorsement on these checks and deposit them into either his account or his wife's. In this manner, petitioner embezzled $ 34.73 and $ 3,421.37 in 1976 and 1977, respectively. 49 Many of these amounts were very small premium refunds payable to various insureds. Some were large amounts payable to Mr. Lundin and his various businesses. Thus, petitioner's forgeries in this regard1987 Tax Ct. Memo LEXIS 588">642 ranged from 62 cents to $ 608.49. VLA issued a Form W-2 to petitioner for 1977. This form was based upon payroll checks drawn on the company's accounts during that year. It does not represent any of the stolen or embezzled amounts set forth above. Petitioner attempted to cover up his embezzlement from VLA, UWIM and GNA by claiming that the fraudulent endorsing of checks into his account was part of a money laundering scheme between Lundin and himself. Lundin, who was not a part of any such scheme, filed a complaint against petitioner with the Los Angeles District Attorney and petitioner eventually pleaded nolo contendere to criminal charges which resulted from the investigation. He served time in various institutions operated by the California Department of Corrections as a result. All the embezzled funds went to petitioner's personal use and enjoyment. There is no evidence whatsoever of repayment to Lundin of any embezzled funds. Respondent dtermined that petitioner earned $ 18,000 in wages from VLA each year for 1976 and 1977. The record indicates that petitioner drew a check each1987 Tax Ct. Memo LEXIS 588">643 week from the company. Towards the end of 1977 petitioner's net pay was $ 750.33 per week. We find that petitioner earned at least $ 18,000 in wages for 1976. Petitioner reported total wages from Lundin for 1977 in the amount of $ 31,146. We find respondent's determination as to 1977 is erroneous. ULTIMATE FINDINGS OF FACT 1. During 1973, 1974 and 1975, neither GNI-Cal. nor GNI-Ill. operated as viable corporations doing business in any state. 2. In 1973 petitioner earned a commission of $ 49,500 as a real estate broker in his purchase of the 16200 Building from the Matankys. He applied this is a reduction of the purchase price. 3. In 1973 petitioner received a note for $ 11,700, the value of which was $ 11,700, as his commission as real estate broker in the acquisition by the Matankys of the Almondoz Ranch. 4. In 1973 petitioner received a note for $ 47,520, the value of which was $ 47,520, as his commission as real estate broker in the acquisition by the Matankys of the Kelly Ranch. 5. In 1974 petitioner received a cash commission of $ 21,000 as real estate broker in the acquisition by the Matankys of he Wright Ranch. 6. In 1974 petitioner received a note1987 Tax Ct. Memo LEXIS 588">644 for $ 16,500, the value of which was $ 16,500, as his commission as real estate broker in the acquisition by the Matankys of the Tullos Ranch. 7. In 1974 petitioner received a cash commission of $ 30,000 as real estate broker in the acquisition by the Matankys of the Encino Medical Towers. 8. In 1974 petitioner received embezzlement income as follows: Southwest Enterprises$ 107,570.76Matankys114,850.00Lancaster Ranches Note17,500.00M & O Enterprises45,289.84$ 285,210.609. In 1974 petitioner received net rental income from the 16200 Building in the amount of $ 63,379.46. 10. In 1974 petitioner did not receive partnership income from M & O Enterprises of $ 9.965, nor did he receive partnership income of $ 47,199 in 1975. 11. In 1975 petitioner received embezzlement income as follows: Southwest Enterprises$ 14,043,32M & O Enterprises41,466.28CEIR Building Transaction27,750.00$ 83,259.6012. In 1975 petitioner received net rental income from the 16200 Building in the amount of $ 61,832.85. 13. In 1975 petitioner realized a gain of $ 283,996 upon the sale of the 16200 Building to The Rock, Ltd. 1987 Tax Ct. Memo LEXIS 588">645 14. During 1976 and 1977 petitioner received embezzlement or theft income from VLA, UWIM or GNA of $ 3,829.60 and $ 68,899.09, respectively. 15. During 1976 petitioner received at least $ 18,000 in wages from VLA, UWIM or GNA which was not reported. Petitioner reported his 1977 wages from this source. 16. Respondent failed in his burden of proving that Esther Olken underpaid her taxes due to fraud in any of the years in question. 17. Respondent sustained his burden of proving that Morton Olken underpaid his taxes due to fraud in each of the years in question. 18. Esther Olken failed to sustain her burden of proving she was an "innocent spouse." OPINION The bulk of this case involves whether respondent has properly determined that petitioners had unreported taxable income during the years in issue from the various sources indicated. Before discussing each of these income items, it is necessary to set forth some general principles. With certain exceptions, there is a presumption of correctness which attaches to respondent's deficiency determination and it is petitioners' burden to show otherwise. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Rule1987 Tax Ct. Memo LEXIS 588">646 142(a) provides as follows: (a) General: The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court; and except that, in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in his answer, it shall be upon the respondent. * * It is apparent, therefore, that with respect to the determination of income, except for the one item raised by respondent in his second amended answer, 50 the burden rests with petitioners to show they did not receive the income as determined by respondent. With respect to the addition to tax for fraud, the burden of proof rests upon respondent and is to be carried by clear and convincing evidence. 51 Rule 142(b). The discussion of the income items will follow the same pattern as do the facts relevant to each item. I. Commission IncomeSection 61(a) provides: Except as otherwise provided in this subtitle, gross income1987 Tax Ct. Memo LEXIS 588">647 means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items * * . [Emphasis added.] Petitioner acted as a real estate broker in numerous transactions during 1973 and 1974. In each of these transactions petitioner earned a commission. Each transaction will be discussed separately. A. 16200 Ventura Boulevard Building TransactionPetitioner first approached the Matankys regarding the purchase of the 16200 Building during the summer of 1973, and at that time represented to the Matankys that he intended to purchase the 16200 Building as an individual. 52 Petitioner also told the Matankys that he had an Illinois real estate broker's license and that the license was recognized in California through a reciprocal arrangement. The parties agreed that petitioner could act as the real estate broker in the transaction and he did so act, representing himself as well as the sellers. 1987 Tax Ct. Memo LEXIS 588">648 Petitioner basically structured the entire 16200 Building transaction. One of the terms of sale was that petitioner's real estate commission of $ 49,500 was to be used to reduce the purchase price of the building. As state above, commissions are specified as an item of gross income by the Internal Revenue Code. Sec. 6(a)(1). The fact that commissions received by a taxpayer are derived from a transaction in which the taxpayer is purchasing for his own account does not alter the commission's character as income to him. Commissioner v. Daehler,281 F.2d 823">281 F.2d 823 (5th Cir. 1960), revg. 31 T.C. 722">31 T.C. 722 (1959). See also Williams v. Commissioner,64 T.C. 1085">64 T.C. 1085 (1975), where we held that the taxpayer in that case, a real estate salesman who purchased property from his employer on his own account, had commission income regardless of his attempt to recharacterize it as a reduction in the purchase price. 52a In that case we stated at 1089: Petitioner attempts to avoid characterization of the commissions as income by calling them a reduction in price. While it is true that petitioner's out-of-pocket costs are 10 percent less than that of other purchasers, 1987 Tax Ct. Memo LEXIS 588">649 the purchase price paid by him was exactly the same for him as it was for any other purchaser. Any reduction in petitioner's out-of-pocket costs was the result of the commission paid him by [the seller], not a reduction in price. Petitioner's costs were less than those of other purchasers since he had done what none of the other purchasers had done -- rendered services to [the seller], for which he was paid his usual commission. [The seller] did not lower the price of the properties for petitioner, nor did it sell the property to petitioner at a bargain price. It sold the property to him at its normal price, for which petitioner was paid a commission. Petitioner did not purchase the 16200 Building at any sort of reduced price. Instead he was able to reduce the purchase price after receiving his commission of $ 49,500. The escrow document makes clear that petitioner had earned the commission. It was at his request that the1987 Tax Ct. Memo LEXIS 588">650 escrow company credited the $ 49,500 to the Matankys, who were quite impressed with the way petitioner structured the transaction, using his broker's commission as a down payment. This allowed petitioner to purchase the 16200 Building without any out-of-pocket costs. Petitioner argues that the $ 49,500 commission amount should be attributable to GNI-Cal. because GNI-Cal. and not petitioner purchased the 16200 Building and received the benefit of the reduction in price by the commission amount. The record, however, reveals that GNI-Ill., a nonexistent corporation, was originally shown as grantee. Petitioner was unable to prove that such a corporation existed and we hold that petitioner purchased the property for his own account. Petitioner never held himself out to the Matankys as an agent, officer or director of any corporation during his negotiations for the 16200 Building. Petitioner also prepared several transfer documents which conveyed title to various parties before and after the October 10, 1973, transaction date. The transfer documents show that petitioner exercised control over the 16200 Building from the time the Matankys transferred title to the building. 53 As1987 Tax Ct. Memo LEXIS 588">651 we will discuss more fully, infra, petitioner continued to treat the 16200 Building as a personal asset irrespective of the fact that either GNI-Ill. or GNI-Cal. retained title to the building. In any event, regardless of who actually purchased the 16200 Building, the $ 49,500 is taxable income to petitioner under the assignment of income doctrine. It has long been established that income is taxable to the individual who earned the right to the income or has otherwise exercised dominion and control over its disposition. Helvering v. Horst,311 U.S. 112">311 U.S. 112 (1940); Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930). It was petitioner who earned the commission as broker in this transaction. He negotiated the sale of the building, he structured the transaction and he exercised control over the commission by having it credited to the purchase price. Even assuming arguendo that GNI-Ill. was viable and did, in fact, purchase the building, petitioner's use of the commission to reduce the purchase price is nothing more than an anticipatory assignment of income. In United States v. Allen,551 F.2d 208">551 F.2d 208 (8th Cir. 1977), it was held that a real estate salesman1987 Tax Ct. Memo LEXIS 588">652 who sold a house to his parents and surrendered his commission upon the sale to his parents, had taxable income in the amount of the commission. "The crucial factor again is Allen's [the taxpayer] unrestricted dominion over the commission proceeds and his right to divert them to whatever use he deemed appropriate." 551 F.2d 208">United States v. Allen, supra at 212. Petitioner, likewise, had unrestricted dominion over the commission proceeds, which he exercised by diverting the funds for use a down payment. The $ 49,500 amount is includable in petitioners' gross income for the 1973 tax year. B. Ranch TransactionsPetitioner1987 Tax Ct. Memo LEXIS 588">653 earned commissions from four real estate transactions during late 1973 and early 1974. These transactions were the result of an oral agreement, later placed in writing, between petitioner and the Matankys regarding their investing in a farming operation. The understanding between the parties was that petitioner would locate ranch properties, the Matankys would purchase the ranches and petitioner would manage them. Once the Matankys recouped their investment from the ranches, Morton and Esther Olken would be entitled to a 50-percent ownership in the properties and in the income derived from them. The Matankys would retain the remaining 50-percent interest. Almondoz Ranch54The Almondoz Ranch was the first ranch that the Matankys purchased in 1973. Petitioner, as the Matankys' real estate broker, helped negotiate and structure the terms of acquisition of the Almondoz Ranch, transferred1987 Tax Ct. Memo LEXIS 588">654 monies to and from the escrow company for the Matankys and transmitted the transactional documents to the Matankys for their signatures. Petitioner also kept all of the records of the Matankys' transaction. After the Almondoz Ranch escrow opened, additional escrow instructions were signed by the Matankys, which provided that petitioner would receive an unsecured promissory note in the amount of $ 11,700 from the Matankys as payment of his commission. Petitioner also approved the additional escrow instructions on November 29, 1973. On December 11, 1973, the Matankys executed a promissory note in favor of petitioner in payment of his broker's commission from the Almondoz Ranch transaction. Petitioner received this note from the Matankys on or around December 11, 1973. Petitioner kept an original copy of the note in a file he maintained at his office in the 16200 Building, from where he managed the ranches. When Southwest Enterprises filed for bankruptcy in 1975, and documents were seized pursuant to a Bankruptcy Court order, this was one of the documents recovered. Respondent has clearly demonstrated to the Court that petitioner received the $ 11,700 note as a commission for his1987 Tax Ct. Memo LEXIS 588">655 work on the Almondoz Ranch transaction. Notes or other evidence of indebtedness received in payment for services constitute income in the amount of their fair market value in the year of receipt. Sec. 1.61-2(d)(4), Income Tax Reg.; Dial v. Commissioner,24 T.C. 117">24 T.C. 117, 24 T.C. 117">122 (1955). Respondent contends that the fair market value of the note received is equal to its face value and therefore the entire $ 11,700 should be included in petitioner's income for 1973. Generally, the burden of proof is on the taxpayer to show that respondent's determination of fair market value is erroneous. See, e.g., Kingsbury v. Commissioner,65 T.C. 1068">65 T.C. 1068, 65 T.C. 1068">1091 (1976). With respect to this note, however, respondent has the burden of proof since he raised it as a new matter. Several factors support respondent's contention that the fair market value of the note equals its face value. The term of the note is very short. It matured on February 15, 1974, a little more than two months after it was issued. The note carried an interest rate of 8 percent per annum, so there is no need to discount the note. Cf. Potter v. Commissioner, a Memorandum Opinion of this Court dated1987 Tax Ct. Memo LEXIS 588">656 February 28, 1946. The obligees on the note, the Matankys, were in a sound financial position at the time the note was made. See Board v. Commissioner,18 B.T.A. 650">18 B.T.A. 650 (1930). The note was unconditionally payable in cash, was negotiable and provided no contingencies which would affect repayment of the principal amount. Considering all of the above, we find that respondent has sustained his burden of proving the fair market value of the note. We conclude the note had a fair market value of $ 11,700 when it was received by petitioner and that amount is includable income for 1973. Kelly Ranch (Lancaster Ranches, Inc.)The Kelly Ranch was the second ranch which the Matankys purchased in 1973. As the Matankys' real estate broker, petitioner assisted in negotiating and structuring the transaction, transferred the Matankys' funds to the escrow company and kept all of the records of the transaction for the Matankys. The Matankys purchased the Kelly Ranch on or about December 26, 1973, and on that date executed a promissory note in the amount of $ 47,520 for a broker's commission. Respondent contends that the $ 47,520 broker's commissioner that the Matankys1987 Tax Ct. Memo LEXIS 588">657 paid in the Kelly Ranch transaction was paid to petitioner. Petitioners dispute this because the copies of the escrow documents and $ 47,520 promissory note that were admitted into evidence indicate that Great Northern Industries, not petitioner, received the broker's commission. It was the intent of the Matankys that the purpose of the note was to pay petitioner a broker's commission from the Kelly Ranch transaction. Petitioner performed those services and he received the note for them. As we indicated in our discussion regarding the 16200 Building transaction, it is simply irrelevant which name was indicated on the escrow documents 55 as petitioner performed the services on his own behalf. The note constituted income to him. Assuming arguendo that the promissory note was originally made in favor of GNI-Cal. instead of petitioner, petitioner would still be taxable on the value of the1987 Tax Ct. Memo LEXIS 588">658 note. In order for a corporation to be the recipient of income, the corporation must have earned the income. Kimbrell v. Commissioner,371 F.2d 897">371 F.2d 897 (5th Cir. 1967), affg. T.C. Memo. 1965-115, citing Helvering v. Horst,311 U.S. 112">311 U.S. 112 (1940); Lucas v. Earl,281 U.S. 111">281 U.S. 111 (1930). As Sylvia Matanky repeatedly stated, she and her husband dealt with petitioner. He was their broker, not some corporation that she was unaware of at the time of the transaction. The record is clear that petitioner provided all of the broker services and thus he, not GNI-Cal., earned and received the $ 47,520 commission from the Matankys. Respondent determined that the fair market value of the note was its face value of $ 47,520. The note was for only two months, and it carried interest. Petitioner has not put forth any evidence that the note's fair market value was less than its face value and it is his burden to do so. 65 T.C. 1068">Kingsbury v. Commissioner, supra.We therefore conclude that in 1973 petitioner earned commission income of $ 47,520 from the Kelly Ranch transaction. Wright RanchDuring March 1974 petitioner acted1987 Tax Ct. Memo LEXIS 588">659 as the Matankys' real estate broker in their purchase of the Wright Ranch. Petitioner received a cash commission of $ 21,000 out of the Wright Ranch escrow account although this violated his agreement with the Matankys. The record is replete with evidence that this amount was received in cash by petitioner. The payment was made in accord with the Real Estate Purchase Contract and Receipt for Deposit. Also, the Matankys' escrow closing statement from the Wright Ranch transaction shows that petitioner was paid a $ 21,000 commission. Finally, petitioner admitted in a letter, dated August 15, 1974, to Ira Boren, that he had received the $ 21,000 commission. Petitioner misrepresented the truth at trial about the receipt of this commission, just as he consistently and interminably misrepresented the truth about numerous matters throughout the course of this hearing. Tullos RanchDuring February 1974 the Matankys purchased the Tullos Ranch. As real estate broker, petitioner negotiated the terms of sale, transferred funds in and out of escrow for the Matankys and kept the Matankys' records of the transaction. On February 25, 1974, the Matankys executed a promissory note in the1987 Tax Ct. Memo LEXIS 588">660 amount of $ 16,500 in favor of petitioner. This note which represents petitioner's commission from the Tullos Ranch transaction, was delivered to him at the close of escrow as provided in the Tullos Ranch escrow instructions. Petitioner kept the original copy of the note in the Tullos Ranch file he maintained at his office in the 16200 Building. There is no question concerning whether petitioner received this note (despite his claims to the contrary), nor did petitioner marshal any credible evidence respecting the fair market value of the note. We note that there was a two-month maturity date on this note, also. We conclude that petitioner received the note as his commission from the Tullos Ranch transaction and that the note had a fair market value of $ 16,500. Petitioner therefore received commission income of $ 16,500 in 1974. C. Encino Medical Towers TransactionDuring 1974 the Matankys acquired the Encino Medical Towers. Petitioner received a $ 30,000 commission in this transaction in the form of a check. Petitioner by letter acknowledged his receipt of this amount. Further, the record contains a copy of the check and check statement indicating petitioner1987 Tax Ct. Memo LEXIS 588">661 received a gross commission of $ 30,000. When questioned about the above-mentioned letter, check and check statement, petitioner was either very evasive or conveniently claimed a lack of recollection. Petitioners claimed that the Encino Medical Towers commission is not taxable to them because the commission amount was credited to the purchase price. This was not the case. It did not happen. Petitioner received a $ 30,000 check for the commission in 1974. Respondent's determination is correct. II. Great Northern IndustriesPetitioner contends that Great Northern Industries, an Illinois corporation, originally purchased the 16200 Building or from time to time contends that GNI-Cal. purchased it. The Real Estate and Purchase Agreement in fact does indicate that a $ 1,000 deposit was placed in escrow closing statement dated October 10, 1973, in regard to the same transaction, refers to GNI-Ill. However, a certified statement from the Secretary of State of Illinois indicates that no corporation of that name existed in Illinois during 1973. We find that there was no such corporation in existence in 1973. Petitioners caused to be formed a California corporation under1987 Tax Ct. Memo LEXIS 588">662 the same name on November 15, 1973. 56Petitioner caused various title transfers to be made in regard to the 16200 Building. These transfers were as follows: 9/26/73Matankys to GNI-Ill. -- grant deed (recorded10/10/73)12/9/73GNI-Ill. to Olkens -- quitclaim (recorded12/23/74)12/19/73GNI-Ill. to Matankys (recorded 12/20/73)12/19/73Matankys to GNI-Cal. (recorded 12/20/73)7/11/75Olkens as individual to Title Ins. & Trust Co.and D. Eve, a deed of trust (recorded 9/19/75)9/22/75Olkens to GNI-Cal. (recorded 9/26/75)12/30/75GNI-Cal. to The Rock, Ltd. (recorded 12/31/75)Petitioners always held themselves out as owners of the building, regardless of where bare legal title might have been at any given moment. Thus, on their 1973 return they treated the building as theirs for purposes of reporting income and deductions, including depreciation. 1987 Tax Ct. Memo LEXIS 588">663 They represented themselves as the owners on financial statements for personal loans and they executed as individuals a deed of trust in order to secure an $ 18,000 personal loan. In addition, Morton Olken in his individual capacity filed a Fictitious Name Statement that he was doing business as $ 16200 Ventura Building." Petitioners held the 16200 Building as a personal asset, irrespective of bare legal title. GNI-Cal. carried on no business activity whatsoever other than to function as a conduit for the passage of funds. A Federal corporate tax return was filed by petitioner on behalf of GNI-Cal. for 1974. It did not set forth gross receipts, deductions or taxable income information, setting forth solely the word "inactive" on the gross receipts line. No returns were filed for 1973, 1975 and 1976. Petitioner did file California Corporation Franchise Tax returns for GNI-Cal. for the years ended October 31, 1974 and October 31, 1975. Neither of those returns shows any business activity whatsoever. On both returns, the response to the line "Exact date began business in California" was "10-1-74." In fact, GNI-Cal. never began business. GNI-Cal. was not formed for any business1987 Tax Ct. Memo LEXIS 588">664 purpose. It did not carry on any business after its incorporation. It was no more than a convenient sham to facilitate petitioner's various activities, legal and otherwise. We accordingly hold that it has no existence for tax purposes. Moline Properties, Inc. v. Commissioner,319 U.S. 436">319 U.S. 436, 319 U.S. 436">438-439 (1943). III. Unreported Rental Income(a) Duplication of IncomePetitioner argues that he has had income asserted against him as embezzlement income for five Southwest Enterprises checks of $ 250 each drawn to and deposited into the 16200 Building account in 1974, and then in effect duplicated as unreported rental income to him from the 16200 Building. We believe that petitioner is correct in this regard as to three payments of $ 250 each for Suite 401 of the building for the months of September, October and December of 1974 and we have deleted these amounts. (b) Rental ExpensesPetitioners failed to report rental income from the 16200 Building. Respondent determined that petitioners had unreported net rental income of $ 190,081 and $ 209,839 for 1974 and 1975, respectively. Petitioners failed to report any amounts whatsoever for either year. 1987 Tax Ct. Memo LEXIS 588">665 Petitioners stipulated to the amount of gross rentals received in each year from the building, and respondent reduced that amount by substantiated rental expenses. Respondent's assertion of the resulting unreported rental income was in the amount of $ 64,129 and $ 61,833 for 1974 and 1975, respectively. We have held above that petitioners owned and operated this building for their own account. Any profits or losses, therefore, affect their personal gross income. Petitioners failed completely to bring forth any evidence which would serve to increase the amount of rental expenses over those allowed by respondent in either year. That is their burden. Rule 142(a). They did, however, prove that the gross rental income should be reduced by $ 750 for 1974 because of duplication. Accordingly, we hold petitioners had net rental income in the amount of $ 63,379.46 and $ 61,832.85 for 1974 and 1975, respectively. (c) Real Property TaxPetitioners proved that they paid real property taxes on the 16200 Building in the amount of $ 17,959.83 in 1973 and $ 27,850.57 in 1975, which are in addition to $ 30,882 for 1975 which respondent allowed. Pettioners will be allowed these additional1987 Tax Ct. Memo LEXIS 588">666 deductions for 1973 and 1975. IV. Embezzlement Income1. Matanky MattersThe broad terms of section 61 defining income suffice to include income derived illegally as well as that lawfully obtained. The Supreme Court in James v. United States,366 U.S. 213">366 U.S. 213 (1961), held that embezzled funds are includable in gross income in the year in which they were embezzled. See also McGee v. Commissioner,61 T.C. 249">61 T.C. 249 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975), cert. denied 424 U.S. 967">424 U.S. 967 (1976); Adams v. Commissioner,456 F.2d 259">456 F.2d 259 (9th Cir. 1972), affg. T.C. Memo. 1970-104; Naegle v. Commissioner,378 F.2d 397">378 F.2d 397 (9th Cir. 1967), affg. T.C. Memo. 1965-212, cert. denied 390 U.S. 927">390 U.S. 927 (1968), rehearing denied 390 U.S. 976">390 U.S. 976 (1968); Nerem v. Commissioner,41 T.C. 338">41 T.C. 338 (1963). We have set forth in great detail in the body of the statement of facts and in the appendices, the various amounts petitioner embezzled from the various Matanky enterprises. Our fact findings are just that. For the most part, the only evidence which conflicts1987 Tax Ct. Memo LEXIS 588">667 with our findings is the uncorroborated testimony of petitioner. It is not enough to state that this petitioner is not credible. The fact of the matter is that he misrepresented the truth constantly during the course of his testimony and he attempted to have admitted in this Court obviously unauthentic documents as well as altered documents. In his reply brief petitioner continued his course of evasive and misleading testimony. In regard to embezzled funds which went into the 16200 Building account, we have held that the account belonged to petitioner as an individual and he used it in that regard. We have further held that the 16200 Building was owned by petitioners as individuals. Thus, the embezzled amounts that petitioner transferred to his 16200 Building account were amounts over which he had complete dominion and control and those amounts are also includable in petitioners' gross income. Further, we have held that GNI-Cal. 57 was no more than a sham corporation. It had no business purpose whatsoever other than to function as a conduit of funds and possibly to aid petitioner in his embezzlement schemes. Thus, embezzled amounts which were deposited by petitioner into1987 Tax Ct. Memo LEXIS 588">668 GNI-Cal. accounts also constitute elements of gross income to petitioners. 2. Lundin MattersWe have set forth in the factual statement and appendices at great length the various methods and modes by which petitioner embezzled funds from his cousing Victor Lundin. 58 As was the situation with the Matankys, Mr. Lundin was impressed by petitioner's apparent business knowledge, this time in the field of insurance rather than real estate. He unfortunately allowed petitioner control of the incoming mail as well as control of the bookkeeping functions of the office. 58Petitioner contended at trial and in his reply brief herein that Mr. Lundin signed some of the checks in question and that they therefore were not forged. We have found as a fact that petitioner forged Mr. Lundin's signature. In any event, we1987 Tax Ct. Memo LEXIS 588">669 point out that all of the checks in question, with minor exceptions, 59 were deposited into one or the other of petitioners' bank accounts. Petitioners had full dominion over these funds and full use and enjoyment of them. They represent gross income to petitioners. V. Partnership Income - M & O EnterprisesRespondent determined that petitioners had unreported partnership income in the amount of $ 9,965 in 1974 and $ 47,199 in 1975. A partnership return for 1974 was filed for M & O Enterprises which indicated that petitioners received $ 9,965 in partnership income for that year. It is unclear as to respondent's soource for the 1975 income but we assume it was from M & O. 60 While petitioner placed no direct evidence into the record to refute respondent's determination, it is clear that no amount should have been included in petitioners' gross income for either year from M & O or from Southwest Enterprises. While the partnership agreement provided for an equal distribution between the partners of net profits and net losses, it is clear1987 Tax Ct. Memo LEXIS 588">670 that there were no net profits. Similarly, we reject petitioner's argument that he is entitled to half the net losses shown on the returns for either 1974 or 1975. The returns filed are not themselves evidence of the truth of the matters included therein and petitioner has failed to produce any evidence as to the losses of M & O or Southwest Enterprises. VI. Unreported Salary Income - Lundin CompaniesOn their 1976 return petitioners reported no salary income from the various Lundin companies. It is clear petitioner received at least the $ 18,000 determined by respondent. During 1977, petitioners reported the receipt of $ 31,146 from the Lundin companies and this amount is indicated by the W-2 filed by petitioners with their return. We believe that the amount reported by petitioners encompasses the $ 18,000 determined by respondent for 1977 and accordingly hold that respondent's determination of $ 18,000 unreported income for 1977 is incorrect. VII. Additions to Tax fo FraudRespondent determined additions to tax for fraud 61 in each of the five years before the Court. To sustain such additions, 1987 Tax Ct. Memo LEXIS 588">671 respondent must prove, by clear and convincing evidence, that petitioner underpaid his taxes for each year and that any such underpayment was due to fraud. Section 7454(a); Rule 142(b). Respondent's burden is met if it is shown that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 80 T.C. 1111">1123 (1983); Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 398 F.2d 1002">1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Webb v. Commissioner,394 F.2d 366">394 F.2d 366 (5th Cir. 1968), affg. T.C. Memo. 1966-81. The fraud envisioned in section 6653 (b) is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Candela v. United States,635 F.2d 1272">635 F.2d 1272 (7th Cir. 1980). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1123;1987 Tax Ct. Memo LEXIS 588">672 Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 67 T.C. 181">199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1123; Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 55 T.C. 85">92 (1970). Fraud may be proven by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. Bradford v. Commissioner,796 F.2d 303">796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601; 80 T.C. 1111">Rowlee v. Commissioner, supra at 1123. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. 80 T.C. 1111">Rowlee v. Commissioner, supra;Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 56 T.C. 213">223-224 (1971); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 53 T.C. 96">105-106 (1969). The Court of Appeals for the Ninth Circuit has recently set forth a nonexclusive list of the "badges of fraud" that circumstantially demonstrate fraudulent intent. These "badges of fraud" include: (1) understatement of income, (2) inadequate records, (3) failure to file tax returns, (4) implausible or inconsistent explanations of behavior, 1987 Tax Ct. Memo LEXIS 588">673 (5) concealment of assets, and (6) failure to cooperate with tax authorities. 796 F.2d 303">Bradford v. Commissioner, supra.The following additional facts support a finding of fraud: (1) engaging in illegal activities, (2) attempting to conceal those activities, (3) dealing in cash, and (4) failing to make estimated tax payments. 796 F.2d 303">Bradford v. Commissioner, supra.Most of these "badges of fraud" and other facts tending to prove fraudulent intent are present in this case. The evidence shows that petitioner substantially understated his income in each of the years before the Court. Further, we consider petitioner's background. He was experienced in real estate transactions as well as insurance. We find it incredible that he could believe that a real estate commission was not includable in his gross income. During 1973 alone petitioner had the benefit of a $ 49,500 commission on the 16200 Building (utilized by him as the down payment), a note for $ 11,700 as a commission on the Almondoz Ranch and one for $ 47,520 on the Kelly Ranch. On the latter note, petitioner removed his name from the note and substituted that of Great Northern Industries thereon, another1987 Tax Ct. Memo LEXIS 588">674 badge of fraud. Petitioner continues to argue, however, despite strong evidence to the contrary, that he never received physical possession of any of the commissions in question. We have stated directly, in the opinion above, that petitioner was a far from credible witness. We note, in addition, that this Court follows the rules of evidence applicable in nonjury trials in the United States District Court for the District of Columbia (sec. 7453; Rule 143(a)), which provide that a conviction pursuant to a nolo contendere plea may be used to impeach the credibility of a witness. Rule 609(a), Fed. R. Evid.; Masters v. Commissioner,243 F.2d 335">243 F.2d 335, 243 F.2d 335">338 (3d Cir. 1957), affg. 25 T.C. 1093">25 T.C. 1093 (1956); Kilpatrick v. Commissioner,227 F.2d 240">227 F.2d 240, 227 F.2d 240">243 (5th Cir. 1955), affg. 22 T.C. 446">22 T.C. 446 (1954); Hicks Co. v. Commissioner,56 T.C. 982">56 T.C. 982, 56 T.C. 982">1027 (1971), affd. 470 F.2d 87">470 F.2d 87 (1st Cir. 1972). Petitioner entered nolo contendere pleas in regard to both the Matanky and the Lundin matters, but we have no need to rely upon such a rule of evidence. It suffices to state that petitioner was1987 Tax Ct. Memo LEXIS 588">675 noncooperative during the pretrial proceedings, not truthful during the hearing and that he made constant attempts to delay, 62 confuse, and obfuscate the proceedings. We further note, as a relevant badge of fraud, that in each year with the exception of 1973, petitioner had substantial illegal income from his various embezzlements. A basic element of fraud is the existence of an underpayment of tax in each year. Respondent has successfully carried his burden of proof in this regard. He has not only shown that there was some underpayment in this case but has shown very specifically the nature and the amounts of such underpayments. Petitioner asserts that he cannot be held liable for the fraud additions because his books and records were taken in April of 19751987 Tax Ct. Memo LEXIS 588">676 and he was thus unable to prepare the necessary returns. He goes on to argue that for one reason or another he was unable to obtain his records from the Bankruptcy Court (Southwest Enterprises bankruptcy) or from the Los Angeles County Attorney's office (the indictments in the Matanky and Lundin matters). The testimony, however, reveals that his personal papers that were mingled with the Southwest Enterprises records were in fact returned to him, that the Southwest Enterprises records were available to him from the Bankruptcy Court and his papers held in connection with the criminal proceedings were returned to his attorney. We completely reject this contention of petitioner as an excuse for his understatements and his failure to file returns. His period of incarceration, from October of 1978 to the end of 1982, similarly should not have served to prevent him from filing correct returns for the years 1973 through 1977. Accordingly, we find as to petitioner Morton Olken that respondent has sustained his burden of proving fraud for each of the years 1973, 1974, 1975, 1976 and 1977. We reach a different result, however, in regard to petitioner Esther Olken. This petitioner1987 Tax Ct. Memo LEXIS 588">677 did not appear in Court, instead filing her Declaration that she wished her husband to represent her. 63 There is no question but that she had substantial unreported income in each of the years in question as a result of her residency in California, a community property state. It is also clear that some of the embezzled sums were deposited into her bank accounts. It is unclear, however, whether she endorsed the embezzled checks herself prior to deposit or whether that was done by Morton Olken. It is also unclear whether she knew about the embezzlements at the time she filed or should have filed her Federal income tax returns. Fraud is never imputed or presumed and the courts should not sustain findings of fraud upon circumstances which at most create only suspicion. Green v. Commissioner,66 T.C. 538">66 T.C. 538, 66 T.C. 538">550 (1976); Olinger v. Commissioner,234 F.2d 823">234 F.2d 823, 234 F.2d 823">824 (5th Cir. 1956); Davis v. Commissioner,184 F.2d 86">184 F.2d 86, 184 F.2d 86">87 (10th Cir. 1950).1987 Tax Ct. Memo LEXIS 588">678 We find that respondent failed in his burden of proving fraud in regard to Esther Olken. VIII. Statute of LimitationsOur holding of fraud serves to settle the contentions of petitioners regarding the statute of limitations. Section 6501(c)(1) provides: In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. Further, there is no bar of the statute of limitations for other reasons. Petitioners' 1973 return was filed on June 10, 1977. Petitioners reported gross income of $ 9,864 and adjusted gross income of $ 7,070. We have found that petitioners omitted from their gross income for that year three commissions totaling $ 108,720. Section 6501(e)(1)(A) provides that where a taxpayer has omitted from gross income an amount which is in excess of 25 percent of the gross income stated on the return, a 6-year statute of limitations applies. Respondent mailed the notice of deficiency herein on December 10, 1982, a date less than 6 years from the filing of petitioners' 1973 return. Petitioner's 1974 "return" in fact was no return at1987 Tax Ct. Memo LEXIS 588">679 all since it contained no information upon which petitioners' tax could be computed. 64 In the case of failure to file a return, the tax may be assessed at any time. Sec. 6501(c)(3). Further, even if we considered petitioners' document as a return, the 6-year statute of limitations would apply here, too. This "return" was filed on September 19, 1975, and the notice of deficiency was mailed less than 6 years from that date. As to their 1975 year, petitioners do not contend they filed a return. Hence the tax may be assessed at any time. Sec. 7501(c)(3). Petitioners filed their 1976 return on July 18, 1977, and executed their consent to extend the statute to December 31, 1981, on June 6, 1980, well within the general 3-year period. Sec. 6501. Further, the statutory period was again extended on April 3, 1981, to December 31, 1982. The notice of deficiency was mailed prior to the latter date. Petitioners' 1977 return was filed on June 12, 1978, and was extended by consent on April 3, 1981 (a time within the 3-year statutory period) to December 31, 1982. The notice of deficiency1987 Tax Ct. Memo LEXIS 588">680 was issued prior to that date. Petitioners' contentions regarding the statute of limitations are meritless. IX. Claimed CarrybackPetitioners were allowed to amend their petition to claim a carryback of the purported loss incurred in 1979 relating to settlement of the Matanky lawsuit for a constructive trust regarding their residential property. 65 Although the record is not complete in this regard, apparently petitioners granted title to their residence in settlement of the civil action by the Matankys arising out of petitioner's embezzlements. Petitioner now seeks to offset his 1979 settlement against embezzlement income in 1974 and 1975. Petitioners are not entitled to such a carryback of their costs of restitution. We considered a similar case in Yerkie v. Commissioner,67 T.C. 388">67 T.C. 388 (1976),1987 Tax Ct. Memo LEXIS 588">681 where the taxpayer embezzled funds from his employer during the year 1966 through 1970, and then repaid some amounts during 1971 and 1972. When amounts embezzled are repaid, a deduction for individuals is permitted by section 165(c)(2) as a loss in a transaction entered into for profit, though not connected with a trade or business. Taxpayers in Yerkie claimed that section 1341 applied to allow the deduction for years earlier than the years of repayment. Section 1341 allows such a deduction where income is "included under a claim of right." We held in Yerkie that the taxpayer did not hold the embezzled funds under a claim of right and hence section 1341 was not applicable. We then went on to reject the taxpayer's alternative argument that the repayment of embezzled funds constitutes a trade or business expense which serves to create a net operating loss in the year of repayment subject to the carryback provisions of section 172. Our holding in Yerkie is equally applicable to the situation at bar. While petitioner may have perfected embezzlement to a fine art, we cannot hold that he was in the trade or business of embezzling. We held to like effect in Mannette v. Commissioner,69 T.C. 990">69 T.C. 990 (1978),1987 Tax Ct. Memo LEXIS 588">682 where we went on to state that the taxpayer's right to substantive due process under the Fifth Amendment was not violated by taxing income on an annual rather than transactional basis. See also McKinney v. United States,574 F.2d 1240">574 F.2d 1240 (5th Cir. 1978), cert. denied 439 U.S. 1972">439 U.S. 1972 (1979). Petitioners are not entitled to a carryback. X. Innocent SpouseEsther Olken claimed the benefit of section 6013(e), the so-called innocent spouse provision. That section provides as follows: (e) Spouse Relieved of Liability in Certain Cases. -- (1) In general. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial1987 Tax Ct. Memo LEXIS 588">683 understatement, then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.Without going into an unnecessary, prolonged discussion of the provisions of this section, it suffices to say that no evidence has been presented which would go to show that Esther Olken did not know or had no reason to know of the substantial understatements. She has simply failed to meet her burden of showing that she has met the requirements of the section. Lessinger v. Commissioner,85 T.C. 824">85 T.C. 824, 85 T.C. 824">838 (1985). XI. Addition to Tax - Section 6654Petitioners failed to file tax returns for 1975 and further made no payments either as estimated tax or withholding tax credits on tax due for that year. Section 6654(a) imposes an addition to tax "in the case of any underpayment of estimated tax by an individual." Respondent's determinations were correct and they are upheld. XII. Miscellaneous MattersWe note two final matters. At the conclusion of trial herein, the Court directed that simultaneous briefs be filed by1987 Tax Ct. Memo LEXIS 588">684 the parties, together with simultaneous reply briefs. This was a direction by the Court that the parties marshal what they considered to be the relevant facts and legal arguments and present them to the Court for its assistance in resolving the issues presented. Pursuant to this direction, petitioner had an obligation to assist the Court by organizing the material presented at trial. Cf. Stringer v. Commissioner,84 T.C. 693">84 T.C. 693 (1985), affd. by order 789 F.2d 917">789 F.2d 917 (4th Cir. 1986); Primoff v. Commissioner,T.C. Memo. 1985-562. Although respondent filed a brief in accordance with the Court's instruction, petitioners filed none. Under the circumstances, we would be justified in deciding this case in favor of respondent on the basis that petitioners' failure to file a brief constituted a concession of the issues presented. See Calcutt v. Commissioner,84 T.C. 716">84 T.C. 716, 84 T.C. 716">721-722 (1985); Bender v. Commissioner,T.C. Memo. 1985-375; Stonegate of Blacksburg, Inc. v. Commissioner,T.C. Memo. 1974-213; Hough v. Commissioner,T.C. Memo. 1986-229. We forebear to do so because of the fact1987 Tax Ct. Memo LEXIS 588">685 that petitioner was a layperson and because of his statements that he was indigent and could not afford a copy of the transcript. We do note, however, that much of this case was stipulated and that petitioner had available the Stipulations of Fact, together with the attached 690 exhibits, as well as copies of each of respondent's and petitioners' exhibits. Nevertheless, petitioner chose not to help ease the burden on the Court of assembling this mass of material. Petitioner has also complained that his right to a fair trial has been violated as a result of an order of this Court dated March 29, 1985, that he serve no further subpoenae on any third party witness without prior leave of this Court. (The Court's order was in response to a subpoena duces tecum petitioner caused to be served which was quashed on the grounds, inter alia, that it was oppressive and burdensome.) Petitioner subsequently on June 3, 1985, filed a motion for leave to serve a subpoena to Seymour Matanky to appear as a witness for trial. Petitioner failed to enclose a copy of his proposed subpoena, was so advised by the Court on June 13, 1985, and upon receipt of petitioner's form subpoena, granted leave to1987 Tax Ct. Memo LEXIS 588">686 serve on July 5, 1985. The trial itself in this matter commenced on July 22, 1985, and continued through August 1, 1985. Seymour Matanky did not appear as a witness and we can assume that petitioner failed to effect service upon him. We completely reject petitioner's allegations that delay by this Court hampered his ability to serve Dr. Matanky. Petitioner's problems are of his own making and the Court granted him leave to serve within a reasonable time of receipt of his form of subpoena and well prior to the commencement of the trial. As the bulk of his contentions herein, petitioner's contention that he did not have a fair trial is simply frivolous. In order to give effect to the stipulations of fact and to the foregoing, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. In addition to the unreported income, respondent's deficiency notices make provisions for certain minor adjustments such as adjustments to the allowable standard deduction and carryover of short-term capital loss. ↩3. This recharacterization, however, has no effect on the amount of tax in issue. ↩4. During the trial petitioners were permitted to amend their petition to raise this issue. ↩5. The "return" filed for taxable year 1974 contained no information regarding petitioners' income and deductions for that year. On the line labeled "Balance Due IRS" petitioners placed the following statement: "Tentative to be filed at a later date." No returns were filed for the 1974 tax year, and this document does not constitute a return. ↩6. Respondent placed into evidence Certifications of Lack of Records regarding both petitioners for the 1975 taxable year. ↩7. There were two Consents to Extend the Time to Assess Tax covering the 1976 taxable year. ↩8. Esther Olken failed to appear during the course of this trial. She did, however, file with the Court her Declaration that she authorized Morton Z. Olken, her husband, to act in her behalf at the trial. ↩9. Petitioners stated that their failure to file their briefs was a result of their inability to afford a copy of the trial transcript. Although in the past we have dismissed cases because a party failed to file briefs, we have been exceedingly tolerant of petitioners' failure to file because they are self-represented and because of their alleged economic condition. ↩10. On July 15, 1985, the parties filed a first stipulation of facts. A second stipulation was filed on July 18, 1985. Finally, on July 22, 1985, additional facts and exhibits were orally stipulated. ↩11. The record contains an official statement of the Office of the Secretary of State of Illinois indicating that "an examination of the records of this office does not disclose the existence of a corporation in the name, Great Northern Industries, Inc., an Illinois corporation, for the year 1973." ↩12. Pending the closing of the sale, petitioner pointed out to the Matankys several problems with their building manager, and helped them operate the building until the sale. ↩13. Petitioner kept an original copy of the promissory note in a file he maintained at his office in the 16200 Building. ↩14. This ranch was also known as Lancaster Ranches, Inc. ↩15. etitioner on November 15, 1973, formed a California corporation named Great Northern Industries. The record is unclear as to whether this note was payable to the so-called Illinois corporation or to the California corporation. It is also far from clear that the note, as originally executed, in fact was payable to Great Northern Industries. It is clear that the words "Great Northern Industries, Inc." were typed on a different typewriter than that used on the balance of the note. A discussion of GNI-Cal. can be found in part IV, infra.↩16. Petitioner's own Exhibit 715, page 5, indicates that the note was originally made payable to Morton Z. Olken. ↩17. Petitioner kept an original copy of this note in a file in his office at the 16200 Building. ↩18. Ms. Schoonover also performed similar duties for other business entities which were operated by petitioner. Petitioner maintained a suite in the 16200 Building, which he owned. In that suite he managed the operation of that building, Southwest Enterprises, Encino Medical Towers and other businesses. Ms. Schoonover assisted petitioner in all of his business activities. ↩19. Ms. Schoonover did not have signatory authority over any of the bank accounts. Her duties with respect to these accounts were to deposit funds at the direction of petitioner and to prepare (type) checks for petitioner's signature. These duties were performed under the specific instruction and guidance of petitioner. ↩20. See Appendix A for a detailed listing of these checks and facts relevant thereto. All of the appendices to this opinion are incorporated as part of the Findings of Fact. ↩21. Petitioner claims that this series of checks was either reimbursements of expenses paid by GNI-Cal. on behalf of Southwest Enterprises or payments to establish an escrow for another partnership (M & O Enterprises) to purchase the Encino Medical Towers. The record does indicate that GNI-Cal. did make some payments on behalf of Southwest Enterprises but it also indicates that GNI-Cal. was repaid by Southwest Enterprises' checks other↩ than those listed above. 22. Petitioner contends that this was a cost for one of the animals on one of the ranch properties. It was not; it was a personal expense of petitioner. ↩23. Petitioner stipulated that all checks payable to the Ashley Company were made in payment for construction of his personal residence. Petitioner hired Michael Ashley, owner of Ashley Construction Company to construct his personal residence at 23924 Lewis & Clark Road in Hidden Hills, California. Petitioner also hired Mrs. Ashley as an interior decorator to decorate his home. Mr. Ashley insisted that petitioner make the checks payable to Ashley Construction Company and not Ashley Company. Petitioner told Mr. Ashley that he would write the checks as he saw fit, and if Mr. Ashley's bank honored them, he should not be concerned. Petitioner directed Ms. Schoonover to record all checks payable to Ashley Construction as payments for crop dusting on the ranches owned by Southwest Enterprises. ↩24. One of the checks was used to purchase a cashier's check from the Bank of America payable to Mark Hayworth for irrigation work. ↩25. A check for $ 20 was for waxing and polishing petitioner's personal automobile; $ 750 for a loan to petitioner's cousin and $ 117.28 to pay airfare for the cousin for a trip which was not connected with Southwest Enterprises. Petitioner instructed the bookkeeper to enter the loan in the ledger as "irrigation ditch." Two checks totaling $ 3,200 were written to the bookkeeper who cashed them and returned the funds to petitioner, who then invested $ 2,200 with friends in some sort of commodities investment. ↩26. Petitioner had advanced through a Great Northern Industries account in January and February of 1974 various costs on behalf of Southwest Enterprises, in the total amount of $ 5,205.22. These amounts were repaid to petitioner in April of 1974. None of the amounts we have held to be embezzled by petitioner pertain to this group of expenditures. Petitioner's generalized claims that the embezzled amounts were repayments due him are simply untrue. Petitioner also made generalized claims throughout the trial that these checks represented "exchange checks," presumably to float funds between banks although he never directly defined the terms. In any event, the record is devoid of any evidence to support such a claim. ↩27. See Appendix B for a detailed listing of these checks and facts relevant thereto. ↩28. MOF was the informal predecessor to Southwest Enterprises. ↩29. On April 18, 1974, and June 20, 1974, checks were issued for $ 9,000 and $ 9,265, respectively. The additional $ 765 was interest due on the note. ↩30. See parts I. B and I. C of the Findings of Fact, supra,↩ for details surrounding the acquisition of the Encino Medical Towers and a detailed statement of the principles governing the partners' relationship. 31. See Appendix C for a detailed listing of these checks. ↩32. See Appendix D for a detailed listing of rental payments diverted petitioner's 16200 Building account. ↩33. On March 9, 1979, the LADA's office released petitioner's records to his attorney at the time, Theodore Tabah. ↩34. See n. 11, supra.↩35. Petitioner provided copies of purported minutes of GNI-Cal. mainly regarding bank account openings. The investigator for LADA, however, testified that he located no minutes when records were seized pursuant to a search warrant. ↩36. It appears that any and all funds received by GNI-Cal. were passed directly through to petitioner for his personal use and enjoyment. ↩37. The record is unclear as to why there was this second Grant Deed to GNI-Cal. ↩38. This conclusion is supported by numerous other facts. Throughout 1974 and 1975 there were numerous employees working at the 16200 Building. Each of these employees was issued W-2 Forms with M. Olken 16200 Ventura Building listed as the employer and not GNI-Cal. Petitioners, on various financial statements listed themselves and not GNI-Cal. as the owners of the building. During 1974 and 1975, petitioner filed Quarterly Federal Tax Returns as an individual operating under the trade name 16200 Ventura Building. No mention of GNI-Cal. was made on these returns. When delinquent property tax notices were issued regarding the 16200 Building, they were issued to petitioners as individuals and no mention of GNI-Cal. was made. Finally, on May 15, 1975, petitioner filed a fictitious business memo statement which stated that he was doing business as "16200 Ventura Building." He did not fill in the sections relating to a corporate registrant. ↩39. Petitioners did not report income from the building nor did they claim expenses connected with its operation for either 1974 or 1975.↩40. This figure also contains an allocation of property taxes.↩41. Dr. Matanky was also actively involved in the negotiations. His interest in this transaction was a result of his filing a civil suit against petitioner in which he requested that a constructive trust of petitioner's assets, including the 16200 Building, be established in his favor. In connection with that suit a Lis Pendens covering the 16200 Building was also filed. ↩42. The parties stipulated that the purchase price was $ 1,214,007 after reduction for petitioner's $ 49,500 commission fee. It is our holding, since we have included the commission in petitioner's gross income, that his cost basis in the building was $ 1,263,507. During the time he held it, depreciation accumulated in the amount of $ 43,503. ↩43. Petitioner told the partners of Rock that the 16200 Building was about 95 percent occupied when in fact numerous tenants were in the process of moving out of the building. He represented to Rock that the property taxes, which were in arrears, were paid and up to date. He told Rock that a second deed of trust on the 16200 Building was assumable, when in fact, it was not. Petitioner also told Rock that there were 24 parking stalls that were allocated to the 16200 Building at the Encino Medical Towers building, and this was not the case. After the escrow closed Rock discovered numerous other misrepresentations that were made by petitioner regarding the 16200 Building. Petitioner had overstated by 7 to 10 percent the leasable square footage of the 16200 Building. He overstated the number of leases that were supposed to be in effect at the time of sale. He indicated that a certain amount of remodelling had been done, however the remodeling had either not been done or was not done in conformity with the building code. ↩44. In 1976, the business was incorporated and operated under the same name until 1977 when its name was changed to United Western Insurance Marketing, Inc. (hereinafter "UWIM"). ↩45. During 1977, a related company was formed under the name Great Northern Administrators (hereinafter "GNA"). GNA operated as a corporation specifically set up to administer all claims filed by persons covered by self-insurance programs established by VLA and UWIM. ↩46. Petitioner had joint signatory authority, along with Lundin and a bookkeeper, over all of VLA, UWIM, & GNA checking accounts. Each check required two signatures. ↩47. See Appendix E for a listing of these checks. ↩48. ↩Checks issued in 1976:Marjorie Sherman (petitioner's sister)$ 164.18Boulevard Mercedes (petitioner's auto lease)321.50H. Alvord (real property tax)1,139.73Internal Revenue Service100.00$ 1,725.41Checks issued in 1977:Marjorie Sherman (petitioner's sister)$ 178.75Tiffany Club40.00Internal Revenue Service150.00$ 368.7549. See Appendix F for a listing of these checks and facts relevant thereto. ↩50. Respondent increased the deficiency for 1973 by asserting that petitioner had an additional $ 11,700 in commission income. ↩51. The details of respondent's burden in this regard will be discussed more fully infra.↩52. Petitioner argues that Great Northern Industries, Inc., a California corporation, purchased the 16200 Building. Respondent argues that GNI-Cal. should not be recognized for tax purposes and that though GNI-Cal. at one time held title to the 16200 Building during 1973, the substance of the transaction was that petitioner in his individual capacity purchased the 16200 Building from the Matankys. In fact, title was originally taken in the name of GNI-Ill., a nonexistent corporation. We hold that petitioners were the beneficial owners of the 16200 Building. ↩52a. In Williams v. Commissioner,64 T.C. 1085">64 T.C. 1085 (1975), we agreed with the views expressed by the Court of Appeals in Commissioner v. Daehler,281 F.2d 823">281 F.2d 823 (5th Cir. 1960), revg. 31 T.C. 722">31 T.C. 722↩ (1959).53. Thus, on September 26, 1973, petitioner had the Matankys transfer title to the 16200 Building to GNI-Ill. On December 19, 1973, as president of the alleged Illinois corporation, Great Northern Industries, petitioner deeded the 16200 Building back to the Matankys. Also, on October 24, 1973, petitioners, as officers of the alleged GNI-Ill., deeded, by quitclaim deed, the 16200 Building to "Morton Olken and Esther Olken as husband and wife." This latter deed was not notarized until December 9, 1974, and was not recorded until December 23, 1974. ↩54. The commission with respect to this ranch was not included in respondent's notice of deficiency, but was raised in respondent's second amendment↩ to his answer. As a new matter the burden of proof in this regard is on respondent, Rule 142(a), and respondent has carried his burden. 55. We are nevertheless convinced that petitioner changed the escrow instructions by handwriting in the words "Great Northern Industries" and that he also either changed the name of the payee on the promissory note to Great Northern Industries or instructed the escrow company to do so. ↩56. GNI-Cal. was suspended on February 3, 1975, restored on April 11, 1975, and then further suspended on December 1, 1976. Apparently, yet another Great Northern Industries was formed by petitioner on June 15, 1979, as a California corporation and was in good standing as of February 3, 1981. ↩57. GNI-Ill., of course, was not in existence at all during 1973 and the record does not indicate in any respect that it ever was in existence. ↩58. Petitioner concedes that he received income from the Lundin companies for 1976 and 1977 in the amounts of $ 3,829.60 and $ 62,087.75, respectively. We have found that the amount in 1977 was greater, $ 68,899.09. ↩59. A few checks were written to third parties, such as the Internal Revenue Service, for personal purposes of petitioners. ↩60. On brief, respondent mentioned only the 1974 income. ↩61. Respondent did not request as an alternative the addition to tax for negligence under the provisions of section 6653(a). ↩62. One Judge presided during the pretrial proceedings herein and a Special Trial Judge heard the case. The process of arriving at the stipulations required by our Rule 91 took some 540 transcript pages before Judges of this Court and some 17 hours of hearings. Most of this extraordinary amount of time was caused by petitioner's refusals to stipulate to items about which there was little, if any, question. ↩63. We note that the signature "Esther Olken" on the Declaration and on the Petition filed herein is completely different from the signature on petitioners' brief and from that on many checks deposited into Esther Olken's bank accounts. ↩64. See, e.g., Commissioner v. Lane-Wells Co.,321 U.S. 219">321 U.S. 219↩ (1944). 65. Petitioner now claims, falsely, that petitioners were also allowed to amend their petition to claim as an offset the default judgment secured against them in 1981 in connection with petitioner's misrepresentations on his sale of the 16200 Building to The Rock. Their amended petition does not include this claim nor were they granted leave to file an amendment encompassing this claim. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618984/	Ernest R. Hanson v. Commissioner.Hanson v. CommissionerDocket No. 61378.United States Tax CourtT.C. Memo 1958-74; 1958 Tax Ct. Memo LEXIS 156; 17 T.C.M. 357; T.C.M. (RIA) 58074; April 25, 19581958 Tax Ct. Memo LEXIS 156">156 Ernest R. Hanson, 21400 East 14th Street, Hayward, Calif., pro se. Leslie T. Jones, Jr., Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion This proceeding involves a deficiency in income tax of the petitioner for the taxable year 1952 in the amount of $688.71. The sole contested issue is whether petitioner is entitled to a deduction of the amount of $7,267 in 1952 as a business or a nonbusiness bad debt. [Findings of Fact] Some facts have been stipulated and are found accordingly. Petitioner is an individual. His 1952 return was filed with the district director of internal revenue in San Francisco, California, on the cash basis. Petitioner by trade was a worker with mosaics. During the depression years mosaic work was scarce and petitioner worked at various jobs. Shortly after his mother's death in 1941, petitioner was inducted into the armed services. While in the service, petitioner's sister, Ione Chapin, sold the family home. Ione asked petitioner and his brother who was also in the armed services, if they would invest their respective shares of the proceeds from the sale of the home in a corporation known as the North Sacramento1958 Tax Ct. Memo LEXIS 156">157 Stage Line, which she and her husband, A. J. Chapin, were to organize. Petitioner and his brother consented, and each was given a one-quarter interest, and Ione and her husband received the remaining one-half interest in the bus company. During the years 1935 to 1940, petitioner purchased in Europe 24 barrels of mosaic tile. Petitioner did not open the barrels, but placed them in storage. When the home was sold, the custom's receipts were misplaced or lost. Petitioner estimated that the 24 barrels contained between 7,000 and 11,000 square feet. Petitioner testified that he didn't have the faintest idea what the tile cost, but, estimated he paid not less than 27 cents up to $1 per square foot. In 1947, after petitioner's return from the armed service he was employed by the North Sacramento Stage Lines corporation at a salary of $75 per week. In 1947, petitioner's sister, Ione, and her husband, advised him that the North Sacramento Stage Lines was in financial difficulty and requested petitioner's assistance in obtaining a bank loan. On February 15, 1947, the petitioner, Patricia Hanson, Ione, and her husband, executed a promissory note payable to the Capital National Bank of1958 Tax Ct. Memo LEXIS 156">158 Sacramento in the face amount of $4,000 payable in 90 days at 6 per cent interest. As security for the note, the petitioner transferred to the bank warehouse receipts covering the 24 barrels of mosaic tile. The amount of $4,000 was credited to the account of the North Sacramento Stage Lines. At the time the loan was negotiated, Ione and her husband agreed that in consideration of petitioner's agreement to pledge his mosaic tile as collateral for the loan, they would transfer to petitioner from their one-half interest, an additional one-eighth interest in the North Sacramento Stage Lines. On February 19, 1947, Ione Chapin was killed and her husband was seriously injured in an automobile accident. The latter was confined to the hospital about four months. In the spring of 1948, the North Sacramento Stage Lines was declared bankrupt. The $4,000 note held by the Capital National Bank of Sacramento was not paid, and on November 22, 1948, the bank demanded payment from petitioner. Petitioner was notified that the mosaic tile pledged as security would be sold on December 2, 1948, and on that date the tile was sold for $400. On January 28, 1949, the bank demanded that petitioner pay1958 Tax Ct. Memo LEXIS 156">159 the balance due on the note. Petitioner has at no time paid any amount to the bank on said note. Petitioner's brother-in-law, A. J. Chapin, after recovering from his injuries was employed as district manager of the Crown Body & Coach Company selling buses in the northern part of California, Washington, Oregon, and Nevada, and earned between $10,000 and $15,000 per year. Chapin died in 1952. Petitioner was informed by Chapin's surviving wife that there was no estate and requested that he assist in defraying the funeral expenses. Chapin was appointed administrator of the estate of his former wife, Ione, and at his death, the administration of her estate had not been completed. Petitioner was thereupon appointed the administrator of Ione's estate. At that time the estate consisted of a bank balance of $276.09, and some other odd "stuff" which petitioner sold. On June 20, 1956, petitioner cleared out the bank account with a check in the amount of $571.28, made payable to the director of internal revenue. Petitioner stated that at the time of Ione's death she left an estate of either $7,500 or $9,000, and that claims filed by the Federal and state authorities for prior income tax liabilities1958 Tax Ct. Memo LEXIS 156">160 and allowed by the Probate Court left nothing for distribution. Petitioner did not file any claim against the estates of his sister and her husband on account of their alleged indebtedness to him. Petitioner has failed to establish that he sustained a loss in the taxable year 1952, which is deductible as a business or nonbusiness bad debt. Opinion LEMIRE, Judge: The question presented is whether petitioner is entitled to deduct, in the taxable year 1952, the amount of $7,267, or any lesser sum as a business or nonbusiness bad debt. Petitioner, a worker in mosaics, appeared pro se. He has filed no brief. Petitioner was the only witness. Petitioner was allowed to testify in narrative form and was assisted by the Court. Aside from the few facts which were stipulated, the record is unsatisfactory. Petitioner's testimony was indefinite, confusing, and seemingly inconsistent. Petitioner had no records to support his evidence. It appears that petitioner's claim for a bad debt deduction is predicated upon some oral understanding he had with his sister, Ione, and her husband, A. J. Chapin, at the time they requested his assistance in securing a bank loan, to the effect that they1958 Tax Ct. Memo LEXIS 156">161 would make good any loss he suffered in the event the collateral he agreed to pledge was sold. Other than petitioner's broad statement, his testimony covers no specific facts or terms of the alleged understanding. Within a period of approximately four days after the loan was secured, petitioner's sister, Ione, died. Petitioner's conduct and that of his brother-in-law, Chapin, subsequent to the time the alleged agreement was made, does not persuade us that all the parties concerned actually intended to make any such agreement as now contended by petitioner. It is stipulated that it was agreed that in consideration of petitioner's assistance in procuring the loan Ione and her husband would transfer to him an additional one-eighth interest in the North Sacramento Stage Lines in which petitioner already owned a one-quarter interest. We think it unlikely that Ione and her husband understood that in addition to the one-eighth interest they were transferring to petitioner for his assistance, they were assuming a further liability of approximately $7,267 now claimed by petitioner, since they were both individually liable on the note in question. The record shows that after Chapin's1958 Tax Ct. Memo LEXIS 156">162 recovery from the tragic accident he was employed and earning between $10,000 and $15,000 a year as a bus salesman. Under such circumstances, we doubt that Chapin would have permitted the pledged collateral to be sold for $400, if he was aware that he would become liable to petitioner in the amount of approximately $7,267. In the light of the entire picture presented, we are unwilling to accept petitioner's unsupported testimony to the effect that there existed an understanding with Ione and her husband that they would make good any loss he sustained by reason of pledging his tile as security for the loan. We think the record warrants the inference that the additional one-eighth interest in the corporation which was transferred to petitioner constituted the final agreement between the parties. Therefore, in our opinion, the petitioner has failed to establish the existence of a valid debt. , affirming a memorandum opinion of this Court [. A further ground for denying relief here is that upon this record the petitioner has not shown the amount of his alleged loss. In his return, petitioner1958 Tax Ct. Memo LEXIS 156">163 claimed a bad debt loss of $7,267 which he computed by taking the difference between the loan of $4,000 and his alleged cost of the tile in the amount of $11,267. Petitioner had no records to establish the cost. He testified that he estimated the 24 barrels of tile contained from 7,000 to 11,000 square feet based on his estimate of the weight of each barrel. Petitioner estimated that the cost ranged from 27 cents up to $1 per square foot. When asked if he knew how much the tile cost, he replied "I haven't the faintest idea." The record supports that answer. Therefore, we have found as a fact that petitioner has failed to show that he suffered any deductbile loss in the taxable year 1952. The respondent's determination is sustained. Other adjustments are not contested. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618986/	PHILIP S. MORGAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMorgan v. CommissionerDocket No. 3480-83.United States Tax CourtT.C. Memo 1984-384; 1984 Tax Ct. Memo LEXIS 285; 48 T.C.M. 613; T.C.M. (RIA) 84384; July 26, 1984. 1984 Tax Ct. Memo LEXIS 285">285 Petitioner sent Forms 1040 to respondent, which provided no information as to petitioner's income, deductions, and credits. Held: The Forms 1040 do not constitute tax returns. As a result, (1) the statute of limitations does not bar assessment of deficiencies; (2) petitioner's and his wife's attempted elections of joint returns are ineffective; and (3) petitioner is liable for additions to tax for failure to file a timely return. Also, (4) petitioner is liable for additions to tax for negligence, etc.; (5) petitioner is liable for additions to tax for underpayment of estimated tax; and (6) the mitigation provisions do not apply. Philip S. Morgan, pro se. Frank R. DeSantis, for the respondent. CHABOTMEMORANDUM FINDINGS OF FACT AND OPINION CHABOT, Judge: Respondent determined deficiencies in Federal individual income tax and additions to tax under sections 6651(a)(1) 1 (failure to file timely tax returns), 6653(a) (negligence, etc.), and 6654(a) (underpayment of estimated tax), as follows: Additions to TaxYearDeficiencySec. 6651(a)(1)Sec. 6653(a)Sec. 6654(a)1973$6,565.99$662.83$328.30$53.4019747,655.00786.12382.7564.3919758,752.50935.53437.63107.4819769,508.691,035.50475.43104.2919772,387.00144.67119.354.511978947.0082.9847.355.6919793,942.00413.33197.1045.21After 1984 Tax Ct. Memo LEXIS 285">286 concessions by both sides, the issues for decision are as follows: (1) Whether the statute of limitations bars assessment for any of the years 1973 through 1976; (2) Whether petitioner is to be taxed as a married individual filing a joint return; (3) Whether petitioner is liable for additions to tax under sections 6651(a)(1), 6653(a), and 6654(a); and (4) Whether the mitigation provisions (secs. 1311-1314) apply. FINDINGS OF FACT Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference. When the petition was filed in the instant case, petitioner resided in Canton, Ohio. During the years in issue, petitioner received income, was entitled to itemized deductions and personal exemptions, and had Federal income tax withheld, in the amounts set forth in table 1. Table 1IncomeCapitalItemizedPersonalWagesInterestGainsDeductionsExemptionsWithholding1973$22,783.3200$4,685.173$3,914.66197425,000.00005,089.6534,510.54197527,500.00$55.0005,284.8235,010.37197629,200.0023.0004,475.2925,366.69197715,283.32001 021,808.3219787,625.0046.8402 4,782.852615.10197917,886.140$352.652 5,133.7022,288.701984 Tax Ct. Memo LEXIS 285">287 In April 1977, petitioner and his wife sent to respondent Forms 1040 for 1973, 1974, 1975, and 1976. Each of these Forms shows petitioner's and his wife's address, taxpayer identification numbers, and occupations ("empl. counselor" for petitioner, "housewife" for his wife). On each of these Forms, petitioner and his wife claim the status of married filing jointly, and claim one personal exemption apiece (for a total of two exemptions). On each of these Forms, an amount of withholding taxes is shown equal to the amount shown for the respective year on table 1, supra. Each of these Forms was signed by petitioner and his wife under penalties of perjury. Each of the other lines on each of these Forms is stamped with the legend "OBJECT 5TH AMEND." Attached to each of these Forms is a six-page "letter of explanation" dealing with the Fifth Amendment to the Constitution, and three one-page documents. In April 1978, petitioner and 1984 Tax Ct. Memo LEXIS 285">288 his wife sent to respondent a Form 1040 for 1977, which contains the same information, objections, attachments, etc., as appear on the Forms 1040 for 1973, 1974, 1975, and 1976. In April 1979, petitioner sent to respondent a Form 1040 for 1978, which contains the same information, objections, attachments, etc., as appear on the Forms 1040 for 1973 through 1977, except for the following: petitioner's wife's name, taxpayer identification number, occupation, and signature do not appear on the 1978 Form; the indicated filing status on the 1978 Form is married filing separate return; the amount of withholding tax does not appear on the 1978 Form, and the "letter of explanation" attached to the 1978 Form is only five pages long. In April 1980, petitioner sent to respondent a Form 1040 for 1979, which contains the same information, objections, attachments, etc., as appear on the 1978 Form 1040, except that the 1979 Form shows petitioner's occupation as "data proc" and his wife's occupation as "housewife". In 1973, petitioner and 973 other Ohio residents bought sites in a recreational camp club. Subsequently, petitioner was elected president of the property owner's association, which was 1984 Tax Ct. Memo LEXIS 285">289 involved in extensive litigation. Petitioner was very busy in connection with his role as president of the association. In early 1974, and subsequenly, he understood that there would be no additions to tax if his taxes were paid on time (and he understood that his taxes were paid on time), even if his tax returns were not filed on time. On November 24, 1982, respondent sent to petitioner the notice of deficiency and on February 18, 1983, petitioner filed the petition which initiated the instant case. In 1981, and again in February 1984, petitioner consulted with attorneys with regard to whether he ought to file tax returns and whether the documents he had sent to respondent were appropriate. On February 17, 1984, respondent's counsel received Forms 1040 for 1973 through 1977 from petitioner and his wife (married--filing jointly), and Forms 1040 for 1978 and 1979 from petitioner (married--filing separately). These Forms 1040 contain substantially the same information as appears in table 1, supra, together with further information as to itemized deductions and amounts claimed as estimated tax payments. OPINION A critical question as to many of the issues in this case is whether the 1984 Tax Ct. Memo LEXIS 285">290 Forms 1040 sent to respondent in 1977, 1978, 1979, and 1980 (for taxable years 1973 through 1979) constitute Federal income tax returns. In order to qualify as a tax return, the Form 1040 must contain sufficient data from which respondent can compute and assess the liability with respect to a particular tax of a taxpayer. Automobile Club v. Commissioner,353 U.S. 180">353 U.S. 180, 353 U.S. 180">188 (1957); Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 77 T.C. 1169">1177 (1981). Specifically, the Form 1040 must show the amounts of income and the deductions and credits claimed. United States v. Grabinski,727 F.2d 681">727 F.2d 681 (CA8 1984); Thompson v. Commissioner,78 T.C. 558">78 T.C. 558, 78 T.C. 558">562 (1982). As to petitioner's Fifth Amendment concerns, see White v. Commissioner,72 T.C. 1126">72 T.C. 1126, 72 T.C. 1126">1130 (1979), and cases cited therein. The Forms 1040 sent to respondent in 1977, 1978, 1979, and 1980 did not contain sufficient data and thus, we conclude, they are not tax returns. Statute of LimitationsUnder section 6501, 2 respondent generally is barred from assessing an income tax deficiency for a taxable year more than three years after the later of (1) the date the tax return was filed or (2) the due date of the return. Petitioner claims that the statute of limitations 1984 Tax Ct. Memo LEXIS 285">291 for 1973 through 1976 had expired by the time the notice of deficiency was mailed. The Forms 1040 that petitioner sent to respondent before the notice of deficiency was mailed, do not constitute tax returns. Accordingly, assessment is not barred by the statute of limitations. We hold for respondent on this issue. Joint Returns In order to use the tax rate schedule provided in section 1(a), rather than the less favorable schedule provided in section 1(d), petitioner must be a person who "makes a single 1984 Tax Ct. Memo LEXIS 285">292 return jointly with his spouse under section 6013". The Forms 1040 that petitioner sent to respondent before the notice of deficiency was mailed, do not constitute tax returns. Accordingly, these Forms 1040 do not qualify petitioner to use the joint return tax rate schedule of section 1(a). Further, petitioner and his wife cannot elect to use the section 1(a) tax rate schedule by executing and sending to respondent tax returns after the notice of deficiency is mailed and petitioner has filed a petition with this Court. Section 6013(b)(2)(c); 31984 Tax Ct. Memo LEXIS 285">293 Thompson v. Commissioner,78 T.C. 558">78 T.C. 561; see Durovic v. Commissioner,54 T.C. 1364">54 T.C. 1364, 54 T.C. 1364">1401-1402 (1970), affd. on this issue 487 F.2d 36">487 F.2d 36, 487 F.2d 36">41-42 (CA7 1973). As a result, the joint return elections sought to be made on the Forms 1040 sent by petitioner to respondent's counsel in February 1984 are not effective. Petitioner is not entitled to be treated as having filed joint returns for any of the years in issue. (See Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1177, n. 14.) We hold for respondent on this issue. Section 6651(a)(1)Petitioner failed to file income tax returns for the years in issue. Consequently, for petitioner to avoid imposition of the additions to tax under section 6651(a)(1), 41984 Tax Ct. Memo LEXIS 285">294 he must prove that such failure to file was both due to reasonable cause and not due to willful neglect. Thompson v. Commissioner,78 T.C. 558">78 T.C. 562-563 (1982). Petitioner's Fifth Amendment concerns are not sufficient cause for his failure to file timely returns for any of the years in issue. Thompson v. Commissioner,78 T.C. 558">78 T.C. 563; Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1180. Petitioner's testimony about consulting with lawyers in 1981 and 1984 does not provide any basis to excuse his failure to file timely returns for 1973 through 1979. Petitioner's understanding about there being no additions to tax if his taxes were paid on time is essentially correct, as to the section 6651(a)(1) additions. However, in relying on that understanding, petitioner essentially was gambling that his withholding would cover his tax liabilities. Petitioner apparently has income tax liabilities that exceed the amounts withheld. Petitioner's gamble is not reasonable cause for his failure to file timely tax returns. Petitioner loses 1984 Tax Ct. Memo LEXIS 285">295 his gamble. We hold for respondent on this issue. Section 6653(a)An addition to tax under section 6653(a) is imposed if any part of any underpayment of tax is due to negligence or intentional disregard of rules or regulations. Petitioner has the burden of proving error in respondent's determinations that such an addition to tax should be imposed against him. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 58 T.C. 757">791-792 (1972). Petitioner has failed to carry his burden of proof. We hold for respondent on this issue. Section 6654(a)Petitioner has the burden of proving error in respondent's determination that additions to tax should be imposed under section 6654(a). Hollman v. Commissioner,38 T.C. 251">38 T.C. 251, 38 T.C. 251">263 (1962). Petitioner has failed to introduce any evidence indicating that respondent so erred. We conclude that petitioner is liable for additions to tax under section 6654(a). We hold for respondent on this issue. Sections 1311 through 1314On brief, petitioner invokes the mitigation provisions, sections 1311 through 1314. Petitioner notes that these sections provide "rules for relief from some of the inequities caused by the Statute of Limitations and other provisions which would otherwise prevent 1984 Tax Ct. Memo LEXIS 285">296 equitable adjustment of various income-tax hardships." To begin with, petitioner's claim is premature at best. One of the prerequisites to relief under the mitigation provisions is a "determination". Section 1311(a). The definition of a determination applicable in the instant case is a decision of this Court which has become final. Section 1313(a)(1). Thus, until the decision in the instant case becomes final, petitioner may not seek relief under the mitigation provisions. Further, even if petitioner were to be eligible for relief under the mitigation provisions, petitioner has failed to indicate how any of the mitigation provisions would affect his deficiency or additions to tax for any of the years in issue. We do not understand that petitioner now contends that his income is less than, or his deductions greater than, the amounts that he and respondent agreed to. Nor is there any dispute about credits, except as may flow from the joint return question for 1976. We hold for respondent on this issue. Although all the disputed issues are decided for respondent, respondent's concessions reduce the amounts of the deficiencies and this, in turn, reduces the amounts of the additions 1984 Tax Ct. Memo LEXIS 285">297 to tax. To take account of these reductions, Decision will be entered under Rule 155.Footnotes1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the years in issue.↩1. So stipulated. We assume that the parties mean that petitioner's itemized deductions do not exceed his zero bracket amount for 1977. See section 63. ↩2. This is the total of itemized deductions for the year, before reduction by the relevant zero bracket amount.↩2. Section 6501 provides in relevant part, as follows: SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. (a) General Rule.--Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) * * and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. * * * (c) Exceptions.-- * * * (3) No return.--In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.↩3. SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE. * * * (b) Joint Return After Filing Separate Return.-- * * * (2) Limitations for making of election.--The election provided for in paragraph (1) may not be made-- (C) after there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition with the Tax Court within the time prescribed in section 6213; or [The foregoing text includes an amendment made by section 1906(a)(1)(A) of the Tax Reform Act of 1976 (Pub. L. 94-455, 90 Stat. 1520, 1824), that does not affect the instant case.]4. SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX. (a) Addition to the Tax.--In case of failure-- (1) to file any return required under authority of subchapter A of chapter 61 * * * on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618987/	Clarence E. and Alice Koester, Petitioners, v. Commissioner of Internal Revenue, RespondentKoester v. CommissionerDocket No. 53216United States Tax Court23 T.C. 515; 1954 U.S. Tax Ct. LEXIS 17; December 22, 1954, Filed 1954 U.S. Tax Ct. LEXIS 17">17 Decision will be entered for the respondent. Credit for Dependent -- Uncle by Marriage -- Sec. 25 (b) (3). -- An uncle by marriage of a petitioner does not qualify as a dependent of that petitioner under section 25 (b) (3). George J. Rabil, Esq., for the respondent. Murdock, Judge. MURDOCK OPINION.The Commissioner determined deficiencies in income tax as follows:1950$ 10519511231952133The only issue is whether the Commissioner erred in disallowing for each year a dependent exemption for John E. Smith. The facts have been presented by a stipulation which is adopted as the findings of fact.The petitioners filed their joint income tax returns for the taxable years with the collector of internal revenue for the twenty-third district of Pennsylvania. 1954 U.S. Tax Ct. LEXIS 17">18 Alice Koester was raised and supported, from the age of 3 until her marriage at the age of 25, by John E. Smith, the husband of the sister of one of Alice's parents. Smith never formally adopted either of the petitioners. He is now 70 years of age and lives with the petitioners who provide him with room, meals, and laundry service. He received social security benefits of $ 510 during each of the taxable years and earned a total of $ 111.41 from temporary employment in 1951. He had no other income during the taxable years. The petitioners furnished more than one-half of his support during each of the taxable years.The petitioners on their joint return for each of the taxable years claimed an exemption based upon the theory that John E. Smith was a dependent within the meaning of section 25 (b).The Commissioner, in determining the deficiencies, disallowed the exemption for each year with the explanation that he did not qualify as a dependent under section 25 (b) (3), adding "(No blood relationship)." The closest relationship with Smith that either of these petitioners could claim is that he had married Alice's aunt. An uncle by marriage is not within the definition of a dependent1954 U.S. Tax Ct. LEXIS 17">*19 as set forth in section 25 (b) (3) applicable to all years involved herein.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618988/	Celeste B. Smith v. Commissioner.Smith v. CommissionerDocket No. 5123-70 "SC".United States Tax CourtT.C. Memo 1971-122; 1971 Tax Ct. Memo LEXIS 209; 30 T.C.M. 516; T.C.M. (RIA) 71122; May 27, 1971, Filed. Celeste B. Smith, pro se, 2015 Nottingham Way, Albany, Ga. Shuford A. Tucker, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar year 1966 in the amount of $298.54. The issue for decision is whether petitioner during the calendar year 1966 was engaged in the trade or business of operating a dog kennel so as to be entitled to a deduction for expenses or losses of that operation. Findings of Fact Some of the facts were orally stipulated and are found accordingly. Celeste1971 Tax Ct. Memo LEXIS 209">210 B. Smith, hereinafter referred to as petitioner, resided in Albany, Georgia at the time of the filing of her petition in this case. She filed her individual Federal income tax return for the calendar year 1966 with the district director of internal revenue at Atlanta, Georgia. During the year 1966, petitioner lived in Albany, Georgia, and was employed as a full-time teacher in the Dougherty County, Georgia School System where she had been teaching for several years. Petitioner's father had been a veterinarian, and petitioner gained some experience with dogs from working with him. In 1962, while living in an apartment with other persons, petitioner purchased for $35 a female cocker spaniel as a pet. She had attended dog shows since 1960 but prior to 1966 had not shown any dog. In May 1964 petitioner bought a home and within a month enclosed with wire fencing a 12- by 15-foot space in the yard in which to keep her pet dog. Following the death of her father in January, 1965, petitioner received a little over $2,000 from an insurance policy. After receiving this sum, petitioner decided she was in a position to "operate a little bit more in the dog line." In July 1965 petitioner bought1971 Tax Ct. Memo LEXIS 209">211 for $100 a 4-month-old cocker spaniel pup from a kennel that showed dogs. The pedigree on this pup was sufficient to permit entry of the dog in shows. Petitioner planned to use this male dog for stud for her female dog and to obtain stud fees for his services to other female dogs. Petitioner had unsuccessfully used three different male dogs in Albany in 1965 in an effort to get some pups from her female dog. This dog was not of the quality that would produce pups petitioner would plan to keep but she planned to sell the pups. In 1966 petitioner improved the enclosure in her yard with a concrete floor, a covered roof, and walls on two of the four sides. Sleeping boxes for the two dogs were kept in the enclosure. The space was ample for two dogs and possibly could have been used for three dogs. Petitioner was of the opinion that a dog without championship status obtained through wins at shows would bring only $35 to $45 per stud service whereas a dog that had obtained championship status would bring $40 and up per service. Petitioner was also of the opinion that breeders would attend dog shows and observe males that might be available for stud service. Beginning in January 1966 when1971 Tax Ct. Memo LEXIS 209">212 her male dog was 9 months old, petitioner exhibited him at various dog shows. He was shown four times in Florida in January, once in Florida and once in Georgia in February, and three times in Georgia in March. In April he was shown once in Richmond and once in Baltimore. The dog was shown five times in Florida in June, three times in South Carolina in July, once in Tennessee in September, and twice in Georgia in November. The shows attended by petitioner were on weekends or holidays and therefore they did not interfere with her work as a teacher. The April shows in Richmond and Baltimore were during 517 petitioner's spring vacation. Petitioner continued to show the dog in 1967 and part of 1968 but the dog was never able to achieve championship status. Petitioner had no employees to help with the dogs in 1966 and if she were away from home would board the dogs at a kennel. On at least two occasions during 1966, petitioner advertised the male cocker spaniel as being available for stud. The advertisements were in local newspapers and were run for several consecutive days. During 1966, petitioner attempted to use the male cocker spaniel in stud on four separate occasions, two1971 Tax Ct. Memo LEXIS 209">213 of which were with her female dog. On the first attempt the male did not complete his assignment and on the second two attempts the female did not conceive. He was used successfully with petitioner's female cocker spaniel in October resulting in a litter of nine pups born in December. All of the pups were sold as pets in the calendar year 1967 for a total amount of about $400. In February 1966 petitioner arranged to purchase a female show quality cocker spaniel pup but before the date set for delivery the pup died of distemper. At some time after 1966 petitioner changed her planned activities with dogs and decided not to keep any male dogs but to keep and breed females and sell the pups. At the time of the trial of this case, petitioner owned three females of breedable age, two of which had completed their championship, one 9-month-old male pup and two 3-month-old male pups which were for sale. In September 1968 petitioner discovered that the male dog she had bought in July 1965 had a hereditary defect and dropped offering him for stud. Prior to making this discovery petitioner had received three stud fees for his services, two of $30 each and one in the form of a pup she sold1971 Tax Ct. Memo LEXIS 209">214 for $50. Petitioner in 1966 kept meticulous records of her receipts and expenses in maintaining the dogs and showing the male. The only revenue reported by petitioner on her 1966 income tax return from her kennel operations was the amount of $19.50, which was received as awards from shows. There was no income derived from stud fees or from the sale of pups in the calendar year 1966. Petitioner had the following expenses which she set forth on her return showing a resultant operating loss of $1,526.26: ExpenseAmountVeterinary expense$ 117.36Feed90.57Advertising15.39Kennel supplies97.00Boarding fees34.00Phone calls2.86Show entry fees120.00Travel expense attending dog shows:Lodging185.74Auto expense - 8,383 miles at 10 cents per mile838.30Depreciation - Schedule 44.54 $1,545.76 13 DEPRECIATION SCHEDULEAssetAcq'dCostLifePriorCurrentKennel fencing3-1-65$200.0015 years11.10$13.33Kennel improvement8-3-66104.6315 years.004.64Transport crate and pen1-3-6636.455 years.007.29Cocker spaniel (female)6-1-65100.007 years7.1414.28Cocker spaniel (male)196435.007 years5.00 5.00$44.541971 Tax Ct. Memo LEXIS 209">215 Respondent determined the deficiency in petitioner's income tax set forth in his statutory notice by disallowing the deduction claimed by petitioner for the year 1966 for the loss from operating her kennel. Opinion Petitioner contends that her efforts were directed at the establishment of a kennel with the intent of operating it as a profitable enterprise, that she did in fact operate the kennel with the usual techniques 518 associated with the business of a dog kennel, and that the expenses incurred are deductible. It is respondent's position that petitioner was not engaged in the trade or business of operating a dog kennel for profit and that the most favorable view of petitioner's activities based on this record is that she hoped at some later time to engage in a kennel business and was taking steps during 1966 looking toward preparing herself to engage in such business. Section 162, I.R.C. 1954, provides for the deduction of expenses incurred in the operation of a trade or business, and section 165(c) provides for deduction by an individual of losses incurred in a trade or business or in a transaction entered into for profit. Therefore, for petitioner to be entitled1971 Tax Ct. Memo LEXIS 209">216 to deduct her expenses in connection with her dogs or the losses from her kennel operation in 1966, she must show that the operation was a trade or business or a transaction entered into for profit. One of the basic criterion of a "trade or business" is that it be operated for the purpose of making a profit. Hirsch v. Commissioner, 315 F.2d 731, 736 (C.A. 9, 1963), affirming a Memorandum Opinion of this Court. As we pointed out in Margit Sigray Bessenyey, 45 T.C. 261">45 T.C. 261, 45 T.C. 261">273-274 (1965), affirmed 379 F.2d 252 (C.A. 2, 1967), a loss in a particular year or even a long history of losses is not conclusive that the operation was not conducted for the purpose of making a profit but this factor may be important in determining the purpose of the operation. In that case we also noted that while a taxpayer's expectation of profit from the operation must be bona fide it is not necessary that it be a reasonable expectation. Whether a taxpayer actually possesses the requisite profit motive is a question of fact to be decided from a consideration of all of the evidence in a particular case. Hirsch v. Commissioner, supra.The fact that the1971 Tax Ct. Memo LEXIS 209">217 operation is small and can be carried on by a person otherwise employed in a fulltime salaried position does not preclude the activity from being a trade or business entered into with the expectation of profit. However, the amount of time given to the undertaking and the motive of the taxpayer's efforts are factors to be considered. Kerns Wright, 31 T.C. 1264">31 T.C. 1264 (1959), affirmed 274 F.2d 883 (C.A. 6, 1960). Petitioner testified that she originally intended to obtain payments for the services of a stud dog which she hoped would obtain its championship. Although she did not specifically state that she intended in this manner to make a profit, her argument at the conclusion of the trial was that she did. However, when a taxpayer's claims or stated intent appears improbable in light of the other evidence of record, his intent must be determined from all the evidence with particular regard to his activities as compared to his claimed intent. Army Times Sales Co., 35 T.C. 688">35 T.C. 688 (1961). While petitioner kept accurate records of her income and expenses, her expenditures display a lack of concern for the economics of the operation. Petitioner's expenditures1971 Tax Ct. Memo LEXIS 209">218 in showing her dog appear to be disproportionate to any return she could expect to receive from any difference in the stud fees received from a dog with championship status as compared to one without such status. Also, the continued showing of a dog which produced only minimal winnings is indicative of lack of profit motive. Likewise indicative of a lack of profit motive. is the keeping of a female not of show quality which had been bought for a pet and would produce pups which would sell at a lower price than pups from a show quality female. Petitioner's vacillation in the objectives of her enterprise manifest a lack of preliminary exploration as to the profit potential of a small kennel business. The facts and circumstances as a whole demonstrate that petitioner's operation in 1966 was merely an avocational activity. Based upon the record before us we conclude that petitioner had no bona fide expectation of making a profit from the type of operation she was engaging in or planning to engage in during 1966. The weight of the evidence indicates that petitioner's activities were primarily in the nature of a hobby and were at most exploratory as to the business potential of operating1971 Tax Ct. Memo LEXIS 209">*219 a dog kennel for profit. We therefore conclude that petitioner has failed to show that in 1966 she had the requisite profit motive to be engaged in a trade or business of operating a dog kennel or that the expenditures she made in connection with her dogs were in a transaction entered into for profit. We hold on the basis of the facts in this record that petitioner is not entitled to deduct her claimed expenses or loss in the operation of her dog kennel in 1966. Decision will be entered for respondent. 519	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618989/	John L. Ketterl and Delores S. Ketterl v. commissioner. Gladys A. Ketterl v. Commissioner.Ketterl v. CommissionerDocket Nos. 4293-68, 5328-68.United States Tax CourtT.C. Memo 1970-350; 1970 Tax Ct. Memo LEXIS 11; 29 T.C.M. 1694; T.C.M. (RIA) 70350; December 24, 1970, Filed Belan M. Wagner, Santa Monica Blvd., Santa Monica, Calif., for petitioners John L. Ketterl and Delores S. Ketterl. Gladys A. Ketterl, pro se. Norman H. McNeil, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in the income taxes of petitioners John L. and Delores S. Ketterl for the calendar years 1963, 1964, 1965, and 1966 in the amounts of $550.55, $334.27, $329.18, and $226.66, respectively. 1970 Tax Ct. Memo LEXIS 11">12 Petitioners claimed in their petition overpayments for the taxable years 1964, 1965, and 1966 in the respective amounts of $105, $114, and $228. Respondent determined a deficiency in the income tax of petitioner Gladys A. Ketterl for the calendar year 1966 in the amount of $216. 1The issues for decision are: (1) Whether John L. and Delores S. Ketterl are entitled to dependency credit exemptions for all or any of the four children of John L. Ketterl for the calendar years 1963, 1964, 1965, and 1966. (2) Whether Gladys A. Ketterl is entitled to dependency exemptions for more than two of her four children for the calendar year 1966. Findings of Fact Some of the facts have been stipulated and are found accordingly. John L. Ketterl and Delores S. Ketterl, husband and wife who resided in Santa Monica, California, 1970 Tax Ct. Memo LEXIS 11">13 at the time of the filing of their petition in this case, filed joint Federal income tax returns for the calendar years 1963, 1964, 1965, and 1966 with the district director of internal revenue at Los Angeles, California. 1695 Gladys A. Ketterl who resided in Cypress, California, at the date of the filing of her petition in this case, filed an individual Federal income tax return for the calendar year 1966 with the district director of internal revenue at Los Angeles, California. John L. Ketterl was a Captain in the Air Force retired on disability during the years here in issue. He was employed by a Building and Loan Association. Gladys A. Ketterl was from May of 1963 throughout 1966 employed as a teacher. John L. Ketterl (hereinafter referred to as John) and Gladys A. Ketterl (hereinafter referred to as Gladys) were married in 1943. They had four children, Karen Lee (hereinafter referred to as Karen), John Anderson Ketterl (hereinafter referred to as John, Jr.), Susan Ann Ketterl (hereinafter referred to as Susan), and Mary Helen Ketterl (hereinafter referred to as Mary). In late 1962 John and Gladys separated and did not thereafter live together. During the years 1963, 1970 Tax Ct. Memo LEXIS 11">14 1964, 1965, and 1966 all four children resided with Gladys except for certain periods when Karen and John, Jr. were away from home at school or at college. After John and Gladys separated, John filed a petition for divorce in Nevada and started making voluntary payments for the support of his children in the amount of $200 a month, which payments were made by John to his attorney in Nevada and transmitted by the attorney to Gladys. A hearing on John's petition for divorce was held in Reno, Nevada, on May 2, 1963, and on September 30, 1963, a decree of divorce was entered. After the hearing on his divorce in May 1963, John voluntarily increased support payments for his children to $250 per month. The Nevada decree fixed child support payments to be made by John at $62.50 per child per month or a total of $250 per month and made no provision for alimony to be paid to Gladys. During the year 1963 John paid a total of $2,050 to Gladys for support of the four children. There were certain periods when he did not make regular payments and subsequently these amounts were held to be arrearages and in later years John was required to pay these arrearages. John drew a check for the April 19631970 Tax Ct. Memo LEXIS 11">15 payment, but the check was never cashed and Gladys never received this $200. The $2,050 total payment is exclusive of this $200 which was not in fact paid. During the year 1964 John paid $3,000 for support of the four children and in addition paid $503.33 of arrearages for 1963 and interest thereon. During 1963 Gladys consulted an attorney with the idea of either attempting to have the Court not grant a divorce to John or to have the divorce granted in Nevada declared not to be legal and have provision made for support payments for the children. There was apparently some misunderstanding between Gladys and her attorney, and the attorney on January 24, 1964, filed a complaint in the Superior Court of the State of California for the County of Los Angeles to establish the Nevada decree in California. On February 25, 1964, the California Court entered an order providing for John's payment of $250 a month or $62.50 per child per month to Gladys, payable through a court trustee. It was after the entry of this order that certain moneys which had been placed in a savings account by John's attorney for payments for child support in 1963 and part of 1964 were forwarded to Gladys. By an1970 Tax Ct. Memo LEXIS 11">16 order entered June 8, 1965, the California court increased the child support payments John was to make to $70 per month per child effective July 1, 1965 and ordered John to pay medical and dental expenses. On October 20, 1965, the California court entered judgment establishing the Nevada decree in California, affirming the $70 per month per child support payments and ordering John to pay Gladys' attorneys' fees of $400 at the rate of $10 per month commencing November 5, 1965. In this judgment it was also noted that arrearages in support payments of $1,500 had been paid. On October 26, 1966, the California court ordered an increase in child support payments to $85 per month per child or $340 a month, commencing November 1, 1966. All the increases in child support payments from John were secured by action instituted by Gladys. In connection with the judgment of October 26, 1966, Gladys filed a statement which listed her regular monthly expenses. Among other items appearing on this list were $50 for transportation, $32 for "doctor and dentist health accident insurance," $35 for utilities, and $20 for "household upkeep-insurance." During the year 1965 John paid to Gladys for support1970 Tax Ct. Memo LEXIS 11">17 of the four children $3,180. In 1696 addition he made some payments on the attorneys' fees he had been ordered to pay in the 1965 judgment. During 1966 John paid to Gladys a total of $3,420 for child support payments. In addition to the payments made to Gladys for child support in 1963, John paid either as direct money gifts or for items purchased for each of the children the following amounts: Karen $48.50, John, Jr. $38.50, Susan $56.50, and Mary $38.50. In addition John paid amounts on his telephone bill which were incurred by accepting collect, long distance telephone calls at various times during 1963 from each of the children. In 1964 John made gifts of either money or items purchased to his children in the following amounts: Karen $79.50, John, Jr. $34.50, Susan $39.50, and Mary $39. In addition, during the year 1964 John accepted and paid for long distance telephone calls which were made to him by each of the children. During 1965 John gave a cash present of $35 directly to Karen. He bought a watch for John, Jr., for which he paid $25 and gave him cash of $25. He gave Susan a watch for which he paid $25 and gave her cash of $25. He gave Mary cash of $10 at one time1970 Tax Ct. Memo LEXIS 11">18 and $25 at another time, making a total of $35. In addition in 1965, John paid medical bills of $30 for Susan and Mary each. During the year 1966 John gave a cash Christmas present of $25 to each of his four children in addition to the payments he made to Gladys for their support. The following schedule shows the total amount spent by Gladys for certain household and incidental expenses for herself and the four children during the years 1963, 1964, 1965, and 1966: Item1963196419651966Food$1,000$1,950$2,150$2,020House rent2,1952,4002,4002,400Utilities243553570560Clothing2006961,1621,654Medical and dental220188560397Children's allowances96366386386Charity2780234124Moving447 These expenses, except for clothing and medical and dental expenses, were made for the entire household of Gladys and the four children. For 1964 through 1966 the food expense included cost of food for Karen at college and for 1966 also included cost of John, Jr.'s food at college. Gladys owned furniture which had been acquired by her and John somewhere around the mid-1950's. She moved this furniture1970 Tax Ct. Memo LEXIS 11">19 to the Los Angeles area in 1963 from San Francisco where she had lived prior to her separation from John and until the end of April of 1963. Gladys and the family used this furniture in their living quarters. Gladys and the family also incurred certain transportation expenses which consisted of the cost of operating one automobile for the use of the whole family. Also, Gladys incurred on behalf of the whole family miscellaneous household expenses which consisted of the purchase of such items as bed linens, repair of the television or furniture and similar type items. The television set which Gladys had among the furnishings which she moved from San Francisco was a 1948 black and white set and she would spend money on repairing it. She included the money so spent under miscellaneous household expenses along with similar furniture repair items. Gladys also paid certain educational expenses on behalf of herself and the children. In 1964 Karen went away to college. She attended Stout State University in Menominie, Wisconsin. She incurred certain travel expenses when she went to college and when she came home for the summer and for Christmas and Easter vacations. She also had certain1970 Tax Ct. Memo LEXIS 11">20 expenses for room and food while at college, as well as tuition, books, and similar expenses. John, Jr. went away to the University of Arizona in the fall of 1966 and he incurred certain similar expenses. From the beginning of 1963 until the middle of March 1966 Gladys together with her four children lived in rented unfurnished apartments or houses. In 1966 Gladys purchased a condominium for a total amount of $22,300. She made a small downpayment and the balance was paid from the proceeds of a first mortgage on the property. The payments on the first mortgage 1697 and other expenses in connection with the condominium were between $150 to $160 per month. The fair rental value of the condominium unfurnished was $200 per month. During all of the years here in issue the fair rental value of the furniture used by Gladys and the children in their unfurnished quarters was $200 per year. During the years here in issue transportation costs for Gladys and the children were $600 per year excluding the cost of travel for Karen and John, Jr. to their respective colleges. Miscellaneous household expenses for Gladys and the children were $130 for 1963, $207 for 1964, $100 for 1965 and $2001970 Tax Ct. Memo LEXIS 11">21 for 1966. Educational expenses for each of the four children in 1963 were $15. In 1964 educational expenses for John, Jr., Susan and Mary were $35 each. For the school year 1964-65 Karen received educational assistance from the Air Force Aid Society of $850. Three hundred and fifty dollars of this amount was an outright grant and $500 was a non-interest-bearing loan payable after graduation. Karen was the primary obligor on the $500 loan and Gladys signed as guarantor. During 1965-66 Karen received similar assistance, but for this year the total amount was $1,000, $500 in the form of a grant, and $500 in a loan on which Karen was the primary obligor. For the school year 1966-67 Karen received from the Air Force Aid Society similar assistance of $1,450 of which $725 was a grant and $725 a loan on which Karen was the primary obligor. For the school year 1966-67 John, Jr. received from the Air Force Aid Society assistance of $700, $500 in a loan on which he was the primary obligor and $200 as an outright grant. In addition, John, Jr. received $1,000 as a loan under the National Defense Act of 1958. This amount was paid directly to the college for John, Jr.'s expenses and John, Jr. was1970 Tax Ct. Memo LEXIS 11">22 the primary obligor on the loan. Karen's educational expenses for the year 1964 excluding the outright grant but including the amount she received under the loan were $874. Her educational expenses for 1965 excluding the grant but including the $500 loan were $1,000, and the educational expenses for this year for each of the other children were $100. In 1966 Karen's educational expenses including her room rent were $868 which amount excluded the direct grant to Karen but did not exclude the loan she obtained. During 1966 John, Jr. had a cost of $500 for his room at college and $500 for other educational expenses. This $1,000 amount was incurred in addition to the direct grant which he received but did not exclude the $500 loan from the Air Force Aid Society or whatever portion of the $1,000 National Defense loan was applied towards his expenses for the first semester of 1966. During 1966 Gladys paid educational expenses for Susan of $100 and for Mary of $60. At the time of trial Gladys had not been called upon to repay and had made no payments on any of the educational loans made to Karen or John, Jr. Gladys maintained a room for Karen while she was away at college for her to use1970 Tax Ct. Memo LEXIS 11">23 during the summer and at Christmas and Easter vacations and similarly maintained a room for John, Jr., when he was away. On the basis of distributing the fair rental value of housing and furniture equally to Gladys and each of the four children, allocating utilities on the basis allocated by Gladys, and making an allocation of transportatio on the basis of a lesser portion of the transportation by the family car being for John, Jr. and Karen when they were away but including cost of transportation to attend college as part of their support, we have arrived, by considering all of the evidence herein, at the following amounts of total support paid for each of the children including in such support the amounts given by John to the children as cash and the value of gifts given them by John: 10 Total support for,yearKarenJohn, Jr.SusanMary1963$1,135$1,231$1,125$1,10419641 2,6451,4921,5131,48719651 3,2421,9311,8221,89219661 2,5012 2,6711,7421,6921970 Tax Ct. Memo LEXIS 11">24 John and Delores on their joint income tax return for 1963 claimed a dependency exemption for each of John's four children. On their 1964 joint income tax return they claimed a dependency exemption for John, Jr., Susan, and Mary, making a total of three such dependency exemptions. On their 1965 joint income tax return they again claimed three dependency exemptions for John's children, John, Jr., Susan, and Mary, and on their 1966 joint income tax 1698 return claimed two dependency exemptions for John's children, Susan and Mary. In their petition to this Court, John and Delores alleged that for each of the years 1963 through 1966 they are entitled to a dependency exemption for each of the four children. For each of the years 1963 through 1966 Gladys claimed dependency exemptions for all four of her children. For the years 1963 and 1964 she listed the children's names on the separate schedule of exemptions either in an original or amended return and stated that none of the children had income of his own, that she had furnished all of the support and under the heading of amount furnished by others showed "none". For the year 1965 on the separate schedule of exemptions she listed1970 Tax Ct. Memo LEXIS 11">25 Karen, stating that Karen lived with her 12 months during the year, that she did not have income of $600 or more, that she had furnished all of Karen's support, and that none of Karen's support had been furnished by others. Respondent in his notice of deficiency to John and Delores disallowed all the deductions which they had claimed for dependency exemptions for John's children for each of the years 1963, 1964, 1965, and 1966. For the year 1966 respondent mailed a short form notice to Gladys. However, the parties have stipulated that in this notice respondent disallowed Gladys' claimed dependency exemptions for only Susan and Mary. Ultimate Findings of Fact 1. For the calendar year 1963, John furnished over one-half of the support for Susan and Mary but has failed to establish that he furnished over one-half the support for Karen and John, Jr. 2. For the calendar year 1964 John furnished over one-half the support for John, Jr., Susan, and Mary but has failed to establish that he furnished over one-half of the support of Karen. 3. For the calendar year 1965 John has failed to establish that he furnished over one-half of the support of any one of his four children. 4. 1970 Tax Ct. Memo LEXIS 11">26 For the calendar year 1966 John furnished over one-half of the support for Susan and over one-half of the support for Mary but has failed to establish that he furnished over one-half of the support for Karen and John, Jr. 5. For the calendar year 1966 Gladys has failed to establish that she furnished over one-half of the support for any of her four children. Opinion The issue here is factual. We have set forth the facts in some detail. We were confronted with either relying to a large extent on estimates by Gladys or concluding that the record did not show the total support of the children. There is much of a contradictory nature in Glady's testimony. For example, on her schedule of cost of support she refers to Karen and John, Jr. being employed in the summer but in no way accounts for the expenditure of their earnings. Also, Gladys stated that all furnished apartments rented for $500 a year more than unfurnished apartments without considering the type of furnishings. She estimated the rental value of her condominium at $300 a month without stating any basis for the estimate. On her tax returns she stated she paid "all" the support of the children and that "none" was paid by1970 Tax Ct. Memo LEXIS 11">27 anyone else. She claimed that the loans received by Karen and John, Jr. were support furnished by her even though she was merely a guarantor of the notes of her children and had not been called upon to make any payments on these notes. However, we have used our best judgment to determine the total cost of support of each of the children in each year here in issue from all the evidence. We have made the best determination that we can from the description of the furniture used by Gladys and the children as to its fair rental value 2 and have determined transportation costs from a consideration of all the evidence. The record shows that in 1963 until the time of the divorce Gladys charged gasoline to John's credit card. It seems unreasonable that she would have had the cost she claimed for transportation exclusive of these charges in that year. Also the primary use of the 1699 automobile was from all the evidence for Gladys' commuting. 1970 Tax Ct. Memo LEXIS 11">28 For miscellaneous household expenses it is apparent that Gladys included purchase of items which were part of the furnishings and apparently replaced similar items which she sold. From the evidence of record we have determined the amount of miscellaneous household expenses as best we could. We have used educational expenses as set forth by Gladys but have noted that substantial protions of Karen's expenses in 1964, 1965, and 1966 were paid by Karen, herself, through loans on which she was the primary obligor and that the same is true of John, Jr.'s expenses in 1966. We have eliminated the portion of the expenses of Karen and John, Jr., paid by grant. 31970 Tax Ct. Memo LEXIS 11">29 The only item claimed by Gladys to be a support expense which we have entirely excluded is an item of attorneys' fees which Gladys claimed were paid to get child support money for the children. From reading the various documents in the record and considering statements made by Gladys with respect to her trip in 1963 to Reno, it is apparent that some if not all of these fees were in connection with an attempt to keep John from obtaining a divorce or for having the Nevada divorce he obtained held invalid. At least this record does not substantiate that these attorneys' fees were paid primarily to obtain increases in child support payments. For 1964 we have considered that Karen furnished $500 of her own support from the proceeds of her loan and that of the remaining $2,145 John furnished $837 and Gladys $1,308. Money borrowed by a college student on his own note is support furnished by the student himself. The record is clear that Gladys has not paid or been called upon to pay any amount on any of the educational loans which Karen and John, Jr. obtained. For the calendar year 1965 Karen also had a $500 loan with which she paid part of her own educational expenses. For this year it1970 Tax Ct. Memo LEXIS 11">30 is apparent from the amount of total support we have found for each of the children that John did not pay over one-half of the support of any of the children. For the years 1963 and 1966 the record shows that John paid over one-half of the support for Susan and Mary. In so holding we have considered all of the payments made by John in the year 1963 to be for child support. This was John's testimony and Gladys did not deny this statement of John's. For the year 1966 of Karen's total support of $2,501, $725 was paid by Karen herself by her educational loan and the remainder was paid $880 by John and $896 by Gladys. It is, therefore, apparent that neither John nor Gladys paid over one-half of Karen's support in 1966. It is likewise apparent that neither John nor Gladys paid over one-half of John, Jr.'s support in 1966 after considering the payment made by John, Jr., himself, from the Air Force Aid Society loan on which he was the primary obligor. Also, it is not clear as to how much of John, Jr.'s support was paid by his loan under the National Defense Act. However, respondent only disallowed the exemptions claimed by Gladys for the year 1966 for Susan and Mary and he has made no1970 Tax Ct. Memo LEXIS 11">31 affirmative allegation claiming an increased deficiency in Gladys' tax for 1966. We have held that John has shown that he paid over one-half of the support of Susan and Mary for the year 1966 and it follows that we sustain respondent's disallowance of the dependency exemptions claimed by Gladys in 1966 for Susan and Mary. Decisions will be entered under Rule 50. 1700 Footnotes1. For the years 1963, 1964, and 1965, Gladys A. Ketterl claimed four dependency exemptions which were disallowed by respondent but no petition was filed with this Court. The amount of deficiencies determined was collected by respondent and Gladys A. Ketterl has filed claims for refund for the deficiencies paid, which claims have not been acted on by respondent.↩1. This amount includes the loans which Karen agreed to repay to the Air Force Aid Society but does not include the amount of the grant. ↩2. This amount includes the amount of the Air Force Aid Society loan to John, Jr., and the National Defense loan to John, Jr. but does not include the amount of the Air Force Aid Society grant to John, Jr.↩2. Respondent's regulations specifically provide in this respect: Sec. 1.152-1(a)(2)(i), Income Tax Regs.(2)(i) * * Generally, the amount of an item of support will be the amount of expense incurred by the one furnishing such item. If the item of support furnished an individual is in the form of property or lodging, it will be necessary to measure the amount of such item of support in terms of its fair market value.↩3. Respondent's regulations provide in this respect: Sec. 1.152-1(c), Income Tax Regs.(c) In the case of a child of the taxpayer who is under 19 or who is a student, the taxpayer may claim the dependency exemption for such child provided he has furnished more than one-half of the support of such child for the calendar year in which the taxable year of the taxpayer begins, even though the income of the child for such calendar year may be $600 or more. In such a case, there may be two exemptions claimed for the child: One on the parent's (or stepparent's) return, and one on the child's return. In determining whether the taxpayer does in fact furnish more than one-half of the support of an individual who is a child, as defined in paragraph (a) of Sec. 1.151-3, of the taxpayer and who is a student, as defined in paragraph (b) of Sec. 1.151-3, a special rule regarding scholarships applies. Amounts received as scholarships, as defined in paragraph (a) of Sec. 1.117-3, for study at an educational institution shall not be considered in determining whether the taxpayer furnishes more than one-half the support of such individual. For example, A has a child who receives a $1,000 scholarship to the X college for one year, A contributes $500, which constitutes the balance of the child's support for that year. A may claim the child as a dependent, as the $1,000 scholarship is not counted in determining the support of the child. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618991/	MISSOURI STATE LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Missouri State Life Ins. Co. v. CommissionerDocket Nos. 58241, 62386.United States Board of Tax Appeals29 B.T.A. 401; 1933 BTA LEXIS 947; November 23, 1933, Promulgated 1933 BTA LEXIS 947">947 1. DEDUCTIONS - LIFE INSURANCE COMPANIES - RESERVES. - Petitioner's reserve set up to meet its liability upon matured coupons under its "guaranteed premium reduction coupon policies" held to represent a legal reserve for computation of its deduction under section 203(a)(2) of the Revenue Act of 1928. 2. Id. - INTEREST. - Amounts paid as interest by petitioner upon deferred dividends under policies whose tontine period ended in the year of such payment held to represent additional dividends and not interest subject to deduction. Lafayette Life Ins. Co.,26 B.T.A. 946">26 B.T.A. 946, followed. 3. Id. - DEPRECIATION. - Petitioner held to be entitled to adjustment of its income reported for 1928 by the amount of the rental value of space occupied by it in its home office building, which it had included under section 203(b) of the Revenue Act of 1928. Held, further, that for 1929 petitioner is entitled to depreciation upon its home office building without compliance with the condition required by that section. Independent Life Ins. Co. of America,17 B.T.A. 757">17 B.T.A. 757, followed. 4. Id. - DEPRECIATION. - Petitioner held to be entitled1933 BTA LEXIS 947">948 to depreciation upon assets used in its underwriting department. 5. Id. - TAXES. - Payments by petitioner in the taxable years of encumbrances upon property acquired by it and representing taxes which had accrued against such property prior to acquisition held to represent capital expenditures not subject to deduction. 6. INCOME - LIFE INSURANCE COMPANIES - INTEREST. - Where petitioner acquired during the taxable year title to properties, either by voluntary conveyance by the owner or at foreclosure sale, the consideration paid being the release of a debt together with accrued interest which represented a lien upon such property, it is held to have acquired such property for a consideration amounting to the total of such principal and interest and to have thereby realized such interest as income. 7. Id. - Where petitioner acquired the assets and business of another insurance company under a contract by which it assumed the latter's policy obligations, the assets taken over representing the investment of the reserves guaranteeing such obligations, and during the taxable years in question collected certain interest representing income from the newly acquired1933 BTA LEXIS 947">949 assets which had accrued but was unpaid at the time the assets were acquired, it is held that such interest represented income to petitioner. Earl W. Shinn, Esq., for the petitioner. John D. Foley, Esq., for the respondent. LEECH29 B.T.A. 401">402 OPINION. LEECH: Petitioner, a Missouri corporation, carrying on a life insurance business, with its home office at St. Louis, Missouri, by these proceedings consolidated for hearing and decision, seeks redetermination of deficiencies of $4,388.52 and $66,794.13, determined by respondent for the calendar years 1928 and 1929, respectively. The same eight issues are presented by each petition for each year. Respondent raises additional issues by amended answers, charging that he, in error, (a) allowed deductions in each of the taxable years of amounts representing taxes paid in those years upon real estate purchased by petitioner, where such taxes accrued as a liability of the former owner of the property and existed as a lien upon the property at the time of its acquisition by petitioner, and (b) for the year 1929 allowed deductions representing advances to tenants. He contends that such payments do not1933 BTA LEXIS 947">950 represent proper deductions and asks that net income as determined by him be increased by these amounts and the deficiencies be increased accordingly. Most of the facts necessary to a determination of the issues are formally stipulated by the parties. Additional facts to those stipulated were established at the hearing. We adopt and incorporate herein by reference the formal stipulation as findings of fact. Additional facts found by us upon the testimony of witnesses at the hearing are set out under the separate headings of the issues to which such facts pertain. ISSUE NO. 1. Reserve for Premium Reduction Coupons.Respondent reduced petitioner's reserve, as determined by it, for computation of its deduction under section 203(a)(2) of the Revenue Act of 1928, by the amount set up by it to meet its liability upon matured coupons under policies known as "guaranteed premium reduction coupon policies." These policies carried coupons attached, maturing on given dates, the policy contract obligating the company to pay the fixed sum stated in the coupon upon maturity, if all premium payments then due had been met. The policyholder is given the option of receiving payment1933 BTA LEXIS 947">951 of the coupon in cash, using 29 B.T.A. 401">403 it to reduce premium payments, purchasing additional insurance, or leaving it at a fixed rate of interest subject to demand. The record shows that the reserves maintained by petitioner in respect to these coupon obligations are necessarily set aside from premium payments to meet at maturity one of the fixed and definite obligations of the policy and are consequently legal reserves. McCoach v. Ins. Co. of North America,244 U.S. 585">244 U.S. 585; New York Life Ins. Co. v. Edwards,271 U.S. 109">271 U.S. 109; United States v. Boston Ins. Co.,269 U.S. 197">269 U.S. 197. The amounts of the reserves in question for each of the taxable years are stipulated. Upon this issue we sustain the petitioner. Farmers Life Ins. Co.,27 B.T.A. 423">27 B.T.A. 423; Reserve Loan Life Ins. Co.,18 B.T.A. 359">18 B.T.A. 359; petition for review dismissed, C.C.A., 7th Cir., Jan. 14, 1933; Standard Life Ins. Co. of America,13 B.T.A. 13">13 B.T.A. 13; affd., 47 Fed.(2d) 218; 1933 BTA LEXIS 947">952 Commissioner v. Western Union Life Ins. Co., 61 Fed.(2d) 207. ISSUE NO. 2. Depreciation on Assets Used in the Underwriting Department of Petitioner's Business.Respondent allowed depreciation upon assets used in the investment department of petitioner's business, but disallowed depreciation of assets used in the underwriting department. The amount of depreciation actually sustained is stipulated. The question is controlled by our decision in Lafayette Life Ins. Co.,26 B.T.A. 946">26 B.T.A. 946. We are advised of the decision of the Circuit Court of Appeals for the 7th Circuit (Oct. 20, 1933) upon the appeal of this case, reaching the opposite conclusion upon this question. However, since our decision we have consistently applied the rule there laid down. Manhattan Life Ins. Co.,28 B.T.A. 129">28 B.T.A. 129, and several cases decided by memorandum opinion. We are still of the opinion that our conclusion on this question is correct, and, therefore, hold that petitioner is entitled to the deduction sought. ISSUE NO. 3. Deduction - Interest Paid on Dividends to Accumulate under Terms of Outstanding Policies.Petitioner paid in 19281933 BTA LEXIS 947">953 the sum of $30,421.13 and in 1929 the sum of $33,945.05 to policyholders as interest upon dividends apportioned but left by the policyholder to accumulate at a specified rate of interest. Respondent admits that petitioner is entitled to the deduction of these amounts, and we accordingly so hold. 29 B.T.A. 401">404 ISSUE NO. 4. Deduction - Amounts Paid in 1928 and 1929 as Interest upon Deferred Dividends Under Policies Whose Tontine Period Ended in Those Years.Petitioner paid in 1928 the sum of $46,237.13 and in 1929 the sum of $42,091.91 as interest upon deferred dividends under policies whose tontine period ended in those years. The following is a specimen of the material portions of the policy in question: This policy shares in the profits of the company, as follows: The accumulation period ends on the day of 19 . If the insured is then living and all premiums have been paid, the company will apportion to this policy its share of the accumulated profits, and 1. The guaranteed cash value of $ THE ENTIRE CASH VALUE of this policy shall then consist ofand2. The profits in cash then apportioned.The insured may then select one of the1933 BTA LEXIS 947">954 following Options of Settlement: 1. Receive the entire cash value orSurrender Options2. Receive the entire cash value as stated above, converted into an annual cash income for life; or,and in any such case discontinue this policy, or,3. Receive the entire cash value as stated above, converted into profit-sharing paid-up life insurance.4. Receive the profits in cash; or,Continuing Options.5. Receive the profits converted into an annual cash income for life; orand in any such case continue this policy for $ as profit-sharing insurance for life by payment of the same premium as previously.6. Receive the profits converted into additional profit-sharing paid-up life insurance, subject to evidence of insurability satisfactory to the Company.At the end of the accumulation period the Company will send to the insured a written statement of the results under the foregoing options of settlement. If the insured's written selection of one of these options is not received at the Home Office within one month thereafter, it is agreed that settlement shall be made under Option 4, and the profits held by the Company at three per cent interest, 1933 BTA LEXIS 947">955 subject to the written demand of the insured. If this policy is continued beyond the accumulation period, profits will be apportioned at the end of each year thereafter during its continuance and shall be payable in cash. The method followed by petitioner with respect to the apportionment of the deferred dividends on these policies was to set aside each year an amount as representing the profits of such year allowable to the policy, the total of these sums representing the sum apportioned as a deferred dividend at the close of the tontine period. In each 29 B.T.A. 401">405 year it also set aside on each policy an amount designated as interest and computed at 3 1/2 percent compounded annually upon the amounts theretofore set aside as apportioned profits of prior years. The total of these sums was paid to the policyholder at the close of the period. The question here presented is whether those portions of the payments made in the taxable years which represented the so-called interest computed, were in fact payments of interest upon debts or obligations of petitioner or whether the entire payment in each case was one of deferred dividends. In 26 B.T.A. 946">Lafayette Life Ins. Co., supra, 1933 BTA LEXIS 947">956 we had a situation substantially similar to this before us. In that case we said: Nor can it be said that the deferred dividends constituted debts owed by petitioner during the 20-year period of the tontine policies. A debt in its general sense is "a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment." J. S. Cullinan,19 B.T.A. 930">19 B.T.A. 930. During the tontine period none of the deferred dividends constituted "a specific sum of money due or owing" from petitioner to a policyholder and enforceable by the latter. Not until the end of such period could it be determined who of the policyholders might be entitled to deferred dividends. Indeed, it is quite conceivable that none would be so entitled. It is clear, we think, that under such circumstances the so-called interest payments could not properly be deemed interest. They constituted additional dividends rather than interest. It will be noted that there is no agreement in the policy here in question to pay interest upon deferred dividends, and we think it immaterial how petitioner1933 BTA LEXIS 947">957 computes the amount allocable to the policy for each year, the total of which it pays at the close of the tontine period, which is the date its obligation to make any payment accrues. Petitioner attempts to distinguish the above cited case upon the ground that the apportionment of profits for each year and the computation of interest thereon was made at the close of the tontine period, whereas in the present case it was made each year and the tentative credits to the policy then transferred from surplus. We see in that no material difference. It was at most, in our opinion, merely a different method of recording upon the corporate books a transaction in all respects similar to the one before us in 26 B.T.A. 946">Lafayette Ins. Co., supra. In both cases the obligation was similar and the payments made were identical in character. Our decision in the Lafayette Life Ins. Co. case, supra, was reversed on appeal, supra, upon this issue, also. However, having consistently followed the rule we there adopted, in a number of cases, decisions in which were by memorandum opinion, and remaining convinced of its correctness, we adhere thereto and sustain respondent upon this issue. 1933 BTA LEXIS 947">958 29 B.T.A. 401">406 ISSUE NO. 5. Inclusion in Income of Rental Value of Space Occupied by Petitioner in Its Home Office Building.For the calendar year 1928 petitioner included in its gross income the sum of $85,948.89 as representing the rental value of space occupied by it in its home office building and was allowed by respondent, under section 203(b) of the Revenue Act of 1928, 1 deductions for depreciation, taxes and operating expenses on said building. For the calendar year 1929 petitioner included no amount in its reported gross income as representing such rental value and was denied by respondent, in computing the deficiency for that year, the deductions for taxes, depreciation and operating expenses. Petitioner contends that income for 1928 should be reduced by the rental value reported in that year and that income for 1929 should be reduced by the amount of depreciation sustained and taxes and expenses paid. All facts necessary for a determination of the issue are formally stipulated. 1933 BTA LEXIS 947">959 This Board has held section 245(b) of the Revenue Acts of 1921 and 1924 to be unconstitutional. Independent Life Ins. Co. of America,17 B.T.A. 757">17 B.T.A. 757; 18 B.T.A. 359">Reserve Loan Life Ins. Co., supra;26 B.T.A. 946"> Lafayette Life Ins. Co., supra; Two-Republics Life Ins. Co.,21 B.T.A. 1355">21 B.T.A. 1355; Jefferson Standard Life Ins. Co.,25 B.T.A. 1335">25 B.T.A. 1335; Volunteers State Life Ins. Co.,27 B.T.A. 1149">27 B.T.A. 1149. We are aware of the fact that the Circuit Court of Appeals for the Seventh Circuit in deciding (Oct. 20, 1933) the appeals in 26 B.T.A. 946">Lafayette Life Ins. Co., supra, and Rockford Life Ins. Co. (memorandum opinion of this Board), held to the contrary. Since our decision in 17 B.T.A. 757">Independent Life Ins. Co., supra, we have applied the rule there laid down in a number of cases. (See citations in preceding paragraph.) It may be noted, further, that this question is pending on appeal in the Circuit Court of Appeals for the Sixth Circuit, Commissioner v. Independent Life Ins. Co., 62 Fed.(2d) 1066; 1933 BTA LEXIS 947">960 288 U.S. 592">288 U.S. 592; as well as in the Circuit Court of Appeals for the Fourth Circuit, 25 B.T.A. 1335">Jefferson Standard Life Ins. Co., supra.We are still of the opinion that the conclusion reached by us in the cited cases is correct and therefore hold that petitioner is entitled under this issue to the relief asked. 29 B.T.A. 401">407 ISSUE NO. 6. Interest Realized as Income Received.Petitioner during the taxable years 1928 and 1929 acquired numerous parcels of real estate upon which it held mortgages as security for loans. Some of these were acquired from the owners by voluntary conveyance under quitclaim or warranty deeds in consideration of the release of the indebtedness, including interest due. Others were acquired at foreclosure sales in which petitioner bid in the properties for the sum of the loan plus accrued interest. In all cases petitioner entered these properties on its books at figures totaling the loan plus interest and, in the case of foreclosed properties, the cost of such foreclosure. The properties in question, the amount of the loan and interest assumed at the time of purchase are all stipulated by the parties. 1933 BTA LEXIS 947">961 Petitioner contends that these transactions can not be considered as mere purchases of property, but really constitute recoveries of only a portion of the face of the loans as in nearly all cases the properties acquired had then fair market values less than the principal sums of the loans. Respondent contends, that petitioner acquired the properties in each case for a consideration representing the principal and accrued interest on the loan and has constructively received its interest, and that, in determining the deficiencies for each year respondent has included in income the amount of accrued interest involved in the transactions taking place in such year. A somewhat similar question was before us in John Hancock Mutual Life Ins. Co.,10 B.T.A. 736">10 B.T.A. 736. We held there that petitioner was not in receipt of income representing accrued interest, for the reason that he had only bid the sum of the principal of the loan, and that the total proceeds of the foreclosure sale were insufficient to satisfy the principal debt and there was nothing to apply to interest accrued. In 1933 BTA LEXIS 947">962 18 B.T.A. 359">Reserve Loan Life Ins. Co., supra, the petitioner, a life insurance company, had acquired various properties at foreclosure. In that case we said: In the instant case the record is silent as to whether the bid prices at which the petitioner acquired the farms were for the principal and the interest of the mortgage or for the principal only, or for less than the principal or at prices in excess of principal and interest. The facts show that upon acquiring title to the farms the petitioner in its books of account transferred these mortgage loan investments from its mortgage loan account to an account of real estate owned, for the full amount then invested in the respective mortgage loans, including the accrued and unpaid interest here involved, and as a part of the transaction credited its income account of interest on mortgage loans with the amount of interest then accrued and unpaid. In the absence of evidence showing at what prices the petitioner acquired the respective farms 29 B.T.A. 401">408 at foreclosure, we are not in a position to hold that the amounts of interest here in controversy were improperly included in the petitioner's income for the respective years. 1933 BTA LEXIS 947">963 In Ewen MacLennan,20 B.T.A. 900">20 B.T.A. 900, petitioner, the mortgage creditor, had bid in the property at foreclosure for the debt, accrued interest, and costs of sale. There we said: Whether settlement was made in cash or by a partial application of credits due the buyer, the amount of accrued interest paid or applied as a credit is, under our decision in Manomet Cranberry Co.,1 B.T.A. 706">1 B.T.A. 706, taxable income to the petitioner. In these sales petitioner was a voluntary purchaser. In those cases where the transaction was by agreement with the owner, who deeded his property in consideration of his release from the obligation representing the loan plus accrued interest, we assuredly would not permit such owner deduction, as a loss, of the difference between the cost of the place to him and the fair market value at the time conveyed to his creditor. If such sale is to the seller one at a consideration representing the liability released, the same consideration must be charged to the purchaser who passes it. In the case of purchases at foreclosure sales petitioner has bid in the property as a purchaser, has obligated himself for the money payment of his1933 BTA LEXIS 947">964 bid, and has exercised his right to satisfy such obligation by application of the indebtedness due under the loan contract. We hold that petitioner in the instances in question has realized in income the accrued interest which represented part of the consideration with which it acquired title to the properties. There is much testimony in the record upon the question of the fair market values of the properties acquired. In our view of the situation such question is not material and accordingly no findings are made of those values other than that the fair market values of certain properties were less than the amount of the loan upon such properties plus accrued interest. Cf. American Cigar Co.,21 B.T.A. 464">21 B.T.A. 464; affd., 56 Fed.(2d) 425. ISSUE NO. 7. Depreciation.This issue is upon the disallowance by respondent of depreciation taken by petitioner upon eleven properties owned in the taxable years. The depreciable cost, amount of the depreciation taken, and the amount disallowed by respondent in respect to each property are stipulated by the parties. Additional facts, upon which depreciation as to each piece of property will be computed, are1933 BTA LEXIS 947">965 determined by us as follows: 29 B.T.A. 401">409 Syndicate Trust Building, St. Louis, Missouri. - This is a steel, stone and concrete fireproof department store and office building of 16 stories and basement, erected in 1908. It was 23 years old when acquired by petitioner in 1929 and at that time had a normal useful life of approximately 27 years. Century Building. - This is a stone building of 10 stories and basement, built in 1897 as a theatre and office building and remodeled in 1910. It was adjacent to the Syndicate Trust Building mentioned above, separated by an alley which was later built over by a new building constructed to make the Syndicate Trust and Century Buildings one operating building. It is agreed by both parties that this building over the alleyway had a normal life when constructed in 1919 of 50 years and a useful life of 40 years when acquired in 1929 by petitioner. The witnesses upon the question of the normal remaining life of the Century Building at the time acquired by petitioner differ to some extent, one being of the opinion that it had a life of 50 years from date of construction and that its life was not extended by the remodeling in 1910. The1933 BTA LEXIS 947">966 other witness was of the opinion that its life was 40 years when constructed and this life extended by 10 years as the result of the remodeling. Neither witness testified as to the effect upon its life by reason of the construction in 1919 of the "over-alley" building by which it was made an integral part of the Syndicate Trust Building. Upon careful consideration of all the facts we are of the opinion that when acquired by petitioner in 1929 the building in question had a reasonable remaining useful life of approximately 27 years. Annex. - This is a steel and brick building, the first floor used for retail store purposes and the upper floors for warehouse and workshop by the lessees of the department store portions of the Syndicate Trust and Century Buildings. This building had a normal useful life of 50 years when constructed and was 16 years old when acquired by petitioner in 1929. At that time it had a remaining life of usefulness of approximately 34 years. Criterion Theatre Building, St. Louis, Missouri. - This is a small theatre building of brick and stone construction with some steel reinforcement. It was approximately 20 years old when acquired by petitioner1933 BTA LEXIS 947">967 in 1929 and had at that time a remaining normal useful life of approximately 20 years. Stanley Apartments, Chicago, Illinois. - This is a four-story brick and concrete building constructed in 1916 and having a normal life of approximately 35 years from that date. It had a remaining normal useful life of approximately 24 years when acquired by petitioner in 1927. 29 B.T.A. 401">410 822-824 Leland Avenue, Chicago, Illinois. - This is a three-story and basement stone front building constructed as a six-flat apartment but now used as a rooming house. It was acquired by petitioner in 1927, was 11 years old at that time and had a remaining normal useful life of 24 years. Vandervoort Hotel, Paragould, Arkansas. - This is a four-story brick hotel of ordinary joist construction, not fireproof, with approximately 80 hotel rooms. It was 11 years old when acquired by petitioner in 1927. When built it had a normal useful life of 35 years and a remaining life of usefulness of 24 years when acquired by petitioner. Warehouse, Centralia, Illinois. - This is a two-story brick warehouse, 50 by 100 feet, without basement and not fireproof. It was acquired by petitioner in 1928, 1933 BTA LEXIS 947">968 was six years old at that time and had a remaining normal useful life of approximately 25 years. Brick store, Charleston, Missouri. - This is a two-story brick store with composition roof and not fireproof. The first floor is used as a store space and the upper floor for storage. It was 33 years old when acquired by petitioner in 1928 and at that time had a remaining normal useful life of approximately 10 years. Brick store, Memphis, Tennessee. - This is a three-story brick store, the first floor of which is used as a market. It was erected in 1906 and was in a dilapidated condition when acquired in 1928 by petitioner but had a remaining normal useful life at that time of approximately 10 years. Store and warehouse building, McAlester, Oklahoma. - This is a three-story brick store building, semifireproof. It is well built and was 17 years old when acquired by petitioner in 1928, at which time it had a normal remaining useful life of approximately 23 years. We hold that petitioner is entitled to depreciation on the properties listed above at rates based upon the approximate normal useful life of such properties when acquired by it, in accordance with the1933 BTA LEXIS 947">969 facts as above found by us. ISSUE NO. 8. Income Realized from Assets Acquired.On August 25, 1928, petitioner acquired all of the assets and business of the International Life Insurance Co. under a contract, a copy of which is a part of the formal stipulation of facts filed. The consideration to be paid consisted of the assumption by petitioner of all of the debts and policy obligations of the International Life, including the reinsurance of all of its outstanding life and annuity contracts and the agreement to pay an indeterminate amount provided 29 B.T.A. 401">411 in no event to be in excess of $5,625,000. The cash consideration is provided to be paid by application of 75 percent of any earnings or profits from assets so acquired and insurance taken over to reduce the deficit of International Life, the remaining 25 percent to be paid that company. When and if such deficit is eliminated and the balance sheet upon the International Life assets shows a surplus, it is to be prorated and paid 75 percent to International Life and 25 percent to petitioner, such payments to continue until the International Life shall have received total payments under the contract of $5,625,000 plus1933 BTA LEXIS 947">970 5 percent interest on the unpaid balance of this sum from the date of the contract or until 15 years have elapsed from the date of the first semiannual balance sheet on which a surplus is shown, whichever event shall first occur. Among the assets transferred to petitioner under this contract were various bonds, mortgage loans, and collateral loans upon which interest accrued but unpaid amounted to $801,091.65. Of this amount petitioner collected in 1928 the sum of $301,302.09 and in 1929 the sum of $194,482.84. Petitioner included these amounts in its income reported for the taxable years in question and now contends that such action was in error as such sums represented the liquidation of capital assets purchased by it. The collections in question represent the income upon property belonging to petitioner at the time such income was realized, and petitioner is on a cash basis. These collections are not subject to inclusion in income of the International Life, which, as far as we know, may never have received any payment under the contract in question. Petitioner has taken over the business of that company. It is not merely a transaction of the purchase of assets, but a1933 BTA LEXIS 947">971 contract of reinsurance under which the policy liabilities of the International Life have been assumed by petitioner, and its assets, representing the investment of the legal reserves guaranteeing such policies, have been taken over and continue to guarantee such obligations. The amounts here in controversy, representing the earnings of such invested assets, could in no event represent income to either the International Life Insurance Co. or petitioner until realized by collection, and are, we think, clearly within the definition of gross income under section 202(a) of the Revenue Act of 1928 which provides: "In the case of a life insurance company the term 'gross income' means the gross amount of income received from interest, dividends and rents." Even were it conceded that the accrued but uncollected items represented capital acquired by petitioner, they would upon collection be taxable to the extent, if any, that they exceeded the consideration paid. The burden is upon petitioner to show them not 29 B.T.A. 401">412 to be subject to tax, or, in other words, to show the proportion of the total consideration allocable to these particular items. This it is manifestly unable to do. In1933 BTA LEXIS 947">972 fact the amount of the consideration is not determinable. It may be $5,625,000 or it may be nothing, depending upon future events impossible to forecast. We can not find that this specific question has, in the case of an insurance company, been passed upon by us or by the courts. The case of Pontiac Commercial & Savings Bank,11 B.T.A. 118">11 B.T.A. 118; affd., 41 Fed.(2d) 602, is similar in many respects, and the reasoning of the court in its opinion approving the conclusion reached by us appears to apply equally to the facts here shown. In that case the court said: This interest having been assigned to petitioner, and yet having been omitted from the capital account, when collected by petitioner necessarily became income to petitioner just as it would have been to the Pontiac Savings Bank if collected before the transfer of the securities. These interest items when collected fell within the term "gross income" as defined in section 213(a), Revenue Act 1918, 40 Stat. 1065. We do not think it can avail petitioner that the interest accrued while the securities were in the hands of its transferors. See 1933 BTA LEXIS 947">973 Taft v. Bowers,278 U.S. 478">278 U.S. 478, 278 U.S. 478">482, 49 S. Ct. 199, 73 L. Ed. 460, 64 A.L.R. 362">64 A.L.R. 362. It was no less income when collected by the united bank than it would have been if collected by one of the units thereof before the consolidation. Cases cited to the effect that income such as profits, commissions, etc., earned during the life of a decedent but not due or payable at his death, are not taxable as income when collected, are not particularly helpful. There is no analogy between the status of the estate of a decedent and the situation presented here. We hold that the amounts in question represented gross income to petitioner when collected by it. ISSUE NO. 9. Payments Made by Petitioner Representing Taxes Accrued Against Property Prior to Its Acquisition.By amendment to his answers in each appeal respondent questions the allowance granted by him of general property and special assessment taxes paid in the taxable year by petitioner upon property acquired by it in those years either by foreclosure or purchase. The facts are not in dispute. The parties have formally stipulated the facts in respect to the properties, dates of acquisition, amount of taxes, 1933 BTA LEXIS 947">974 dates paid, periods for which paid, and dates of accrual under laws of the various states in which the properties are situated. With respect to the general property taxes respondent contends that they represent merely the payment of an encumbrance existing upon property acquired at the date of acquisition and constitute liabilities of the former owner, their payment being merely a part of the capital expenditure made in acquiring a clear and unencumbered title. Petitioner contends that the provision of section 203(a)(6) 29 B.T.A. 401">413 of the Revenue Act of 1928 2 grants the deduction as the payment is one of "taxes upon or in respect to real estate owned by the company." It contends that it is in any event entitled to deduction of that part of the tax for the year allocable to that portion of the tax year during which it was the owner of the property. 1933 BTA LEXIS 947">975 Petitioner cites our decision in John Hancock Mutual Life Ins. Co.,10 B.T.A. 736">10 B.T.A. 736, but we find in that case no support for its contention. There we said: When property is sold with a covenant that it is free and clear of encumbrance, the covenant is broken if prior to the sale taxes had become a lien upon the land. This is true where the taxes become a lien from the date of assessment, though they have not become due and payable at the time of the conveyance. See Thompson on Real Property, § 3499, and cases therein cited, particularly O'Connell v. First Parish in Malden,204 Mass. 118">204 Mass. 118; 90 N.E. 580">90 N.E. 580. If in such case the purchaser was legally required to pay the taxes, he would have recourse against the seller. It is then apparent that taxes which have become a lien against real estate in Massachusetts prior to the date of the sale are primarily an obligation of the seller and not of the purchaser. If then the purchaser of real estate agreed to pay a lien which he knew existed as a charge on the property at the time of its purchase, and if, in fact, he does discharge that lien by payment, he has not in fact paid taxes or1933 BTA LEXIS 947">976 interest of which the lien may have consisted, but he is simply completing his payments in the purchase of the property. The taxes and interest installments which he paid were the seller's taxes and interest installments and it was by an agreement and reduction in the purchase price that the purchaser paid them on behalf of the seller. The same principle applies where the sale is on the foreclosure of a mortgage. We did not there hold that the proration of the tax payment was proper. Respondent in determining the deficiency had made such proration and the only question presented to us was whether petitioner was entitled to deduction of that portion of the tax representing the period prior to the foreclosure sale. In First Bond & Mortgage Co.,27 B.T.A. 430">27 B.T.A. 430, we held that taxes paid by the purchaser on property acquired at a foreclosure sale, which represented at that time a lien on the property sold, could not be claimed as a deduction by such purchaser on computing net income. In the present case the properties were acquired after the tax liability accrued and were subject to a lien for its payment. We hold that petitioner is not entitled to deduction of1933 BTA LEXIS 947">977 the payments made. Leamington Hotel Co.,26 B.T.A. 1004">26 B.T.A. 1004; Grand Hotel Co.,21 B.T.A. 890">21 B.T.A. 890; H. H. Brown Co.,8 B.T.A. 112">8 B.T.A. 112. 29 B.T.A. 401">414 With respect to the special improvement taxes the parties have stipulated the dates of acquisition of the several properties, the date in each instance of the assessment of the tax, and the proportion of the tax representing interest and maintenance charges. Respondent contends that in no event are these payments allowable deductions to petitioner, as they fall within the exception of the statute as "taxes assessed against local benefits of a kind tending to increase the value of the property assessed." He contends, that since the saving clause in section 23(c)(3) of the Revenue Act of 1928, permitting the deduction by other corporations of so much of taxes assessed against local benefits as is properly allocable to maintenance or interest charges, is not found in section 203 of the act, it follows that no part of the tax is deductible by an insurance company. With this contention we do not agree. Our decision upon the question of general property taxes disposes of the question in respect to the1933 BTA LEXIS 947">978 special improvement taxes which are shown by the stipulation to have been assessed prior to the acquisition of the several properties by petitioner. However, those taxes assessed subsequent to the acquisition of the property by petitioner are allowable deductions unless they come within the prohibition of section 203. The specific allowance of the deduction of so much of special improvement taxes as represents interest and maintenance charges appears for the first time in section 23(c)(3) of the Revenue Act of 1928. In prior acts the provision respecting corporations other than insurance companies is similar to that here under consideration, embodied in section 203 of the Revenue Act of 1928, and under these former acts we have uniformly held that taxes representing interest and maintenance charges, such as these, were not of a character tending to increase the value of the property assessed and consequently were not excepted from allowance as a deduction. Evens & Howard Fire Brick Co.,8 B.T.A. 867">8 B.T.A. 867; Andrew Little,21 B.T.A. 911">21 B.T.A. 911. This petitioner is granted by the act here applicable the deduction of taxes, except those assessed against local1933 BTA LEXIS 947">979 benefits of a kind tending to increase the value of the property assessed, and the question of its right to deduction is determined by the answer to the inquiry of whether or not the taxes representing interest and maintenance are such as tend to increase the value of the property. We hold that these taxes, to the extent that they represent interest and maintenance, are not of such character and are consequently deductible by petitioner in those cases where, under the stipulation filed, the properties are shown to have been acquired prior to the assessment of the tax. For the year 1929, however, respondent affirmatively charges error on his part in his allowance of a deduction of $11,244.27 representing 29 B.T.A. 401">415 "advances" by petitioner in this amount to tenants. The record fails to show what these advances represent. If they were advances for capital improvements to the property they would not be deductible, but if they merely represented advances for purchase of seed and fertilizer or some similar expense item and return was realized by petitioner only in the rent received, they would be deductible as an expense. The burden is upon respondent to show the item not allowable1933 BTA LEXIS 947">980 and he has failed to make such showing. His allowance of this item will not be disturbed. Reviewed by the Board. Judgment will be entered under Rule 50.SMITH SMITH, dissenting: The decision on Issue No. 5 of the majority opinion is predicated upon the assumption that certain provisions of the income tax law relating to life insurance companies are unconstitutional. I disagree. See Commissioner v. Lafayette Life Ins. Co., 67 Fed.(2d) 209, and Commissioner v. Rockford Life Ins. Co., 67 Fed.(2d) 213. I also dissent from the decision on Issue No. 2. See 26 B.T.A. 946">Commissioner v. Lafayette Life Ins. Co., supra.VAN FOSSAN agrees with this dissent. Footnotes1. (b) Rental value of real estate.↩ - No deductions shall be made under subsection (a)(6) and (7) of this section on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied. 2. (6) REAL ESTATE EXPENSES. - Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a company upon his interest as shareholder, which are paid by the company without reimbursement from the shareholder, but in such case no deduction shall be allowed the shareholder for the amount of such taxes. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618992/	TAKAMINE LABORATORY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Takamine Lab. v. CommissionerDocket No. 3199.United States Board of Tax Appeals7 B.T.A. 963; 1927 BTA LEXIS 3073; August 1, 1927, Promulgated 1927 BTA LEXIS 3073">3073 Louis H. Hall, Esq., for the petitioner. Charles H. Curl, Esq., for the respondent. STERNHAGEN 7 B.T.A. 963">964 Deficiency of $112,768.92, income tax for 1918. The respondent added to petitioner's gross income an amount alleged to represent profit on an exchange of property for stock. FINDINGS OF FACT. Petitioner, a corporation, was organized under the laws of New York on December 21, 1914, with its principal office at 120 Broadway, New York City. Dr. Jokichi Takamine, now deceased, was president of the petitioner, his son, Jokichi Takamine, Jr., its secretary, and another son, Eben T. Takamine, treasurer. Petitioner was capitalized at $10,000; 100 shares at a par value of $100 a share were issued, 97 shares to the father, Jokichi Takamine, and two shares and one share to the sons, Eben and Jokichi, Jr., respectively. They were the sole stockholders and directors of petitioner. Petitioner was engaged in the manufacture, importation, exportation, and sale of chemicals and pharmaceutical supplies in bulk, its principal trade being with Japan. Some time prior to August, 1918, Dr. Takamine and his son, Eben, were in Japan and discussed the formation1927 BTA LEXIS 3073">3074 of a separate company under the laws of Japan, which would carry on for petitioner its business in Japan. Previously the Sankyo Company had acted as petitioner's agent in Japan. The assets of the petitioner's business department, that is to say, that branch of the concern which carried on the importation and exportation of chemicals, were to be transferred to the new Japanese company, and a certain number of shares of stock of the new company were to be issued to the Takamines. At this time the war with Germany was in progress and apparently substantial profits were to be made from this trade in "heavy chemicals." Accordingly, on August 19, 1918, the contemplated new company was incorporated in Japan under the name of the Takamine Industrial Co., Ltd., hereinafter called the "Japan Company." It had its principal office at 444 Tokyo Marine Building, Tokyo, and a branch office at 120 Broadway, New York City. Dr. Takamine was president of the company and director authorized to represent it. Its capitalization was 3,000,000 yen, which at the 1918 exchange value of the yen (49.8 cents) amounted to approximately $1,500,000. The par value of a share was 50 yen ( $25), and 60,000 shares1927 BTA LEXIS 3073">3075 were issued. Dr. Takamine subscribed for 14,000 shares, and each of his two sons to 10,000 shares, making 34,000 shares, or an interest of 56.66 per cent of the stock in the Takamines. The par value of the stock was not, however, paid in full to the Japan Company. Twelve and one-half yen per share, or one-quarter of the par value was paid in by other stockholders than the Takamines, twenty-seven in all, who 7 B.T.A. 963">965 held 26,000 shares, the remaining three-fourths being left subject to call by the corporation's directors. Of the 34,000 shares held by the Takamines, one-half of the par value, or $425,000 was paid in. But this sum was not paid to the new company in cash. On Otober 29, 1918, an agreement was signed by Dr. Takamine as president of the Japan Company and by Dr. Takamine again as president of the petitioner, by which an assignment was made of all the assets and liabilities, with a single exception, of petitioner's "business department," as of August 31, 1918, to the Japan Company. This property of petitioner was worth $250,000 and consisted of merchandise and property on contract, in transit and in Japan, and was received by the Japan Company as one-half payment1927 BTA LEXIS 3073">3076 on the stock subscribed by the Takamines. The names of the Takamines, and not that of petitioner, were entered on the Japan Company's stock subscription list. The petitioner accepted the stock of the Japan Company and an entry was made on petitioner's books, setting up an investment of $425,000 in the Japan Comapny. The Takamines originally intended to receive this stock as individuals but later, on the advice of counsel, decided that petitioner should receive it. No certificates of stock were ever issued to or received by the petitioner, or its nominees, nor by any other shareholders of the Japan Company. No sales of stock by stockholders were made after original subscription. After the Armistice, November 11, 1918, there was an immediate decline in the market value of drugs and chemicals. Contracts were repudiated all over Japan. The value of the commodities transferred to the Japan Company dropped. At this time the Japan Company was under contracts involving large sums of money for the purchase of chemicals. Some of these the Japan Company sought to cancel, and in doing so became in one instance involved in a lawsuit which resulted in a loss to it of $30,000. The company1927 BTA LEXIS 3073">3077 ceased doing business on February 10, 1919, but goods under order continued to arrive in Japan after this date. It was the practice of the Japan Company's New York office to draw drafts covering shipments, without letters of credit, on Tokyo banks, including the Yokohama Specie, the Sumitomo, and the Taiwan Banks, for the amount of the expected sale price, and to cash these drafts in New York. The shortest time of shipment between New York and Tokyo was 60 days, and often as long as 4 or 5 months elapsed while goods were in transit. In November, 1918, the New York office of the Japan Company had instructed the main office at Tokyo to procure no further orders and in February, 1919, the Tokyo office instructed the New York branch office to ship no more goods. Under the conditions indicated 7 B.T.A. 963">966 above, however, goods arrived, consigned to the Japan Company, as late as March, 1919. By February, 1919, Dr. Takamine had returned to Japan. On March 18 or 19, 1919, all the assets and liabilities of the Japan Company were assigned to Dr. Takamine. At this time the liabilities of the company exceeded its assets by about 1,100,000 yen. Dr. Takamine then in turn assigned part, 1927 BTA LEXIS 3073">3078 or all, of the Japan Company's assets to Sankyo on consignment, the proceeds to be applied against indebtedness of the Japan Company on account of drafts honored by it. He also sold in March, 1919, certain personal property in order to procure a loan of 468,433.88 yen for the Japan Company, which that company never repaid him. Dr. Takamine bought, after February, 1919, a majority of outstanding shares of the Japan Company. No call was made by the Japan Company on unpaid stock subscribed, and it was Dr. Takamine's object in buying outstanding shares of the company to prevent further losses to his friends who had subscribed this stock. He assumed and paid all liabilities and the creditors of the company were paid in full. Formal dissolution proceedings were instituted on August 21, 1919, in accordance with resolutions of a general shareholders' meeting. A report of liquidation of the company was made in November, 1919, with a statement of assets and liabilities as of September 30, 1919, as follows: ASSETSCapital unpaid$1,825,000.00Good will350,000.00Furniture6,161.85Due from customers4,377.73Bills receivable17,114.59Advanced payments13,472.49Deposit in bank and cash on hand53.42Due from New York Branch Office130,689.48Unsettled accounts with New York Branch Office218.52Loss by Tokyo Head Office1,042,458.73Loss by New York Branch Office82,825.52Total3,472.372.33LIABILITIESCapital stock3,000,000.00Legal reserve fund2,600.00Suspense account1,338.45Loan from Dr. Takamine468,433.88Total3,472,372.331927 BTA LEXIS 3073">3079 7 B.T.A. 963">967 The entire loss on ultimate liquidation, which was completed on March 10, 1924, was 1,272,776.13 yen. No dividends on the stock were ever declared and the stockholders never received any dividends on the company's dissolution. The stock of the Japan Company became worthless in 1919. The books and records of the Japan Company were destroyed in the earthquake and fire of September 1, 1923. The deficiency notice to petitioner, in addition to stating the deficiency for 1918, states there is no deficiency or overassessment for 1919, and shows a net loss of $27,162.76 sustained in 1919. In computing the deficiency for 1918, the respondent has allowed this net loss for 1919 as a deduction. OPINION. STERNHAGEN: From a record far from certain as to the facts, some of which appear in testimony and documentary evidence given in Japan on written interrogatories, the foregoing findings have been made. They are not satisfactory because the absence of clear detail requires inferences of fact to serve as premises for conclusions of law. Perhaps it was necessary, or at least justifiable, that a closely held business should be reorganized with as little regard for detail1927 BTA LEXIS 3073">3080 or legal formality as is shown by this record; but if so, when the matter becomes of legal significance in litigation such as this, the tribunal can only take the evidence as it finds it, make such inferences as are necessary, as reasonably as possible, and from this reach its decision. In such a decision there can be little value by way of precept. Numerous issues are raised in the pleadings but in view of our decision it is unnecessary to consider them all. Considering all the evidence, we find no foundation upon which to rest a conclusion other than that the stock of the Japan Company here in question was worth $425,000 as found by the Commissioner and was taken by the petitioner for assets which had cost $250,000, thus establishing a gain of $175,000 as part of petitioner's 1918 income. This stock was not entirely worthless in 1918, although probably of doubtful value. In 1919 it became totally worthless and in that year petitioner sustained a loss of $425,000 by reason thereof. This loss should be included in the computation of petitioner's admitted net loss of 1919 and applied against its 1918 income to redetermine the 1918 deficiency in question. Judgment will be1927 BTA LEXIS 3073">*3081 entered on 15 days' notice, under Rule 50.Considered by GREEN and ARUNDELL.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618993/	Appeal of ESTATE OF WILLIAM H. LARKIN.Larkin v. CommissionerDocket No. 1764.United States Board of Tax Appeals1 B.T.A. 1045; 1925 BTA LEXIS 2697; April 25, 1925, decided Submitted April 1, 1925. 1925 BTA LEXIS 2697">2697 J. M. Cumming, C.P.A., for the taxpayer. R. E. Copes, Esq., for the Commissioner. 1 B.T.A. 1045">1045 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This is an appeal from a determination by the Commissioner of a deficiency in estate tax on the above-mentioned estate in the sum of $4,544.97. 1 B.T.A. 1045">1046 FINDINGS OF FACT. The decedent upon his death was the owner of 200 shares of stock of Cosden & Co., which subsequently were exchanged for ten shares of new stock upon a reorganization of that company. The said 200 shares owned by the decedent had a fair market value on the date of the decedent's death of $1,072.50. The executor, in connection with the administration of the estate, was eneitled to receive, and in his final accounting filed with the Orphan's Court of the County of Butler, Commonwealth of Pennsylvania, was allowed, fees as said executor in the sum of $12,500, and said fees were paid prior to the date of hearing in this appeal. In the aforesaid accounting as executor, there was allowed on account of attorneys' fees the sum of $25,000, of which $2,000 was paid prior to the hearing of this appeal, and $23,000 was then due and payable by the taxpayer1925 BTA LEXIS 2697">2698 to the said attorneys. In the aforesaid accounting there was also allowed to M. Cumming, as accountant, in connection with work in the affairs of the said estate, the sum of $3,800, all of which sum was paid prior to the hearing in this appeal. All of the above-mentioned amounts were excluded by the Commissioner in the determination of the deficiency from which this appeal was taken, and the Commissioner, in addition, through an error in the taxpayer's return, included in the gross estate the above-mentioned Cosden & Co. stock at a valuation of $21,450. DECISION. The deficiency should be recomputed by allowing the taxpayer a deduction on account of executor's fees in the sum of $12,500; a deduction on account of attorneys' fees in the sum of $25,000; a deduction on account of accountant's fee of $3,800; and a deduction from the value of the gross estate in respect of the overvaluation on account of the stock of Cosden & Co., of $20,377.50. The final deficiency will be settled upon ten days' notice, in accordance with Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618995/	CRSO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCRSO v. Comm'rNo. 11804-05X United States Tax Court128 T.C. 153; 2007 U.S. Tax Ct. LEXIS 12; 128 T.C. No. 12; April 30, 2007, Filed 2007 U.S. Tax Ct. LEXIS 12">12 P is a nonprofit corporation. Its sole activity involves renting out its two parcels of debt-financed commercial real estate and distributing the profits to a sec. 501(c)(3), I.R.C., organization.P applied for tax exemption under sec. 501(c)(3), I.R.C. In 2003, R sent a final adverse determination letter to P at an incorrect address; P did not receive the letter until R sent it to P's counsel in 2005. P filed its petition within 90 days of receiving the final adverse determination letter.Held: Because R's initial, misdirected adverse determination letter was ineffective for purposes of triggering the 90-day period under sec. 7428(b)(3), I.R.C., P's petition was timely. Held, further, because P's rental activity is not excluded from classification as a "trade or business" under sec. 502(b)(1), I.R.C., P is a feeder organization under sec. 502, I.R.C., and is not operated exclusively for charitable or other exempt purposes within the meaning of sec. 501(c)(3), I.R.C.James J. Workland and Gary C. Randall, for petitioner.Mark A. Weiner, for respondent. Thornton, Michael2007 U.S. Tax Ct. LEXIS 12">13 B. MICHAEL B. THORNTON128 T.C. 153">153 THORNTON, Judge: Respondent denied petitioner's request for tax-exempt status under section 501(c)(3). 1 Pursuant to section 7428, petitioner seeks declaratory relief.The parties submitted this case to the Court without trial to be decided on the basis of the pleadings and the parties' stipulation as to the administrative record. See Rules 122, 217(b). The Court's decision will be based upon the assumption 128 T.C. 153">154 that the facts as represented in the administrative record, as stipulated, are true. See Rule 217(b).BACKGROUNDPetitionerOn December 26, 2000, petitioner was incorporated in the State of Washington as a nonprofit corporation. When it filed its petition, petitioner's principal place of business was in Spokane, Washington.Petitioner characterizes its sole activity as receiving rental income2007 U.S. Tax Ct. LEXIS 12">14 from commercial real estate that it owns and distributing the net proceeds to Chi Rho Corp. (Chi Rho), a publicly supported section 501(c)(3) organization.Articles of IncorporationPetitioner's articles of incorporation state that it is organized and shall be operated exclusively for charitable, educational, and scientific purposes within the meaning of section 501(c)(3), by making distributions to carry out the charitable, educational, and scientific purposes of Chi Rho. The articles of incorporation further state that petitioner "is organized to act as a supporting organization for Chi Rho pursuant to section 509(a)(3)".Board of Directors and OfficersPetitioner's initial board of directors consisted of three individuals: Hudson R. Staffield, Cynthia T. Staffield (collectively, the Staffields), and Peter A. Witherspoon. These three individuals also served as petitioner's president, secretary/treasurer, and vice president, respectively. They each devoted, on average, about 3 hours of service per week to these positions.Petitioner's Real Estate AcquisitionsIn 1997, the Staffields purchased two commercial retail buildings (the real estate) that are part of a retail2007 U.S. Tax Ct. LEXIS 12">15 center in Wenatchee, Washington. The Staffields paid $ 2,297,000 for the real estate, borrowing a portion of the funds from the Washington Trust Bank.128 T.C. 153">155 In December 2000, the Staffields gave the real estate to petitioner. In a certificate of corporate resolution dated December 28, 2000, petitioner agreed to accept the real estate and to assume the outstanding mortgage obligation, which was then about $ 1.4 million. Washington Trust Bank did not modify the original loan; the Staffields remained personally liable on the mortgage.LeasesWhen the Staffields purchased the real estate and at all relevant times thereafter, the real estate was subject to preexisting long-term leases; the tenants were a sporting goods business and a cellular telephone business. Petitioner characterizes the leases as "triple net leases", contending that the leases require "little or no expenditure of time or funds by the Lessor" and that petitioner is entitled to reimbursement from the lessees for "virtually all" costs it is required to pay under the terms of the lease agreements.On April 18, 2001, petitioner entered into a management agreement with Kiemle & Hagood Co., which agreed to lease, manage, 2007 U.S. Tax Ct. LEXIS 12">16 and operate the real estate for a $ 250 monthly fee and a percentage of future rents on any new leases with new tenants.Petitioner's Application for ExemptionOn October 15, 2001, petitioner submitted to respondent Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Part II of Form 1023 requests a "detailed narrative description of all the activities of the organization -- past, present, and planned." In response to this inquiry, petitioner's application stated:CRSO owns real estate in Wenatchee, Washington, which is used as a shopping center. Its revenue is derived from triple net leases on that property to unrelated third parties. CRSO is a "supporting organization" for Chi Rho Corporation, a California corporation holding a Section 501(c)(3) exemption.128 T.C. 153">156 Petitioner's Income Tax ReturnsFor taxable years 2001, 2002, 2003, and 2004, petitioner reported the following figures on its Forms 990-T, Exempt Organization Business Income Tax Return:GrossunrelatedUnrelatedUnrelateddebt-AveragebusinessbusinessGrossfinancedacquisitiontaxableincomeYearrentsincomedebt ratioincometax2001$ 275,570$ 144,23352.34%$ 37,684$ 5,6532002280,577147,10752.43 50,2347,5592003254,317130,64351.37 30,0644,5102004228,116113,16849.6 16,6552,4982007 U.S. Tax Ct. LEXIS 12">17 Denial of Petitioner's Application for ExemptionBy letter dated November 8, 2002, respondent's Exempt Organizations Division proposed to deny petitioner's request for tax- exempt status. The letter concluded that petitioner is a feeder organization described under section 502 and does not meet the operational test for exemption under section 501(c)(3).By letter dated November 25, 2002, petitioner requested a hearing with respondent's Appeals Office concerning this matter. In a letter dated November 4, 2003, the Appeals Office made a "final adverse determination", concluding:Your only activity is the rental of improved real property and forwarding net funds to an organization described in section 501(c)(3). Your primary purpose is to operate a trade or business for profit. As such, you are an organization described in section 502(a). You are not entitled to the exception set forth in section 502(b)(1) because not all of your rents would be excluded under section 512(b)(3). Finally, you did not establish that you were operated exclusively for one or more purposes specified under section 501(c)(3) of the Code.Respondent initially sent the determination letter to an2007 U.S. Tax Ct. LEXIS 12">18 incorrect address. Petitioner received the determination letter only after respondent mailed it by certified mail to petitioner's counsel on June 14, 2005. On June 27, 2005, petitioner filed its petition requesting section 7428 declaratory relief as to its tax-exempt status under section 501(c)(3).128 T.C. 153">157 DISCUSSIONA. JurisdictionOur jurisdiction over this action for declaratory relief depends upon the filing of a timely petition. 2Sec. 7428(a) and (b)(3); see Rule 210(c)(3). Petitioner was required to file its petition within 90 days of the Secretary's sending to the organization, by certified or registered mail, notice of his determination. Sec. 7428(b)(3). Respondent originally mailed the purported notice of adverse determination, dated November 4, 2003, to an incorrect address; respondent does not contend that it was mailed to petitioner's last known address. Petitioner did not receive this purported notice. Accordingly, this purported notice was ineffective for purposes of triggering the 90-day period under section 7428(b)(3). Cf. Roszkos v. Commissioner, 850 F.2d 514">850 F.2d 514 (9th Cir. 1988) (holding that misaddressed purported notices of deficiency, which2007 U.S. Tax Ct. LEXIS 12">19 the taxpayers did not receive, were a nullity and ineffective for terminating a Form 872-A agreement to extend the period for assessment), vacating and remanding 87 T.C. 1255">87 T.C. 1255 (1986); Coffey v. Commissioner, 96 T.C. 161">96 T.C. 161 (1991) (following Roszkos and decisions of other similarly aligned Courts of Appeals).In 96 T.C. 161">Coffey v. Commissioner, supra, after sending the original deficiency notice to an incorrect address, the Commissioner issued another one and sent it to the correct address. Because the petition was filed within 90 days thereafter, the petition was deemed timely. 96 T.C. 161">Id. at 163, 167.2007 U.S. Tax Ct. LEXIS 12">20 Similarly, petitioner received the notice of determination only after respondent sent a second notice by certified mail to petitioner's counsel on June 14, 2005. The petition was filed within 90 days thereafter and, accordingly, was timely.B. Whether Petitioner Is Entitled to Exempt Status1. Statutory ProvisionsAn organization that is organized and operated exclusively for charitable purposes, as described in section 501(c)(3), is 128 T.C. 153">158 exempt from Federal income tax unless exemption is denied under section 502 or 503. Sec. 501(a). The central issue in this case is whether petitioner's exemption is denied under section 502, which deals with so-called feeder organizations. Section 502(a) provides:SEC. 502(a). General Rule. -- An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501.Section 502(b) excludes various types of activities from the term "trade or business". Of particular relevance here is section 502(b)(1), which provides in part:SEC. 502(b). 2007 U.S. Tax Ct. LEXIS 12">21 Special Rule. -- For purposes of this section, the term "trade or business" shall not include --(1) the deriving of rents which would be excluded under section 512(b)(3), if section 512 applied to the organization * * Thus, an organization's rental activity is not a "trade or business" for purposes of section 502 if the rents would be excluded from unrelated business taxable income (UBTI) under section 512(b)(3). 3Section 512(b)(3) excludes from UBTI "all rents from real property", subject to various exceptions that are not germane here. 42007 U.S. Tax Ct. LEXIS 12">22 Section 512(b)(4) provides, however, that "Notwithstanding" this exclusion, rents from "debt-financed property" (as defined in section 514) are included in UBTI. 52. The Parties' ContentionsRespondent contends that petitioner's only activities are:(1) Renting and managing two parcels of improved commercial real estate, and (2) distributing the profits to Chi Rho. 128 T.C. 153">159 Respondent contends that from 2001 through 2004, over half of petitioner's rental income was unrelated debt-financed income, which was not excluded by reason of section 512(b)(3). Consequently, respondent concludes, petitioner is operated for the primary purpose of carrying on a "trade or business" within the meaning of section 502, so as to preclude tax-exempt status under section 501(c)(3). 62007 U.S. Tax Ct. LEXIS 12">23 Petitioner does not dispute that its real property holdings are debt-financed property within the meaning of section 514 or that its rental income is unrelated debt-financed income, which would give rise to UBTI pursuant to sections 512(b)(4) and 514(a)(1) if petitioner were an exempt organization. On brief, petitioner concedes that if respondent is correct "that debt financed real estate is, for purposes of Section 502(a), a prohibited trade or business because of Section 512(b)(4) * * * the organization is a feeder organization and not a Section 501(c)(3) entity", unless the exception in section 502(b)(1) applies. 7 Petitioner asserts, however, that it "does not agree that simply having unrelated business income causes it to become a Section 502(a) organization".2007 U.S. Tax Ct. LEXIS 12">24 3. Is Petitioner's Rental Activity a "Trade or Business" Under Section 502Petitioner contends that its "triple net leases" are "investment vehicles, not businesses". Petitioner contends that under well-established criteria for determining a trade or business, as applied in Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 107 S. Ct. 980">107 S. Ct. 980, 94 L. Ed. 2d 25">94 L. Ed. 2d 25 (1987), and its progeny, these leases do not represent a regular and continuous activity so as to constitute a trade or business. Petitioner contends that there is no indication that Congress intended "trade or business" to mean anything different for purposes of section 502(a). Therefore, petitioner concludes, section 502(a) fails to ensnare petitioner's rental 128 T.C. 153">160 activity in the "trade or business" classification. Accordingly, petitioner suggests, we need not concern ourselves with the effect, if any, of the section 502(b)(1) escape hatch. As petitioner puts it: "The recipe for rabbit soup is to 'first catch a rabbit'."Whether or not respondent has caught a rabbit, it would appear that petitioner is in the soup. The question is whether petitioner belongs there.Section 502(b)(1) expressly provides that its special rule as to the meaning of "trade2007 U.S. Tax Ct. LEXIS 12">25 or business" applies "For purposes of this section". Consequently, in construing section 502, we do not read subsection (a) in isolation but in conjunction with the special rule of subsection (b)(1), which addresses the meaning of the term "trade or business".Section 502(b)(1) excludes from the term "trade or business" the deriving of rents that would be excluded from UBTI under section 512(b)(3) if section 512 applied to the organization. Under traditional principles of statutory construction, the statute's explicit provision excluding rental activity that meets this test should be understood as precluding the exclusion of rental activity that does not meet this test. See Silvers v. Sony Pictures Entmt., Inc., 402 F.3d 881">402 F.3d 881, 402 F.3d 881">885 (9th Cir. 2005); Catterall v. Commissioner, 68 T.C. 413">68 T.C. 413, 68 T.C. 413">421 (1977), affd. sub nom. Vorbleski v. Commissioner, 589 F.2d 123">589 F.2d 123 (3d Cir. 1978); see also Black's Law Dictionary 620 (8th ed. 2004) (the statutory canon of construction "expressio unius est exclusio alterius" holds that "to express or include one thing implies the exclusion of the other, or of the alternative").Consistent with this analysis, section 1.502-1(d)(2), Income Tax Regs.2007 U.S. Tax Ct. LEXIS 12">26 , provides in relevant part:For purposes of section 502, and this section, for taxable years beginning after December 31, 1969, the term "trade or business" does not include --(i) the deriving of rents described in section 512(b)(3)(A),* * * * * * For purposes of the exception described in subdivision (i) of this subparagraph, if the rents derived by an organization would not be excluded from unrelated business income pursuant to section 512(b)(3) and the regulations thereunder, the deriving of such rents shall be considered a "trade or business". [Emphasis added.]Petitioner contends that because the just-quoted sentence containing the emphasized matter applies by its terms only 128 T.C. 153">161 "For purposes of the exception described in subdivision (i) of this subparagraph", it has no applicability in construing the meaning of "trade or business" in section 502(a). We disagree. The exception described in subdivision (i) of this regulation applies, according to the regulation's initial words, "For purposes of section 502, and this section". Inasmuch as this exception applies for purposes of section 502 comprehensively, the emphasized language supra,2007 U.S. Tax Ct. LEXIS 12">27 which delimits the exception, also applies for purposes of section 502 comprehensively. Accordingly, under the regulation, if rents are not excluded from UBTI pursuant to section 512(b)(3), the deriving of such rents is a "trade or business" for all purposes under section 502.Petitioner does not expressly contend that the subject regulation is invalid but contends that it is inconsistent with legislative history. We disagree.Before amendment in 1969, both sections 502 (in defining "trade or business" for purposes of the feeder organization rules) and 512(b)(3) (in defining UBTI) broadly excluded rents from real property and personal property leased with the real property. 8 In 1969, Congress acted to curtail perceived abuses involving exempt organizations' engaging in commercial activity. See Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1969, at 62-63 (J. Comm. Print 1970). To that end, Congress amended section 512(b)(3) to narrow the exclusion for real property and associated personal property rentals that previously had applied for purposes of determining UBTI. Tax Reform Act of 1969 (TRA), Pub. L. 91-172, sec. 121(b)(1), 83 Stat. 537. In place2007 U.S. Tax Ct. LEXIS 12">28 of the former exclusion, Congress provided the more limited exclusion now found in section 512(b)(3). S. Rept. 91-552, at 68-69 (1969), 1969-3 C.B. 423, 468. In addition, pursuant to new section 512(b)(4), rents that would be treated as unrelated debt-financed income pursuant to section 514(a)(1) were 128 T.C. 153">162 included as UBTI. TRA sec. 121(b)(2); see also Kern County Elec. Pension Fund v. Commissioner, 96 T.C. 845">96 T.C. 845 (1991), affd. without published opinion 988 F.2d 120">988 F.2d 120 (9th Cir. 1993).2007 U.S. Tax Ct. LEXIS 12">29 In the same section of this legislation, Congress amended section 502 to eliminate the former exclusion for rental activity, replacing it with the more limited exclusion of section 502(b)(1), cross-referencing new section 512(b)(3). TRA sec. 121(b)(7), 83 Stat. 542. Congress also added other special rules in section 502(b)(2) and (3), similarly intended to conform the treatment of exempt organizations' business activities for purposes of the UBTI rules and the feeder organization rules under section 502. Id.; see S. Rept. 91-552, supra at 70, 1969-3 C.B. at 469. Describing this amendment to section 502, the Senate Finance Committee stated: "this amendment merely makes these rules [i.e., the UBTI rules and the feeder organization rules] consistent." S. Rept. 91-552, supra at 70, 1969-3 C.B. at 469.In sum, the legislative history shows clearly that Congress, in replacing the former exclusion for real property (and associated personal property) rental activities with the more limited exclusion provided in section 502(b)(1), did so to preserve consistency between the feeder organization rules and the UBTI rules. Petitioner's position, by contrast, assumes that the 19692007 U.S. Tax Ct. LEXIS 12">30 legislation introduced inconsistency, where it did not exist before, between the feeder organization rules and the UBTI rules. In the light of the legislative history, as well as the plain meaning of the statute and the regulations, petitioner's position is untenable.4. Does the Section 502(b)(1) Exclusion Apply?Alternatively, petitioner argues that even if its rental activity is deemed to be a "trade or business" under section 502(a), it qualifies for the section 502(b)(1) exclusion. As previously noted, section 502(b)(1) excludes from the definition of "trade or business" the deriving of rents "which would be excluded under section 512(b)(3), if section 512 applied to the organization". Petitioner contends, and respondent does not dispute, that petitioner's rents would be excluded under section 512(b)(3) if that provision were applied in isolation. Petitioner does not dispute that its rentals, deriving from debt-financed property, would be subject to UBTI pursuant to section 512(b)(4). 128 T.C. 153">163 Petitioner suggests, however, that the operation of section 512(b)(4) is irrelevant for purposes of establishing eligibility for the section 502(b)(1) exclusion. We disagree.Section 512(b)(4)2007 U.S. Tax Ct. LEXIS 12">31 provides that "Notwithstanding" the various exclusions from UBTI contained in section 512(b)(1), (2), (3), and (5), unrelated debt-financed income is included in UBTI. Section 512(b)(4) thereby "nullifies these exclusions for income derived from 'debt-financed property'". Bartels Trust v. United States, 209 F.3d 147">209 F.3d 147, 209 F.3d 147">149 (2d Cir. 2000). Consequently, "if section 512 applied to the organization", as section 502(b)(1) provides, then section 512(b)(4) would preclude petitioner's exclusion of its rents from UBTI under section 512(b)(3). Hence, petitioner does not satisfy the requirements of the section 502(b)(1) exclusion.CONCLUSIONPetitioner's rental activity constitutes a "trade or business" within the meaning of section 502(a); the exclusion under section 502(b)(1) does not apply. Consequently, petitioner is not operated exclusively for charitable or other exempt2007 U.S. Tax Ct. LEXIS 12">32 purposes and so is not entitled to exemption under section 501(c)(3).Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code, as amended; Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. The parties do not disagree that petitioner timely filed its petition and that we have jurisdiction pursuant to sec. 7428(a). The parties' agreement is insufficient, however, to confer jurisdiction if it is otherwise lacking. The Court still must assure itself that jurisdictional conditions are satisfied. Evans Publ., Inc. v. Commissioner, 119 T.C. 242">119 T.C. 242, 119 T.C. 242">247↩ n.5 (2002). 3. Sec. 511 taxes a tax-exempt organization's "unrelated business taxable income" (UBTI). Under the general rule of sec. 512(a), UBTI is the gross income that an exempt organization derives from an "unrelated trade or business" (as defined in sec. 513) that it regularly carries on, less applicable deductions and subject to modifications contained in sec. 512(b)↩.4. In general, the exclusion for rents is denied if the rents depend in whole or part on the income or profits by any person from the property leased. Sec. 512(b)(3)(B)(ii). Also, the exclusion is limited if the rents attributable to personalty leased with real property are more than "incidental", sec. 512(b)(3)(A)(ii); the exclusion is denied if more than 50 percent of the rents are attributable to the personalty, sec. 512(b)(3)(B)(i)↩.5. Debt-financed property generally means, subject to various exceptions, any property held to produce income and with respect to which there is acquisition indebtedness during the taxable year. Sec. 514(b)(1)↩.6. Respondent also contends that the facts and circumstances show that petitioner's ownership and management activities associated with its commercial leasing activity are properly categorized as a "common law trade or business", without regard to the UBTI provisions. Because we base our decision on respondent's primary argument described in the text supra, we need not and do not address this alternative argument. ↩7. According to petitioner's Forms 990-T, Exempt Organization Business Income Tax Return, for the years 2001 through 2004, petitioner's average acquisition debt ratios declined from a high of 52.43 percent in 2002 to 49.6 percent in 2004. Petitioner has not raised, and accordingly we do not consider, any issue as to whether or how these declining ratios should affect a determination as to whether petitioner fits the description of an organization that carries on a business as its "primary purpose" within the meaning of sec. 502(a)↩. 8. Before sec. 502 was amended in 1969, it read in its entirety:An organization operated for the primary purpose of carrying on$ a trade or business for profit shall not be exempt under section 501 on the ground that all of its profits are payable to one or more organizations exempt under section 501 from taxation. For purposes of this section, the term "trade or business" shall not include the rental by an organization of its real property (including personal property leased with the real property).Similarly, before amendment in 1969, sec. 512(b)(3)↩ excluded from the definition of "trade or business", for purposes of defining UBTI, "all rents from real property (including personal property leased with the real property)."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4618998/	DOERNBECHER MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ST. JOHNS INVESTMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Doernbecher Mfg. Co. v. CommissionerDocket Nos. 34853, 43527, 46421, 50607, 50613, 63628, 71534.United States Board of Tax Appeals30 B.T.A. 973; 1934 BTA LEXIS 1236; June 21, 1934, Promulgated 1934 BTA LEXIS 1236">1236 1. SALARIES. - Amounts distributed in addition to salaries as bonuses to employees in substantial proportion to the stock of petitioner which they had contracted to purchase, held, to be distributions of profits and not deductible as compensation. The dropping of the word "bonus" in later years and the designation as salaries of the sums paid to stockholders does not make the sums paid deductible in the absence of convincing evidence that they were reasonable compensation for services rendered. 2. EXPENSES. - Amount paid by petitioner as its share of expenses of investigating the possibilities of forming a merger are deductible in the year in which the plan to form the merger was abandoned. 3. AFFILIATION. - Stock of petitioner contracted to be purchased by it and held in escrow as collateral security for the purchase price is outstanding stock, and the acquisition by another corporation of the remaining stock, which was less than 95 percent of the outstanding stock, including that in escrow, did not result in affiliation. O. A. Neal, Esq., for the petitioners. Chester A. Gwinn, Esq., for the respondent. ARUNDELL30 B.T.A. 973">974 The respondent1934 BTA LEXIS 1236">1237 determined deficiencies in income tax as follows: PetitionerDocket No.YearAmountDoernbecher Manufacturing Co348531922$11,403.55Do34853192311,697.86Do34853192411,571.75Do34853192512,528.45Do43527192613,793.18Doernbecher Manufacturing Co464211927$12,825.00Do5060719287,946.41Do6362819294,503.31Do715341 19307,631.34St. Johns Investment Co50613192860.05In the case of the St. Johns Investment Co. the deficiency was determined on the basis of its affiliation with the Doernbecher Manufacturing Co. and will be controlled by the decision in the Doernbecher case for the same year. No separate findings will be made in the St. Johns case. The doernbecher Manufacturing Co. will be spoken of throughout as the petitioner. The deficiencies arise principally out of respondent's disallowance of part of the deductions claimed by petitioner as compensation of officers and employees. The issue as to the propriety of the action of respondent in this respect is presented for decision for each year. In Docket No. 46421, pertaining to the year 1927, counsel1934 BTA LEXIS 1236">1238 for the respondent filed an amended answer alleging excessive accrual and overstatement of state and county taxes in the amount of $6,112.41 and asked for an increase in the deficiency proposed for that year. No proof was offered on this item, and respondent's prayer for an increased deficiency is denied. In Docket No. 63628 there is in issue petitioner's right to a deduction for its share of the expenses of an investigation in connection with a proposed merger which it claims was abandoned in 1929. In Docket No. 71534 an issue as originally framed was whether petitioner's right to have its income computed on a consolidated basis with that of the Furniture Corporation of America, Ltd., dated from June 23 or October 1, 1930, petitioner claiming the earlier date and respondent having allowed affiliation from the later date. At the hearing counsel for respondent moved for an increased deficiency for 1930 on the ground that affiliation did not exist at any time during the year. 30 B.T.A. 973">975 Several matters originally in issue have been settled. In Docket No. 34853 counsel for respondent concedes error in his claim of a profit in the year 1923 on the trade-in of a truck. In the1934 BTA LEXIS 1236">1239 same docket counsel for respondent concedes a $200 loss in 1924 on stock of the Mount Hood Lodge and a $1,000 loss in 1925 on stock of the Gearhart Hotel Co. These losses were claimed by petitioner in 1928 and the respondent's disallowance of them for that year is conceded by petitioner to be correct. In Docket No. 43527 the respondent disallowed the deduction of $3,712.69 as excessive accruals of state and county taxes. He now concedes $1,769.60 to be a proper accrual and deduction. Petitioner offered no proof as to the balance of the sum in dispute and respondent's disallowance thereof is sustained. In Docket No. 71534 counsel for petitioner concedes the correctness of respondent's disallowance of $4,100 claimed for 1930 as a deduction for bonuses to employees and by amended petition in Docket No. 63628 claim is made for the deduction of the $4,100 for the year 1929. Counsel for respondent on brief concedes that petitioner is entitled to the deduction for 1929. The matters set forth in this paragraph will be reflected in the recomputation that will need to be made. FINDINGS OF FACT. Petitioner, an Oregon corporation, was incorporated in 1900, and throughout the years1934 BTA LEXIS 1236">1240 here involved was engaged in the furniture-manufacturing business, with its principal place of business at Portland. Its original capitalization was $300,000, divided into 3,000 shares of the par value of $100 each. On or about February 19, 1921, its capital stock was increased to $2,000,000 par, consisting of 20,000 shares of $100 par value each, and 3,000 shares of the increased capital stock were issued to the then stockholders in lieu of the stock then held by them. On or about November 16, 1922, petitioner declared and issued a stock dividend of 12,000 shares of its capital stock, and on or about May 4, 1923, it declared and issued a stock dividend of 5,000 shares, making the total stock then outstanding 20,000 shares of the total par value of $2,000,000. On December 1, 1920, F. S. Doernbecher, president of petitioner, owned 1,375 shares of stock, H. A. Green owned 688 shares, and B. P. John owned 937 shares. Doernbecher was in poor health and desired to relinquish active control of petitioner's affairs. On that date, December 1, 1920, Doernbecher entered into an agreement to sell his 1,375 shares of stock to H. A. Green, B. P. John, Clarke E. Dye, E. S. Beach, F. A. Tauscher, 1934 BTA LEXIS 1236">1241 Conrad Tauscher, and P. J. Lychywek, all of whom had been in the employ of petitioner for a number of years. The agreed sales price was to be paid in 20 30 B.T.A. 973">976 semiannual installments. Until all payments were completed title to the stock was to remain in Doernbecher and the certificates, endorsed in blank, were to be held in escrow by the United States National Bank at Portland. Pending completion of payment of the sales price, all dividends were to be paid to Doernbecher to apply on the sales price, and the purchasers were entitled to declare dividends for that purpose, but for no other purpose except from petitioner's "surplus earnings" and only then with Doernbecher's consent. It was further agreed in the instrument of December 1, 1920, that no additional expense would be incurred by the petitioner corporation "by the increase of salaries or other expenditures" without the written consent of Doernbecher. The 1,375 shares of stock were to be divided among the purchasers as follows: SharesH. A. Green512B. P. John263Clarke E. Dye200E. S. Beach200F. A. Tauscher100Conrad Tauscher50P. J. Lychywek50Total1,375F. S. Doernbecher1934 BTA LEXIS 1236">1242 died in 1921, and Edward M. Doernbecher and Ada Doernbecher succeeded to his interests in petitioner. Upon the declaration of stock dividends of November 16, 1922, and May 4, 1923, the stock of petitioner was held of record as follows: Shares held - November 16, 1922May 4, 1923Edward M. Doernbecher3,437 1/24,583 1/3Ada Doernbecher3,437 1/24,583 1/3B. P. John4,6856,246 2/3H. A. Green3,4404,586 2/3By agreement of December 1, 1922, the conditional sales agreement of December 1, 1920, was amended so as to make changes in the installments to be paid by the purchasers and to provide that in December 1923 the stock should be issued in the names of the several purchasers, who were to endorse the certificates in blank and place them in escrow with the United States National Bank as collateral security for the balance due on the purchase price. In accordance with that agreement certificates were issued on December 19, 1923, as follows: SharesH. A. Green8,000B. P. John8,000C. E. Dye1,333 1/3F. S. Beach1,333 1/3F. A. Tauscher666 2/3P. J. Lychywek333 1/3Conrad Tauscher333 1/3Total20,0001934 BTA LEXIS 1236">1243 30 B.T.A. 973">977 There were no changes in the stockholdings until 1926, when several transfers were made among the group of record holders, resulting in the holdings being as follows at the close of 1926: SharesH. A. Green8,135 1/2B. P. John8,135 1/2C. E. Dye1,356E. S. Beach1,356F. A. Tauscher678P. J. Lychywek339Total20,000On July 18, 1927, B. P. John entered into an agreement with the petitioner corporation to sell his 8,135 1/2 shares of stock to it for an agreed price plus the assumption by petitioner of the balance due from John to Ada and Edward Doernbecher under the conditional sales contract of December 1, 1922. The stock was to remain in escrow with the United States National Bank at Portland, which then held it under the previous contract, until payment of the purchase price, which was to be paid in installments. It was provided in the agreement that until John foreclosed on the stock, which he might do in the event of petitioner's failure to perform under the contract, he should have no right to vote or draw dividends on the stock, "it being expressly understood and agreed that the purchase price herein fixed when paid is in1934 BTA LEXIS 1236">1244 full payment for said stock as of the date hereof." On June 30, 1928, F. A. Tauscher, and on August 18, 1928, P. J. Lychywek's estate, entered into similar agreements to sell their stock, 678 shares and 339 shares, respectively, to petitioner. Following these transactions, petitioner's outstanding stock, exclusive of that which it contracted to purchase, was held as follows: SharesH. A. Green8,135 1/2C. E. Dye1,356E. S. Beach1,356Total10,847 1/2At the time the contract was entered into for the purchase of John's stock, the other stockholders of petitioner agreed in writing to pledge their stock with the then escrow holders thereof, the United States National Bank, as security for the performance of petitioner's contract to purchase John's stock. On June 26, 1930, the above named stockholders, Green, Dye, and Beach, executed separate assignments transferring their stock in petitioner, excepting in each case one share, to the Furniture Corporation of America, Ltd., a Nevada corporation organized June 23, 1930. Each assignment was made expressly subject to the contract of July 18, 1927, under which all the stock of the three vendors was held in1934 BTA LEXIS 1236">1245 escrow as collateral to secure the payments under the contract 30 B.T.A. 973">978 with B. P. John. The shares thus assigned to the Furniture Corporation of America, Ltd., were 10,844 1/2 in number. On October 21, 1930, transfers were made on the stock records of petitioner to show stock of record as follows: SharesFurniture Corporation of America, Ltd10,844 1/2H. A. Green1C. E. Dye1E. S. Beach1No stock certificate has been delivered to the Furniture Corporation of America, Ltd. All the certificates repressenting petitioner's stock are still held by United States National Bank as security for the performance of petitioner's contract to purchase the stock of B. P. John. Petitioner filed a separate income tax return for the period January 1 to June 23, 1930. Its income and deductions for the remainder of the year 1930 were included in a consolidated return filed by the Furniture Corporation of America, Ltd. The respondent disallowed affiliation for the period prior to October 1, and determined that petitioner should have filed a separate return for the period January 1 to September 30, 1930. During the years 1918 to 1930, inclusive, petitioner's1934 BTA LEXIS 1236">1246 net sales, net profit according to its books, and percentage of profits to average net worth were as follows: YearNet salesNet profit per booksPercentage of profits to net worth1918$879,890.39$157,540.5316.0219191,092,170.33222,727.7820.0919201,483,860.67286,926.1522.5319211,530,592.47401,199.4926.7219221,661,713.56358,097.1419.8919232,066,419.92300,446.5514.4719242,058,267.61249,280.7910.801925$2,736,487.53$407,368.2416.0219262,637,490.53379,156.1214.6719272,251,121.34258,061.6510.5719282,856,002.05167,776.716.8719292,850,978.22452,579.0716.7219302,403,496.50148,659.349.37From 1922 to 1925, inclusive, petitioner paid certain of its employees, who were also stockholders or had contracted to purchase stock, amounts that it designated as salaries and bonuses. The socalled bonuses were based on the volume of petitioner's gross sales and divided among the several recipients according to prearranged percentages. Minutes of the directors' meeting of March 14, 1924, authorizing the bonuses for 1924, which are typical of the action taken in other years, read1934 BTA LEXIS 1236">1247 as follows: WHEREAS, it has been the policy of this Company to suitably reward its faithful employees for their efforts in upbuilding the success of this Company, and WHEREAS, it is the intention of this Company to pay to said employees for the year 1924, additional compensation for services rendered, NOW THEREFORE. 30 B.T.A. 973">979 BE IT RESOLVED, that in addition to salaries paid monthly to said employees during the year 1924, there shall be paid a total amount computed as follows: 7% of gross sales not exceeding $1,000,000 6% of gross sales $1exceeding,000,000 and not exceeding $1,100,000 5% of gross sales exceeding 1,100,000 and not exceeding 1,200,000 4% of gross sales exceeding 1,200,000 and not exceeding 1,300,000 3% of gross sales exceeding $1,300,000 and not exceeding $1,400,000 2% of gross sales exceeding 1,400,000 and not exceeding 1,500,000 1/2% of gross sales exceeding $1,500,000 Gross sales as herein used shall mean total sales, less returned goods, being balance as shown in sales account of the general ledger. The total amount as above computed shall be paid as follows: B. P. John2/5H. A. Green2/5C. E. Dye1/15E. S. Beach1/15F. A. Tauscher1/30P. J. Lychwek1/60Conrad Tauscher1/601934 BTA LEXIS 1236">1248 and the corporation is hereby authorized to pay each of the above employees on December 31, 1924, the additional amount of 1924 salary as above provided. The amounts paid and claimed as deductions in income tax returns as salaries and bonuses and the deductions allowed by the respondent as reasonable salaries were as follows: 1922192319241925H. A. Green:Salary$36,000.00$36,000.00$36,000.00$36,000.00Bonus36,346.5637,139.6537,124.9539,278.46Total72,346.5673,139.6573,124.9575,278.46Allowed36,000.0036,000.0036,000.0036,000.00B. P. John:Salary36,000.0036,000.0036,000.0036,000.00Bonus36,346.5637,139.6537,124.9539,278.46Total72,346.5673,139.6573,124.9575,278.46Allowed36,000.0036,000.0036,000.0036,000.00E. S. Beach:Salary8,500.008,500.008,500.009,374.97Bonus6,057.766,189.946,187.506,416.54Total14,557.7614,689.9414,687.5015,791.51Allowed8,500.008,500.008,500.009,374.97C. E. Dye:Salary12,000.0012,000.0012,000.0012,000.00Bonus6,057.766,189.946,187.506,416.54Total18,057.7618,189.9418,187.5018,416.54Allowed12,000.0012,000.0012,000.0012,000.00F. A. Tauscher:Salary5,000.005,000.005,000.005,000.00Bonus3,028.893,094.973,093.753,203.46Total8,028.898,094.978,093.758,203.46Allowed5,000.005,000.005,000.005,000.00P. J. Lychywek:Salary4,000.004,000.004,000.004,250.00Bonus1,514.441,547.491,546.901,606.54Total5,514.445,547.495,546.905,856.54Allowed4,000.004,000.004,000.004,250.00Conrad Tauscher:Salary3,600.003,600.001 2,700.00Bonus1,514.441,547.491,491.83Total5,114.445,147.494,191.83Allowed3,600.003,600.002,700.001934 BTA LEXIS 1236">1249 30 B.T.A. 973">980 Bonuses were discontinued after 1925, and salaries voted were thereupon increased. The amounts paid and claimed as deductions in income tax returns as salaries and the deductions allowed by the respondent as reasonable salaries were as follows: 1926192719281929H. A. GreenSalary$75,000.00$75,000.00$75,000.00$75,000.00Allowed36,000.0036,000.0036,000.0036,000.00B. P. JohnSalary75,000.0075,000.00Allowed36,000.0036,000.00E. S. BeachSalary18,500.0018,500.0018,500.0018,500.00Allowed12,000.0012,000.0012,000.0012,000.00C. E. DyeSalary18,600.0018,600.0018,600.0018,600.00Allowed12,000.0012,100.0012,000.0012,000.00F. A. TauscherSalary8,400.008,400.007,200.00Allowed6,000.006,000.005,500.00P. J. LychywekSalary6,600.006,900.001 2,400.00Allowed5,000.005,300.001,666.67For the period January 1 to September 30, 1930, petitioner paid the following sums to the persons named: H. A. Green$43,750.00E. S. Beach9,300.00C. E. Dye11,499.95Total64,549.951934 BTA LEXIS 1236">1250 The total was claimed as a deduction for compensation, and the respondent allowed $38,000 and disallowed $26,049.95. The allocation made by respondent to the several individuals is not shown. H. A. Green has been in the furniture business for 24 years, and has been with the petitioner for 20 years. In 1913 he became manager of the Seattle branch of the petitioner, and secretary of the petitioner in 1916. He assumed active management of the petitioner corporation in the latter part of 1918, and became president in 1923. In 1914 he became sales manager of petitioner and assistant to president Doernbecher. After going to Portland in 1914 he 30 B.T.A. 973">981 assumed entire general management of all operations of petitioner's business, including merchandising and promotion work, and supervised all of the warehouses, with the aid of assistants. When Green became connected with the petitioner in 1913 it employed approximately 225 employees and at the time of the death of Doernbecher in 1921 had between 250 and 300 employees. Under the management of Green the number of employees has increased until in 1930 it had about 900 employees, and at the time of the hearing of these proceedings1934 BTA LEXIS 1236">1251 the employees numbered approximately 2,500. Green devoted his entire time to petitioner's business, and during all of the years involved in these proceedings he put in a great deal of overtime, working nights, Sundays, and holidays. Under his administration new and efficient machinery was devised and installed. When he first became connected with petitioner it required from two to two and one half weeks to work lumber into completed furniture. At the present time lumber received at the factory in the morning is worked into completed furniture and placed into cars for shipment the same day. B. P. John entered the employ of petitioner's predecessor in 1890. He was secretary of petitioner from 1912 to 1927, when he contracted to sell his stock. In the latter years of his connection with petitioner he was production manager, and had charge of logging, timber and towing operations, logging camps and sawmills, and sawmill and manufacturing operations. He also had charge of plant and buildings, purchases of machinery, outside purchases of lumber and veneer, and determined wage scales and employed factory help. John devoted his entire time to the petitioner's business, putting in1934 BTA LEXIS 1236">1252 long hours and much overtime. After contracting to dispose of his stock in 1927 he purchased the plant of another furniture-manufacturing company at Portland, Oregon, and has increased to a substantial extent the production of the company. The number of employees of that company has increased from about 50 to in excess of 500 since John acquired the plant. E. S. Beach became connected with petitioner in 1914 and was office manager and had charge of accounting and financial matters. He devoted his entire time to the business of the petitioner, working long hours and much overtime. C. E. Dye became connected with petitioner in 1919 as sales manager and in 1928 became vice president. He occupied the position of general sales manager and was assistant to Green. He had charge of all warehouse operations. At various times the petitioner had warehouses at Los Angeles, San Francisco, Seattle, Salt Lake City, and Denver. He devoted his entire time to the business of petitioner, putting in long hours and much overtime. 30 B.T.A. 973">982 F. A. Tauscher was employed by petitioner's predecessor in 1890 and has continued with the petitioner ever since, except for a short period in the1934 BTA LEXIS 1236">1253 year 1928. From 1922 until he sold his stock in petitioner in June 1928 he was assistant to John, was the petitioner's shipping and warehouse superintendent, was also petitioner's designer, and supervised part of the finishing operations. After he sold his stock in 1928 he took a vacation and upon his return went to work as assistant designer, working six hours a day and ten months a year because of his health. After he sold his stock the duties he had performed were divided among three other employees. He has had over forty years' experience in the furniture business and is considered an excellent designer for the class of furniture produced by petitioner. After selling his stock and giving up some of his duties with petitioner Tauscher received a salary of $500 per month. P. J. Lychywek was employed by petitioner's predecessor in 1890, and continued in the service of petitioner until his death in 1928. He was plant engineer, maintained all plant machinery and equipment, assisted in the purchase of machinery, supervised its installation, and also assisted in the construction of new buildings and additions to the plant. After his death the duties which he had performed were1934 BTA LEXIS 1236">1254 divided between two men. Conrad Tauscher was employed by petitioner's predecessor in 1890, and after incorporation of the petitioner continued in its employ until his death in 1924. He had charge of petitioner's sawmill, veneer, and logging operations, which operations supplied the factory with the most of its hardwood, lumber, and veneer. He was considered an excellent hardwood, lumber, and veneer man, and when he died his son, who had been brought up in the business, took his place but did not perform all of the duties that had been performed by his father. In 1929 a number of furniture companies on the west coast proposed merging and appointed a committee to investigate the possibilities of the proposal. Under an agreement entered into by the interested companies the committee caused an appraisal of assets to be made and investigated various matters concerning the several companies, including financial affairs, and conducted negotiations with investment bankers. It was agreed that if the merger was not completed the bills of the appraisers and auditors would be paid by the individual companies. All other expenses would be prorated among them. In November 1929 the committee1934 BTA LEXIS 1236">1255 advised petitioner that the proposed merger had been abandoned and that petitioner's share of the expenses of the committee amounted to $9,902.58. That sum was paid by petitioner and claimed as a deduction in its income tax return for the year 1929. The deduction so claimed was disallowed by the respondent. 30 B.T.A. 973">983 In June 1930 theFurniture Corporation of America, Ltd., was organized, and brought together a number of furniture-manufacturing companies through the purchase of their assets. The petitioner, while interested in the merger thus effected, did not directly enter into it. Petitioner's stockholders, as heretofore related, assigned their stock in petitioner to the Furniture Corporation of America, Ltd., under date of June 26, 1930. OPINION. ARUNDELL: The issue that runs through all the years before us in these proceedings is that of whether amounts paid to petitioner's stockholders, who were also employees, are deductible in full as reasonable allowances for salaries. From 1922 on through 1925 petitioner paid its stockholder-employees certain salaries plus bonuses designated in the minutes of directors' meetings as "additional compensation." Beginning with 19261934 BTA LEXIS 1236">1256 the bonus system was discontinued and thereafter the stockholders were paid flat amounts approximately equal to the total of salaries and bonuses previously paid. The bonuses paid in the earlier period were not distributed according to individual efforts or results, but were based on petitioner's gross sales and allocated according to predetermined percentages. The respondent allowed as deductions the basic salaries paid, and disallowed the bonuses on the theory that they were distributions of earnings and not ordinary and necessary business expenses. In the later period, 1926 to 1930, the respondent allowed as salary deductions amounts equal to, and in some cases substantially more than, the amounts he determined represented deductible salaries in the earlier years. The respondent having made a determination that the amounts claimed by petitioner are excessive, the burden is on petitioner to show that the amounts involved are but reasonable compensation for the services rendered and are no more than ordinary and necessary expenses of conducting its business. 1934 BTA LEXIS 1236">1257 . In , we said: When the Commissioner has made a determination, the taxpayer who attacks it must prove by evidence of the services rendered and their value that a correct determination would exceed that of the Commissioner. Where the payments are to kinsfolk or to shareholders, the proof must also show that they were not influenced by family considerations and were not disguised distributions of profits. In , in discussing the question of reasonableness of salaries, the court said: There can be no doubt that the corporation was entitled to deduct from the income it received all the ordinary and necessary expenses incurred in carrying on its business, including a reasonable compensation to its officers and 30 B.T.A. 973">984 employees. But the salaries which are paid in order to constitute an allowable deduction must be a reasonable and fair compensation for the services rendered. The expenses which can be deducted are the "ordinary and necessary expenses." If a corporation sees fit to pay its employees1934 BTA LEXIS 1236">1258 extraordinary, unusual, and extravagant salaries, distributing the profits of the business in the guise of salaries to its officers, who hold the stock and control its affairs, such salaries manifestly do not constitute the "ordinary and necessary expenses" of the business, which can be deducted under the statute. The government is not bound or concluded either by any resolution which the corporation adopts, or by its method of keeping books, upon the question as to whether any particular payment is a salary payment or a division of surplus. Examining the documentary evidence, a close relationship between stock ownership and the distribution of the so-called bonuses at once appears. The several stockholder-employees, the percentages of Doernbecher's stock for which they were to pay under the contract of December 1, 1920, and the percentages of bonus distributions were as follows: NameShares heldPercentage of costPercentage of bonusH. A. Green5123840B. P. John1 2633840C. E. Dye20086 2/3E. S, Beach20086 2/3F. A. Tauscher10043 1/3Corad Tauscher5021 2/3P. J. Lychywek5021 2/3Total1,3751001001934 BTA LEXIS 1236">1259 While the distributions based on petitioner's gross sales were not exactly in the same ratio as stock ownership, the two are sufficiently close to raise a most strong presumption that there was a direct conection between them. Although there was the variation between percentage of stock ownership and that of distribution as set out above, the amounts distributed, with but insignificant variations, were in direct proportion to stockholdings. Thus in 1922 and 1923 F. A. Tauscher, owning twice as much stock as P. J. Lychywek and Conrad Tauscher, received twice the amount distributed that they did. C. E. Dye and E. S. Beach each owned twice the amount of stock owned by F. A. Tauscher and each received double the amount paid to Tauscher. H. A. Green and B. P. John in all the years 1922 to 1925 received the same amounts as "bonuses", there being a difference of one share in amount of stock issued to them at December 1, 1920, and their stockholders being equal after December 19, 1923. In1934 BTA LEXIS 1236">1260 1924 and 1925 the same situation obtained, with differences of but a few cents. Thus in 1924 F. A. Tauscher, with twice the stock of Lychywek, received in distribution $3,093.75 and Lychywek $1,546.90. 30 B.T.A. 973">985 Based on stock, Tauscher should have received 5 cents more. In the same year Beach and Dye, with twice the stock of Tauscher, were paid twice as much as Tauscher as bonuses. In 1925 Beach and Dye each received the same amount, $6,416.54, which was slightly more than twice Tauscher's $3,203.46, and this latter sum was not quite double Lychwek's $1,606.52. Moreover, comparing the basic salaries and the bonuses, a further relationship between stockholdings and bonuses is apparent. It may be presumed that the basic salary is some indication of the directors' judgment of the worth of the employee to the business. Here we find employees with substantially different basic salaries, but having contracted to purchase the same amounts of stock, receiving the same amounts as bonuses. Beach with a basic salary of $8,500 from 1922 to 1924 and $9,374.97 in 1925, and Dye with a basic salary of $12,000 in all these years, each contracted to buy the same amount of stock, and each1934 BTA LEXIS 1236">1261 received the same distribution every year. Conrad Tauscher's basic salary was $3,600 in 1922 and 1923 and that of Lychywek was $4,000. Each contracted to purchase the same amount of stock and received equal amounts in distribution. With these figures before us the conclusion is inescapable that the annual distributions designated as bonuses were in fact distributions of profits to stockholders and were not salaries paid for services rendered. For the purpose of this phase of the case we think that the several employees who contracted to purchase Doernbecher's stock on December 1, 1920, should be considered to be stockholders throughout the entire period, although stock was not issued in their names until in December 1923. All of them were parties to the contract of purchase and all eventually received their stock. Beginning with 1926 the distribution of bonuses was discontinued and the amounts paid to stockholder-employees were thereafter designated as salaries. The principal stockholders, Green and John, thereafter were paid $75,000 each, which was but $278.46 less than the total received by each in 1925. The other stockholders all received more after 1925, the increases1934 BTA LEXIS 1236">1262 from 1925 to 1926 being as follows: Beach, $2,708.49; Dye, $183.46; F. A. Tauscher, $196.54; Lychywek, $1,043.46. No reason is given for the change from salary plus bonus system to the straight salary method of compensation. It is apparent, however, that none of the stockholders suffered any decrease, except Green and John in comparatively small amounts, in the annual sums received, and which in the prior years we have held represented in part distributions of profits to stockholders. In each of the years involved the respondent has allowed deductions of substantial amounts as compensation to these employee for services rendered, and the evidence does not convince us that the amounts so allowed were not reasonable sums. 30 B.T.A. 973">986 The petitioner offered the testimony of witnesses to establish what amounts would constitute reasonable salaries for Green and John. These witnesses were experienced in the wholesale and retail furniture business and knew something of some of the manufacturing concerns. However, they did not know what salaries were paid by manufacturers to the men who occupied the positions similar to those of Green and John, and we are not convinced that they had1934 BTA LEXIS 1236">1263 sufficient familiarity with the manufacture of furniture to be able to give an opinion of what constituted reasonable salaries sufficiently reliable to form the basis for a finding of fact. The evidence abundantly establishes that the several stockholders performed valuable services for petitioner, that each was skilled in his field of duty, and that they all served petitioner loyally and whole-heartedly. But it does not establish to our satisfaction that they were entitled to any greater sums than allowed by the respondent as reasonable compensation. We accordingly sustain the respondent on the salary issue for all years. The item of $9,902.58 paid by petitioner in 1929 as its share of the expenses of investigating the possibilities of a proposed merger of furniture concerns in our opinion should be allowed as an expense deduction in that year. It appears that the respondent's only reason for disallowance is that some of the information gathered in that investigation was availed of by companies entering into another merger in 1930. The evidence is that petitioner was not a party to the 1930 merger. Its nearest approach to participating was that in 1930 a newly organized corporation1934 BTA LEXIS 1236">1264 which took over the assets of a number of companies purchased petitioner's stock from its stockholders. As far as petitioner was concerned the proposed merger in connection with which it incurred expenses was abandoned in 1929 and it is entitled to the deduction claimed. The remaining question is that of affiliation in the year 1930 with the Furniture Corporation of America, Ltd., hereinafter called the Furniture Corporation. The facts, in brief, are that on June 26, 1930, Green, Beach, and Dye assigned all their stock except qualifying directors' shares to the Furniture Corporation, expressly subject to the contract of July 18, 1927, between Green, Beach, Dye, Tauscher, and Lychywek, on the one side, and John on the other. Under that contract all of the stock which Green, Beach, and Dye assigned to the Furniture Corporation was placed in escrow with the United States National Bank at Portland as collateral security to guarantee the performance of the contract under which the petitioner had contracted to purchase John's stock. The contract with John gave him the right to foreclose on the stock in case of default, but it was provided that until he did foreclose, "this agreement1934 BTA LEXIS 1236">1265 shall not in any way or manner affect the rights of the first parties to vote their 30 B.T.A. 973">987 respective stock hereby pledged as collateral." The assignors attempted to deliver the stock to the assignee on October 1, 1930, but John refused to release it from escrow. The petitioner filed a consolidated return with the Furniture Corporation for the period June 26 to December 31, 1930. The respondent allowed affiliation and determined income on a consolidated basis from October 1 to December 31, 1930, and refused to allow affiliation prior to October 1. The respondent's position now is that there was no statutory affiliation at any time in the year 1930. The assignment of June 26, 1930, in our opinion was effective as of that date to transfer ownership to the Furniture Corporation of 10,844 1/2 shares of stock. The prior pledge agreement of the assignors with John did not deprive them of title and ownership. Where there exists the requisite statutory ownership, affiliation is not denied because the stock has been pledged, 1934 BTA LEXIS 1236">1266 , or leased, including the right to the lessee to vote the stock, . But there is still the question of whether the 10,847 1/2 shares of Green, Beach, and Dye constituted all the outstanding stock at June 26, 1930, or whether the 8,135 1/2 shares standing in the name of John and held in escrow throughout 1930 should also be considered to be outstanding stock. Petitioner's view if that the contract with John was a contract of purchase and sale and that John's stock thereupon became treasury stock, leaving only the 10,847 1/2 shares of Green, Beach, and Dye as outstanding stock in 1930. We think it unnecessary to decide whether the agreement with John was a contract of sale vesting title presently in the petitioner, or a contract to sell under which John retained title until payment was completed. In either event the 8,135 1/2 shares which were the subject of the contract continued to be outstanding stock throughout 1930. If title passed to the corporation upon execution of the contract, the stock again became outstanding when it was deposited1934 BTA LEXIS 1236">1267 with the bank as collateral security for performance of the terms of the contract. If title remained in John the stock clearly was outstanding. By the same token that stock pledged or leased was taken into consideration in determining the matter of affiliation in the cases above cited, John's block of stock must be treated as outstanding stock here. It cannot be ignored or treated as nonexistent, "Stock once issued is and remains outstanding until retired and canceled by the method provided by statute for the retirement and cancellation of capital stock." , quoting . No action is shown to have been taken by petitioner to retire and cancel the John block of stock. The statute requires direct ownership of 30 B.T.A. 973">988 at least 95 percent "of the stock" in order to constitute an affiliation. It follows from what we have said that the John block of 8,135 1/2 shares must be considered as part "of the stock" of petitioner. As that block was not owned by the Furniture Corporation at any time during 1930, there was no affiliation in1934 BTA LEXIS 1236">1268 that year, and the respondent erred, as he now claims, in allowing affiliation for a part of the year. Decision will be entered under Rule 50.Footnotes1. Period Jan. 1 to Sept. 30. ↩1. This employee died in October 1924. ↩1. This employee died April 30, 1928. ↩1. John was the record holder of 249 shares more than Green at the time the contract was executed. The 263 shares under the contract of December 1, 1920, made his holdings and Green's equal. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619000/	Western Precipitation Corporation, Petitioner, v. Charles B. Henderson, Henry A. Mulligan, Howard J. Klossner, Sam H. Husbands, Charles T. Fisher, Jr., Constituting the Board of Directors of the Reconstruction Finance Corporation, RespondentsWestern Precipitation Corp. v. HendersonDocket No. 192-R.United States Tax Court9 T.C. 877; 1947 U.S. Tax Ct. LEXIS 40; October 31, 1947, Promulgated 1947 U.S. Tax Ct. LEXIS 40">40 Since the petitioner has failed to carry its burden of establishing error in the determined amount of its excessive profits for 1942, and respondents have likewise failed to carry their burden of establishing the factual basis upon which they rely for an increase therein, the amount of such excessive profits is found as so determined. Nathan Cohen, 7 T.C. 1002">7 T.C. 1002; Aircraft Screw Products Co., 8 T.C. 1037">8 T.C. 1037. George Bouchard, Esq., for the petitioner.Julian R. Wilheim, Esq., for the respondents. Leech, Judge. LEECH9 T.C. 877">877 The petitioner asks redetermination of its excessive profits, if any, derived during its fiscal year ended December 31, 1942, from contracts subject to renegotiation under the Renegotiation Act of 1942 as amended, the Reconstruction Finance Corporation Price Adjustment Board having determined under that act that such profits were excessive in the amount of $ 10,000. Petitioner contends that it had no excessive profits. Respondents, by amended answer, ask that we find excessive profits in the increased amount of $ 15,000.FINDINGS OF FACT.The petitioner was organized under the laws of California1947 U.S. Tax Ct. LEXIS 40">41 in November 1936 and began business December 1, 1936. It is the successor of a corporation known as Western Precipitation Co., which was organized 9 T.C. 877">878 in 1908. Its office and principal place of business are in Los Angeles, California.Petitioner's business is that of engineering and building industrial equipment, primarily Cottrell electrostatic precipitators, mechanical dust collecting equipment, and spray drying equipment. It designs equipment for a specified purpose in a customer's plant, selecting the type of equipment to be used and specifying the size equipment to accomplish the desired result. Petitioner then secures the fabrication of such equipment. Some of this fabrication is done in petitioner's own shop, but more than 50 per cent is done for petitioner by other firms according to its specifications. In some instances petitioner merely delivers the equipment to its customer. In other instances it erects and installs the equipment in its customer's plant and puts it into operation. On some occasions when petitioner does not install equipment for a customer it furnishes engineering services to supervise the installation and to conduct and/or supervise its placing1947 U.S. Tax Ct. LEXIS 40">42 in operation. Petitioner's customers are primarily industries producing essential materials or industrial materials such as steel, cement, and chemical plants and various metallurgical industries.During its fiscal year ended December 31, 1942, petitioner had overall sales, including both renegotiable and nonrenegotiable sales, in the total amount of $ 1,628,234; costs attributable thereto in the sum of $ 1,531,675; and profits derived therefrom in the total amount of $ 96,559. During its fiscal year ended December 31, 1942, petitioner had renegotiable sales within the meaning of the Renegotiation Act of 1942 as amended, in the total amount of $ 533,631; costs attributable thereto in the sum of not more than $ 493,172; and profits derived therefrom of not less than the amount of $ 40,459, and petitioner's renegotiable profit therefrom was not less than 7.58 per cent of renegotiable sales before renegotiation.During its fiscal year ended December 31, 1942, petitioner had nonrenegotiable sales in the total amount of $ 1,070,990; costs attributable thereto of not less than $ 1,014,890; and profits derived therefrom in the amount of not more than $ 56,100, and its profit on such nonrenegotiable1947 U.S. Tax Ct. LEXIS 40">43 business for that fiscal year was not more than 5.24 per cent of its total nonrenegotiable sales for that year.For each of its fiscal years ended December 31, 1937, to and including December 31, 1945, petitioner had the following total gross sales and total net profits:YearSalesProfits1937$ 662,082$ 46,0611938523,2008,8251939674,60864,7781940933,95937,59719411,110,40320,5541942$ 1,628,234$ 96,55919431,632,22859,50919441,905,56161,69519451,638,88663,1029 T.C. 877">879 The percentage of net profit to gross sales which petitioner realized in each of its fiscal years ended December 31, 1937, to and including December 31, 1945, is as follows:19376.96%19381.69%19399.60%19404.02%19411.85%19425.93%19433.64%19443.23%19453.85%Petitioner's net worth for each of its fiscal years ended December 31, 1937, to and including December 31, 1942, as of January 1 of each year, was as follows:1937$ 196,9391938225,3311939227,4481940$ 279,3271941294,4251942309,902Petitioner's net worth as of December 31, 1942, was $ 330,924.During its fiscal years ended December 31, 1937, to and including1947 U.S. Tax Ct. LEXIS 40">44 December 31, 1945, petitioner paid the following annual salaries to its three officers, namely, president, vice president and secretary-treasurer, as follows:ViceYearPresidentpresidentSecretary-treasurer1937$ 12,330$ 4,212$ 5,136193816,5004,2005,400193918,8254,9926,247194018,0004,2005,400194118,0004,2005,975194219,8004,6206,600194319,8004,6206,600194419,8004,6206,600194519,9004,7206,690By a resolution dated December 16, 1942, petitioner's board of directors authorized and directed petitioner to pay a bonus, for petitioner's fiscal year ended December 31, 1942, to the following officers and directors in the following amounts:President and member of board of directors$ 10,000Vice president and member of board of directors2,500Secretary-treasurer and member of board of directors2,500Engineer and member of board of directors2,500Bonuses in the identical respective amounts were authorized and directed by petitioner's board of directors to be paid to each of the above mentioned officers and members of the board of directors for each of petitioner's fiscal years ended December 31, 1947 U.S. Tax Ct. LEXIS 40">45 1940, to and including December 31, 1945. There is included in the renegotiable costs of not more than $ 493,172, $ 5,735 which is the maximum amount, if any, of the above mentioned bonuses for petitioner's fiscal year ended December 31, 1942, allocable to petitioner's renegotiable business for that fiscal year. It is stipulated that if the Court should find 9 T.C. 877">880 that all, or any part, of the above mentioned bonuses for petitioner's fiscal year ended December 31, 1942, are not allocable to petitioner's renegotiable business for said fiscal year, then the renegotiable profits of not less than $ 40,459 shall be increased by such amount of those bonuses as the Court finds is not allocable to petitioner's renegotiable business for that fiscal year, not exceeding, in any event, the total amount of $ 5,735.During the year 1942 petitioner's president, vice president, and secretary-treasurer held, respectively, 52, 6, and 5 per cent of its outstanding stock. These officers were also members of its board of directors. Petitioner's president, Walter A. Schmidt, is a chemical engineer by profession and a graduate of the University of California. He has been the president of the petitioner1947 U.S. Tax Ct. LEXIS 40">46 and its predecessor company since 1909. Petitioner's vice president, Alfred W. Knight, is a chemical engineer and a graduate of the California Institute of Technology. He is also a patent attorney and has been with petitioner and its predecessor since 1924.During the year 1942 petitioner's employees numbered approximately 125, of which about 50 were engineers. Its business is highly technical. It has a number of competitors who manufacture and sell other types of apparatus constructed for the same use and purpose as that of the petitioner.Petitioner's work during the war years, including 1942, was of the same character as in prior years. It did not increase its facilities during the war period. It was organized for a peacetime business and required no change to continue production under wartime conditions. It used only private capital during the year 1942. Its products sold in its 1942 renegotiable sales and nonrenegotiable sales were substantially identical. Petitioner in 1942 carried no regular inventories of its products and had no inventory risks. During that year its risks in labor and/or price fluctuations were little. During that period its regular business risks1947 U.S. Tax Ct. LEXIS 40">47 did not differ from its prewar normal business risks and such risks did not differ as between its renegotiable and nonrenegotiable sales. Petitioner faced no reconversion problem at the end of the war.Petitioner during the fiscal year ended December 31, 1942, realized excessive profits upon its renegotiable sales in the amount of $ 10,000.OPINION.The burden is upon petitioner to establish that the profits it realized in 1942 upon its renegotiable sales were not excessive, or excessive in an amount less than $ 10,000. Nathan Cohen, 7 T.C. 1002">7 T.C. 1002; Aircraft Screw Products Co., 8 T.C. 1037">8 T.C. 1037. Upon careful consideration of the evidence, it is our conclusion that it has failed to carry that burden.9 T.C. 877">881 The record shows clearly to our satisfaction that petitioner's risks from its war business were no more than those it faced in normal prewar times, and that its risks with respect to its renegotiable business were no greater than those faced with respect to its regular nonrenegotiable business. Notwithstanding these facts as stipulated, we have found that petitioner's profits upon its nonrenegotiable sales were not more1947 U.S. Tax Ct. LEXIS 40">48 than 5.24 per cent of such sales, whereas its profits upon its renegotiable sales were not less than 7.58 per cent of such sales. Petitioner has given no satisfactory explanation as to why its prices quoted to the Government or to Government contractors were such that it derived a considerably higher profit than that realized by it from sales it made to other customers of products substantially identical in character and produced at similar costs and under similar risks. Its first attempted explanation of this difference was that the renegotiable sales were mainly of small jobs upon which the prices quoted are higher. However, the record does not support this explanation. Petitioner's vice president admitted upon cross-examination that one of the probable causes for a higher profit on renegotiable sales was that, in the case of these sales, there was an excessive estimate of the cost which was anticipated.Respondents ask, however, that petitioner's profits be redetermined to be excessive to the extent of $ 15,000. This $ 5,000 increase is based upon the allegation in the answer, and denied in the reply, that a bonus of $ 17,500 paid by petitioner at the close of 1942 to its 1947 U.S. Tax Ct. LEXIS 40">49 three executive officers and its engineer did not represent reasonable compensation for services rendered by the recipients, but was in the nature of a dividend distribution to them as stockholders.Of the total bonus of $ 17,500 paid, $ 5,735 was allocated to petitioner's renegotiable business and was accepted and allowed by respondents as an expense of that business in computing the net profit upon which an excessive profit of $ 10,000 was determined.The burden is accordingly upon the respondents to establish that these bonuses were in fact distributions of earnings or unreasonable compensation for services. 7 T.C. 1002">Nathan Cohen, supra; 8 T.C. 1037">Aircraft Screw Products Co., supra. We think they have failed to carry this burden.There is no proof in the record even tending to show that the bonuses in question do not represent reasonable compensation. The only evidence is to the contrary. All the recipients of the bonuses are men of high technical knowledge and experience and are directing the activities of a very successful business. The amounts of the bonuses were not in proportion to the stockholdings of the recipients. The payment 1947 U.S. Tax Ct. LEXIS 40">50 of these bonuses was not unusual in the history of the company. They were paid under a fixed policy of the company. Bonuses in these identical amounts were paid to these same individuals 9 T.C. 877">*882 in each of the six years from 1940 to 1945, inclusive. Moreover, the Government, through the Commissioner of Internal Revenue, in computing net income of petitioner for 1942 for income tax purposes, allowed the deduction of the payments in that year to these officers, including the bonuses, as ordinary and necessary business expenses.It is accordingly our conclusion that the bonuses in question represent reasonable compensation. Of the total of $ 17,500, the sum of $ 5,735 allocated to petitioner's renegotiable business represents an allowable expense subject to deduction in computing the net profits subject to renegotiation.Thus, respondents have failed to carry their burden in establishing the basis of fact upon which they rely for the increase of $ 5,000 in the disputed excessive profits. The increase is, therefore, denied.An order will issue in accordance herewith.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619002/	CUYAHOGA ABSTRACT TITLE & TRUST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cuyahoga Abstract Title & Trust Co. v. CommissionerDocket No. 8937.United States Board of Tax Appeals7 B.T.A. 95; 1927 BTA LEXIS 3253; May 26, 1927, Promulgated 1927 BTA LEXIS 3253">3253 It appearing from the evidence that capital was a material income-producing factor in petitioner's business, it is not entitled to classification as a personal service corporation under section 200 of the Revenue Act of 1918. Ben Jenkins, Esq., for the petitioner. Geo. G. Witter, Esq., for the respondent. TRAMMELL7 B.T.A. 95">96 This proceeding is for the redetermination of deficiencies in income and profits taxes for the year 1918 in the amount of $3,671.85, for the year 1919 in the amount of $6,849.11, and for the year 1920 in the amount of $252.52, a total of $10,773.48. The only issue presented is whether petitioner was, during the years involved, entitled to classification as a personal service corporation as that term is defined by section 200 of the Revenue Act of 1918. FINDINGS OF FACT. The petitioner is an Ohio corporation, with its principal office at Cleveland. It was organized in May, 1900, with an authorized capital stock of $20,000, divided into 200 shares of a par value of $100 each. The corporation succeeded a partnership which had been in existence since 1898, and its stock was issued for the partnership assets, consisting principally1927 BTA LEXIS 3253">3254 of records and abstracts of title, which constituted a so-called "abstract plant." From the date of its organization and during the years involved herein, petitioner was engaged in the business of preparing abstracts and certificates of title to real estate, for which it made charges to its clients according to the amount of work involved. The number of abstracts furnished was small in comparison with the number of certificates, and about 75 per cent of petitioner's services were furnished to banks. In the preparation of abstracts and certificates of title, employees searched the records and assembled the necessary data under the supervision of the principal stockholders, one of whom would pass opinion upon the validity of each title and finally approve each abstract or certificate. The principal owners or stockholders of petitioner were during the years in question regularly engaged in the active conduct of its affairs. In 1911, the authorized capital stock of petitioner was increased from $20,000 to $200,000. Additional stock in the amount of $180,000 was issued and set up on the books as good will. The abstract plant, for which petitioner at organization issued its capital1927 BTA LEXIS 3253">3255 stock of $20,000, had been built up by the predecessor partnership, and, during the succeeding years, additions and betterments were constantly made to the plant by the petitioner. The larger part of the cost of maintaining, building up, and improving the plant by the petitioner, was paid out of its current earnings and charged to expense. Petitioner expended between $200,000 and $300,000 in maintaining and building up its plant, which now has a replacement value of not less than $500,000. Petitioner's investment in its abstract plant was necessary to enable it to render the services from which it received its income. The plant was essential to the efficient performance of its functions. 7 B.T.A. 95">97 Without the plant it would have been necessary to go to the court house to look up the records in each case, and this would have precluded work on a number of titles at the same time. Without the plant, it would have been impracticable for petitioner to have operated its business. An important factor in the preparation of abstracts and certificates of title by petitioner was the possession of a complete set of abstract books and records, such as those maintained by it, with employees1927 BTA LEXIS 3253">3256 competent to use them. Petitioner's abstract plant represented a capital investment, which was a material income-producing factor in its business. During the year 1918, petitioner had 33 employees to whom it paid salaries in the aggregate amount of $37,232; during 1919, it had 41 employees to whom it paid $57,148; and during 1920, it had 75 employees to whom it paid $113,620. These employees were classified, according to the duties performed by them, as searchers and examiners, indexing and filing clerks, draftsmen, private secretaries, typists and comparers, bookkeepers, general clerks, and office boys. As shown by its amended tax returns, petitioner had a net income for the year 1918 of $17,725.48; for 1919 a net income of $69,949.52; and for 1920, a net income of $60,234.64. OPINION. TRAMMELL: The Revenue Act of 1918 exempts personal service corporations from the taxation imposed upon ordinary business corporations, and provides in section 218(e) that the individual stockholders shall be taxed in the same manner as the members of partnerships. In section 200 of the Act a personal service corporation is defined as one (a) whose income is to be ascribed primarily to1927 BTA LEXIS 3253">3257 the activities of the principal owners or stockholders, (b) who are themselves regularly engaged in the active conduct of the affairs of the corporation, and (c) in which capital (whether invested or borrowed) is not a material income-producing factor. For each of the years 1918, 1919, and 1920, petitioner filed an original corporation income and profits-tax return on Form 1120, and for the years 1919 and 1920 later filed amended returns on the same form. Under date of November 15, 1923, petitioner prepared and filed a personal service corporation return of income on Form 1065, for each of said years, thereby claiming for the first time to be a personal service corporation. Petitioner now contends that it is entitled to classification as a personal service corporation, and as such is exempt from taxation under the provisions of the revenue act above mentioned. No error other than respondent's refusal to allow such classification is alleged to have been committed in connection with 7 B.T.A. 95">98 his determination of the deficiencies involved in this proceeding. Respondent avers that petitioner is not entitled to classification as a personal service corporation for the reason that1927 BTA LEXIS 3253">3258 its income can not be ascribed primarily to the activities of its principal stockholders, and because capital was a material income-producing factor in its business. Thus, the sole issue presented is whether petitioner, during the years in question, possessed the qualifications of a personal service corporation as defined in section 200 of the Revenue Act of 1918. Since petitioner is seeking to overturn the determination of respondent, the burden is upon it clearly to establish by competent and satisfactory evidence that it comes within the class of corporations referred to. As stated by the court in : Every corporation has full control of its own activities. * * If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law or to come within hailing distance thereof, is not enough. * * * There is constant temptation to urge that particular corporations, with no right to such favor, be accorded classification as personal service corporations, and the requirements necessary thereto must be substantially observed. 1927 BTA LEXIS 3253">3259 Has petitioner discharged its burden and shown itself fairly to come within the definition of a personal service corporation? We think it has wholly failed to do this. The evidence shows that petitioner at the time of its organization in 1900 issued its entire capital stock of the par value of $20,000 for a set of abstract books and records, which were accepted at that valuation, and that during the succeeding years up to 1920, it spent large sums of money amounting to between $200,000 and $300,000 by way of additions and betterments to its abstract plant in order to keep it up to date. It is immaterial that such expenditures were largely made from current earnings and charged to expense. Book entries are not conclusive of the nature of the expenditure. . A taxpayer has no option to treat expense items as capital or capital expenditures as expenses. . We are not here concerned with the question of what portion of the expenditures might properly be regarded as maintenance and hence be chargeable to expense, and what part represents a capital investment. 1927 BTA LEXIS 3253">3260 It is sufficient to say that the expenditures in question raised the value of petitioner's abstract plant from $20,000 in 1900 to several hundred thousand dollars in 1920, and to a very material extent constituted an investment of capital. The replacement value of the abstract plant is shown to be now approximately $500,000. Without the possession and use of such plant, petitioner could not successfully have conducted its business. On that point, J. V. Chapek, a witness for petitioner, 7 B.T.A. 95">99 and who has been its president for 26 years, testified at the hearing as follows: Q. In other words, you think that you have got to have that investment in the business before you could perform that service to the public? A. Yes. Q. Before you could perform it efficiently? A. Absolutely. You have got to have that. You have got to have all that stuff together. If you don't have it you cannot do the work. Of course we could not do the work that we do, work on ten or fifteen jobs, if we had to go to the Court House and look up the records. That is something that we could not do night and day efficiently. Q. In other words, that is where you make your money? A. Yes. 1927 BTA LEXIS 3253">3261 In the light of this and the other evidence before us, we are unable to agree with the contention of petitioner that the capital represented by its plant was not a material factor in producing its income. On the contrary, the evidence shows that it was the principal factor. In the , the facts were strikingly similar to those in the instant case. There we held that the abstract books of the taxpayer corporation represented a capital asset which was a material income-producing factor in its business, and precluded classification as a personal service corporation. Having decided that capital was a material income-producing factor, the petitioner herein does not meet the requirements of a personal service corporation and a discussion of the other elements prescribed by the statute is not necessary. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619003/	LEON STOBAUGH and BARBARA STOBAUGH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Stobaugh v. CommissionerDocket No. 12073-79United States Tax CourtT.C. Memo 1984-112; 1984 Tax Ct. Memo LEXIS 565; 47 T.C.M. 1227; T.C.M. (RIA) 84112; March 6, 1984Leon Stobaugh, pro se. Lottie G. Wolfe, for the respondent. WILBUR1984 Tax Ct. Memo LEXIS 565">566 MEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined the following deficiencies in petitioners' Federal income tax and additions to tax under sections 6651(a), 6653(a), 6653(b), and 6654: 1Party to whom noticeof deficiency wasType ofAmount ofissuedYearDeficiencyAdditionAdditionLeon Stobaugh1967$4,479.40Sec. 6651(a)$1,119.85Leon Stobaugh1967Sec. 6653(a)223.97Leon Stobaugh1967Sec. 6654143.33Leon Stobaugh19682,477.94Sec. 6651(a)619.49Leon Stobaugh1968Sec. 6653(a)123.90Leon Stobaugh1968Sec. 665479.30Barbara Stobaugh19674,057.81Sec. 6651(a)1,014.20Barbara Stobaugh1967Sec. 6653(a)202.85Barbara Stobaugh1967Sec. 6654129.82Barbara Stobaugh19681,978.74Sec. 6651(a)494.68Barbara Stobaugh1968Sec. 6653(a)98.94Barbara Stobaugh1968Sec. 665463.31Leon Stobaugh andBarbara Stobaugh19701,374.08Sec. 6653(b) 687.04Leon Stobaugh andBarbara Stobaugh197114,738.00Sec. 6653(b) 7,369.001984 Tax Ct. Memo LEXIS 565">567 After concessions, the issues remaining for our decision are: (1) whether petitioner Leon Stobaugh made payments for the use of a backhoe in 1967; (2) whether petitioner Leon Stobaugh paid $5,300 to a business supplier in 1968; and (3) whether petitioner Leon Stobaugh is liable for an addition to tax under section 6653(b) for the year 1971. FINDINGS OF FACT Some of the facts have been stipulated and those facts are so found. The stipulation and attached exhibits are incorporated by this reference.The deficiencies and additions to tax assessed against petitioner Barbara Stobaugh have been settled, therefore any references to petitioner involve only Leon Stobaugh. Petitioners Leon and Barbara Stobaugh resided in Bakersfield, California, when the returns and petition were filed in this case.They willfully neglected to file returns for the years 1967 and 1968 in violation of section 6651(a), and negligently or intentionally disregarded the rules of the Internal Revenue Code in violation of section 6653(a) in those years. Their gross income, calculated by respondent, in those years was $104,518.35 and $21,891.04, respectively. Petitioner had allowable business expenses in 19671984 Tax Ct. Memo LEXIS 565">568 and 1968 of $90,763.55 and $8,020.23. Petitioner does not contest these figures, but does claim that he is entitled to additional expenses in each of the 2 years. During the years at issue petitioner was in the sewer and water line business, operating as the Stobaugh Sewer Company. In 1967 he worked with Oldham Construction Company on a housing development in Stockton, California. Petitioner and his crew dug the land, laid the pipe, and did other work related to installing a sewer system. Stockton is some 200 miles from petitioner's home in Bakersfield, so rather than transporting his own backhoe to the job site, petitioner hired Johnny True, a local owner/operator, to help dig the lines necessary to installation of the sewer system. Mr. True worked for petitioner for 16 weeks at a rate of $500 per week. The Oldham Construction Company paid Johnny True for three of those weeks. Petitioner paid the remaining $6,500, yet respondent included only $500 in calculating petitioner's 1967 business expenses. At trial petitioner introduced a 1968 receipt showing charges of $5,300 for various construction supplies. This "receipt" appears to be part of a page torn from a ledger. No1984 Tax Ct. Memo LEXIS 565">569 names are on it, thus we do not know who was the buyer or the seller of these supplies. Petitioners timely filed their 1970 and 1971 Federal income tax returns. Those items omitted from 1970 income have been agreed to by petitioner, and additional business expenses have been substantiated. As a result, there is no deficiency remaining for that year. The parties have also reached agreement on the 1971 deficiencies. In February 1977 Leon Stobaugh pleaded not guilty to charges of wilfully subscribing to false 1970 and 1971 income tax returns in violation of section 7206(1). Petitioner presented arguments and evidence designed to show his innocence, but was found guilty by the jury. Final judgment was entered against him in March 1977. Ruth Drake, 2 petitioner's bookkeeper, prepared his 1971 income tax return. She asked Stobaugh where she could find information about his gross income; he told her the money was in his business checking account. Mrs. Drake then totalled up the deposits shown on bank statements and/or deposit slips to arrive at gross income. The amount shown on the return also included $25,000 which petitioner had deposited in his savings account. Mrs. Drake1984 Tax Ct. Memo LEXIS 565">570 learned of this money when she found the deposit slip in the files and questioned petitioner about it. He told her that he had forgotten about that money, then told her that it should be included in his income. During the course of the criminal investigation, respondent's agent Dale Smith discovered two sources of unreported income. First, petitioner sometimes deposited less than the full amount of incoming checks in the bank. The bank statements and deposit slips used by Mrs. Drake showed only the net deposit, not the total payment received. 3 Second, petitioner sometimes endorsed his checks directly over to his suppliers to pay his bills to them. These checks were not included in the income reported on petitioner's return. Petitioner paid his suppliers in this manner throughout the years at issue. Usually the1984 Tax Ct. Memo LEXIS 565">571 supply company would issue an "exchange check" to petitioner for the excess of the amount of the initial check over the amount due the supplier. 4OPINION Petitioner Leon Stobaugh was in the sewer and water line construction business during the years at issue. He failed to file Federal income tax returns in 1967 and 1968, and in 1971 filed a return which substantially understated his income. Petitioner asserts that he is entitled to additional business deductions in 1967 and 1968, and that he is not liable for the addition to tax under section 6653(b) for the year 1971. Petitioner1984 Tax Ct. Memo LEXIS 565">572 claims that in reconstructing his 1967 business expenses respondent failed to include $8,000 paid to Johnny True for use of a backhoe in Stockton. The evidence before us shows that $1,500 of this expense was paid by Oldham Construction Company. Petitioner's claim is denied to the extent of that payment, but he is entitled to an additional $6,000 in expenses. 5Petitioner claims an additional deduction of $5,300 in 1968, relying on a receipt which was not in his bookkeeper's files, thus not included in respondent's calculation. This "receipt" is nothing more than part of a page torn from someone's accounting records, and is insufficient proof that any payment was made by petitioner Stobaugh. The deduction is therefore denied. The third issue is whether petitioner Leon Stobaugh's underpayment of tax in 1971 was due to fraud, rendering him liable for the addition to tax imposed by section 6653(b). The existence of fraud is determined from consideration of all the facts and circumstances. Stratton v. Commissioner,54 T.C. 255">54 T.C. 255, 54 T.C. 255">284 (1970). Respondent1984 Tax Ct. Memo LEXIS 565">573 bears the burden of proof, must show clear and convincing evidence of each element of fraud. Section 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure; 54 T.C. 255">Stratton v. Commissioner,supra.In Considine v. United States,683 F.2d 1285">683 F.2d 1285, 683 F.2d 1285">1286 (9th Cir. 1982), the Ninth Circuit held that to establish civil fraud the Government is required to show (1) a knowing falsehood; (2) an underpayment of tax; and (3) an intent to evade tax. Discussing the third element, the court held that a conviction under section 7206(1) did not necessarily include a finding of fraudulent intent. 683 F.2d 1285">Considine v. United States,supra at 1287. In so ruling the court expressly disagreed with what it perceived to be the holding of this Court in Considinev. Commissioner,68 T.C. 52">68 T.C. 52 (1977) (Considine I). 6Golsen v.Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10 Cir. 1971), requires us to follow a Court of Appeals decision squarely on point where appeal from our decision lies to that Court. Accordingly, we will follow the analysis of Considinev. United States,683 F.2d 1285">683 F.2d 1285 (9th Cir. 1982).1984 Tax Ct. Memo LEXIS 565">574 1984 Tax Ct. Memo LEXIS 565">575 Respondent contends, and correctly so, that the doctrine of collateral estoppel bars petitioner from contesting any issues actually litigated during his criminal trial. 683 F.2d 1285">Considine v. United States,supra; Commissioner v. Sunnen,333 U.S. 591">333 U.S. 591 (1948). He was found guilty of willfully subscribing to a false return; the first element of civil fraud is, therefore, conclusively established. Respondent has also established by clear any convincing evidence that there was an underpayment of tax in 1971. The third element of civil fraud has, however, not been conclusively established: "Because section 7206(1) does not require a willful attempt to evade tax, a conviction under section 7206(1), without more, does not establish fraudulent intent." Considine v. United States,683 F.2d 1285">683 F.2d at 1287. The intent required for a finding of fraud has been described as an "intentional wrongdoing * * * motivated by a specific purpose to evade a tax known or believed to be owing," Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 398 F.2d 1002">1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Powell v. Granquist,252 F.2d 56">252 F.2d 56 (9th Cir. 1958);1984 Tax Ct. Memo LEXIS 565">576 and as an act attributable to "bad faith or evil intent." United States v. Bishop,412 U.S. 346">412 U.S. 346, 412 U.S. 346">360 (1973). Respondent must show that the taxpayer intended to evade taxes by concealing, misleading, or generally preventing the collection of taxes. 398 F.2d 1002">Stoltzfus v. United States,supra;Wilson v. Commissioner,76 T.C. 623">76 T.C. 623 (1981); Mitchell v. Commissioner,118 F.2d 308">118 F.2d 308 (5th Cir. 1941).We find that the respondent has shown petitioner's fraudulent intent by clear and convincing evidence. Respondent described two sources of unreported income. The first stemmed from petitioner's practice of depositing less than the full amount of some checks in his business checking account. Both the bank statements and the duplicate deposit slips which petitioner's bookkeeper used in finding gross income showed only the net deposit, and by this method substantial income was not reported. Petitioner did not tell Mrs. Drake about these additional sums when questioned about his income. Respondent argues that this shows petitioner's fraudulent intent, and we agree. Petitioner was an intelligent man, and he knew and intended the consequences1984 Tax Ct. Memo LEXIS 565">577 of this procedure. He confirmed this intent when he lied to Mrs. Drake. Petitioner also acted fraudulently by failing to tell his bokkeeper that he endorsed certain checks directly over to his suppliers. When petitioner endorsed a check directly to his suppliers, they would issue him an "exchange check" for the amount due him after payment for supplies that did not find their way into his income as reported by Mrs. Drake. Again, we found petitioner to be an intelligent man who understood precisely what he was doing, and on the record before us, he must be presumed to have intended the consequences of his act. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.↩. The additions to tax under section 6653(b) for the years 1970 and 1971 apply only to petitioner Leon Stobaugh. ↩2. Mrs. Drake did not testify in the trial because she died sometime after petitioner's criminal trial in 1977. She was interviewed by respondent's agent Dale Smith in the course of his investigation. Drake's statements are admissible as the admissions of a party-opponent under Rule 801(d)(2)(D), Federal Rules of Evidence.↩3. One exhibit introduced by respondent showed a check of $5,200, and a net deposit of $4,700; the remaining $500 was given to petitioner in cash and a cashier's check. ↩4. Much of the testimony at trial was devoted to this practice. In one instance, petitioner received a check for $65,000. He turned this over to Central Valley Supply to pay a bill of $35,000, and then received a check for the balance, $30,000. When respondent's agents reconstructed petitioner's income they included both the $65,000 and the $30,000 in income, but also gave petitioner a business deduction for the full $65,000.↩5. The additional deduction is $6,000 rather than $6,500 because respondent already allowed $500 as an expense.↩6. Considine v. Commissioner,68 T.C. 52">68 T.C. 52 (1977) involved tax year 1969. We held that conviction under sec. 7206(1) requires a finding that the taxpayer had "willfully" made a return which he does not believe to be true and correct. We noted that the term "willfully" as used in sec. 7201 encompassed all of the elements of fraud in sec. 6653(b), including "a specific intent * * to evade or defeat the * * * tax." We then concluded that the sec. 7206(1) conviction for "willfully" making a return was proof that the return was fraudulent. We further noted that it is not essential to the judgment of conviction under sec. 7206(1) that there be an underpayment of tax. Considine v. Commissioner,68 T.C. 52">68 T.C. 61. See also Goodwin v.Commissioner,73 T.C. 215">73 T.C. 215, 73 T.C. 215">229 (1979). The Considines then went to the Court of Claims seeking a refund of the sec. 6653(b) additions they had paid for tax year 1966 and 1967.In Considine v. United States,227 Ct. Cl. 77">227 Ct. Cl. 77, 645 F.2d 925">645 F.2d 925 (1981) (Considine II), that court found independent indicia of fraudulent intent, so did not address the issue of collateral estoppel. Mr. Considine sought a refund for 1965 in the District Court. The court granted the Government's motion for summary judgment, and held that "by reason of his prior conviction under 26 U.S.C. 7206(1)" the plaintiff was estopped from denying that he willfully filed a fraudulent return. Considine v. United States, an unreported case, 45 AFTR 2d 80-1315, 80-1 USTC par. 9395 (S.D.Cal. 1980).This last decision was affirmed, albeit for different reasons, in Considine v. United States,683 F.2d 1285">683 F.2d 1285↩ (9th Cir. 1982).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619005/	Long Island Water Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentLong Island Water Corp. v. CommissionerDocket No. 65960United States Tax Court36 T.C. 377; 1961 U.S. Tax Ct. LEXIS 141; May 25, 1961, Filed 1961 U.S. Tax Ct. LEXIS 141">141 Decision will be entered under Rule 50. 1. A, a public utility holding company, and M, an investment banking firm, agreed that M should acquire all of the capital stock of Q, an operating water company, and transfer it to petitioner, a newly organized corporation, in exchange for petitioner's stock and bonds. When these transactions were completed Q was merged into petitioner. M then exchanged the stock it held in petitioner for an agreed number of A's shares which were subsequently sold on the open market. Prior to these steps taking place the stockholders of Q were in control of its assets. Afterwards A owned all of petitioner's stock and was in control of the assets. The stockholders of A and Q were unrelated. Held: That the steps which began with the agreement between A and M and ended with the merger of Q into petitioner were interdependent steps of an integrated transaction. No tax-free reorganization occurred, and the petitioner's basis for the assets acquired from Q is its cost, which is determined to be $ 4,583,556.03. Held, further, that the later transactions consisting of the petitioner's purchase of the stock of R and B, water companies operating in territory 1961 U.S. Tax Ct. LEXIS 141">142 adjacent to petitioner, and the subsequent merger of those corporations into petitioner were not integral parts of the above-mentioned transaction but resulted in statutory reorganizations, and the petitioner's basis for the assets acquired from R and B, respectively, is the basis of each of its transferors. Held, further, that none of the above transactions constituted or was equivalent for tax purposes to the direct acquisition of assets by petitioner under any principle exemplified by Kimbell-Diamond Milling Co., 14 T.C. 74">14 T.C. 74, affd. 187 F.2d 718.2. The petitioner's basis for depreciable and nondepreciable assets acquired from Q and R must be allocated between such assets. On the basis of allocations made by the Court held that the petitioner sustained a loss on the sale of certain land in 1951. Held, further, that the respondent's reductions in the petitioner's basis, resulting from the sale of certain depreciable assets in 1929 and 1931, were excessive and resulted in an inadequate deduction for depreciation in each of the years involved. J. Marvin Haynes, Esq., N. Barr Miller, Esq., and Arthur H. Adams, Esq., for the petitioner.Anthony S. Del Giudice, Esq., for the respondent. 1961 U.S. Tax Ct. LEXIS 141">143 Kern, Judge. KERN 36 T.C. 377">378 Respondent determined deficiencies in the petitioner's income taxes as follows:YearDeficiency1949$ 19,494.42195024,317.46195126,429.34195222,977.22By amendment to his answer to the amended petition respondent has asked that the deficiencies set forth above be increased by certain amounts in the event we decide the major question presented herein adversely to the petitioner.The primary issue in this proceeding is whether the petitioner's basis as to certain depreciable properties should be their cost (and, if so, the amount thereof and its proper allocation) or should be the cost of such properties to corporations merged into petitioner. Related questions have to do with the amount of gain or loss realized upon the sale of a part of such properties and with the amounts by which petitioner's depreciation base should be reduced by reason of certain dispositions of parts of such properties.FINDINGS OF FACT.Some of the facts have been stipulated. The stipulated facts are so found and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.The petitioner is the Long Island Water Corporation, a New York corporation 1961 U.S. Tax Ct. LEXIS 141">144 with its principal office located at Lynbrook, New York. Since its incorporation in 1925 petitioner has been engaged in the distribution and sale of water to communities located on Long Island, New York. The petitioner has kept its books and filed its income tax returns according to a calendar year accrual method of accounting. The returns for the years in issue were filed with the then collector of internal revenue at Brooklyn, New York.In February or March of 1925 a large public utility holding company, the Associated Gas and Electric Company (hereinafter referred to as Associated), asked a public utility engineer to make an investigation and submit a preliminary appraisal of the property of 36 T.C. 377">379 the Queens County Water Company of Long Island (hereinafter referred to as Queens), a firm which had engaged in the distribution and sale of water to communities located in or adjacent to Queens and Nassau counties, Long Island, New York, since its incorporation on March 27, 1884.On April 1, 1925, pursuant to an understanding with Associated, the investment banking firm of Marshall Field, Glore, Ward & Company (hereinafter referred to as Marshall Field) contracted with Queens' president for 1961 U.S. Tax Ct. LEXIS 141">145 the cash purchase of the outstanding capital stock of Queens.On April 6, 1925, Marshall Field and Associated entered into a written agreement evidenced by the following proposal by Marshall Field and acceptance by Associated:RE THE QUEENS COUNTY WATER COMPANYAssociated Gas and Electric Company,61 Broadway, New York City.Gentlemen: We enclose herewith a copy of our contract for the purchase, at $ 280.50 per share, of not less than 90% of the outstanding capital stock of The Queens County Water Company, evidenced by our letter of April 1, 1925, to Mr. Henry de Forest Baldwin and his acceptance noted thereon under the same date. Mr. Baldwin is very confident that 100% of the stock will be delivered although some shares may not come in until the first of May. We are writing this letter to confirm the understanding which has been reached between your Company and ourselves in the matter.1. We have made the purchase on behalf of your Company and ourselves, you to have 51% interest therein and the undersigned the remaining 49%. The total purchase price (assuming the acquisition of 100% of the outstanding Stock) will be $ 2,945,250 for the 10,500 shares outstanding. To this must be added 1961 U.S. Tax Ct. LEXIS 141">146 the cost (exclusive of accrued interest) of calling the outstanding $ 702,000 of bonds at 105, or $ 737,100, making the total purchase price, on the basis mentioned $ 3,682,350. We shall provide the entire funds requisite to make the purchase and to carry the transaction, pledging, in order to raise the requisite funds, the entire stock to be purchased; it being the intent of our understanding that the entire transaction is to be worked out without your raising or providing any cash funds whatever.2. The debt and stock of the Company will be re-adjusted so that the Company, or a new company to be formed for the purpose in succession to the present company, will create an issue of First Mortgage Bonds, unlimited in aggregate principal amount and issuable in series, and issues of First Preferred, Second Preferred and Common Stock, all without nominal or par value. The total number of authorized shares of each class of stock shall be worked out between us except that the Common Stock shall be divided into such number of shares as shall be fixed solely by your Company.3. The First Preferred Stock shall be entitled to dividends at the rate of either $ 6.50 or $ 7 (as you shall determine) 1961 U.S. Tax Ct. LEXIS 141">147 per/share per annum. The Second Preferred Stock shall be entitled to dividends at the rate of $ 8 per share per annum. Both classes of Preferred Stock shall be non voting and shall be redeemable at $ 105 per share and accrued dividends, and in the event of dissolution shall be entitled to $ 100 per share and accrued dividends, the First Preferred in preference to the Second Preferred and Common, and the Second Preferred 36 T.C. 377">380 in preference to the Common. If your Company so decides, the First Preferred shall be convertible, at the option of the holders after such date as your Company shall fix and/or (except while held by us) at any time at the option of the Queens Company, share for share, into the proposed new $ 7 Preferred Stock of your Company. If you so elect, it may be so convertible at the option of the Queens Company, but not at the option of the holders. This new Preferred Stock, we understand, is to be entitled to cumulative preferred dividends at $ 7 per share per annum, and is to be on a parity with your present outstanding Preferred Stock (Original Series, entitled to cumulative preferred dividends at $ 3.50 per share per annum) and your present outstanding Preferred Stock 1961 U.S. Tax Ct. LEXIS 141">148 ($ 6 Series, entitled to cumulative preferred dividends at $ 6 per share per annum).4. The following securities, in addition to the entire amount of no par value common stock, shall be issued in the manner provided in Paragraph 5 hereof, unless a different manner is agreed upon between us, and the same shall be taken by us at the following prices (plus accrued interest or dividends, as the case may be), producing the following proceeds (exclusive of accrued interest and dividends) to be applied as follows: SecuritiesPriceCost$ 3,000,000 Thirty-Year 5 1/2% First Mortgage GoldBonds92 1/22,775,000$ 532,000 (preference value) First Preferred Stock95505,400$ 437,000 (preference value) Second PreferredStock92402,040Total$ 3,682,440Redemption of outstanding $ 702,000 of bonds(exclusive of accrued interest)105737,100$ 2,945,340Repayment of cost of 10,500 shares at $ 280.502,945,250Surplus$ 90If said bonds are sold to the public at a price in excess of 98 1/2 the excess shall be paid to the Queens Company.5. If a new company is formed, all of the securities above mentioned, plus the entire no par Common Stock to be issued, shall be issued by the new company in exchange for the par value stock 1961 U.S. Tax Ct. LEXIS 141">149 to be purchased, plus an amount of cash (exclusive of accrued interest) sufficient to redeem the $ 702,000 bonds now outstanding, subject to adjustment for accrued interest and dividends. The present Company and the new company shall thereafter be consolidated by consolidation, merger or otherwise, as you and ourselves shall determine. If a new company is not formed, the proceeds of the bonds, in excess of the amount (exclusive of accrued interest) to redeem the present outstanding bonds, shall be declared as a dividend on the stock now outstanding, and the dividends so received by us shall be applied, as above provided, in part payment of the purchase price of the stock, and in such case, also, the First and Second Preferred Stock and Common Stock to be issued, shall be issued in exchange for and/or as a dividend upon the par value stock now outstanding, the latter to be retired.6. Immediately upon receipt by us of the securities mentioned in Paragraph 4 and the no par Common Stock which is to be issued to represent the equity, we shall deliver to you(a) 51% of such Common Stock in exchange for $ 100,000 (preference value) of the new $ 7 Preferred Stock of your Company (we to pay 1961 U.S. Tax Ct. LEXIS 141">150 you the accrued dividends thereon, if any), retaining the remaining 49% which shall include 36 T.C. 377">381 the shares, if any, to be issued in exchange for the present outstanding par value shares not acquired, if any; and(b) 75% or $ 327,750 (preference value) of the Second Preferred Stock to be acquired by us at the same price paid by us, namely, 92 and accrued dividends, or a total price of $ 301,530, exclusive of preferred dividends, and we shall accept in payment therefor, new $ 7 Preferred Stock of your Company at 91 and accrued dividends (said price being computed on a 7.14 current return basis less a discount of 7 points), making a total of approximately $ 331,352 (preference value) of such new $ 7 Preferred Stock, subject to adjustment for accrued dividends.7. The application of the proceeds of the $ 3,000,000 new bonds, remaining after the redemption of the bonds now outstanding, to the repayment of purchase price to be paid by us, will leave $ 907,440 remaining unpaid (exclusive of accrued interest and dividends), and for such outlay on our part, after the foregoing shall be consummated, we shall own the following securities, at the respective cost to us as follows, exclusive of accrued 1961 U.S. Tax Ct. LEXIS 141">151 dividends:SecuritiesPriceCost$ 532,000 (preference value) First Preferred Stock ofthe Queens Company95$ 505,400$ 109,250 (preference value) Second Preferred Stockof the Queens Company92100,510$ 331,352 (preference value) approximately of yournew $ 7 Preferred Stock91301,530$ 100,000 (preference value) of your new $ 7 PreferredStock49% of no par common stock of the Queens Company,including unacquired minority, if anyTotal$ 907,440 You will have 51% of the total Common Stock outstanding and $ 327,750 (preference value) Second Preferred, at a cost to you of approximately $ 431,352 (preference value) of your new $ 7 Preferred Stock, subject to adjustment for accrued dividends.8. A customer and employee ownership campaign shall be instituted and all or as much as possible of the $ 532,000 (preference value) First Preferred Stock so to be acquired by us shall be sold to customers and employees of the Queens Company. As and when so sold, the same shall be taken up from us at 95 and accrued dividends. In case any or all thereof shall not be sold within one year from the date hereof, we shall have the right to put the unsold portion thereof, or all in case none is sold, to your Company at 1961 U.S. Tax Ct. LEXIS 141">152 95 and accrued dividends, and in case the same is so put, we will accept in payment thereof your new $ 7 Preferred Stock at 91 and accrued dividends (said price being computed on a 7.14 current return basis less a discount of 7 points). If none of the First Preferred Stock is sold you will deliver to us approximately $ 555,385 (preference value) of your new $ 7 Preferred Stock in exchange for said $ 532,000 (preference value) of First Preferred Stock, subject to an adjustment for accrued dividends.9. The fees and expenses of the engineers, accountants and counsel whom we have retained to investigate the property, and interest on the loans to be made by us to carry the transaction from the date of purchase to the effective date of the readjustments of debt and stock and from which interest and dividends on the new securities to be issued shall accrue, shall be paid by the Queens Company. To the extent not reimbursed by dividends declaration, the same shall be evidenced by the One Year 7% Note of the Queens Company which we shall take at par and accrued interest.10. We will not sell the 49% of the new Common Stock (subject to adjustment for the unacquired minority, if any) to be retained 1961 U.S. Tax Ct. LEXIS 141">153 by us without first 36 T.C. 377">382 taking up the sale thereof with your Company, nor thereafter unless within a period of twenty days we shall not be able to agree upon the price to be paid therefor.11. In case any additional First Mortgage Bonds of the Queens Company are issued or any other funded debt, the sale thereof shall first be taken up with us, and the sale thereof shall not be taken up with others unless after a period of twenty days we shall be unable to agree upon terms satisfactory to each. If upon any issue we fail to so agree, all liability under this paragraph shall terminate and end. An appropriate agreement shall be entered into between us and the Queens Company to reflect the understanding in this paragraph.12. Your Company shall have the management of the Queens Company and to that end contracts in the usual form used by the J. G. White Management Corporation shall be used. The fee to be paid you for management shall be 2% of the gross operating revenue; the fee for construction shall be 6%. It is understood that so long as the J. G. White Management Corporation manages the properties of your Company, you shall have the right to delegate such management to it in whole or 1961 U.S. Tax Ct. LEXIS 141">154 in part.13. In addition to the fees and expenses mentioned in Paragraph 9 hereof, all additional fees and expenses incurred by either of us in consummating and carrying out this Agreement shall be paid by the Queens Company. In case the funds of the Queens Company shall be insufficient to pay the same, as well as the expenses to be incurred by it in consummating this transaction (e.g., mortgage recording tax, etc.), additional First Preferred Stock may be offered to the customers and employees of the Queens Company and the proceeds of the first shares so sold may be applied to defray such fees and expenses.14. It is our purpose to distribute the Preferred Stock of your Company to be received by us among investors to the extent that we are able so to do. To the extent that we are not so able we will keep in touch with you and cooperate with you so that the disposition thereof will not prejudice or interfere with the market condition of the Preferred Stock of your Company.15. We understand that an issue of Preferred Stock ($ 6 Series) is now being offered by bankers to the public. We agree that you shall not be under obligation either to create the new $ 7 Preferred Stock or to 1961 U.S. Tax Ct. LEXIS 141">155 deliver to us the amount thereof called for by this Agreement until the term of the syndicate or selling group formed to distribute such Preferred Stock ($ 6 Series) shall terminate. Said delivery shall in no event be delivered later than September 1, 1925.16. All details and phases of the transaction, including the terms of the new securities to be issued, and those of the new mortgage, for which express provision is not made herein, shall be worked out between us. Wherever reference is made herein to the present Queens Company, it includes a successor if such is formed.If the foregoing is in accordance with your understanding, we will be obliged if you will so indicate at the place noted below for your acceptance.Yours very truly,Marshall Field, Globe, Ward & Company,By J. T. Foster, V.P.Accepted this 6th day of April, 1925Associated Gas and Electric Company,By H. C. Hopson,Vice President.36 T.C. 377">383 As contemplated as a possibility in the contract between Associated and Marshall Field petitioner was incorporated on May 4, 1925, under the name of Bellport Water Supply, Inc. The consent of a municipality was necessary to the formation of a new water utility company. Such a consent was obtained 1961 U.S. Tax Ct. LEXIS 141">156 from the Village of Bellport, Long Island, on April 24, 1925. Petitioner's corporate name was changed to the Long Island Water Corporation on May 6, 1925. At the time of incorporation Marshall Field paid $ 1,000 cash for the issuance of 10 shares of petitioner's common stock to certain individuals. By amendment of its charter on May 6, 1925, petitioner's capital stock was increased to 35,000 shares.At a meeting of its board of directors on May 6, 1925, called "for the purpose of authorizing the acquisition of the entire outstanding capital stock of The Queens County Water Company and the issue of securities * * * in exchange therefor, and the merger of The Queens County Water Company into Long Island Water Corporation," the petitioner accepted an offer made by Marshall Field to exchange the Queens stock for petitioner's demand promissory note in the amount of $ 3,344,000 and 19,990 shares of its no-par-value common stock. On the same day the board adopted a resolution merging Queens with petitioner, the merger being completed on May 8, 1925, with the filing of a certificate to that effect with the secretary of state of New York. On May 22, 1925, petitioner classified its 35,000 1961 U.S. Tax Ct. LEXIS 141">157 shares of capital stock into 20,000 shares of common stock, 10,000 shares of first preferred stock, and 5,000 shares of second preferred stock. The $ 3,344,000 note was subsequently paid by petitioner on or about May 26, 1925, through issuances of bonds and nonvoting preferred stock and its own note to Marshall Field as follows:a. First Mortgage 5 1/2 percent Gold Bonds, Series 1955, bearinginterest at said rate from May 1, 1925 -- principal amount$ 2,262,900b. 5,320 shares of First Preferred stock entitled to earnpreference dividends at the rate of $ 6.50 per share fromMay 1, 1925532,000c. 4,370 shares of Second Preferred stock entitled to secondpreference dividends at the rate of $ 8 per share fromMay 1, 1925437,000d. Note for $ 112,000, dated May 1, 1925, to mature May 1, 1926,and to bear interest at the rate of 7 percent per annum, payablequarterly112,100Total3,344,000 Petitioner duly paid the $ 112,100 promissory note. In addition Marshall Field paid, on behalf of petitioner, the $ 737,100 due on the mortgage bonds, releasing the physical properties of Queens from a trust indenture. In consideration thereof petitioner issued an equivalent amount of its own bonds to Marshall 1961 U.S. Tax Ct. LEXIS 141">158 Field, which in May 1925 marketed all of these bonds at 98 1/2.36 T.C. 377">384 By September 15, 1925, pursuant to the agreement made on April 6, 1925, Marshall Field had transferred to Associated all of its stock-holdings in petitioner in exchange for 15,183.37 shares of Associated's preferred stock which were marketed through a syndicate for $ 100 per share in July 1925.Petitioner assumed Queens' liabilities in addition to its acquisition of all the physical properties and other assets, the net result of which was $ 10,460.37 in current assets passing to petitioner. Queens' depreciable property had a book value of $ 2,443,884.27, and accumulated depreciation as of December 31, 1924, was $ 552,348.86. Net additions through April 30, 1925, amounted to $ 42,787.23.A complete inventory and appraisal of the assets formerly owned by Queens was made by the public utility engineer employed by Associated and completed by August 1, 1925. It valued Queens' depreciable property at $ 4,535,793.68, with accumulated depreciation of $ 660,450. The physical depreciable assets of Queens were entered on petitioner's books in accord with the engineer's appraisal. The land was appraised at $ 661,400, which amount 1961 U.S. Tax Ct. LEXIS 141">159 was also entered on petitioner's books. The engineer's appraisal reflected the reproduction cost new of the property. The depreciation figure was the difference in value between the property as it existed and the value of the same property if it were new. All of the engineer's figures related to the date of May 1, 1925.Sometime in April 1925 Queens wrote up on its books the fixed capital account in order to reflect the preliminary valuation made by Associated's engineer. This was done through the creation of a "Fixed Capital" account in the amount of $ 3,454,963.13 and concurrent credits of $ 221,291.78 to retirement reserve and $ 3,233,671.35 to capital surplus. Exclusive of this writeup, the fixed capital of Queens on April 30, 1925, as shown by its books of account, was $ 2,945,576.88. This figure was further divided as follows:Land$ 298,954.56Depreciables2,353,895.34Intangibles292,726.982,945,576.88 This total differs only slightly from the amount Marshall Field paid Queens' stockholders for their stock -- $ 2,945,250. The engineer's appraisal compares as follows:Land$ 661,400.00Depreciables4,535,793.68Overheads879,700.006,076,893.68The overhead accounts were computed by 1961 U.S. Tax Ct. LEXIS 141">160 applying arbitrary percentages to the total value of the depreciable property.36 T.C. 377">385 Roosevelt Water, Power and Light Company (hereinafter referred to as Roosevelt), and Baldwin Water Company (hereinafter referred to as Baldwin) were water companies which also operated on Long Island. The territory served by Baldwin was adjacent to the territory served by petitioner, and the territory served by Roosevelt was adjacent to the territory served by Baldwin. On June 11, 1925, petitioner's vice president obtained an option to purchase 3,848 shares of Roosevelt's 4,000 shares of common stock at $ 32.50 per share, and on the same date obtained an option to purchase 445 shares of Baldwin's 456 shares of common stock at $ 550 per share. These options cost $ 10,000 and $ 17,500, respectively. On or before July 23, 1925, and pursuant to these options petitioner had obtained 4,000 shares of Roosevelt's common stock and 451 shares of Baldwin's common stock. On August 6, 1926, petitioner purchased the remaining 5 outstanding shares of Baldwin's common stock. Including the price of the options and incidental fees and expenses the total cost to petitioner of Roosevelt's common stock was $ 141,319.90 and 1961 U.S. Tax Ct. LEXIS 141">161 the total cost of all of Baldwin's common stock was $ 271,366.23. These acquisitions were originally entered on petitioner's books as "Investments."Roosevelt was merged with the petitioner on August 25, 1925, the latter assuming Roosevelt's liabilities in the amount of $ 81,307.79. Although petitioner had taken the assets acquired from Baldwin onto its books by December 31, 1925, Baldwin was not formally merged with petitioner until February 4, 1927, with petitioner assuming Baldwin's liabilities in the amount of $ 74,249.35. Associated advanced cash in the amount of $ 409,936.13 to enable petitioner to purchase the stock of Roosevelt and Baldwin. In return Associated received 4,456 shares of petitioner's preferred stock which were accepted at $ 92 a share.In the early part of 1926 the same engineer who had appraised the properties of Queens appraised the properties of Roosevelt and Baldwin as of October 31, 1925. These appraisals reflected the reproduction cost new of such properties as of that date with depreciation from such value to reflect the fact that such properties had been used. Sometime in 1925 these properties were carried on petitioner's books at their appraised 1961 U.S. Tax Ct. LEXIS 141">162 value.Pursuant to a contract entered into on March 2, 1926, the petitioner on June 26, 1926, acquired for $ 30,000 cash the operating water distribution properties of Island Park-Long Beach, Inc., including all materials and supplies. Of the total purchase price the amount of $ 17,000 represented the cost of the depreciable properties and the amount of $ 13,000 represented the cost of materials and supplies. The Island Park properties were located in and had been used to provide water utility services for an area adjacent to the other areas served by petitioner.36 T.C. 377">386 The Island Park properties were placed on petitioner's books in 1927 on the basis of an appraisal by a public utility engineer in the amount of $ 71,390.76 with depreciation from present cost of $ 20,490.In 1929 petitioner acquired the depreciable operating water distribution properties of the Rockville Centre Manor Company at a cost of $ 3,000. Such properties were located in and had been used to provide water utility services for an area adjacent to other areas served by petitioner. Such properties were placed on the books in 1929 on the basis of an appraisal by a public utility engineer in the amount of $ 10,231.05.A 1961 U.S. Tax Ct. LEXIS 141">163 summary of the book values of the properties herein involved, as appearing on the books of the transferor corporations, the appraised values of such properties on the books of petitioner, and additions thereto is as follows:Summary of Property Acquired by PetitionerBook value on books oftransferorsSourceValue ofDepreciationdepreciablesreserveQueens$ 2,486,671.50$ 552,348.86Roosevelt93,531.077,619.92Baldwin163,098.5120,610.39Island ParkRockville Manor (1929)Additions, 1925182,778.51Additions, 1926324,002.35Total Jan. 1, 19273,250,081.94580,579.17Additions, 1927-1952 (includes RockvilleManor purchase price -- $ 3,000)1 $ 8,522,074.67Summary of Property Acquired by PetitionerAppraised value on booksof petitionerSourceValue ofDepreciationdepreciablesreserveQueens$ 4,535,793.68$ 660,450Roosevelt221,641.2914,910Baldwin353,299.8621,425Island Park71,390.7620,490Rockville Manor (1929)10,231.05Additions, 1925Additions, 1926Total Jan. 1, 19275,192,356.64717,275Additions, 1927-1952 (includes RockvilleManor purchase price -- $ 3,000)The 1961 U.S. Tax Ct. LEXIS 141">164 appraisal made by the engineer included certain overhead costs, such as organization costs, legal fees, taxes, and interest during construction. In 1927 all of these entries were reversed with the exception of a single item labeled "Injuries and damages during construction" amounting to $ 51,715. These overheads were replaced by figures computed under the so-called Brooklyn-Borough formula which amounted in final form to 45.2 percent of the 1925 appraised value of depreciable assets submitted by the engineer.Prior to petitioner's acquisition of the Queens, Roosevelt, and Baldwin properties the three companies had operated as individual companies and were not interconnected. After the acquisition of the Roosevelt and Baldwin water distribution properties in 1925 work was commenced to lay the necessary water mains to connect those water distribution properties with that acquired from Queens to form an integrated water distribution system. The work was completed and the mains connected on January 10, 1926. After the underground 36 T.C. 377">387 distribution system of these three companies was connected they functioned as a single integrated system and the wells of each of the old companies became 1961 U.S. Tax Ct. LEXIS 141">165 part of the regular water supply for the entire interconnected system.Part of the depreciable property petitioner acquired from Roosevelt in 1925 was sold to the Village of Freeport in 1929, and a reduction in plant account in the amount of $ 93,616 was made on petitioner's books. This reduction in plant account represented the then book value of the property sold, which was based upon the engineer's appraised 1925 reproduction cost of the property increased by the overheads computed under the Brooklyn-Borough formula and the net additions to the depreciable property from 1925 to the date of sale. The net additions amounted to $ 5,274.95 and the undepreciated 1925 book value on petitioner's books was $ 62,113.74. Although the basis to Roosevelt of all its depreciable property was $ 93,531.07, the books of the old Roosevelt company have not been in existence for a good many years and there is no known source available for determining the cost or other basis of the specific property sold in the hands of the transferor. As a result of this sale in 1929 the respondent reduced petitioner's depreciable base for tax purposes in the amount of $ 93,616.In 1931 petitioner sold almost all 1961 U.S. Tax Ct. LEXIS 141">166 of the depreciable property in Queens County which it had acquired from Queens to the City of New York. The 1925 book value on the books of petitioner (not including overheads) was $ 1,665,277.86, with net additions until the sale increasing this amount to $ 1,940,401.57. The respondent required a reduction in basis as a result of this sale in the amount of $ 2,572,221.28.In 1951 petitioner received $ 74,500 for a 72.3825-acre tract of land which it had acquired from Queens in 1925. The costs connected with the sale amounted to $ 5,234.50. Originally the petitioner reported a capital gain of $ 59,466.10 resulting from the use of 1893-1910 cost figures of Queens. The land was a part of a 281.428-acre tract entered on petitioner's books in 1925 with a value of $ 509,000, based upon the engineer's appraisal. The engineer obtained this figure from a "qualified real estate dealer or an appraiser familiar with the real estate values," and incorporated the figure into his report. The entire tract was not of uniform value. In a more recent appraisal of 1925 values the value of the entire tract was $ 602,000, and the parcel in issue had a value of $ 85,000, if it were used for developing 1961 U.S. Tax Ct. LEXIS 141">167 one-family homes, its highest and best use.Petitioner's outstanding capital stock was owned by Associated until July 14, 1944, during which time consolidated Federal income tax returns were filed. At that time the present owners, who are unrelated in any way to Associated or its stockholders, acquired all of petitioner's outstanding capital stock. Separate Federal income tax 36 T.C. 377">388 returns have been filed for the period July 15 to December 31, 1944, and for each calendar year thereafter. On its returns for all years since May 1, 1925, including those in issue, petitioner computed its allowable depreciation in the amount of 1.8 percent of the average balance of its depreciable assets. The respondent used the same figure and the parties have stipulated that this rate is correct.The negotiations and agreements which resulted in the property formerly owned by Queens being thereafter held by petitioner were interdependent steps of one integrated transaction, which began with the oral agreement between Associated and Marshall Field sometime prior to April 1925 and ended with the merger of Queens into petitioner on May 8, 1925. Before the steps were taken Queens' stockholders were in control 1961 U.S. Tax Ct. LEXIS 141">168 of its assets. When the steps were completed Associated owned all of petitioner's outstanding stock and was in control of the assets. There was no continuity of interest or ownership as to those in control prior to these transactions and those in control after the transactions were completed.Marshall Field derived financial advantage from this series of transactions which, from the surrounding circumstances, we find to have been conducted at arm's length. The fair market value of petitioner's securities and those of Associated, which were transferred as consideration for the assets obtained from Queens, was $ 4,583,556.03 which was computed as follows:(1) $ 3,000,000 of petitioner's First Mortgage Bonds,5 1/2 percent, due in 1955 at public selling price of 98 1/2$ 2,955,000.00(2) 5,320 shares of petitioner's First Preferred Stock, 4,370shares of petitioner's Second Preferred Stock, and 20,000shares of petitioner's Common Stock; all at the equivalentvalue of 15,183.37 shares of Associated's $ 7 Dividend SeriesPreferred Stock for which the stock was exchanged. 15,183.37shares at selling price of $ 100 per share1,518,337.00Accrued dividends on 5,316 shares8,579.40(3) Petitioner's promissory note dated May 1, 1925,which was duly paid112,100.00Total4,594,016.40(4) Less net current assets of Queens10,460.374,583,556.031961 U.S. Tax Ct. LEXIS 141">169 The adjustment for accrued dividends on Associated's stock was provided for in the letter contract of April 6, 1925, which is set forth in our findings.OPINION.The primary issue in this case concerns the proper depreciation bases to petitioner of the properties formerly owned by the Queens, Roosevelt, and Baldwin Companies. Respondent contends that these properties were acquired in connection with reorganizations 36 T.C. 377">389 as defined in either section 112(g)(1) (A) and (F) of the Internal Revenue Code of 1939 or section 203(h)(1) (A) and (D) of the Revenue Act of 1924, and therefore the bases should be the same as in the hands of the transferor corporations. The petitioner contends that there were no statutory reorganizations and that when the transactions are considered in their entireties they are in reality purchases of assets by petitioner and therefore petitioner's basis must be cost. Petitioner cites in its argument on brief Southwell Combing Co., 30 T.C. 487">30 T.C. 487; Orr Mills, 30 T.C. 150">30 T.C. 150; Estate of James F. Suter, 29 T.C. 244">29 T.C. 244; Montana-Dakota Utilities Co., 25 T.C. 408">25 T.C. 408; American Wire Fabrics Corporation, 16 T.C. 607">16 T.C. 607; and Illinois Water Service Co., 2 T.C. 1200">2 T.C. 1200.A number of those cases rely 1961 U.S. Tax Ct. LEXIS 141">170 upon the principle laid down in Commissioner v. Ashland Oil & Refining Co., 99 F.2d 588; Koppers Coal Co., 6 T.C. 1209">6 T.C. 1209; and Kimbell-Diamond Milling Co., 14 T.C. 74">14 T.C. 74, affd. 187 F.2d 718, commonly referred to as the Kimbell-Diamond rule. In discussing those cases in John Simmons Co., 25 T.C. 635">25 T.C. 635, we said at pages 641-642:Our examination of the cases cited * * * convinces us that the principle enunciated therein was intended to be and should be limited to the peculiar situations disclosed by the facts in each of those cases * * . In each of those cases it appeared that an existing corporation had as its primary purpose or indeed its sole purpose, the purchase of a particular asset or a group of assets of another corporation, but was forced by circumstances beyond its control to effect the acquisition through the channels of first acquiring stock and then liquidating the subsidiary. * * [Emphasis supplied.]In North American Service Co., 33 T.C. 677">33 T.C. 677, 33 T.C. 677">690-691, we stated the rule to be "that where a going business desires to acquire the asset of another corporation and the only means available by which it can acquire that asset is to purchase all of the outstanding stock and liquidate 1961 U.S. Tax Ct. LEXIS 141">171 the acquired corporation, the complete liquidation of the acquired corporation will be treated as one of the steps of a single transaction, namely, the purchase of an asset." (Emphasis supplied.)In 30 T.C. 150">Orr Mills, supra at 154, we stated the rule to be "that where a taxpayer, interested primarily in a corporation's assets, is compelled to first purchase stock and then liquidate the corporation in order to acquire the desired assets, the separate steps taken to accomplish the primary objective will be treated as a single transaction." (Emphasis supplied.)These cases clearly indicate that a prerequisite to the application of the so-called Kimbell-Diamond rule is the impossibility of accomplishing the direct acquisition of assets and the consequent necessity of purchasing the stock of the corporation owning the assets sought to be acquired.The record herein does not disclose any unsuccessful negotiations for the direct purchase of the assets of any corporation at any time 36 T.C. 377">390 or any other circumstance which would make the direct purchase of the assets impossible.The position of the petitioner on this point may be summarized as follows: The underlying purpose of petitioner and those acting for 1961 U.S. Tax Ct. LEXIS 141">172 it was to acquire the physical assets of Queens, Roosevelt, and Baldwin, as indicated by (1) the fact that appraisals of such assets were made prior to the purchases, (2) the conclusion drawn in petitioner's brief that the Transportation Corporation Law of New York dealing with Water-Works Corporations (under which petitioner was organized), to quote petitioner's brief, "confines its corporate powers to the ownership and operation of the necessary physical properties to carry on a water distribution business," 11961 U.S. Tax Ct. LEXIS 141">173 and (3) the fact that immediately after the acquisition by petitioner of all of the stock of each company the petitioner by merger acquired the ownership of the properties owned by each and then integrated such properties into a single system, thus supplying "the pragmatic test of the ultimate result." Petitioner then argues that the Kimbell-Diamond rule applies.This position is equivalent to advancing the proposition that where a corporation desires to acquire the totality of the business assets 2 of another corporation and chooses on its own volition to effect such acquisition by purchasing the stock of the other corporation and then merging such other corporation with itself, the provisions of the Code dealing with acquisitions of properties incident to tax-free reorganizations should be ignored and the basis of the business assets thus acquired in the hands of the acquiring corporation shall be its cost of the stock purchased.As we have already indicated, the prior opinions of this Court do not support this proposition and the statements made by us of the Kimbell-Diamond rule directly contradict it. We are not disposed to alter our position on this matter or to overrule our prior statements with regard thereto.Respondent contends that the integration-of-assets factor is also a prerequisite to the application of the Kimbell-Diamond rule. 1961 U.S. Tax Ct. LEXIS 141">174 This contention has been rejected in 33 T.C. 677">North American Service Co., supra. See also United States v. Mattison, 273 F.2d 13. 3 This remains an important factor for consideration in cases of this type, but it is not a prerequisite to the application of the rule.36 T.C. 377">391 Even if prior unsuccessful negotiations for the direct acquisition of assets or other circumstances demonstrating the impossibility of such direct acquisition do not constitute a prerequisite to the application of the Kimbell-Diamond rule but merely constitute an important factor to be considered in determining whether the sole purpose for the purchase of the stock of a corporation was to acquire its assets, similar to other factors such as integration of assets or "stripping down" of assets, we would nevertheless find it impossible to conclude that petitioner has proved that the acquisition by it of the stock of the Queens Company through the transactions described in our findings was 1961 U.S. Tax Ct. LEXIS 141">175 for the sole purpose of acquiring assets. Those matters pointed to by petitioner as proving such purpose have been set forth above. We do not consider it important that a preliminary appraisal of the assets of Queens was made before the Queens stock was bought. We do not know what other investigations were made. The fact that such an appraisal of assets was made is in no way inconsistent with a purpose to buy the stock of Queens since an approximation of the value of the assets of Queens would be a pertinent factor in an estimate of a fair price to be offered for its stock regardless of the purpose for its acquisition. The detailed inventory and appraisal made after the acquisition of the stock would be irrelevant to the question of the purpose for such acquisition. Nor are we impressed by petitioner's assertion that under the New York laws governing its organization (which we have outlined above) it was required to own physical assets directly rather than through a wholly owned operating subsidiary. Our construction of these laws does not accord with petitioner's assertion and petitioner has not cited any decided cases which would support it. We do consider it to be an important 1961 U.S. Tax Ct. LEXIS 141">176 factor for our consideration that immediately after the acquisition by petitioner of all of the Queens stock it acquired by merger the direct ownership of all of Queens' properties. However, as against this factor in petitioner's favor, there are other important factors militating against it: The absence of a showing that it was impossible for petitioner to acquire the assets of Queens by a direct purchase (if this be a factor rather than a prerequisite), the fact that petitioner, at the time it purchased the Queens stock, had no business and owned no assets into which the assets of Queens could be integrated, and the fact that all of the assets owned by Queens and used by it in a going business were acquired without any "stripping down." Considering this balance (or, rather, imbalance) of pertinent factors we would be unable to conclude that petitioner has borne its burden of proving that the sole or primary purpose of acquiring the Queens stock was to acquire its assets.We understand petitioner to further argue that, regardless of the applicability of the so-called Kimbell-Diamond rule, the properties 36 T.C. 377">392 here involved were not acquired pursuant to a statutory reorganization since 1961 U.S. Tax Ct. LEXIS 141">177 there was not the requisite continuity of interest or control. Petitioner contends that the transaction consisted of a series of interdependent steps and must be considered as a whole. Thus considered, according to its argument, the transaction began with the oral agreement made between Marshall Field and Associated sometime prior to April 1925, and ended with the formal merger of Baldwin with petitioner in the early part of 1927, resulting in the properties here involved being owned by a new corporation owned by stockholders having no relationship to the stockholders of the corporations owning the properties at the beginning of the transaction.Two cases are particularly relied on by petitioner in this connection: 30 T.C. 487">Southwell Combing Co., supra, 4 and 16 T.C. 607">American Wire Fabrics Corporation, supra. In the latter case we said at page 613:The test to be applied in order to determine whether a particular transaction is complete in itself or whether it is merely a step in a series of integrated transactions or, put another way, whether a series of steps should be treated as a single, indivisible transaction or should retain their separate entity is whether the various steps were "so interdependent 1961 U.S. Tax Ct. LEXIS 141">178 that the legal relations created by one transaction would have been fruitless without the completion of the series." American Bantam Car Co., 11 T.C. 397">11 T.C. 397, affd., 177 Fed. (2d) 513. See also, ACF-Brill Motors Co., 14 T.C. 263">14 T.C. 263, Independent Oil Co., 6 T.C. 194">6 T.C. 194; Spang, Chalfant & Co., 31 B.T.A. 721">31 B.T.A. 721; Paul, Selected Studies in Federal Taxation, 2d Series, pp. 200-254. * Looking to the facts of the instant case and again bearing in mind that the burden of proof is on petitioner, it is clear to us that the acquisition by petitioner of the stock of Roosevelt and Baldwin and the subsequent mergers of those two companies with petitioner were not so integrated with or interdependent upon the prior transactions that we can say that the legal relations created by the prior transactions would have been fruitless if they had not been accomplished. The acquisition by Associated (in cooperation with and assisted by Marshall Field) of an operating water company on Long Island in all probability led to the later acquisition of the Roosevelt and Baldwin Companies, but nothing 1961 U.S. Tax Ct. LEXIS 141">179 in the record convinces us that the plan for the acquisition of the first operating company (Queens) or its merger into petitioner contemplated or would have been fruitless without the subsequent acquisitions of Roosevelt and Baldwin.Leaving out of consideration the acquisition of Roosevelt and Baldwin, petitioner's argument is more convincing when confined to the acquisition by merger of the properties formerly owned by Queens. The crux of the question thus presented is whether the acquisition by Associated and Marshall Field of all of the stock of Queens and the organization of petitioner with its acquisition of all of Queens' 36 T.C. 377">393 properties by merger may be considered as two separate transactions or must be considered as interdependent steps in one transaction.The facts herein clearly show that the formation of petitioner and its acquisition of the property of Queens constituted "a contemplated possibility under the plan that actually eventuated" and must therefore be considered as an interdependent step therein. Avco Manufacturing Corporation, 25 T.C. 975">25 T.C. 975, 25 T.C. 975">983-986.We therefore consider that all of the steps taken pursuant to the plan beginning with the oral agreement between Associated1961 U.S. Tax Ct. LEXIS 141">180 and Marshall Field sometime prior to April 1925 and ending with the merger of Queens into petitioner on May 8, 1925, must be considered as interdependent steps of one integrated transaction which, when completed, resulted in the property formerly owned by Queens being thereafter held by petitioner. Since the former stockholders of Queens had no relationship to the stockholders of petitioner and retained no vestige of ownership or control with regard to the property acquired by petitioner there could not be the continuity of control or ownership required in a statutory reorganization. 16 T.C. 607">American Wire Fabrics Corporation, supra.We therefore conclude that the petitioner's basis as to the property formerly owned by Queens was its cost, and that its basis as to the properties formerly owned by Roosevelt and Baldwin was the bases of those corporations.The cost of assets received in exchange for securities is the fair market value of the securities exchanged. Hazeltine Corporation, 32 B.T.A. 110">32 B.T.A. 110. The petitioner's basis for the land sold in 1951 must be determined by allocating the cost to the various assets acquired. C. D. Johnson Lumber Corporation, 12 T.C. 348">12 T.C. 348, 12 T.C. 348">363; Wren Bowyer, 33 T.C. 660">33 T.C. 660.The 1961 U.S. Tax Ct. LEXIS 141">181 petitioner paid $ 4,583,556.03 for land appraised at $ 661,400 and depreciable property appraised at $ 3,875,343.68. (This figure was obtained by subtracting from the appraised reproduction cost new the reserve for depreciation estimated by the public utility engineer.) By applying appropriate comparisons expressed as percentage amounts of the appraised net depreciated value, the cost of the depreciables to petitioner is found to be $ 3,915,331.31 and the cost of the land is found to be $ 668,224.72.The 281.428-acre tract was appraised in 1925 at $ 509,000, and the application of a percentage comparison (509,000/661,400) discloses that the portion of the total cost figure applicable to this tract was $ 514,252.11. The land was found to be of varying worth, and the parcel sold was not the most valuable piece of the tract. Applying percentages comparing the appraised value of the parcel sold to the entire appraised value of the tract, based upon recent appraisals of 1925 values, the basis to petitioner of the parcel sold in 1951 is found 36 T.C. 377">394 to be $ 72,610.34. Adding to this figure the costs of the sale, amounting to $ 5,234.50, petitioner sustained an ordinary loss of $ 3,344.84 in 1961 U.S. Tax Ct. LEXIS 141">182 1951. See sec. 117(j), I.R.C. 1939.The parties were unable to agree upon the composition of peitioner's gross depreciable base. The rate of depreciation allowed by the respondent is not an issue before this Court. The parties have stipulated that the rate used over the years was 1.8 percent of the gross depreciable base. That base is the cost of the property increased by any additions and decreased by any reductions necessitated by the sale or other disposition of property included therein. We see no merit in the petitioner's contention that Internal Revenue Service Bulletin F authorizes the addition to the gross depreciable base of a beginning depreciation reserve in the event the property purchased is used property. While that is a factor that may be considered in choosing the applicable rate, it is not a factor to be considered when the rate is agreed upon and only the gross depreciable base itself is in issue.The parties were unable to agree upon the correctness of the reductions in basis required of petitioner by the respondent in 1929 and 1931 as a result of the sale of land and other property acquired from Queens and Roosevelt.As an alternative issue, in the event we decided 1961 U.S. Tax Ct. LEXIS 141">183 (as we have) that the petitioner's basis for the property formerly owned by Roosevelt and Baldwin was the bases of those corporations, the petitioner affirmatively alleged that the respondent had excessively reduced its tax base for purposes of depreciation as a result of the sale of depreciable property acquired from Roosevelt to the Village of Freeport in 1929. The respondent asserts that his reduction was proper in view of the lack of evidence of the original cost or other basis of the property in the hands of the transferor.The respondent's reduction in petitioner's tax basis for purposes of depreciation, occasioned by this sale in 1929, was $ 93,616, which amount exceeds the basis to which we have determined the petitioner is entitled for all of the depreciable property it acquired from Roosevelt. The parties stipulated that Roosevelt's book value of this property was $ 93,531.07. They further stipulated that the appraised value of this same property on petitioner's books was $ 221,641.29. The undepreciated 1925 book value of the property sold in 1929 was $ 62,113.74. Adding the net additions to the date of sale ($ 5,274.95) to the product obtained by utilizing a ratio comparing 1961 U.S. Tax Ct. LEXIS 141">184 the appraised value of the property sold to the appraised value on petitioner's books of all the depreciable property acquired from Roosevelt as one factor, and the book value of all of the depreciables in the hands of the transferor as another factor, we have determined that the transferor's basis of the property sold by petitioner in 1929 was $ 31,486.47. The reduction 36 T.C. 377">395 in petitioner's tax basis for purposes of depreciation resulting from the sale in 1929 should be in that amount, and any reduction beyond that amount was, in view of our findings, excessive.Having determined that petitioner's basis as to the property formerly owned by Queens is its cost and having determined the amount of such cost, we assume that the parties will be able to agree in computation under Rule 50 on the proper amount by which petitioner's tax basis for purposes of depreciation should be reduced on account of the sale in 1931 to the City of New York of a part of the property acquired by petitioner from Queens. 5 This may be done by making a proper allocation of a part of petitioner's total cost of Queens' depreciable property to the depreciable property sold such as, for example, by allocating that 1961 U.S. Tax Ct. LEXIS 141">185 proportion of such total cost which the appraised value of the property sold bears to the appraised value of all of the depreciable property acquired from Queens.Decision will be entered under Rule 50. Footnotes1. This figure is derived as follows: Net additions from 1927 through 1948, $ 3,766,914.11; 1949, $ 553,993.03; 1950, $ 1,618,272.66; 1951, $ 1,347,049.03; 1952, $ 1,235,845.84.↩1. Petitioner cites section 80 of such law which requires that every such corporation must supply water to the communities, and section 82 which provides that "such corporation shall have the following additional powers: 1. To lay and maintain its pipes and hydrants * . 2. To lay its water pipes * . 3. To cause * * examinations and surveys for its proposed waterworks to be made * * *"2. In this case there was obviously no "stripping down" of the assets to be acquired. See Estate of James F. Suter, 29 T.C. 244">29 T.C. 244↩.3. It should be noted that in that case the facts stated do not affirmatively show prior unsuccessful negotiations for the direct acquisition of assets. However, this point was not considered in the opinion and does not appear to have been raised.↩4. In this case there was also a consideration of the Kimbell-Diamond↩ rule by way of dictum in discussing an alternative contention.5. The amended petition indicates that this may be a question even though we determine that petitioner's basis as to this property is its cost, while it is referred to on brief as an issue which would only be present if we decided that its basis was that of the transferor, Queens.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619006/	Estate of Lena G. Lazar, Deceased, Joseph C. Chapman, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Lazar v. CommissionerDocket No. 3564-69United States Tax Court58 T.C. 543; 1972 U.S. Tax Ct. LEXIS 97; June 27, 1972, Filed 1972 U.S. Tax Ct. LEXIS 97">97 Decision will be entered for respondent. Decedent, shortly prior to her husband's death, entered an agreement with him at his insistence, promising, in return for his maintaining her as the sole heir in his will, to leave three-fourths of her estate to certain of his nieces and nephews. Most of the property held by decedent and her husband at the time of his death was held as joint tenants by the entirety. After making several wills complying with the agreement, decedent, about 15 years after her husband's death, made a will leaving most of her estate to her nephew. Some of her husband's nieces brought suit to set aside decedent's will on the basis that it was procured by undue influence and to remove the executor. Decedent's executor and residuary legatee, with the approval of the Probate Court, agreed to a distribution of $ 150,000 to the nieces and nephews of decedent's husband to dispose of all matters in dispute between them concerning decedent's will or estate. Held, petitioner is not entitled to deduct the $ 150,000 as a claim against the estate within the meaning of sec. 2053(a)(3), I.R.C. 1954, since it was paid in settlement of claims to share in the estate1972 U.S. Tax Ct. LEXIS 97">98 and not claims against the estate. Held, further, even if the claim of the nieces and nephews was against the estate within the meaning of sec. 2053(a)(3), the agreement upon which it was based was not supported by consideration in money or money's worth as required by sec. 2053(c)(1)(A). Held, further, petitioner has failed to show that in fact any part of the $ 150,000 settlement distribution was paid in settlement of the rights of the claimants as third party beneficiaries of the agreement between decedent and her husband. D. Alexander Wieland, for the petitioner.Max J. Hamburger, for the respondent. Scott, Judge. SCOTT 58 T.C. 543">544 Respondent determined a deficiency in the Federal estate1972 U.S. Tax Ct. LEXIS 97">100 tax of the Estate of Lena G. Lazar in the amount of $ 46,298.19.The issue for decision is whether the amount of $ 150,000 distributed to nieces and nephews of decedent's deceased husband in accordance with a settlement of disputes between the executor and residuary legatee of decedent's estate and her deceased husband's nieces and nephews was deductible as a claim against the estate under section 2053, I.R.C. 1954. 1FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Lena G. Lazar died testate on January 22, 1965, a resident of the Commonwealth of Pennsylvania. Joseph C. Chapman, whose office is located in Philadelphia, Pa., was named executor under decedent's will and is still acting in that capacity.A Federal Estate Tax Return, Form 706, was filed for the Estate of Lena G. Lazar with the district director of internal revenue, Philadelphia, Pa.Decedent and her husband, Milton C. Lazar (hereinafter called Milton), were 1972 U.S. Tax Ct. LEXIS 97">101 married in 1903 and remained married and without issue until his death on September 4, 1947, at age 71. A Federal Estate Tax Return for the Estate of Milton C. Lazar was filed with the collector of internal revenue, Philadelphia, Pa.Sometime in 1946, Milton developed carcinoma, which by May 1947 had reached such an advanced stage that Milton knew that his death was imminent. A short time prior to May 28, 1947, Milton told decedent that since most of the property which he and decedent owned jointly had originated from his side of the family, he wanted three-fourths of the property to go to his nieces and nephews after decedent's death. At that time, as at the time of Milton's death, Milton and decedent owned as tenants by the entirety, stocks, bonds, and bank accounts of a total value of approximately $ 246,000, of which assets of a value of approximately $ 212,000 had derived from Milton and assets of a value of approximately $ 34,000 had derived from decedent. Milton owned in his name only stock of a value of approximately $ 1,800 and owned life insurance policies of approximately $ 25,000 face value, in which decedent was named beneficiary.58 T.C. 543">545 In May 1947, Milton stated1972 U.S. Tax Ct. LEXIS 97">102 to decedent that unless she would enter into an agreement promising to make and maintain a will disposing of three-fourths of her entire estate to Milton's nieces and nephews he would revoke his last will dated December 23, 1943, and limit her interest in their property by deed of trust or by will to a life estate. Decedent and Milton consulted their family attorney who prepared an agreement for them which was executed by decedent and Milton on May 28, 1947. While decedent was displeased with the terms of the agreement, she signed the agreement. She stated to the attorney that she had signed it in order to avoid causing Milton any additional mental distress during the short time he had remaining to live.The agreement provided inter alia, that Milton would maintain his last will and testament, dated December 23, 1943, under which Milton's residuary estate was bequeathed absolutely to decedent and that decedent would make and maintain a will under which three-fourths of her entire estate would pass to five of Milton's nieces and nephews. There was the added restriction that decedent could not make gifts of the inheritance received from Milton except for normal gifts to charities1972 U.S. Tax Ct. LEXIS 97">103 or emergency gifts to members of either of their families.Milton died on September 4, 1947. His last will and testament, dated December 23, 1943, was duly probated. Decedent was named as executrix and residuary legatee of Milton's estate, which she received after payment of debts, funeral and administration expenses, and estate and succession taxes. 2After Milton's death decedent made several wills between 1947 and 1963, each of which complied with the terms of the 1947 agreement. Decedent stated to her attorney that she resented having to make bequests as required under the 1947 agreement, but since the attorney assured her that the agreement was binding on her, decedent reluctantly acquiesced.In February 1963 decedent consulted another attorney upon the recommendation of her investment adviser, Joseph C. Chapman. This attorney advised1972 U.S. Tax Ct. LEXIS 97">104 decedent that the agreement of May 28, 1947, was invalid and unenforceable and that in his opinion she was not obligated to comply with its terms.On February 14, 1963, decedent executed a trust agreement as settlor with Provident Tradesmen's Bank & Trust Co. and Joseph C. Chapman as trustees, with the trust corpus consisting of certain specified bonds. Under the trust agreement the trust income was 58 T.C. 543">546 payable to decedent for life, and upon her death the principal, together with any accrued and undistributed income, became payable to decedent's nephew, Clement Stuart, and decedent's niece, Hortense Strause.Decedent's last will and testament was executed on January 18, 1965, and she died 4 days later on January 22, 1965. Her will was admitted to probate by the register of wills of Philadelphia County as will No. 330 of 1965 and letters testamentary were issued thereon to Joseph C. Chapman by the register of wills of Philadelphia County.Decedent's will dated January 18, 1965, made no provision for any of the beneficiaries designated in the 1947 agreement, except to the extent that it made bequests of $ 25,000 each to two of Milton's nieces, Mildred Lazar Barab and Eleanor1972 U.S. Tax Ct. LEXIS 97">105 Lazar Reuben. The residuary estate was bequeathed to decedent's nephew, Clement Stuart. The will provided that if any beneficiary contest the will or the trust agreement of February 14, 1963, or seek to enforce the agreement of May 28, 1947, the bequest of such beneficiary would be considered to be annulled and revoked.Thereafter, as more fully described below, Susan R. Simon, a niece of Milton's 3 on her own behalf and on behalf of others, commenced two actions in the Orphans' Court of Philadelphia County, a court of competent jurisdiction having jurisdiction over the estate of decedent, Lena G. Lazar, against the estate of decedent, Lena G. Lazar, as follows:(a) On or about April 1, 1965, Susan R. Simon filed an appeal from the decree of the Register of Wills admitting Lena G. Lazar's last will dated January 18, 1965, to probate.(b) On or about April 21, 1965, Susan R. Simon, on her own behalf and on behalf of others, brought action for removal of Joseph C. Chapman, executor of the will of Lena G. Lazar, deceased.The suits alleged that the will dated January 18, 1965, was procured by undue influence.1972 U.S. Tax Ct. LEXIS 97">106 Answers were filed denying undue influence by Executor Joseph C. Chapman by his attorneys and by Clement Stuart, residuary legatee under decedent's will, by his attorney. Preliminary objections were filed by Clement Stuart, by Joseph C. Chapman, executor, and by Provident National Bank (formerly Provident Tradesmen's Bank & Trust Co.), by virtue of its being a trustee under the trust agreement dated February 14, 1963, contending that the rights, if any, of petitioners therein, Susan R. Simon, et al., under the agreement of May 28, 58 T.C. 543">547 1947, were creditors' rights, and as such petitioners therein would have no standing to contest the will.The Orphans' Court of Philadelphia County, in granting petitioners therein leave to file an amended petition to more fully allege the cause of action, ruled:If petitioner's claim was based solely on the status as creditor she would have no right to challenge the validity of the will.But she apparently has other rights, the nature of which we must explore. * and that under Pennsylvania law "beneficiaries under a prior will which would become effective if the contested writing were held to be invalid" would have standing.Thereafter, 1972 U.S. Tax Ct. LEXIS 97">107 Susan R. Simon, et al., filed an amended petition on November 9, 1965, as authorized by the Orphans' Court, alleging, inter alia, that each will executed by decedent beginning on February 14, 1963, up to and including the last will on January 18, 1965, was made by decedent while under the undue influence of Carrie Silverman, Clement Stuart, and others, inducing her to ignore the provisions of the agreement of May 28, 1947.Joseph C. Chapman and Provident National Bank, executors, filed their answer to the amended petition in which they averred that the agreement of May 28, 1947, was invalid and unenforceable and denied that decedent was under the undue influence of Clement Stuart, Carrie Silverman, or any other person at the time of the execution of her wills dated February 14, 1963, April 10, 1963, May 21, 1963 (and codicil thereto dated October 28, 1964), and January 18, 1965.Clement Stuart, nephew and legatee of the residuary estate of decedent, filed his answer to the amended petition in which he averred that the agreement of May 28, 1947, was invalid and unenforceable for failure of consideration and denied that decedent was under the undue influence of Clement Stuart, Carrie1972 U.S. Tax Ct. LEXIS 97">108 Silverman, or any other person at the time of the execution of her wills dated February 14, 1963, April 10, 1963, May 21, 1963 (and codicil thereto dated October 28, 1964), and January 18, 1965.Thereafter, on May 12, 1966, the various parties involved in the aforesaid issue raised by Susan R. Simon entered into a stipulation which in part provided:6. The appeal from the Register in probating the will was withdrawn on petition of Susan R. Simon per decree of Lefever, J., dated March 8, 1966. 47. The various parties in interest have reached an agreement compromising the disputes which have arisen among them relating to the various rights under 58 T.C. 543">548 the agreement between Mr. and Mrs. Lazar dated May 28, 1947, the deed of trust1972 U.S. Tax Ct. LEXIS 97">109 of Lena G. Lazar dated February 14, 1963 and the various wills of Lena G. Lazar.8. It is deemed in the best interest of all parties in interest to accept this agreement in settlement of all such disputes because of the difficult legal questions involved, the difficulties of proof and the expense, publicity and delay incident to further proceedings.Now Therefore, in consideration of the above and in full settlement of all claims and disputes relating to (1) the agreement between Mr. and Mrs. Lazar dated May 28, 1947, (ii) the agreement of trust of Lena G. Lazar dated February 14, 1963, (iii) the various wills of Lena G. Lazar and (iv) the estate of Lena G. Lazar, the parties executing this instrument, intending to be legally bound hereby, stipulate and agree as follows:A. The Court is requested to dismiss with prejudice the petition of Susan R. Simon for a citation to show cause why Joseph C. Chapman should not be removed as executor. * * C. At the audit of the account of the executor of the will of Lena G. Lazar the statement of proposed distribution shall request that distribution of the testamentary estate be made as follows: * * To BERNARD L. FRANKEL, ESQ., as counsel1972 U.S. Tax Ct. LEXIS 97">110 for Susan R. Simon, Fred M. Simon, 3rd, Carolyn B. Salsbury, Mildred L. Barab and Eleanor Reuben (all of the surviving beneficiaries of the agreement between Mr. and Mrs. Lazar dated May 28, 1947), the sum of $ 150,000.00 (that part of the award allocable to Fred M. Simon, 3rd, a minor, to be held by Mr. Frankel for disposition in such manner as the Court shall direct).To CLEMENT STUART, the residue of the estate.The schedule of distribution submitted by the estate was approved by the Orphans' Court of Philadelphia County on June 1, 1966.Subsequent to the payment in the amount of $ 150,000 to Bernard L. Frankel, attorney for Susan R. Simon, et al., petitioner filed an inheritance tax return with the Commonwealth of Pennsylvania in which a deduction of $ 150,000, representing the above payment, was claimed as a debt of the estate.The aforesaid deduction was disallowed by the Commonwealth of Pennsylvania, and petitioner filed an appeal to the Orphans' Court of Philadelphia County in which the following question was presented:Is the sum of $ 150,000.00 paid in settlement to claimants, relatives of the decedent's husband, as third party beneficiaries under an agreement between the1972 U.S. Tax Ct. LEXIS 97">111 decedent and her husband, providing that the decedent would bequeath three-quarters of her estate to her husband's relatives, which the decedent failed to do, deductible from her gross estate for Inheritance Tax purposes as a debt?Thereafter, under date of December 12, 1968, the hearing judge of the Orphans' Court of Philadelphia County, Judge Robert V. Bolger, 58 T.C. 543">549 entered a decree dismissing the appeal of the petitioner-executor and affirming the determination of the Commonwealth of Pennsylvania that the aforesaid claim for $ 150,000 was not deductible. Without ruling on the validity or enforceability of the 1947 agreement, the court ruled that under the Pennsylvania Inheritance and Estate Tax Act of 1961, the deduction claimed was improper. The opinion and decree of Judge Bolger stated in part as follows:Any deductions for indebtedness when founded upon a promise or agreement is limited to the extent that, inter alia, it is supported "by adequate and full consideration in money or money's worth." The 1947 agreement does not by its terms set forth any consideration passing between the parties except their mutual promises. However, assuming that by the agreement Lena gave1972 U.S. Tax Ct. LEXIS 97">112 up a marital right, that is, her right to elect to take against her husband's will, it is apparent from section 662 of the act that if such a relinquishment is the consideration for the agreement, it is not consideration in "money or money's worth". Section 662 is in effect a legislative declaration that relinquishment of marital rights can never be consideration "in money or money's worth."On December 17, 1968, petitioner filed exceptions to the opinion and decree of Judge Bolger. On March 5, 1969, the Orphans' Court of Philadelphia County, sitting en banc, entered its decree dismissing petitioner's exceptions and sustaining the opinion and decree of Judge Bolger.Petitioner, thereupon, appealed the decision of the Orphans' Court of Philadelphia County to the Supreme Court of the Commonwealth of Pennsylvania, the highest appellate court of the Commonwealth of Pennsylvania. The Supreme Court of the Commonwealth of Pennsylvania handed down its decision on January 30, 1970, in In re Estate of Lena G. Lazar v. Commonwealth of Pennsylvania, officially reported at 437 Pa. 171">437 Pa. 171, 260 A.2d 734, in which it affirmed the decree of the1972 U.S. Tax Ct. LEXIS 97">113 court below that the aforesaid $ 150,000 was not deductible as a debt of the estate.Decedent's gross estate for estate tax purposes was computed as follows:Gross estateAlternate valueValue at dateof deathStocks$ 560,014.56$ 564,796.91Mortgages, notes, and cash16,855.3216,855.32Other miscellaneous property4,193.104,193.10Transfers during decedent's life197,929.75201,215.61Total gross estate778,992.73787,060.94Deductions from decedent's gross estate as claimed on the estate tax return were composed of $ 41,647.31 in debts and funeral and administration expenses and the $ 150,000 stated to be a debt of the estate paid in settlement of "claims of donee-beneficiaries under an agreement 58 T.C. 543">550 between decedent and her deceased husband * * dated May 28, 1947."Respondent in his notice of deficiency disallowed the claimed deduction of $ 150,000.OPINIONPetitioner contends that the $ 150,000 settlement payment made to Susan R. Simon, et al., was in discharge of decedent's obligations under the agreement of May 28, 1947, and, therefore, deductible from decedent's gross estate under section 2053. 5 Petitioner asserts that the 19471972 U.S. Tax Ct. LEXIS 97">114 agreement was valid and enforceable and that Susan R. Simon, et al., as third-party beneficiaries under that agreement had an enforceable creditor's claim against decedent's estate. Petitioner's assertion that the 1947 agreement was valid and enforceable is predicated on the contention that the 1947 agreement was contracted bona fide for adequate and full consideration.Respondent takes the position that the payment of $ 150,000 by petitioner was in settlement of the suit brought by Susan R. Simon, et al., to set aside decedent's wills which were 1972 U.S. Tax Ct. LEXIS 97">115 nonconforming with the 1947 agreement. Under respondent's view the settlement was made to compromise a claim to share "in" decedent's estate as distinguished from a claim "against" the estate, and would therefore not constitute a deductible claim against the estate within the meaning of section 2053.Respondent additionally contends that petitioner, having taken the position in prior proceedings before the Orphans' Court of Philadelphia County and the Supreme Court of the Commonwealth of Pennsylvania that the agreement of May 28, 1947, was invalid, illegal, and lacking in consideration, and having received unfavorable rulings in those courts, should not obtain a different result herein on the basis of a diametrically opposed legal position on the same facts.Petitioner has already litigated the issue of whether the $ 150,000 settlement payment was deductible as a claim against the estate under the Pennsylvania Inheritance Tax Act. In re Estate of Lazar, 260 A.2d 734 (1970). The Orphans' Court of Philadelphia County, the court of original jurisdiction in the State inheritance tax proceeding, disallowed 58 T.C. 543">551 the deduction. The opinion1972 U.S. Tax Ct. LEXIS 97">116 and decree of that court is set forth in part in our Findings of Fact.Petitioner appealed the decision of the Orphans' Court of Philadelphia County to the Supreme Court of Pennsylvania. The Supreme Court of Pennsylvania, in affirming the decision of the lower court, noted the striking similarity between the State inheritance tax provisions and the Federal estate tax law as follows (260 A. 2d at 736):The purpose of this section and the similar provisions of the federal estate tax law, 26 U.S.C.A. section 2053(c), is to prevent the depletion of a decedent's taxable estate by the creation of indebtedness intended as a substitute for a taxable bequest. "The purpose of the phrase under discussion was, in our opinion, to prevent a man from diminishing his taxable estate by creating obligations not meant correspondingly to increase it but intended as gifts or a means of distributing it after his death." Commissioner of Internal Revenue v. Porter, 92 F.2d 426">92 F.2d 426, 92 F.2d 426">428 (2d Cir. 1937). "Absent such an offset or augmentation of the estate, a testator could disguise transfers as payments1972 U.S. Tax Ct. LEXIS 97">117 in settlement of debts and claims and thus obtain deductions for transmitting gifts." United States v. Stapf, 375 U.S. 118">375 U.S. 118, 375 U.S. 118">131, 84 S. Ct. 248, 257, 11 L. Ed. 2d 195 (1963).Petitioner, before the Supreme Court of Pennsylvania, took the position that the agreement of May 28, 1947, was invalid and unenforceable. In reaching its conclusion the Supreme Court of Pennsylvania made the following observation (260 A. 2d at 736):In dealing with the claimants, it was appellant's position that the agreement was invalid and unenforceable because of a failure of the intended consideration in that Lena was going to receive $ 260,000 of the $ 262,000 by operation of law regardless of what Milton provided in his will. It is not necessary for us to determine whether appellant was correct in taking that position. He has chosen to assert the inapplicability of Section 632 [footnote omitted] and is bound by that choice. * * Before a taxpayer is entitled to a deduction, he must indicate what section of the statute provides for that deduction. Appellant nowhere states what section would permit the 1972 U.S. Tax Ct. LEXIS 97">118 deduction of a payment made in compromise of a claim that the executor contends is spurious. Appellant assumes that a deduction follows naturally and automatically from a finding that Section 632 does not apply. * * The only section upon which appellant could rely is Section 631 which provides for deducting all liabilities of the decedent. He, however, can not assert simultaneously that the contract was invalid, and unenforceable and hence not subject to Section 632, and that a payment in compromise of that claim (although invalid and unenforceable) is deductible as a liability of the decedent.Appellant must be denied the deduction because he has not shown what section of the statute grants it to him. The decree of the court below is affirmed. Costs on the appellant.The decision of the Supreme Court of Pennsylvania was based upon the applicable provisions of the Pennsylvania Inheritance Tax Act. Notwithstanding the similarity of the provisions of that act to the Federal estate tax law, that decision is an interpretation of State law. Even if that decision is viewed as an interpretation of the Federal 58 T.C. 543">552 estate tax law, it is well settled that "no effect is given a1972 U.S. Tax Ct. LEXIS 97">119 State court decision which undertakes to interpret such a provision." Estate of Harry Britenstool, 46 T.C. 711">46 T.C. 711, 46 T.C. 711">715 (1966). Where the issue in Federal tax litigation requires a determination of the rights of, or the nature of interests, created under State law, a decision of a lower State court adjudicating those rights or interests is not conclusive. The State law as interpreted by the highest court of the State is controlling, and if the highest court of the State has not spoken on the subject, the Federal court must apply what it finds to be the State law, giving consideration to the decision of the lower State courts. Commissioner v. Bosch, 387 U.S. 456">387 U.S. 456 (1967).Section 2053(a)(3) provides for the deduction of claims against the estate which are allowable under the laws of the jurisdiction under which the estate is being administered. The allowability of the claim against decedent's estate is a question of State law. However, in no case in litigation before the courts of the Commonwealth of Pennsylvania was any determination made as to the validity or enforceability of the agreement of May 28, 1947. In fact, 1972 U.S. Tax Ct. LEXIS 97">120 both the Orphans' Court of Philadelphia County and the Supreme Court of Pennsylvania specifically announced the lack of any necessity to decide that issue in the State inheritance tax case. We, likewise, find it unnecessary to resolve the rather complex issue as to the rights of the various parties under that agreement.We view the claim of Susan R. Simon, et al., for which the decedent's estate paid $ 150,000 in settlement, as a claim to share in the estate as distinguished from a claim against the estate. Such a claim is to a distributive interest in the estate, not a claim against the estate within the meaning of section 2053(a)(3), and as such would not be deductible from the gross estate. Latty v. Commissioner, 62 F.2d 952 (C.A. 6, 1933), dismissing petition to review 23 B.T.A. 1250">23 B.T.A. 1250 (1931). Our conclusion is supported by the fact that Susan R. Simon sought to establish her rights as beneficiary in the Orphans' Court of Philadelphia County rather than assert her rights in a claim as a third-party beneficiary 6 of the agreement of May 28, 1947. Indeed, no action or suit was pursued by Susan R. Simon, 1972 U.S. Tax Ct. LEXIS 97">121 et al., as a claimant under color of a contractual right nor was any such right legally established. See Estate of Louis D. Markwell, 40 B.T.A. 65">40 B.T.A. 65, 40 B.T.A. 65">70 (1939), affd. 112 F.2d 253">112 F.2d 253 (C.A. 7, 1940).The claims in litigation of Susan R. Simon, et al., were cast in the form of claims of a beneficiary of the estate as distinguished from 58 T.C. 543">553 claims adverse to the estate. Cf. 40 B.T.A. 65">Estate of Louis D. Markwell, supra. Respondent urges, and we agree, that the tax treatment to be accorded the proceeds of a law suit is to be determined by the nature of the litigation with respect to which the payment in settlement is made. Nicholas W. Mathey, 10 T.C. 1099">10 T.C. 1099, 10 T.C. 1099">1104 (1948),1972 U.S. Tax Ct. LEXIS 97">122 and cases there cited, affd. 177 F.2d 259">177 F.2d 259 (C.A. 1, 1949).No litigation asserting the rights of Susan R. Simon, et al., as third-party beneficiaries of the agreement dated May 28, 1947, was ever effectively commenced. No claim of right as third-party beneficiaries was ever established by Susan R. Simon, et al. See Estate of Sarah Caplan, 42 T.C. 446">42 T.C. 446 (1964), affd. 355 F.2d 987">355 F.2d 987 (C.A. 5, 1966).The $ 150,000 settlement distribution was made in the wake of litigation petitioning the setting aside of the wills of decedent executed on or after February 14, 1963, and the removal of petitioner Joseph C. Chapman as executor. It is evident that this settlement was made to avoid the burdensome costs of protracted litigation over the rights of Susan R. Simon, et al., as beneficiaries of the estate and over the removal of petitioner Joseph C. Chapman, as executor.We therefore conclude that the $ 150,000 was paid in settlement of a claim to share in the estate. Our conclusion is supported by the fact that the $ 150,000 was paid as a "distribution" from the testamentary estate pursuant to the stipulation1972 U.S. Tax Ct. LEXIS 97">123 dated May 12, 1966, which specifically designates and casts the payment of that sum as a testamentary distribution, and approved by the Orphans' Court of Philadelphia County as a "distribution" of the testamentary estate on June 1, 1966. Cf. concurring opinion of Justice Pomeroy, In re Estate of Lazar, supra at 737-738.Assuming, arguendo, that we were to conclude, and we do not, that the $ 150,000 settlement was paid in consideration of the right of Susan R. Simon, et al., to claim as third party beneficiaries under the contract between Milton and decedent, the payment would not of necessity constitute a deductible claim against decedent's estate.The deductibility of claims against the estate under section 2053(a)(3) is subject to the limitations of section 2053(c)(1)(A)7 which provides that claims against the estate when founded on a promise or agreement, "be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth." For a claim founded on a promise or agreement to be deductible it must be (1) allowable under State law, and (2) meet the requirement 58 T.C. 543">554 1972 U.S. Tax Ct. LEXIS 97">124 of section 2053(c)(1)(A) that it be founded on "adequate and full consideration in money or money's worth." Taft v. Commissioner, 304 U.S. 351">304 U.S. 351 (1938). However, merely because a claim against an estate would be allowable or enforceable under State law governing the validity of contracts does not of necessity make it deductible for Federal estate tax purposes. 304 U.S. 351">Taft v. Commissioner, supra, and Estate of Herbert C. Tiffany, 47 T.C. 491">47 T.C. 491, 47 T.C. 491">500 (1967). While consideration may be sufficient to establish an enforceable claim under State law, the same consideration does not necessarily constitute "adequate and full consideration in money or money's worth" within the meaning of section 2053. Estate of Ella J. Davis, 57 T.C. 833">57 T.C. 833 (1972).1972 U.S. Tax Ct. LEXIS 97">125 Respondent points out that the vast majority of the property held by Milton and decedent was held as an estate by the entirety. Such an estate is a form of joint ownership of property combined with a right of survivorship. Respondent asserts that Milton's testamentary estate was insolvent and that he possessed nothing which he could use to provide adequate and full consideration in money or money's worth to support the promise of his wife to make and maintain a will conforming to the provisions of the agreement of May 28, 1947.Petitioner contends that there was full and adequate consideration in money or money's worth provided by Milton in support of the claim against decedent's estate. Petitioner contends that notwithstanding the fact that the vast majority of the property owned by Milton and decedent was held as estate by the entirety, Milton had placed most of that property in their joint names with the belief that he continued to control that portion of the property originating with him. Petitioner concludes that Milton could have gained restitution of any property originating with him but held by decedent and Milton as tenants by the entirety. Petitioner cites as authority1972 U.S. Tax Ct. LEXIS 97">126 for this conclusion: Restatement, Restitution, secs. 49 and 51; White v. White, 346 Mass. 76">346 Mass. 76, 190 N.E.2d 102 (1963); Bauer v. Crummy, 56 N.J. 400">56 N.J. 400, 267 A.2d 16 (1970); and a headnote from United Fruit Co. v. United States, 186 F.2d 890">186 F.2d 890 (C.A. 1, 1951). We do not agree with petitioner's contentions and find the authority cited not to be controlling of the issue.The sections of Restatement of the Law -- Restitution cited by petitioner are premised on transfers made where there is a mistake of law. The cases cited are likewise founded on factual situations wherein there was a mistake of law or a mistake of fact and law. 8 Petitioner has not established herein, nor is there any indication in the proceedings before the Pennsylvania courts, of the existence of such a mistake at the time of the transfer of property to an estate by the entirety. There is nothing in the record before us to support an inference of any 58 T.C. 543">555 such mistakes of fact or law at the time of the transfer of the property to tenancy by the entirety. Of even greater significance1972 U.S. Tax Ct. LEXIS 97">127 is the fact that the cases cited by petitioner as controlling on this point are expressions of New Jersey and Massachusetts law by the highest courts of those States and not of Pennsylvania law which would control the issue in this case. 91972 U.S. Tax Ct. LEXIS 97">128 Under Pennsylvania law an estate by the entirety is a form of joint ownership in husband and wife with the right of survivorship. Such an estate may only be destroyed or terminated by the joint acts of the cotenants and not by the act of one of them. In re Gallagher's Estate, 352 Pa. 476">352 Pa. 476, 43 A.2d 132, 133 (1945). An estate by the entirety under Pennsylvania law dies with the owner, who has no testamentary power of disposition over the property so held since the survivor of the cotenants receives absolute title to the whole by operation of law. In re Williams' Estate, 349 Pa. 568">349 Pa. 568, 37 A.2d 584 (1944); In re Flynn, 1 F.2d 566">1 F.2d 566 (W.D. Pa. 1924).At the time Milton and decedent entered into the agreement of May 28, 1947, and at the moment preceding Milton's death the property held by them as tenants by the entirety continued to exist as an estate by the entirety. See concurring opinion of Justice Roberts, In re Estate of Lazar, supra at 737. Petitioner has failed to establish that Milton was possessed of sufficient 1972 U.S. Tax Ct. LEXIS 97">129 property rights to constitute adequate and full consideration in money or money's worth supporting the agreement of May 28, 1947, within the meaning of section 2053(c)(1). Therefore, even if we were to view the payment of the $ 150,000 to be in settlement of a right of claim by third-party beneficiaries under the agreement of May 28, 1947, which was enforceable under State law, which we do not, we would conclude that their claim was not supported 58 T.C. 543">556 by adequate and full consideration in money or money's worth and, hence, not deductible as a claim against the estate under section 2053(a)(3).Finally, even if the record supported the conclusion that there was full and adequate consideration in money or money's worth for the agreement of May 28, 1947, we would conclude that petitioner has failed to establish the deductibility of the $ 150,000. The stipulation with respect to the settlement dated May 12, 1966, recites as consideration for the $ 150,000 settlement distribution the following:in full settlement of all claims and disputes relating to (i) the agreement between Mr. and Mrs. Lazar dated May 28, 1947, (ii) the agreement of trust of Lena G. Lazar dated February 14, 1972 U.S. Tax Ct. LEXIS 97">130 1963, (iii) the various wills of Lena G. Lazar and (iv) the estate of Lena G. Lazar, * The stipulation does not apportion the $ 150,000 settlement distribution to the four designated bases of the claims of Susan R. Simon, et al. Petitioner has presented no evidence upon which a reasonable apportionment of any part of the $ 150,000 settlement distribution could be made to the rights of Susan R. Simon, et al., as third-party claimants under the agreement dated May 28, 1947, as distinguished from their rights as beneficiaries of the testamentary estate under prior wills or otherwise. Therefore, petitioner would still have failed to establish the deductibility of the $ 150,000 settlement distribution or any part thereof under section 2053. Raytheon Production Corporation, 1 T.C. 952">1 T.C. 952 (1943), affd. 144 F.2d 110 (C.A. 1, 1944).Decision will be entered for respondent. Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. In computing Milton's gross estate the bonds derived from decedent in the amount of $ 33,943.75 were not included so that the amount of Milton's gross estate was $ 238,749.71.↩3. Notwithstanding the stipulation of the parties to the effect that Susan R. Simon was Milton's niece, such fact is in conflict with certain exhibits which indicate that Susan R. Simon was the daughter of Milton's niece, Ruth Simon, who predeceased decedent. Ruth Simon was one of the five persons designated to be beneficiaries under the 1947 agreement.↩4. The decree of "Lefever, J., dated March 8, 1966," permitting the withdrawal of the appeal from the register in probating the will on petition of Susan R. Simon is not in the record. However, the inference from the record is that this withdrawal was a part of the negotiated settlement.↩5. This section provides in part:SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES.(a) General Rule. -- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts -- * * * (3) for claims against the estate, and* * * ↩as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.6. As a third-party beneficiary, Susan R. Simon would be a donee-beneficiary as distinguished from a creditor-beneficiary, having provided no consideration directly or indirectly herself for decedent's promise to make a will conforming with the provisions of the agreement of May 28, 1947.↩7. SEC. 2053(c). Limitations. -- (1) Limitations applicable to subsections (a) and (b). -- (A) Consideration for claims. -- The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * *↩8. It also might be noted that none of these cases involved husband and wife holding property as tenants by the entirety.↩9. Petitioner cites Silverman's Estate, 51 Pa. D. & C. 2d 589 (C.P., Orphans' Div., 1970), to support its position that placing property in the joint names of a husband and wife does not create tenancy by the entirety nor prevent such property from being regarded and dealt with as the separate property of the spouse who provided the funds for the acquisition of the property.Petitioner's emphasis on the case of Silverman's Estate is misplaced. The facts here show that the property held by Milton and decedent was for the most part held as an estate by the entirety and not simply as a joint tenancy. In addition, Silverman's Estate does not support petitioner's position, since that case involved a "Mutual Agreement" of the parties at the time of acquisition of the property that the wife was the sole owner of the property. Such an agreement constitutes the joint acts of the parties in acquiring the property. No such fact is present in the case herein. See In re Gallagher's Estate, 352 Pa. 476">352 Pa. 476, 43 A.2d 132 (1945). In the Silverman case the court specifically quoted the statement by the Supreme Court of Pennsylvania in Brenner v. Sukenik, 410 Pa. 324">410 Pa. 324, 189 A.2d 246, 249 (1963), that a "conveyance of real or personal property to a husband and wife without more↩, vests in them an estate by the entireties" but "if it is the intention of the parties to create an estate other than by entireties, such intention will be given effect" and that Pennsylvania law is clear that where "a husband transfers his property [to his wife] without consideration, the law presumes that a gift to the wife was intended." In the instant case, not only was the property held by Milton and decedent as tenants by the entirety, but if that estate were created by Milton's transfer of property derived from him to decedent, Pennsylvania law would "presume that a gift" to decedent was intended.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619007/	Edward Stevens and Leona Stevens v. Commissioner.Stevens v. CommissionerDocket No. 53934.United States Tax CourtT.C. Memo 1955-333; 1955 Tax Ct. Memo LEXIS 5; 14 T.C.M. 1318; T.C.M. (RIA) 55333; December 28, 1955Joseph Leo McGroary, Esq., for the petitioners. William Schwerdtfeger, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The Commissioner has determined a deficiency in the income tax of petitioners for the calendar year 1951 in the amount of $2,147.50 and additions to tax under section 294(d)(1)(A) and (d)(2) of the Internal Revenue Code of 1939 in the amount of $3,097.50. Petitioners claim an overpayment in tax. The sole issue for our decision due to petitioners' abandonment of other issues raised in the pleadings is whether petitioners received during that year as a dividend distribution from Stevens Tile and Marble Co., Inc., the sum of $37,317.25. Findings of Fact The stipulated facts are so found. Petitioners are husband and wife, residents of the District of Columbia. 1955 Tax Ct. Memo LEXIS 5">6 They filed a joint income tax return for the calendar year 1951 with the collector of internal revenue at Baltimore, Maryland. On the return filed, petitioners included in income an item in the amount of $37,317.25 designated as dividends from the Stevens Tile and Marble Co., Inc., hereinafter sometimes designated the corporation. The corporation was formed under the laws of the District of Columbia on April 16, 1940. Petitioner Edward Stevens was, during the taxable year, its president, treasurer, and a member of its board of trustees. Petitioner Leona Stevens was its secretary and a member of its board of trustees. The authorized capital stock of the corporation from its inception was 10 shares. On January 1, 1951, Edward was the owner of 5 shares thereof which he held throughout 1951. On October 5, 1950, Edward C. Stevens, son of the petitioners, died testate, and at the time of his death was owner of the other 5 shares of stock of the corporation. Decedent nominated his widow, Ann A. Stevens, executrix of his estate, and in his will bequeathed 4 of the 5 shares of the corporation's stock to her and one share to his mother and father, the petitioners, jointly. At a regular meeting1955 Tax Ct. Memo LEXIS 5">7 of the stockholders of the corporation, held on December 22, 1950, Edward was authorized and directed, on behalf of the corporation, to purchase from Ann 4 shares of its stock, said shares to be cancelled and not reissued. On July 16, 1951, Edward drew his personal check to the order of Ann in the sum of $10,622.08; she endorsed it as executrix of the estate of her deceased husband, and deposited it in a bank account which she maintained in the name of the estate. On the following day, July 17, 1951, Ann endorsed 4 of the 5 shares over to Edward. On the estate tax return filed on November 1, 1951, by Ann for the estate of her deceased husband, this stock was valued at $2,665.52 per share. She filed no Federal fiduciary return of income for the estate. On her personal income tax return for 1951, she reported no gain or loss from the sale of the stock of the corporation. On or about October 29, 1951, Ann endorsed one of the 5 shares of stock to petitioners in accordance with her late husband's will. A new certificate for that share of stock was, on the same day, issued by the corporation to petitioners. A friendly relationship prevailed between petitioners and Ann throughout the1955 Tax Ct. Memo LEXIS 5">8 transactions here involved. It was petitioners' desire that she should receive as soon as practicable such funds from the corporation's business as were representative of the 4 shares of stock willed to her by her husband. To that end, a meeting of the interested parties was held on May 21, 1951, at which meeting Ann, George L. Quinn, an attorney, and Jack Pearson, an accountant, were present. Quinn had for some time represented the corporation and was also retained as attorney by Ann in her capacity as executrix of her deceased husband's estate. Pearson had acted as bookkeeper or accountant of the corporation for 5 to 7 years and had kept physical possession of the corporate books during that time. He also prepared the corporation income tax returns, together with the returns of petitioners. Petitioners had requested that Pearson be prepared at the meeting to furnish information as to the value of the stock of the corporation, but at the meeting he indicated that he had been unable to comply and assured all present that such information would later be forthcoming. Making the statement that Ann would receive her share of the business by way of a dividend, he presented three checks1955 Tax Ct. Memo LEXIS 5">9 on the corporation's checking account for the signature of petitioner Edward Stevens. Quinn immediately questioned the propriety of and authority for the paying of a dividend, but Edward signed the checks and delivered one to Ann, drawn to her as payee, in the amount of $24,878.17, which she deposited in a special bank account as executrix. One check in the amount of $6,219.54 was drawn to Edward and Leona Stevens and a check in the amount of $31,097.71 was drawn to Edward Stevens. After being left in the office of the corporation for a time, the latter two checks were endorsed by the payees and deposited in the corporate bank account on which they had been drawn. No formal corporate resolution authorizing the payment of dividends was adopted at this meeting. However, the stubs of the referred to checks each bore the notation "Div." In November 1951, an agent of respondent investigated the corporate records for 1949 and 1950 with respect, among other things, to the liability of the corporation for surtax under section 102 of the 1939 Code for unreasonably accumulating its profits. During his investigation, the cancelled checks above referred to were exhibited to him. As a result1955 Tax Ct. Memo LEXIS 5">10 of the investigation, no action was taken against the corporation under section 102. At the time petitioners deposited the checks drawn on May 21, 1951, there was also deposited Edward's personal check to the order of the corporation in the amount of $16,021.85. On June 1, 1951, the amount of $53,339.10, the total of the three checks, was credited to the regular account of the corporation and, after another deposit was made and two unrelated checks cleared the account that day, the balance stood at $65,709.49. The two checks in the amounts of $31,097.71 and $6,219.54 were charged to the account on June 4, 1951, leaving a balance at the end of that day in the amount of $24,632.70. On June 8, 1951, after several other checks cleared the account and after several deposits were made thereto, the balance rose to $47,717.22. During the remainder of 1951 there was a balance in the regular account of sufficient size to cash both these checks, i.e., a balance greater than $37,317.25, for the following periods: June 8 to June 19 June 19 to June 22 July 17 to July 23 August 15 to August 16 In addition to the regular account which the corporation maintained at the Second National Bank, 1955 Tax Ct. Memo LEXIS 5">11 it had three other accounts. At the same bank it maintained a "special" account which was used largely for the deposit of amounts withheld from the wages of employees for income and social security tax purposes. On May 21, 1951, the balance in this account was $1,663.21. On June 1 and June 4 the balance was $2,367.56, and on June 8 it was $2,600.22. The third account, maintained by the corporation, was at the National Metropolitan Bank, Washington, D.C. This account was inactive during the months of January to July, 1951, with the balance remaining constant at $3,699.10. In August, activity began on an increasing scale to the end of the year. The highest balance therein was achieved on October 12 when the amount stood at $27,576.46. The fourth account was a savings account in an undesignated depository. As to this account, the record is silent except that it shows that at the beginning of 1951 the balance therein was $12,362.25 and that by the end of the year the account had been closed. In 1950, Edward Stevens caused the corporation to pay for him the following amounts: Feb. 17 Deposit on a lot$ 5,000.00Mar. 1 Payment on automobile1,016.45Apr. 4 Payment to Dist. Title Ins.Co.31,479.00June 10 Payment to Dist. Title Ins.Co.14.20Sept. 13 Real Estate tax360.101955 Tax Ct. Memo LEXIS 5">12 During the same year, he paid the following amount to the corporation: December 31 Rent$4,000During 1951, Edward Stevens caused the corporation to pay for him the following amounts: (date not given) Real Estate tax$360.10(dates not given) Other drawings485.87 During the same year, he paid the following amounts to or for the corporation: May 21$16,021.85September 176,948.13(date not given) Rent950.00(date not given) Rent6,000.00July 17 Purchase of stock10,662.08On March 17, 1952, the corporation paid Federal income tax of petitioners for 1951 in the amount of $18,502.48. The original 1951 income tax return of the corporation shows a cash dividend distribution for that taxable year of $62,195.42. Petitioners' individual income tax returns for 1951 show receipt of dividends from the corporation in the amount of $37,317.25. After the original 1951 return was filed on March 19, 1952, the corporation discharged Pearson who had handled its accounting and certain other corporate matters and retained Frederick Kitchener and another certified public accountant, Samuel J. Smith. Kitchener and Smith were hired1955 Tax Ct. Memo LEXIS 5">13 to survey the company's affairs for 1951 as well as reorganize its current bookkeeping. In making their survey, they decided that the checks of May 21, 1951, to the shareholders did not constitute dividends. They filed an amended corporate return on September 22, 1952, which did not show the payment of any dividends during the taxable year. In that return, $35,140.25 of the total of $35,540.25 paid to Ann during 1951 was treated as "Premium on Treasury Stock." On the same day that the amended corporate return was filed, petitioners filed a claim for refund on the ground that the $37,317.25 in the form of the two checks received by them did not constitute income. This claim was prepared by Kitchener and filed at his suggestion. Smith set up new company books for 1951 in which he reflected the $37,317.25 as a simultaneous debit and credit to the personal account of petitioner Edward Stevens. The corporation had accumulated earnings and profits during 1951 in excess of $62,195.42. Throughout that year not only did its net worth exceed such sum, but its current assets alone, less total liabilities, exceeded it. The check of Edward Stevens in the amount of $10,662.08, dated July 16, 1951, was1955 Tax Ct. Memo LEXIS 5">14 in full and complete satisfaction of the agreement to purchase 4 shares of the Stevens Title and Marble Co. stock from Ann A. Stevens. The corporate check of $24,878.17, dated May 21, 1951, to Ann A. Stevens was not, in whole or in part, in satisfaction of the agreement. Opinion The sole question before us is whether by the receipt of the two checks in the amounts of $6,219.54 and $31,097.71, respectively, and totaling $37,317.25 the petitioners during 1951 received dividends in the latter amount from Stevens Tile and Marble Co. The respondent has determined that they did receive dividends from that source in such amount. The petitioners contend that they did not. The petitioners therefore had the burden of showing that the respondent's determination was erroneous. The petitioners have submitted considerable testimony respecting the circumstances surrounding the issuance on May 21, 1951, of the two checks to them and the check to Ann and have made a number of arguments with respect to such testimony and the treatment to be accorded such checks in the light of the evidence relating thereto All of the evidence respecting the checks and the arguments respecting them have been carefully1955 Tax Ct. Memo LEXIS 5">15 considered and, in our opinion, the petitioners have failed to discharge their burden. We discuss herein the principal contentions of petitioners. The petitioners make no contention that the formal declaration of a dividend is a prerequisite to its taxability as such, nor do they contend that the corporation's earnings and profits as contemplated by section 115(a) of the 1939 Code were insufficient during 1951 to pay dividends in the total amount of the checks issued to them and Ann on May 21, 1951. They do contend that the payment of a dividend was not intended by the issuance of the checks; that they, the petitioners, knew the corporation did not have funds to pay their checks when they were issued, that the checks could not have been cashed by petitioners and that they therefore received nothing by depositing the checks; and further that to constitute a dividend includible in their gross income for 1951, it was essential that during that year the amounts of their two checks be "unqualifiedly subject to their demands" and that such was not the situation during the year. Quinn, the corporation's attorney, usually prepared minutes of the corporate meetings, but no minutes were1955 Tax Ct. Memo LEXIS 5">16 prepared of the meeting on May 21, 1951. Quinn's testimony and that of other witnesses is to the effect that the meeting was principally concerned with arranging for Ann to obtain from the corporation the interest therein represented by the 4 shares of stock bequeathed to her by her husband. That action in such respect does not appear to have been the sole action taken at the meeting is shown by the fact that at that meeting not only did Edward sign and deliver a corporate check drawn to Ann but also signed two other corporate checks, one drawn to himself and one drawn to himself and wife. The amounts of the three checks were proportionate to the stock interests of parties, namely, the 5 shares of Edward, 4 of Ann and one of Edward and wife. If the checks drawn to Edward and to himself and wife were for any purpose other than a distribution to them of earnings and profits of the corporation, we are unable to find any evidence of it in the record. The evidence shows that on May 21, 1951, the date on which all three checks were signed by Edward, the corporation's regular checking account at the Second National Bank had a balance therein of $41,530.29 and that its account with National1955 Tax Ct. Memo LEXIS 5">17 Metropolitan had a balance of $3,699.10, or a total for the two accounts of $45,229.39. The evidence further shows that at the beginning of 1951 the corporation had a savings account with an undesignated depository which had a balance therein of $12,362.25. The record is silent as to the balance in that account thereafter during 1951 except that by the end of the year the account had been closed. Whether deposits were made in this account during 1951, and, if so, when they were made and the amounts thereof or what time in 1951 the account was closed and the amount withdrawn as that time or previously are matters as to which the petitioners have left us uninformed. It may well be that the balance in this account on May 21, 1951, plus the $45,229.39 mentioned above, was ample to make payment of the checks issued to petitioners and Ann and all other outstanding checks of the corporation on that date. If such were the situation, it could not be said that the corporation did not have funds to pay the checks or that the checks could not have been cashed if petitioners had desired to do so. The record does not disclose that at the time Edward signed the three checks, or at any other time, 1955 Tax Ct. Memo LEXIS 5">*18 there was any agreement or understanding between him and his wife and Ann or the corporation which limited or restricted the time for cashing the checks or otherwise making demand on the corporation for payment of the amounts thereof. In view of this and since it does not appear that the corporation was without funds with which it could have paid the amounts of the two checks of petitioners, either at the time issued or at other times thereafter, in 1951, we can not find that the amounts of petitioners' checks were not unqualifiedly subject to their demands. The petitioners' endorsements of their checks and the deposit thereof in the corporation's bank account does not aid them under the circumstances presented here. The repayment by a taxpayer to the paying corporation of the amount of a dividend which had been paid earlier in the year does not relieve him of the tax thereon, even though the dividend had been paid as a result of the erroneous advice of an accountant. Estate of Lloyd E. Crellin, 17 T.C. 781">17 T.C. 781, affd 203 Fed. (2d) 812, certiorari denied 346 U.S. 873">346 U.S. 873. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1065362/	IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE October 14, 2003 Session PACHE INDUSTRIES, LLC v. WALLACE HARDWARE CO., INC. Appeal from the Circuit Court for Hamblen County No. 02-CV-236 Kindall T. Lawson, Judge FILED NOVEMBER 12, 2003 No. E2003-01483-COA-R3-CV Pache Industries, LLC (“Plaintiff”) sued Wallace Hardware Co., Inc. (“Defendant”) for unpaid invoices. Defendant was served with the summons and complaint, but did not answer within thirty days. Plaintiff filed a motion for default judgment. After being served with the motion for default judgment, Defendant hired an attorney, filed an answer to the complaint, and filed responses to discovery requests. The Trial Court granted Plaintiff a default judgment. Defendant filed a motion to set aside the default judgment. The Trial Court denied the motion. Defendant appeals. We affirm.1 Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed; Case Remanded. D. MICHAEL SWINEY, J., delivered the opinion of the court, in which CHARLES D. SUSANO, JR., J., and WILLIAM H. INMAN , SR., J., joined. Lori L. Jessee, Morristown, Tennessee, for the Appellant, Wallace Hardware Co., Inc. J. Randall Shelton, Morristown, Tennessee, for the Appellee, Pache Industries, LLC. 1 Oral argument was heard in this case on October 14, 2003, in Morristown as part of the Court’s C.A.S.E. (Court of Ap peals Affecting Student Education) p roject. OPINION Background Plaintiff sued Defendant for several unpaid invoices. The summons and complaint were served upon William A. Trusler, Defendant’s registered agent and Vice President of Finance, on September 9, 2002. At that same time, Defendant also was served with requests for admission and interrogatories. Mr. Trusler admits he received these documents. Defendant did not answer the complaint within thirty days and also did not answer the requests for admission and interrogatories timely. On November 1, 2002, Plaintiff filed a motion for judgment by default and served Defendant with the motion and with notice that the motion would be heard on February 3, 2003. Defendant’s appellate brief states that Defendant finally met with, and hired, an attorney on November 24, 2002. The next day, Defendant’s attorney contacted Plaintiff’s attorney to discuss the case. On January 15, 20032, approximately eighteen days prior to the hearing on the motion for default judgment, Defendant filed an answer, a motion to withdraw admissions, and a response to requests for admission and interrogatories. Defendant provided responses to all of the requests to admit and to twenty-four of the twenty-five interrogatories. Defendant objected to interrogatory number twenty-five claiming it was “ambiguous, overbroad, and unduly burdensome.” Specifically, interrogatory number twenty-five requested that Defendant “[i]dentify and attach to your answers copies of any documents [you have] which have a bearing or shed light on the issues raised in the Complaint.” Plaintiff filed a motion to compel an answer to interrogatory number twenty-five. The Trial Court heard argument on the motion for default judgment on February 3, 2003, and granted Plaintiff a default judgment rendering the other pending motions moot. The Trial Court entered a judgment on February 6, 2003, granting Plaintiff the sum of “$11,678.70, plus prejudgment interest of 10% from the dates of the individual invoices identified in the Complaint.” Defendant filed a motion to set aside the default judgment and the supporting affidavits of Mr. Trusler and Defendant’s attorney. The motion claims that the failure to timely answer the complaint was “the result of excusable neglect, mistake, and inadvertence of [Defendant].” In addition, Defendant claimed it had a valid and meritorious defense to the suit and that Plaintiff would not be prejudiced if Defendant’s motion were granted. Mr. Trusler’s affidavit admits that he received the summons and complaint and states that “the documents were misplaced by me and allowed to languish” until November of 2002, when the documents were found and Defendant finally sought legal counsel. The Trial Court heard argument and then entered an order 2 The certificate of service, the signature block, and the notarization on the Answer are all dated January 16, 2003; howe ver, the H amb len Co unty Circ uit Court Clerk date stamped the document as filed on January 15, 2003. W hether the Answer was actually filed on the 15th or the 16th has no bearing on our analysis of the issue s in this case. -2- on May 19, 2003, denying Defendant’s motion to set aside the default judgment. Defendant appeals to this Court. Discussion Defendant raises two issues on appeal: 1) whether the Trial Court erred in granting judgment by default; and 2) whether the Trial Court erred in denying Defendant’s motion to set aside the default judgment. We will address each issue in turn. The decision to grant a default judgment is reviewed under an abuse of discretion standard. State of Tennessee ex. rel. Jones v. Looper, 86 S.W.3d 189, 193 (Tenn. Ct. App. 2000). A trial court’s decision to grant or deny relief under Rule 60.02 also is reviewed for abuse of discretion. Federated Ins. Co. v. Lethcoe, 18 S.W.3d 621, 624 (Tenn. 2000); Underwood v. Zurich Ins. Co., 854 S.W.2d 94, 97 (Tenn. 1993). Our Supreme Court discussed the abuse of discretion standard in Eldridge v. Eldridge, stating: Under the abuse of discretion standard, a trial court’s ruling “will be upheld so long as reasonable minds can disagree as to [the] propriety of the decision made.” A trial court abuses its discretion only when it “applie[s] an incorrect legal standard, or reache[s] a decision which is against logic or reasoning that cause[s] an injustice to the party complaining.” The abuse of discretion standard does not permit the appellate court to substitute its judgment for that of the trial court. Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001) (citations omitted). Appellate courts ordinarily permit discretionary decisions to stand when reasonable judicial minds can differ concerning their soundness. Overstreet v. Shoney’s, Inc., 4 S.W.3d 694, 709 (Tenn. Ct. App. 1999). A trial court’s discretionary decision must take into account applicable law and be consistent with the facts before the court. Id. When reviewing a discretionary decision by the trial court, the “appellate courts should begin with the presumption that the decision is correct and should review the evidence in the light most favorable to the decision.” Id. We first will consider whether the Trial Court erred in granting Plaintiff judgment by default. The entry of a default judgment is governed by Tenn. R. Civ. P. 55, which states, in pertinent part: 55.01. Entry. - When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules and that fact is made to appear by affidavit or otherwise, judgment by default may be entered as follows: -3- The party entitled to a judgment by default shall apply to the court. All parties against whom a default judgment is sought shall be served with a written notice of the application for judgment at least five days before the hearing on the application, regardless of whether the party has made an appearance in the action. No judgment by default shall be entered against an infant or incompetent person unless represented in the action by a general guardian, committee, conservator, or other such representative who has appeared therein. If, in order to enable the court to enter judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter the court may conduct such hearings or order such references as it deems necessary and proper and shall accord a right of trial by jury to the parties when and as required by any statute. Tenn. R. Civ. P. 55.01. The Trial Court granted the default judgment because Defendant failed to comply with Tenn. R. Civ. P. 12, which states: “A defendant shall serve an answer within thirty (30) days after the service of the summons and complaint upon him.” Tenn. R. Civ. P. 12.01. As this Court stated in the Looper case: “The belated filing of an answer is not an adequate response to a motion for default. There must be some application to the court for relief from the failure to timely file an answer.” The language of Rule 55.01 makes it clear that a judge, in the exercise of sound judicial discretion, may enter a default judgment against a party who has failed to plead or otherwise defend in accordance with the rules, as long as proper notice of hearing on the motion is given. . . . Under the rules, an extension of time within which to file an already overdue response is available in the discretion of the trial court, for good cause shown, and upon a showing of excusable neglect. While trial courts generally have discretion to allow late filings, they are not compelled to do so. State of Tennessee ex. rel. Jones v. Looper, 86 S.W.3d at 196 (citations omitted). In this case, Defendant failed to file an answer within the time period provided by Rule 12 of the Rules of Civil Procedure or to otherwise timely defend as provided by the Rules of Civil Procedure. Defendant then made no application for an extension of time in which to respond to the complaint, but instead merely filed a belated answer. Defendant claims that this was not an “eleventh hour” defense because its answer was filed eighteen days prior to the hearing on the motion for default judgment. However, neither the Rules of Civil Procedure nor case law provide that a default judgment must be denied if an answer is filed prior to the court’s hearing on the motion. Rule 12.01 clearly provides that a complaint -4- “shall” be answered within thirty days. Defendant did not do that. In addition, Defendant did not simply delay in answering the complaint, but also delayed in hiring an attorney for several weeks after being served with the motion for default judgment. The Trial Court took into account the applicable law and the facts before it and exercised its discretion under Rule 55.01 to grant a default judgment. The Trial Court neither applied an incorrect legal standard nor reached a decision that is against logic or reasoning that causes an injustice to Defendant. Likewise, we believe that reasonable minds could disagree as to the propriety of the decision made by the Trial Court, the very essence of a discretionary decision. Given this, we are not permitted to substitute our judgment for that of the Trial Court, and, therefore, we affirm the Trial Court as to this issue. We next consider whether the Trial Court erred in denying Defendant’s motion to set aside the default judgment. Rule 55 provides that “[f]or good cause shown the court may set aside a judgment by default in accordance with Rule 60.02.” Tenn. R. Civ. P. 55.02. As this Court has stated: A party seeking relief under Rule 55.02 must satisfy the court that it is entitled to relief based on one of the grounds in Tenn. R. Civ. P. 60.02 and that it has a meritorious defense to the plaintiff’s suit. Further, the party seeking relief from a judgment has the burden of proving he or she is entitled to relief. State of Tennessee ex. rel. Jones v. Looper, 86 S.W.3d at 199-200 (citations omitted). In pertinent part, Rule 60.02 provides that “[o]n motion and upon such terms as are just, the court may relieve a party or the party’s legal representative from a final judgment, order or proceeding for the following reasons: (1) mistake, inadvertence, surprise or excusable neglect; . . . .” Tenn. R. Civ. P. 60.02. “Neither dismissals nor default judgments are favored by the courts. Dismissals based on procedural grounds like failure to prosecute and default judgments run counter to the judicial system’s general objective of disposing of cases on the merits.” Henry v. Goins, 104 S.W.3d 475, 481 (Tenn. 2003) (citations omitted). However, a defendant may not simply ignore a suit or delay filing an answer to inconvenience the plaintiff. “[D]efendants are not to be allowed to prolong litigation by imposing procedural delays. The default judgment protects a diligent party from continual delay and uncertainty as to his or her rights.” State of Tennessee ex. rel. Jones v. Looper, 86 S.W.3d at 194 (quoting 49 C.J.S. Judgments § 196 (1997)). The Rules of Civil Procedure “shall be construed to secure the just, speedy and inexpensive determination of every action.” Tenn. R. Civ. P. 1. Tenn. R. Civ. P. 1. In addition, our Supreme Court has stated: It has been declared that the mere negligence or inattention of a party is no ground for vacating a judgment against him. Carelessness is not synonymous with excusable neglect. Mere forgetfulness of a party to an action is not a sufficient -5- ground for vacating or setting aside a judgment by default. Parties are not justified in neglecting their cases merely because of the stress or importance of their own private business and such neglect is ordinarily not excusable. Food Lion, Inc. v. Washington County Beer Bd., 700 S.W.2d 893, 896 (Tenn. 1985) (quoting 46 Am. Jur. 2d 874-75 Judgments § 718 (1969)). Defendant offered no explanation to support its claim that it is entitled to have the default judgment set aside other than the assertion in Mr. Trusler’s affidavit that “the documents were misplaced by me and allowed to languish.” When Defendant was served with Plaintiff’s motion for default judgment, Defendant apparently waited several more weeks before hiring an attorney. Mr. Trusler is Defendant’s registered agent for service of process and, as such, is assumed to understand the seriousness of being served with a summons and complaint. Yet, Mr. Trusler, by his own admission, allowed the documents to “languish.” Defendant’s carelessness, mere forgetfulness, or stress or importance of other business is not excusable neglect. Defendant argues that the default judgment should be set aside because it has what it believes is a meritorious defense. While it may be true that Defendant may have a meritorious defense, Defendant did not take steps to defend within the proper time limits and has offered no excuse for this failure that rises to the level of “mistake, inadvertence, surprise or excusable neglect” contemplated by Rule 60.02. Rule 60.02 provides that a court may relieve a party from a final judgment “upon such terms as are just.” To relieve Defendant from the default judgment because it allowed the summons and complaint to “languish” would not be just to Plaintiff. Rule 60.02 was not intended to rescue a party who failed to answer a complaint for no good reason. There must be finality to lawsuits so that parties may move on with their lives and their personal business, and our Rules of Civil Procedure are in place to assist in achieving that goal. If we allow defendants to overturn properly granted default judgments without a good excuse, we are undermining the goal of achieving finality. “[D]efendants are not to be allowed to prolong litigation by imposing procedural delays. The default judgment protects a diligent party from continual delay and uncertainty as to his or her rights.” State of Tennessee ex. rel. Jones v. Looper, 86 S.W.3d at 194 (quoting 49 C.J.S. Judgments § 196 (1997)). Defendant also claims that there would be no prejudice to Plaintiff if the default judgment were set aside. However, Defendant did not carry its burden of proving it is entitled to relief under Rule 60.02. Since Defendant did not prove it is entitled to relief under Rule 60.02, proof of a meritorious defense and a lack of prejudice to Plaintiff are insufficient to overturn a default judgment. The Trial Court neither applied an incorrect legal standard nor reached a decision that is against logic or reasoning that causes an injustice to Defendant when it denied Defendant’s motion. Likewise, we believe that reasonable minds could disagree as to the propriety of the Trial Court’s decision to deny Defendant’s motion. Given this, we are not permitted to substitute our judgment for that of the Trial Court. We hold that the Trial Court did not abuse its discretion in -6- refusing to set aside the default judgment, and, therefore, we affirm the Trial Court on this issue. Conclusion The judgment of the Trial Court is affirmed, and this cause is remanded to the Trial Court for such further proceedings as may be required, if any, consistent with this Opinion and for collection of the costs below. The costs on appeal are assessed against the Appellant, Wallace Hardware Co., Inc., and its surety. ___________________________________ D. MICHAEL SWINEY, JUDGE -7-	01-04-2023	10-09-2013
https://www.courtlistener.com/api/rest/v3/opinions/6113483/	In The Court of Appeals Ninth District of Texas at Beaumont __________________ NO. 09-21-00351-CV NO. 09-21-00352-CV NO. 09-21-00353-CV __________________ RICHARD WESTMORELAND D/B/A MADISON COUNTY BAIL, Appellant V. THE STATE OF TEXAS, Appellee __________________________________________________________________ On Appeal from the 252nd District Court Jefferson County, Texas Trial Cause Nos. 7708 (19-33335), 7709 (19-33335) and 7710 (19-33335) __________________________________________________________________ ORDER Richard Westmoreland d/b/a Madison County Bail filed a motion to abate these appeals to provide an opportunity for the parties to attempt to negotiate a settlement. The State did not object to Westmoreland’s motion to abate. It is, therefore, ordered that the motion to abate the appeal is granted. The appeal is abated until March 1, 2022. All appellate timetables are suspended while 1 the appeal is abated. The appeal will be reinstated without further order of this Court on March 1, 2022, unless the parties show good cause for continuing the abatement. If a settlement has been reached on or before that date, we instruct the parties to file a motion to reinstate and dispose of the appeal in accordance with their settlement agreement. All appellate timetables are suspended until the appeal is reinstated. If the appeal is reinstated without a settlement having been reached, the brief of the appellant will be due thirty days after the appeal is reinstated. ORDER ENTERED January 27, 2022. PER CURIAM Before Kreger, Horton and Johnson, JJ. 2	01-04-2023	01-28-2022
https://www.courtlistener.com/api/rest/v3/opinions/4669038/	ACCEPTED 08-21-00043-CV EIGHTH COURT OF APPEALS EL PASO, TEXAS 08-21-00043-CV 3/16/2021 10:17 AM ELIZABETH G. FLORES CLERK IN THE COURT OF APPEALS EIGHTH DISTRICT OF TEXAS EL PASO, TEXAS FILED IN 8th COURT OF APPEALS EL PASO, TEXAS IRMA PEREZ, § 3/16/2021 10:17:48 AM § ELIZABETH G. FLORES Clerk Appellant, § § v. § No. 08-21-00043-CV § VICTOR MANUEL PEREZ, JR., § § Appellee. § ENTRY OF APPEARANCE AS APPELLATE COUNSEL TO THE HONORABLE COURT OF APPEALS: COMES NOW John P. Mobbs, attorney, and files this his entry of appearance as lead appellate counsel for the Appellee VICTOR MANUEL PEREZ, JR. in the above-styled cause in this Court only, and requests that all notices, copies of documents filed, and other communications in this appeal be addressed to him as counsel for Appellee. The information required by Texas Rule of Appellate Procedure 6.1(c) is provided below. Respectfully submitted, /s/ John P. Mobbs John P. Mobbs Attorney at Law Texas Bar No. 00784618 6350 Escondido Drive, Suite A-14 El Paso, Texas 79912 Tel. 915-541-8810 Fax 915-541-8830 Email johnmobbs@gmail.com ATTORNEY FOR APPELLEE CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing instrument was served by electronic service to Rob Edwards (redwards@raylaw.com), Attorney for Appellant, Ray Pena McChristian, 5822 Cromo Dr., El Paso, Texas 79912; and to Mark T. Davis and Geourge Mansouraty (attorneymdavis@yahoo.com), Trial Counsel for Appellee, Law Office of Mark T. Davis, 1554 Lomaland, El Paso, Texas 79935, on March 16, 2021. /s/ John P. Mobbs John P. Mobbs 2 Automated Certificate of eService This automated certificate of service was created by the efiling system. The filer served this document via email generated by the efiling system on the date and to the persons listed below. The rules governing certificates of service have not changed. Filers must still provide a certificate of service that complies with all applicable rules. John Mobbs on behalf of John Mobbs Bar No. 00784618 johnmobbs@gmail.com Envelope ID: 51509754 Status as of 3/16/2021 10:49 AM MST Associated Case Party: VictorMPerez Name BarNumber Email TimestampSubmitted Status JOHN P.MOBBS johnmobbs@gmail.com 3/16/2021 10:17:48 AM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669039/	In The Court of Appeals Seventh District of Texas at Amarillo No. 07-20-00286-CV BERTIS CUPIT, APPELLANT V. MANAGEMENT AND TRAINING CORPORATION, APPELLEE On Appeal from the 345th District Court Travis County, Texas Trial Court No. D-1-GN-20-000500, Honorable Dustin M. Howell, Presiding March 16, 2021 MEMORANDUM OPINION Before QUINN, C.J., and PARKER and DOSS, JJ. Bertis Cupit appeals from an order dismissing his petition for writ of habeas corpus for want of jurisdiction.1 The petition was filed with and dismissed by the 345th Judicial District Court, Travis County. We affirm.2 1 The appeal is this Court’s second review regarding the same set of facts addressed in our opinion in Cupit v. Tex. Civil Commitment Office, No. 07-18-00228-CV, 2018 Tex. App. LEXIS 9384 (Tex. App.— Amarillo Nov. 16, 2018, no pet.) (mem. op.). 2 Because this appeal was transferred from the Third Court of Appeals, we are obligated to apply its precedent when available in the event of a conflict between the precedents of that court and this Court. See TEX. R. APP. P. 41.3. As a matter of background, we note that Cupit was tried and found to be a sexually violent predator by the 435th Judicial District Court, Montgomery County, Texas, and as defined in Texas Health & Safety Code § 841.003. As a result, he was ordered to be committed to a facility located in Lamb County, Texas, for those found to be such predators. The entity operating the facility, Management & Training Corporation, specially appeared and filed a plea to the jurisdiction of the trial court. It contended that Cupit’s “suit should be dismissed because [his] claims concern or arise from the subject matter of his civil commitment.” Therefore, the committing court, i.e., the 435th Judicial District Court, had continuing jurisdiction over the matter while the 345th Judicial District Court had none. The trial court agreed and dismissed the action “without prejudice to re-filing same in the committing court.” Cupit appealed. Whether a trial court has subject-matter jurisdiction over a suit is a question of law. Tex. Dept. of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004); Cupit v. Tex. Civil Commitment Office, No. 07-18-00228-CV, 2018 Tex. App. LEXIS 9384, at 2–3 (Tex. App.—Amarillo Nov. 16, 2018, no pet.) (mem. op.). Consequently, we review this ruling under the de novo standard of review. Miranda, 133 S.W.3d at 226. In assessing whether jurisdiction actually exists, we consider the plaintiff’s pleadings, the factual allegations therein, and any evidence pertinent to the question which the parties may file. Cupit, 2018 Tex. App. LEXIS 9384, at 3. We also note that the plaintiff (i.e., Cupit here) has the burden to allege facts which affirmatively show the existence of subject-matter jurisdiction. Id. 2 The true nature of Cupit’s claims depend upon the substance of his pleading, as opposed to the label appended to them. Id. at 4. Reading his petition for habeas relief, one encounters his request that he immediately be released “from his un-authorized In- Patient placement.” He believes himself entitled to release because “there is No Order for Confinement, [n]or is there ANY specific documentation Ordering him to an IN-Patient Only Facility, in which he has been in for a continuous period since Sept. 01, 2015.” Simply put, the petition for writ of habeas corpus is being used by Cupit as a means to attack and gain his release from commitment in Lamb County, which commitment was ordered by the 435th Judicial District Court. Section 841.082 of the Texas Health and Safety Code provides that the court civilly committing someone as a sexually violent predator “retains jurisdiction of the case with respect to a proceeding conducted under . . . subchapter [E of the statute], other than a criminal proceeding involving an offense under Section 841.085, or to a civil commitment proceeding conducted under Subchapters F and G.” TEX. HEALTH & SAFETY CODE ANN. § 841.082(d) (West Supp. 2020). Encompassed within the scope of that statute is the complaint and relief sought via Cupit’s petition. Thus, the 435th Judicial District Court has continuing jurisdiction over the proceeding, while the 345th Judicial District Court had none. Cupit, 2018 Tex. App. LEXIS 9384, at 4–5 (concluding that because the committing court in Montgomery County did not lose jurisdiction over Cupit’s circumstance, the Lamb County district court lacked jurisdiction over the proceeding). Thus, the trial court did not err in dismissing, without prejudice, the entire cause. Id. 3 In short, and contrary to the directive of § 841.082(d), Cupit appears to be shopping the various district courts in Texas in effort to gain release from his commitment as a sexually violent predator ordered by the 435th District Court. We overrule his issues and affirm the trial court’s judgment. Per Curiam 4	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4879905/	In the Court of Appeals Second Appellate District of Texas at Fort Worth ___________________________ No. 02-20-00034-CR No. 02-20-00035-CR ___________________________ MICHAEL RAY KERR, Appellant V. THE STATE OF TEXAS On Appeal from the 43rd District Court Parker County, Texas Trial Court Nos. CR19-0626, CR19-0627 Before Bassel, Womack, and Walker, JJ. Memorandum Opinion on Rehearing by Justice Walker MEMORANDUM OPINION ON REHEARING On July 1, 2021, we issued a memorandum opinion and two judgments affirming appellant Michael Ray Kerr’s convictions for unauthorized use of a motor vehicle and for evading arrest or detention with a vehicle. Part of our decision was based on the fact that the record did not reflect that Kerr had properly presented his motion for new trial to the trial court. Kerr filed a motion for rehearing and requested a supplemental clerk’s record, which contained proof that the motion arguably had been properly presented. After review of the motion and the State’s response, we grant Kerr’s motion for rehearing, withdraw our July 1, 2021 memorandum opinion and judgments, and substitute the following. Kerr attacks his convictions in two issues and argues that the trial court abused its discretion by failing to conduct a hearing on his motion for new trial and by denying his motions to continue the trial. Kerr, however, failed to establish reasonable grounds in his new-trial motion and affidavit showing that he potentially could have been entitled to relief, and he has shown neither error nor prejudice attributable to the continuance denials. Thus, the trial court did not abuse its discretion, and we affirm the trial court’s judgments. I. BACKGROUND On June 13, 2019, Scotty Edmunds called the police to report that his 2012 black Chevrolet Silverado truck had been stolen. Two days later, Sheriff’s Deputy Jarrett Turner was informed that a truck had been stolen, that Kerr was in possession 2 of the truck,1 that Kerr had active warrants for his arrest, and that Kerr had facial tattoos. Turner later saw a “black Chevy 2500” drive past him. When Turner followed the truck, he electronically checked its license-plate number and discovered that the plates had not been registered to that truck. Turner then saw the truck pull up to a bank ATM. Turner recognized the driver as Kerr because of his facial tattoos. When Kerr drove away from the ATM, Turner turned on his patrol car’s overhead lights. Kerr sped off, later swerved off the road, and jumped out of the car while it was still moving. A woman followed Kerr out of the driver’s side of the truck. Kerr ran away, and Turner chased him for a short time. When Turner lost sight of Kerr, he went back to where Kerr and the woman had jumped out to secure the truck, which had hit a pole. About an hour later, Turner and another officer searched the area to try to find Kerr. Kerr was eventually found and arrested. Kerr told Turner that he had been driving the truck, that he knew the truck was stolen, that the truck belonged to “Mary Daniels,” and that “[s]he was in the backseat.” Kerr, a repeat felony offender, was indicted with unauthorized use of a motor vehicle and with evading arrest or detention with a vehicle, and the cases were consolidated and set for a February 10, 2020 trial. See Tex. Penal Code Ann. §§ 3.02, 12.42, 31.07(a), 38.04(a). 1 It is unclear from the record how the police knew that Kerr was in possession of the stolen truck. The record only reflects that this information was shared during a pre-shift briefing. 3 Kerr’s trial counsel filed three motions for continuance. The first motion was an agreed motion for continuance, filed three days before trial, alleging that “new facts and information” had been discovered, necessitating further investigation, and that counsel had a scheduling conflict. The trial court denied the motion. On the first day of trial, Kerr filed a second motion for continuance and contended that “officers believed someone besides [Kerr] was responsible for stealing the vehicle that was involved in this case.” Kerr’s counsel also filed a motion for the appointment of an investigator with her second continuance motion “to [e]nsure that defendant receives the right to effective assistance of counsel.” Before voir dire began, the trial court addressed the continuance issue. Kerr’s counsel asserted that she had also filed a third motion for continuance that morning “just to be on the safe side.”2 The trial court orally denied the second and third continuance motions but granted the motion for an investigator.3 On February 13, a jury found Kerr guilty of unauthorized use of a motor vehicle and of evading arrest or detention with a vehicle. After a punishment hearing, 2 The third motion was not filed until the next day—February 11; however, Kerr’s counsel provided copies of the motion to the State and to the trial court before the trial court orally denied it. The third motion averred that “new facts and information about the case came to light over the weekend, and that information needs to be investigated further.” 3 The order denying the second and third continuance motions was filed on February 12. The clerk’s record does not contain an order granting the motion for an investigator. 4 the jury assessed his sentences at 20 years’ confinement for unauthorized use of a motor vehicle and at 75 years’ confinement for evading arrest or detention with a vehicle. The trial court set the sentences to run concurrently. See id. § 3.03(a). Kerr filed a notice of appeal that same day, and the trial court appointed him appellate counsel. On February 26, the trial court held a hearing on the State’s agreed motion to correct the appellate record.4 The trial court granted the motion and allowed Kerr to “speak to the Court.” Kerr complained that he had not wanted to go to trial and had wanted to accept the State’s 50-year plea-bargain offer but that his trial counsel had not allowed him to accept it. The trial court took no action on Kerr’s assertion. On March 12, Kerr filed a timely, verified motion for new trial, alleging ineffective assistance of counsel and requesting a hearing. See Tex. R. App. P. 21.3(h), 21.4(a). Kerr attached his affidavit to the motion and alleged that his trial counsel had advised against accepting the State’s plea-bargain offer and had not been prepared for trial, which was shown by her late requests to continue the trial and for an investigator and by her ignorance of the basic facts of the offenses. The motion also included a “certificate of presentment,” certifying that Kerr’s appellate counsel had “hand- delivered” a copy of the motion “to the Office for the 43rd Judicial District Court of Parker County.” See Tex. R. App. P. 21.6. On March 16, the trial court’s court 4 Both Kerr’s trial and appellate counsel were present at the hearing. 5 coordinator, Kerr’s counsel, and the prosecutor began discussing by email when Kerr’s motion for new trial could be set for a hearing.5 On March 19, the State filed a response to the motion and argued that because Kerr had failed to make a prima facie showing of deficient performance or of prejudice arising from trial counsel’s performance, he was not entitled to a hearing on his motion. Although the court coordinator told the prosecutor and Kerr’s counsel on March 20 that she “believe[d] the court is going to set this for hearing,” it was not, and the motion was deemed denied. See Tex. R. App. P. 21.8(c). II. DENIAL OF CONTINUANCES In his second issue, Kerr argues that the trial court abused its discretion by denying trial counsel’s three continuance motions because the denials deprived him of the ability to present a defensive theory—that someone else had stolen the truck. We review the denials for an abuse of discretion. Gallo v. State, 239 S.W.3d 757, 764 (Tex. Crim. App. 2007). A continuance denial will be an abuse of discretion only if the appellant shows both error and prejudice. Gonzales v. State, 304 S.W.3d 838, 843 (Tex. Crim. App. 2010). Error occurs if the appellant made a convincing case for delay such that no reasonable trial judge could conclude scheduling, or the State’s interest, outweighed the appellant’s interest in a delay of the trial. Id. An appellant establishes 5 These communications with the court coordinator satisfy the presentment requirement. See Butler v. State, 6 S.W.3d 636, 641 (Tex. App.—Houston [1st Dist.] 1999, pet. ref’d). 6 prejudice by specifically showing how he was harmed by the absence of more preparation time than he actually had. Id. at 842–43. Kerr has shown neither error nor prejudice. The newly discovered evidence Kerr relied on to request a continuance, specifically that someone else had stolen the truck, was not relevant to the offenses with which Kerr was charged. Kerr was not charged with theft of the truck, and he admitted that he knew the truck he was driving had been stolen. See Tex. Penal Code Ann. § 31.07(a). Accordingly, the trial court could have concluded that scheduling and other considerations outweighed Kerr’s interest in a trial delay. See, e.g., Nwosoucha v. State, 325 S.W.3d 816, 827–28 (Tex. App.—Houston [14th Dist.] 2010, pet. ref’d). Kerr’s assertion of prejudice is likewise insufficient. He argues that the denials precluded him from “assessing, addressing, or preparing for the new facts and information.” This bare assertion does not raise specific prejudice to his defense. See Heiselbetz v. State, 906 S.W.2d 500, 511–12 (Tex. Crim. App. 1995). Further, the jury heard evidence that Kerr was not alone in the truck and that Kerr did not admit to stealing the truck, which apparently was the extent of the “new facts and information” referred to in the continuance motions. These facts negate any prejudice assertion. See Gallo, 239 S.W.3d at 765. We overrule issue two. III. NEW-TRIAL HEARING Kerr argues in his first issue that the trial court abused its discretion by failing to hold a hearing on his new-trial motion. In his motion, Kerr relied on his assertion 7 that his trial counsel’s assistance had been constitutionally ineffective. In his affidavit, Kerr focused on his counsel’s advice to not accept the State’s 50-year plea-bargain offer: [Four days before trial,] I was transported to the courthouse for a hearing on my case. [Counsel] told me the District Attorney’s offer in my case was 50 years in prison and I told her I wanted to accept that offer. [Counsel] told me I had a better chance of getting less than 50 years if I took it to trial. I asked [counsel] for the paperwork for the 50 year plea offer but she said no and instead brought two other attorneys in to meet with me and both of them said I should go to trial. I did not want to go to trial because I feared getting a much longer sentence than 50 years, which is what happened because the jury ultimately gave me a 75 year sentence. I wanted to take the 50 year plea offer and I believe I was not given a fair trial because my attorney would not let me sign for the 50 year plea offer and she was not prepared for trial. Right before jury selection began, . . . my attorney told me the 50 year offer was still available. I reminded her she told me the previous Thursday I should not take that offer. I asked her what I should do and she advised me to go to trial. He also pointed to his counsel’s lack of preparation for trial, leading to her last-minute and unsuccessful continuance requests. He contended these actions and inactions showed his counsel was not acting as a reasonably competent attorney and that but for her ineffective assistance, he would have been sentenced to less than 75 years’ confinement or he would have accepted the 50-year offer. For the following reasons, we disagree and overrule his first issue. A. REVIEW STANDARD We review the trial court’s failure to hold a requested hearing on a motion for new trial for an abuse of discretion. Wallace v. State, 106 S.W.3d 103, 108 (Tex. Crim. 8 App. 2003). Such a review does not determine whether the motion could have reasonably been denied but, rather, whether the trial court could have reasonably denied the appellant a hearing on his motion. Id. In any event, a defendant does not have an absolute right to a hearing. Hobbs v. State, 298 S.W.3d 193, 199 (Tex. Crim. App. 2009). A hearing is required only when one is requested, the matters raised in the motion and in accompanying affidavits6 are not determinable from the record, and the motion and affidavits establish reasonable grounds showing that the defendant could potentially be entitled to relief. Id.; Smith, 286 S.W.3d at 340; Flores-Alonzo v. State, 460 S.W.3d 197, 207 (Tex. App.—Texarkana 2015, no pet.). In the context of an ineffective-assistance-of-counsel claim, a defendant will be entitled to a hearing if he alleges sufficient facts from which a trial court could reasonably conclude both that counsel failed to act reasonably competently and that, but for counsel’s failure, there is a reasonable likelihood that the trial’s outcome would have been different. Smith, 286 S.W.3d at 340–41. To do so, Kerr must have shown that his counsel’s performance was deficient and prejudiced his defense. Smith, 286 S.W.3d at 340. Deficient performance requires Kerr to have demonstrated by a preponderance that counsel’s representation objectively fell below the professional standards. Id. To establish prejudice, Kerr must have shown a reasonable probability 6 Supporting affidavits do not have to establish a prima facie case for a new trial or even include every element required to establish relief, but they do have to be supported by facts and give sufficient notice of the reasonable bases for relief. Smith v. State, 286 S.W.3d 333, 339 (Tex. Crim. App. 2009). 9 that but for counsel’s errors, the result of the proceeding would have been different. Id. Under these standards, the trial court’s discretion extends only to deciding whether the defendant has raised reasonable grounds that are both undeterminable from the record and potentially could entitle the defendant to relief. Id. Kerr’s ineffective-assistance-of-counsel claim is not determinable from the record; thus, we focus on whether he established his potential right to relief based on ineffective assistance of counsel. Hobbs, 298 S.W.3d at 202; Walker v. State, No. 14-18- 00601-CR, 2020 WL 3892756, at 3 (Tex. App.—Houston [14th Dist.] Mar. 17, 2020, pet. dism’d) (per curiam order). B. ADVICE REGARDING PLEA-BARGAIN OFFER It is important to clarify that Kerr’s claim regarding the plea-bargain offer is not that counsel failed to communicate his acceptance of the offer to the prosecutor. Indeed, his affidavit establishes that although he wanted to accept the offer, he did not based on counsel’s advice. Accordingly, Kerr’s claim is that he rejected the offer based on counsel’s legal advice that a trial probably would result in a shorter sentence than the 50-year offer.7 The professional standards applicable to a plea-bargain offer require counsel to fully advise the defendant about the terms and desirability of a In his motion for new trial, Kerr attempted to argue that counsel did not 7 communicate his acceptance to the prosecutor. But in his attached affidavit, Kerr averred that he did not accept the offer on counsel’s advice. On appeal, Kerr now recognizes that he “would have accepted the plea offer but for trial counsel’s advice.” [Emphasis added.] 10 particular plea offer. See Walker, 2020 WL 3892756, at 4 (citing Ex parte Wilson, 724 S.W.2d 72, 73–74 (Tex. Crim. App. 1987)); Turner v. State, 49 S.W.3d 461, 465 (Tex. App.—Fort Worth 2001), pet. dism’d, 118 S.W.3d 772 (Tex. Crim. App. 2003). Even so, the ultimate decision of whether to accept a plea offer is for the defendant. See Turner, 49 S.W.3d at 465. Here, Kerr twice reluctantly made the decision to not accept the State’s offer. Granted, Kerr avers that he made his decisions based on counsel’s allegedly deficient advice, which Kerr attacks with the benefit of hindsight. But an attorney’s prediction that a particular plea strategy is likely to result in a lower sentence is not deficient performance simply because the prediction later proves inaccurate. See Graves v. State, 803 S.W.2d 342, 345, 347 (Tex. App.—Houston [14th Dist.] 1990, pet. ref’d); see also Gonzalez v. State, No. 03-01-00546-CR, 2002 WL 1987632, at 5 (Tex. App.—Austin Aug. 30, 2002, pet. ref’d) (not designated for publication) (“Although appellant may have relied on defense counsel’s opinion of what type of punishment may be assessed and may have been disappointed in the punishment actually assessed, this does not render his counsel ineffective.”). We conclude that Kerr failed to show a potential right to relief based on counsel’s plea-bargain advice because such advice does not objectively fall below prevailing professional norms. Thus, the failure to hold a hearing on Kerr’s motion raising this alleged deficiency was not an abuse of the trial court’s discretion. 11 C. TRIAL PREPARATION Kerr additionally asserted that his counsel was ineffective because she was not prepared for trial, which was allegedly apparent from her failure to consult with Kerr, her late continuance motions that relied on unspecified new information, her late request for an investigator, her lack of knowledge of the facts that she “should have known if she read the report and watched the video recordings,” and her refusal to question Turner’s “ability to recall” a specific, identifying facial tattoo. To establish reasonable grounds supporting prejudice arising from counsel’s alleged inadequate preparation, Kerr must show that better preparation would have benefitted him and led to a better result. See Shamim v. State, 443 S.W.3d 316, 324 (Tex. App.—Houston [1st Dist.] 2014, pet. ref’d) (op. on reh’g). Kerr has not shown that additional preparation and communication between him and his counsel before trial would have changed the trial’s outcome. Kerr did not explain what evidence could have been admitted or which witnesses could have been called had counsel prepared more. See Strickland v. Washington, 466 U.S. 668, 694–96, 104 S. Ct. 2052, 2068–69 (1984) (discussing requirements to show prejudice arising from counsel’s alleged deficient performance). And the State’s case against Kerr was strong. See West v. State, 474 S.W.3d 785, 793–94 (Tex. App.—Houston [14th Dist.] 2014, no pet.) (holding appellant failed to show prejudice when record contained ample evidence of guilt). Thus, Kerr’s motion and affidavit did not set forth reasonable grounds that counsel’s level of preparation prejudiced his defense. See 12 Guillory v. State, No. 02-18-00428-CR, 2019 WL 2554242, at 20 (Tex. App.—Fort Worth June 20, 2019, no pet.) (per curiam) (mem. op., not designated for publication) (recognizing prejudice showing requires explanation of how counsel’s alleged deficient performance impacted trial’s result); Adekeye v. State, 437 S.W.3d 62, 71 (Tex. App.— Houston [14th Dist.] 2014, pet. ref’d) (concluding prejudice not shown because “there is no evidence that information beneficial to appellant’s defense would have been discovered but for counsel’s unprofessional errors”). Accordingly, the trial court did not abuse its discretion by failing to hold a hearing on Kerr’s motion based on counsel’s alleged inadequate preparation. IV. CONCLUSION Kerr has failed to show either that the trial court erred by denying his motions for continuance or that the denials prejudiced his defense; thus, the trial court did not abuse its discretion by denying the motions. Similarly, the trial court did not abuse its discretion by failing to hold a hearing on Kerr’s new-trial motion because he failed to establish reasonable grounds showing that he could potentially be entitled to relief based on trial counsel’s alleged ineffectiveness. Accordingly, we overrule Kerr’s two issues and affirm the trial court’s judgments. See Tex. R. App. P. 43.2(a). 13 /s/ Brian Walker Brian Walker Justice Do Not Publish Tex. R. App. P. 47.2(b) Delivered: August 26, 2021 14	01-04-2023	08-30-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669040/	ACCEPTED 08-19-00296-CR 08-19-00296-CR EIGHTH COURT OF APPEALS EL PASO, TEXAS 3/13/2021 10:54 AM ELIZABETH G. FLORES CLERK No. 08-19-00296-CR IN THE COURT OF APPEALS FILED IN - 8th COURT OF--APPEALS ---- EIGHTH DISTRICT OF TEXAS EL PASO, - - --- TEXAS - - ---- RG ------ 3/13/2021 - I10:54:48 - D -- AM _____________________________________________________________ ---- VO ------ ELIZABETH -- G. FLORES ---- IN RE EL PASO COUNTY PUBLIC DEFENDER ---- Clerk ______________________________________________________________ DEFENDANT’S MOTION TO SUPPLEMENT BRIEF FILED IN 8th COURT OF APPEALS ______________________________________________________________ EL PASO, TEXAS 3/15/2021 9:22:00 AM TRIAL COURT CAUSE NO. 20180D05116ELIZABETH G. FLORES Clerk IN THE 210TH DISTRICT COURT OF EL PASO COUNTY, TEXAS ______________________________________________________________ EL PASO COUNTY PUBLIC DEFENDER A. Marcelo Rivera Todd D. Morten Deputy Public Defenders State Bar No. 24027663 500 E. San Antonio Ave., Room 501 El Paso, Texas 79901 Telephone: (915) 546-8185 Fax: (915) 546-8186 ATORNEYS FOR THE DEFENSE COMES NOW Relator, Sarah Hernandez, by and through her Attorney of Record, Todd D. Morten, who herein respectfully requests this Honorable Court to permit her to supplement her brief pursuant to Tex. R. App. P. 38.7 for the following reasons(s): 1. March 3, 2021 the Texas Court of Criminal Appeals issued Watkins v. State, PD- 1015-18, 2021 WL 800617 (Tex. Crim. App. March 3, 2021); 2. In Watkins the Court of Criminal Appeals defines the word material as it is found in Tex. C. Crim. P. Art. 39.14(a) as evidence having “some logical connection to a fact of consequence”; Watkins at *20. 3. While this matter ostensibly surrounds a complaint made by the State concerning a subpoena and Arts. 24.02 and 24.03, Art. 39.14(h) has also been discussed by the Parties. Further, a motion for discovery pursuant to Art. 39.14(a) was filed in this case and served upon the State. Therefore, in light of Watkins a discussion of 39.14(a) is also warranted; 4. The discussion and holding in Watkins is therefore relevant to the correct disposition of these proceedings and therefore further briefing by the Parties will benefit the Court in reaching a correct disposition. WHEREFORE, Relator Sarah Hernandez requests that this Court allow supplemental briefs from the Parties. Page 2 of 3 Respectfully submitted, EL PASO COUNTY PUBLIC DEFENDER By: /S/ Todd D. Morten Deputy Public Defender, App. Div. State Bar No. 24099592 500 E. San Antonio Ave., Room 501 El Paso, TX 79901 Telephone (915) 546-8185 Fax: (915) 546-8186 CERTIFICATE OF SERVICE The undersigned certifies that a true and correct copy of the foregoing document was delivered to all parties to this action via E-File.Texas.Gov on the date this document was accepted for filing by the Clerk’s Office. /s/ Todd Morten TODD MORTEN Page 3 of 3 Automated Certificate of eService This automated certificate of service was created by the efiling system. The filer served this document via email generated by the efiling system on the date and to the persons listed below. The rules governing certificates of service have not changed. Filers must still provide a certificate of service that complies with all applicable rules. Todd Morten Bar No. 24099592 TMorten@epcounty.com Envelope ID: 51449590 Status as of 3/15/2021 8:57 AM MST Case Contacts Name BarNumber Email TimestampSubmitted Status DISTRICT ATTORNEYAPPEALS daappeals@epcounty.com 3/13/2021 10:54:48 AM SENT TODD MORTEN TMorten@epcounty.com 3/13/2021 10:54:48 AM SENT AMADEO MARCELORIVERA ARivera@epcounty.com 3/13/2021 10:54:48 AM SENT ALYSSA PEREZ AlyPerez@epcounty.com 3/13/2021 10:54:48 AM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619009/	APPEAL OF NATIONAL PNEUMATIC CO.National Pneumatic Co. v. CommissionerDocket No. 3651.United States Board of Tax Appeals5 B.T.A. 637; 1926 BTA LEXIS 2822; November 26, 1926, Decided 1926 BTA LEXIS 2822">2822 The cash value of patents paid in for shares of stock of a corporation determined. John F. McCarron, Esq., George E. Hamilton, Esq., Philip Stein, Esq., and Albert I. Coe, C.P.A., for the petitioner. Ward Loveless, Esq., for the Commissioner. SMITH 5 B.T.A. 637">637 This is an appeal from the determination of deficiencies in income and profits tax as follows: YearDeficienciesOverassessments1915$556.511916375.561917$42,220.501918119,432.82191922,218.1219204,655.74Total142,583.0146,876.24The issues presented by this appeal are: (1) Valuation of the assets acquired by the petitioner at the time of organization for invested capital purposes. (2) Valuation of capital stock of the Prepayment Car Sales Co. as of 1911, the date acquired in exchange for other assets. (3) Valuation of the patents as of March 1, 1913, for depreciation purposes. (4) The profit realized, if any, in 1911, on the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. This profit, if any, affects the computation of the war-profits credit in 1918. (5) A determination of the proper deduction1926 BTA LEXIS 2822">2823 from invested capital on account of inadmissible assets. (6) Loss sustained on the sale of Prepayment Car Sales Co. stock in 1918. (7) Whether the petitioner is entitled to a determination of its profits tax for the year 1918 under the provisions of section 328 of the Revenue Act of 1918. Petitioner's allegation of error with respect to the computation of the allowance for amortization for 1918 was withdrawn at the hearing. 5 B.T.A. 637">638 FINDINGS OF FACT. Since the questions are numerous and the facts involved are detailed, the facts will be subdivided by appropriate headings to correspond with the questions presented. 1. Valuation of assets acquired at date of organization. - The petitioner was incorporated February 2, 1910, with an authorized capital stock of $500,000, divided into 5,000 shares of a par value of $100 each, for the purpose of taking over certain patents owned principally by J. B. Burdett and Harold Rowntree, or by corporations whose stock was principally owned by them, and shares of capital stock of corporations either owned by them or in which they were principally interested. There were five incorporators, each of whom first paid in to the1926 BTA LEXIS 2822">2824 petitioner $100 cash, for which each received one share of stock. On April 9, 1910, Burdett and Rowntree entered into an agreement with the petitioner by which they, in full payment for 4,995 shares of petitioner's capital stock, agreed to cause to be sold, assigned, transferred and set over to the petitioner: (1) Eighteen patents, principally on door devices then owned by Burdett-Rowntree Manufacturing Co. (2) Twenty-one patents or applications for patents, among which were a number relating to pneumatic door-operating devices. (3) Certain contracts as follows: (a) Contract pertaining to door safety devices made between the Burdett-Rowntree Manufacturing Co., and James S. Doyle, dated July, 1909; (b) contract pertaining to an air trap device, made between Burdett-Rowntree Manufacturing Co., and George M. Spencer, dated June 1, 1909; (c) contract pertaining to door devices made between the Burdett-Rowntree Manufacturing Co., and H. C. Randall, dated October 8, 1909. (4) Four air brake patents owned by Harold Rowntree. (5) Two applications for air brake patents owned by Harold Rowntree. (6) The entire capital stock then issued and outstanding ($92,500 par value) 1926 BTA LEXIS 2822">2825 of the Pay-Within Car Co., but with the proviso that the then stockholders of that company should have and retain all of the cash on hand, bills and accounts receivable, or devices as the same existed February 1, 1910, and that it should also complete such contracts at its own expense; that they should also discharge all of the bills and accounts payable and obligations of the company as they existed February 1, 1910. It was further provided that the capital stock of The Pay-Within Car Co., so sold, assigned, transferred and set over to the petitioner should carry: (a) All letters patent owned by said The Pay-Within Car Co.; (b) all agreements relating to patents, or interests therein, or licenses thereunder, of 5 B.T.A. 637">639 said The Pay-Within Car Co.; (c) all contracts made by said The Pay-Within Car Co. for furnishing or installing machinery or devices on and after February 1, 1910. The letters patent thus referred to were six in number. (7) Six hundred and thirty-three shares of the capital stock of the Chicago Welding Co., the entire capital stock of which then issued and outstanding was 1,000 shares of a par value of $100 each. The petitioner further agreed to purchase for1926 BTA LEXIS 2822">2826 $4,000, the remaining 367 shares of the capital stock so that the petitioner should then own the entire capital stock of that company. (8) Seventeen thousand, seven hundred and fifty dollars cash. The agreement also provided in Article IX, in part, as follows: (a) As a part of this transaction the National Pneumatic Company shall pay all expenses of prosecuting the applications for patents, hereinbefore mentioned and described, and of the issue of Letters Patent thereon, incurred from and after February 1, 1910. (b) As a part of this transaction the National Pneumatic Company shall enter into a contract with the Burdett-Rowntree Manufacturing Company (which contract we will procure the Burdett-Rowntree Manufacturing Company to execute), providing for the manufacture by said Burdett-Rowntree Manufacturing Company, of all machinery and devices hereafter sold, furnished or installed by said National Pneumatic Company, its agents, sub-contractors or licensees, such contract to be substantially in the form of contract submitted herewith. (c) As a part of this transaction the National Pneumatic Company shall, if required by the Electric Service Supplies Company, enter into1926 BTA LEXIS 2822">2827 a contract with that Company and also enter into contracts J. B. Burdett, Harold Rowntree, Paris R. Forman, and Frank T. Johnson, respectively (which contracts we will procure to be executed by the individuals above mentioned, respectively), all such contracts to be respectively in substantially the form of contracts submitted herewith. (d) As a part of this transaction the National Pneumatic Company, having acquired the entire capital stock of the Chicago Welding Company, as hereinbefore set forth, shall procure and cause the Chicago Welding Company to sell and deliver to the Burdett-Rowntree Manufacturing Company, and the Burdett-Rowntree Manufacturing Company shall purchase from the Chicago Welding Company, (and we will procure the Burdett-Rowntree Manufacturing Company to so purchase) the entire manufacturing plant, including tools, machinery and appliances and the stock of material manufactured and in process of manufacture of said Chicago Welding Company at its present fair cash value, such fair cash value to be fixed and determined by the undersigned J. B. Burdett and W. G. McCune. The cash received by the petitioner for its shares of stock was $18,250, which was duly1926 BTA LEXIS 2822">2828 recorded on its cash book. The remaining assets acquired were set up under a single item "Sundries," in the "Plant Account" carried on its general ledger. The petitioner's capital stock was placed at $500,000, for the reason that the incorporators thought that was a fair price for the assets to be transferred to the corporation in exchange for its capital 5 B.T.A. 637">640 stock. The incorporators agreed among themselves as to how the stock should be split up among the several owners of the assets to be transferred to the petitioner, and the stock which was issued to Burdett and Rowntree in the first instance was turned back to the corporation by them and certificates of stock were issued in accordance with such agreement. The several assets acquired and carried on the books under the title of "Sundries" in the plant account were not segregated until some time in 1917. The segregation then made was as follows: Apr. 22, 1910 - For cash, organizers$500.00Apr. 22, 1910 - For cash, per agreement17,750.00Apr. 22, 1910 - For services under contract, (stock held in trust by taxpayer corporation)3,500.00In Plant Account.Apr. 22, 1910 - For patents of Burdett-Rowntree Mfg. Co240,000.00Apr. 22, 1910 - For entire capital stock of Pay-Within Car Co166,750.00Apr. 22, 1910 - For capital stock of Chicago Welding Co25,000.00Apr. 22, 1910 - For air brake patents12,750.00Mar. 31, 1911 For foreign patents30,250.00Mar. 31, 1911 For two Pay-Within patents3,500.001926 BTA LEXIS 2822">2829 Prior to January 1, 1917, the petitioner did no manufacturing of its own; its income consisted of royalties, dividends and profits from subcontracting. On or after January 1, 1917, the corporation purchased machinery, tools and other equipment incidental to the manufacture of street car supplies and started operating as a manufacturing concern, along which lines it has directed its attention up to the present time. In its tax returns for 1918 and 1919, the petitioner claimed as the actual value of the assets listed above, subject to the statutory limitations applicable, the amounts set out in the first column of the following tabulation. The amounts allowed by the Commissioner for such assets in his determination of deficiencies for those tax years are shown by the second column. Taxpayer.Commissioner.Cash$18,250$18,250.00(a) Patents of Burdett, Rowntree Mfg. Co240,000162,610.88(b) Entire capital stock of The Pay-Within Car Co166,750112,980.63(c) Capital stock of Chicago Welding Co25,00016,938.63(d) Air brake patents12,7508,469.31(e) Foreign patents30,250None.(f) Two Pay-Within car patents3,500None.(g) Services under contract3,500None.500,000319,249.451926 BTA LEXIS 2822">2830 (a) Actual cash value of patents of Burdett-Rowntree Manufacturing Co. - The Burdett-Rowntree Manufacturing Co. was incorporated 5 B.T.A. 637">641 April 11, 1894. It acquired certain patents on opening and closing door devices for street cars, and in 1905 secured a contract from the Metropolitan West Side Elevated Railroad Co. in Chicago to equip certain of its cars with such devices. It secured contracts of a similar nature during succeeding years and in 1909 and 1910 was doing a large business along this line. In 1910 it had three distinct businesses; one was manufacturing various street car specialties of which the principal one was a pneumatic door-closing device for street cars; the second was the manufacture of pneumatic air closing devices for elevators or elevator doors; the third was the manufacture of electric dumb-waiters or package elevators. It had patents protecting its business in each line. The Burdett-Rowntree Manufacturing Co. had a capital stock of $75,000 during the period 1905 to 1911, inclusive. The patents owned by it were not listed as an asset. Its tangible assets at the beginning of each year, its book income for such year, and the dividends paid1926 BTA LEXIS 2822">2831 during such year are shown by the following tabulation: DateTangible assetsFiscal period.Book income.Dividends paid.Jan. 31, 1905$62,017.81Jan. 31, 1905 toDec. 31, 1905 $14,832.57$7,500Jan. 1, 190669,350.38190647,551.6330,000Jan. 1, 190788,282.40190740,028.2048,750Jan. 1, 190879,560.60190842,041.5130,000Jan. 1, 190991,602.11190978,795.5315,000Jan. 1, 1910148,622.531910146,477.7480,000Jan. 1, 1911187,026.321911127,544.7952,500The following is a summary of gross contracts taken each year and the resulting profits therefrom, regardless of the year in which the contract was completed: Gross contract price.Profits on contracts.Street car work.Contracts taken in 1905$6,624.25$966.63Contracts taken in 190646,810.147,327.10Contracts taken in 190729,563.505,381.87Contracts taken in 1908117,167.6350,315.67Contracts taken in 1909408,153.14135,918.05Elevator work.Contracts taken in 1905105,742.3638,359.38Contracts taken in 190656,938.9818,515.08Contracts taken in 190733,738.767,600.67Contracts taken in 190851,266.5316,747.08Contracts taken in 190943,979.5112,888.21Dumb-Waiter work.Contracts taken in 190568,106.3015,966.55Contracts taken in 190696,749.6626,598.25Contracts taken in 190799,675.3026,216.37Contracts taken in 190896,619.5623,832.53Contracts taken in 1909165,564.6339,667.871926 BTA LEXIS 2822">2832 5 B.T.A. 637">642 In the business of the Burdett-Rowntree Manufacturing Co., the corporation did the work of manufacturing as well as the work of installing. None of its contracts or tangible assets or patents relating to dumb-waiters were transferred to the petitioner. The value of the Burdett-Rowntree Manufacturing Co. patents acquired by the petitioner in exchange for its shares of stock was based largely upon the earnings attributable thereto. The contracts taken by the Burdett-Rowntree Manufacturing Co. under its patents were based on a definite contract price and a predetermined estimate of cost. The cost of each contract was determined in advance from the nature and size of the contract and the known cost of material and shop labor, with a further percentage to cover all overhead charges, which percentage was based on the previous experience of the company. Upon the basis of such computation, the incorporators reached the conclusion that the Burdett-Rowntree Manufacturing Co. patents to be transferred to the petitioner had a value of $240,000. The books of account of the Burdett-Rowntree Manufacturing Co. show the sale of those patents at a price of $240,000. The average1926 BTA LEXIS 2822">2833 remaining life of these patents at the time of their acquisition by the petitioner was 15 years. The commissioner made his determination of a value of $162,610.88 for the patents upon the following: Earnings of the predecessor owner for the five-year period preceding the date of organization of the petitioner in excess of a fair return on the tangible assets was $37,356.11; he determined that 58 per cent of the earnings of the predecessor owner was attributable to the patents acquired by the petitioner. The value of the patents acquired was determined by taking the present worth of an annuity of $21,666.54 for 15 years discounted at the rate of 10 per cent, with provision for a 4 per cent sinking fund. By the use of Hoskold's tables, it was determined that such an annuity had a present worth of $162,610.88, and that figure was accepted as the value of the patents. (b) Capital stock of The Pay-Within Car Co. - While the Burdett-Rowntree Manufacturing Co. was manufacturing its door devices for cars where the passenger entered at the end of the car, a "Pay-as-you-enter" car came into use, where fares were collected as the passenger passed by the conductor. Harold Rowntree thought1926 BTA LEXIS 2822">2834 he could make an improvement on that car and he, with a man named Lincoln, in Philadelphia, got out a patent on what they called the "Pay-Within" car. This car had doors on the side and these doors were operated by a mechanism which it was contemplated would be made by the Burdett-Rowntree Manufacturing Co. The 5 B.T.A. 637">643 Pay-Within Car Co. was organized in 1908 and its business increased very rapidly. In 1910 it had an authorized capital stock of $100,000, only $92,500 of which was outstanding. For this capital the owners received $166,750 of the capital stock of the petitioner corporation. The Commissioner has allowed an actual cash value for this stock at the time acquired by the petitioner of $112,980.63. The basis for this determination is that, since 2,400 shares of stock were issued for the patents of the Burdett-Rowntree Manufacturing Co., which patents had a value determined to be $162,610.88, the value of each share was $67.7545; that this value, multiplied by 1,667 1/2 shares issued to the owners of the capital stock of The Pay-Within Car Co., gives a value for the stock of $112,980.63. At the time acquired by the petitioner, The Pay-Within Car Co. had but one1926 BTA LEXIS 2822">2835 asset, namely, patents. The previous stockholders were permitted to withdraw all cash, accounts and bills receivable, and contracts for furnishing or installing machinery or devices, as the same existed on February 1, 1910. They also assumed all indebtedness of the company existing on February 1, 1910. The accounts of The Pay-Within Car Co. from November 1, 1908, to February 1, 1910, show the contracts acquired and completed with the profit derived therefrom, but do not include contracts acquired under the patents and in process of completion which were uncompleted on February 1, 1910. Such net income on work completed alone and tangible assets at the beginning of each year were as follows: PeriodTangible assets at beginning of period.Net income for period.Nov. 1-Dec. 31, 1908 (2 months)$1,000.00$3,883.41Jan. 1-Dec. 31, 1909 (12 months)4,883.4118,515.88Jan. 1-Jan. 31, 1910 (1 month)11,024.7613,208.87Total$35,608.16The dividend record of the company shows as follows: September 20, 1909$4,518.05October 18, 19095,240.99December 31, 19092,620.49January 31, 19102,620.49Total15,000.02Liquidating dividend Feb. 1, 1910 (balance of surplus)20,608.1435,608.161926 BTA LEXIS 2822">2836 5 B.T.A. 637">644 (c) Capital stock of Chicago Welding Co. - The Chicago Welding Co. had been recently started for acetylene welding and cutting, and it was believed that it might be a good thing in the street car business in the repair of castings and in making sheet iron specialties and things of that kind. Some of the stockholders of that company insisted upon receiving cash for their shares. This was the occasion for the provision that the petitioner should issue $25,000 par value of its capital stock for 633 shares of the capital stock of the Chicago Welding Co. and pay $4,000 cash for the balance of the shares. The Commissioner's determination of a value of $16,938.63 for the 633 shares of stock acquired is the same as that referred to as the basis for the determination of the value of the capital stock of The Pay-Within Car Co. (d) Air-brake patents. - Rowntree owned four air-brake appliances upon which patents had been issued or for which applications were pending. The petitioner issued to Rowntree $50,000 par value of its capital stock for these patents. He donated all but $12,500 of this stock back to the corporation. These patents had never been used by Rowntree1926 BTA LEXIS 2822">2837 nor were they used by the petitioner after they had been acquired by it, but the incorporators believed that they had a trading value, inasmuch as the Burdett-Rowntree Manufacturing Co. sold some of its products to manufacturers of air brakes, and the ownership of these patents might be instrumental in retaining such business. (e) Rowntree patents - foreign. - The petitioner issued $30,250 par value of its capital stock, donated to it by Rowntree, for foreign patents of Rowntree. The patents were never used by Rowntree and were never used by the petitioner. The Commissioner allowed no invested capital in respect of them. (f) Pay-Within car patents. - The petitioner acquired two patents relating to the manufacture of Pay-Within cars, through Burdett and Rowntree. These patents were included in the sundries shown in petitioner's plant account and were set up in the segregation of the plant account at $3,500. The Commissioner found no value for the patents in his computation of invested capital. (g) Services under contract. - The agreement made by Burdett and Rowntree with petitioner corporation on April 9, 1910, provided that petitioner corporation should enter1926 BTA LEXIS 2822">2838 into an agreement for the employment of one Hugh L. Adams, of Chicago, and that it should issue to him, in addition to the payment of a regular salary, certain shares of stock. To enable the petitioner to carry out the agreement, Burdett and Rowntree obligated themselves to turn over to the corporation the shares of capital stock necessary to pay Adams. Adams was employed under a contract for a term of 3 1/2 years, with a provision that he should receive, as a bonus for each year of employment, 5 B.T.A. 637">645 ten shares of capital stock. He resigned from his position before the termination of the contract and only thirty shares of the stock were issued to him. 2. Valuation of the capital stock of the Prepayment Car Sales Co. as of 1911, the date acquired, in exchange for their assets. - On March 1, 1911, the petitioner exchanged 60.03 per cent of the patents acquired from the Burdett-Rowntree Manufacturing Co., and the patents (the only assets) of The Pay-Within Car Co., for 4,000 shares of the capital stock of the Prepayment Car Sales Co. Thereafter, The Pay-Within Car Co., although continuing its corporate existence, had no assets or income and transacted no business whatever. 1926 BTA LEXIS 2822">2839 The entire capital stock of this company was $1,000,000, divided into 10,000 shares. The Commissioner determined that the cost to the petitioner of these 4,000 shares of stock was the value at date of acquisition by it of the assets turned over to the Prepayment Car Sales Co. for the shares, since the petitioner had shown no increase in value of such assets from the date acquired to March 1, 1911. The Commissioner used as the value of the capital stock of The Pay-Within Car Co. $112,980.63 (computed in the manner outlined above), and computed the cost and value of 60.03 per cent interest in the patents acquired from the Burdett-Rowntree Manufacturing Co. at 60.03 per cent of $162,610.88, the amount fixed by him as the value of the patents acquired from the Burdett-Rowntree Manufacturing Co. The Commissioner used as the March 1, 1913, value the cost at March 1, 1911. The cost of the stock at March 1, 1911, and the value at March 1, 1913, was computed as follows: Value of capital stock of The Pay-Within Car Co$112,980.63Patents acquired from Burdett-Rowntree Mfg. Co., given as part consideration (60.03% X $162,610.88)97,615.31Value of stock of Prepayment Car Sales Co., at March 1, 1911, and March 1, 1913210,595.941926 BTA LEXIS 2822">2840 3. Valuation of patents as of March 1, 1913, for depreciation purposes. - The values of the patents at March 1, 1913, for purposes of determining depreciation deductible during the taxable years, were the values at the date of acquisition, less the exhaustion occasioned by the lapse of time from the date acquired to March 1, 1913. The patents had an average life of 15 years from February 1, 1910. 4. The profit realized, if any, in 1911, on the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. - The cost of the 4,000 shares of stock of the Prepayment Car Sales Co. was the sum of (a) The value of the capital stock of The Pay-Within Car Co. at the date acquired by the taxpayer, plus (b) 60.03 per cent of the value of the patents of the Burdett-Rowntree Manufacturing Co. when acquired by the petitioner in February, 1910, less the proportionate exhaustion of the patents of the Burdett-Rowntree Manufacturing 5 B.T.A. 637">646 Co. from February 1, 1910, to March 1, 1911, on the basis of a fifteen-year life. 5. Determination of the proper deduction from invested capital on account of inadmissible assets. - The nature of the petitioner's business1926 BTA LEXIS 2822">2841 is such that certain of its contracts extend over several years. The method employed in keeping its books of account is to charge the incurred costs of its uncompleted contracts to "Contract Construction Account." At intervals during the course of completion of contracts, bills are sent to its customers and entries are made charging "Accounts Receivable" and crediting "Contracts Private Account." Upon completion of the contract the "Contracts Construction Account" and "Contracts Private Account" are closed out and the difference credited to surplus. In preparing its balance sheets for the taxable years 1917 to 1920, inclusive, the petitioner showed as a liability the difference between the costs of the contracts and the amounts billed. The amounts billed and the incurred costs, as shown by the "Accounts Receivable" and "Contracts Private Account" at December 31 of each of the years 1917 to 1920, inclusive, were as follows: Date.Amounts billed.Incurred costs.December 31, 1917$601,337.82$494,934.85December 31, 1918853,619.11605,620.82December 31, 1919181,324.29141,393.56December 31, 1920813,305.11704,856.73The excess of the amounts1926 BTA LEXIS 2822">2842 billed over the amounts of the incurred costs at the close of each of the years 1917 to 1920, inclusive, is shown on the petitioner's balance sheets at the close of each year as a liability, with the descriptive title "Contracts in Process." Thus, the amount at December 31, 1920, is shown by the petitioner's balance sheet to have been $108,448.28. 6. Loss sustained on the sale of Prepayment Car Sales Co. stock in 1918. - In 1918 the petitioner sold its 4,000 shares of stock in the Prepayment Car Sales Co. for $5,000. The Commissioner determined that the petitioner sustained a loss of $210,595.94 on the sale. OPINION. SMITH: The principal point involved in this appeal is the value of assets acquired by the petitioner in exchange for its capital stock. No question of affiliation of the petitioner with the Burdett-Rowntree Manufacturing Co. is involved. The petitioner apparently never claimed affiliation with that company and no evidence as to the stock ownership of that company or of the petitioner is before us. Since 5 B.T.A. 637">647 the questions are numerous they will be considered in the same order in which they are stated in the preliminary statement and in the findings1926 BTA LEXIS 2822">2843 of fact. 1. Valuation of assets acquired at date of organization. - (a) Actual cash value of patents of Burdett-Rowntree Manufacturing Co. - The Burdett-Rowntree Manufacturing Co. had been in existence since 1894 and was doing a large and profitable business in 1910. Although it was engaged in three lines of business, the largest and most profitable line was that connected with street car work This work was secured by reason of the ownership of numerous patents. These patents, together with certain other patents and applications for patents, relating to elevator doors, etc., were transferred to the petitioner and eventually the petitioner issued for such assets $240,000 capital stock. Under the agreement of transfer the Burdett-Rowntree Manufacturing Co. was to continue to manufacture under its patents. The provisions of the contract were not introduced in evidence. The books of account of the Burdett-Rowntree Manufacturing Co. showed the sale of these assets for $240,000. The Commissioner determined that the actual cash value of these assets was $162,610.88. The basis of this determination is a capitalization of the earnings of the Burdett-Rowntree Manufacturing1926 BTA LEXIS 2822">2844 Co. attributable to the patents during a five-year period immediately preceding the date of transfer. The findings of fact show a very large increase in volume of business of the company during the three years preceding 1910. Many of the contracts begun in 1908 and 1909 had not been completed at the date of transfer of the assets to the petitioner, and very large profits were realized by the Burdett-Rowntree Manufacturing Co. from the completion of such contracts. The Commissioner did not take into account these profits in determining the earnings attributable to the patents during the five-year period prior to February 1, 1910. The petitioner contends that if the value of its patents is to be predicated upon its earnings, the earnings realized during the years 1910, 1911 and 1912, from the contracts in hand but uncompleted at the date of transfer, should be taken into consideration. We are of the opinion that the contention of the petitioner upon this point is well founded. The contracts from which the Burdett-Rowntree Manufacturing Co. had a large income in 1910, 1911 and 1912 were attributable to the patents owned by it prior to February 1, 1910, and assigned to the1926 BTA LEXIS 2822">2845 petitioner in 1910. No hard and fast rule can be laid down for determining the value of patents paid in for capital stock of a corporation. . The value is a question of fact in any case. Appeal of J. J. Gray, jr.,. See also Appeals of5 B.T.A. 637">648 ; ; . In the instant case, the interested parties determined that the value of the assets to be transferred to the petitioner by the Burdett-Rowntree Manufacturing Co. was $240,000. We think that that determination is entitled to serious consideration. We are satisfied that the assets had a greater value than was placed upon them by the Commissioner, and from a consideration of the entire record we are of the opinion that $240,000 was not in excess of the cash value. (b) Capital stock of The Pay-Within Car Co. - For the entire capital stock of The Pay-Within Car Co., the petitioner issued $166,750 of its capital stock. It claims that that was its actual cash value. It is true1926 BTA LEXIS 2822">2846 that The Pay-Within Car Co. had been in existence for only a short period, but its earnings during that period had been very large. There was a prospect that the business would continue to increase in the manner shown by the record of its earnings from November 1, 1908, to February 1, 1910. If those earnings should continue, the patents from which they arose had a very large cash value. We are of the opinion that the actual cash value was at least $166,750. (c) Capital stock of the Chicago Welding Co. - The petitioner claims that the actual cash value of 633 shares acquired by it was $25,000, the par value of the shares of stock of the petitioner corporation issued therefor. It appears, however, that the petitioner was to acquire the remaining 367 shares for $4,000 cash. The Commissioner determined the actual cash value of the 633 shares to be $16,938.63. The evidence of record does not warrant a cash value in excess of $16,938.63. (d) Air-brake patents. - The Commissioner determined the actual cash value of the air-brake patents to have been $8,469.31. In our opinion the evidence does not warrant a greater cash value. (e) Burdett-Rowntree patents - Foreign.1926 BTA LEXIS 2822">2847 - Although these patents were placed upon the petitioner's books of account at a value of $30,250, the evidence shows that the patents were never used by the Burdett-Rowntree Manufacturing Co. and were never used by the petitioner. No evidence has been adduced which would warrant a finding that the patents had a cash value. (f) Pay-Within car patents. - There is no evidence of record that would warrant any finding of fact that these patents had an actual cash value at the date of acquisition. In the absence of evidence the Commissioner's determination of no value must be approved. (g) Services under contract. - The evidence shows that $3,000 par value of capital stock of petitioner was issued to Hugh L. Adams as compensation for services. All of his services were performed 5 B.T.A. 637">649 prior to the tax years under consideration. The services were worth the par value of the capital stock issued therefor and the Board is of the opinion that the petitioner is entitled to invested capital in the amount of $3,000 in respect of such services paid for by capital stock. 2. Valuation of the capital stock of the Prepayment Car Sales Co. as of 1911, the date acquired1926 BTA LEXIS 2822">2848 in exchange for their assets. - At the hearing of this case it was stipulated as follows: On March 1, 1911, the taxpayer acquired 4,000 shares of the capital stock of the Prepayment Car Sales Company, par value $100 per share. The consideration given for this stock was the patents of The Pay-Within Car Company and 60.03 per cent of the patents acquired by the taxpayer from the Burdett-Rowntree Manufacturing Company in February, 1910. It is further stipulated that the Board may find that the cost of the 4,000 shares of stock of the Prepayment Car Sales Company was the sum of (a) the value fixed by the Board as the value of the capital stock of The Pay-Within Car Company at the date acquired by the taxpayer, plus (b) 60.03 per cent of the value fixed by the Board as the value of the patents of the Burdett-Rowntree Manufacturing Company when acquired by the taxpayer in February, 1910, less the proportionate exhaustion on the patents of the Burdett-Rowntree Maufacturing Company to March 1, 1911, on the basis of a fifteenyear life. It is further stipulated that the value so fixed shall be accepted both as the cost and the March 1, 1913, value of the said 4,000 shares of capital1926 BTA LEXIS 2822">2849 stock of the Prepayment Car Sales Company. In accordance with the stipulation, it is found that 60.03 per cent of the value of the patents acquired from the Burdett-Rowntree Manufacturing Co. was $144,072; that the exhaustion of the interest in the patents to March 1, 1911, amounted to $10,405.20, and that the cost and the March 1, 1913, value of the 4,000 shares of capital stock of the Prepayment Car Sales Co. was $300,416.80. 3. Valuation of patents as of March 1, 1913, for depreciation purposes. - It was stipulated by and between counsel for the petitioner and counsel for the Commissioner that the values of the patents that were determined by the Board might be accepted as the March 1, 1913, values, less the exhaustion occasioned by the lapse of time from the date acquired to March 1, 1913. 4. The profit, if any, realized in 1911 on the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. - It was originally the contention of the petitioner that it realized a profit in 1911 upon the sale of certain assets to the Prepayment Car Sales Co. for stock of that company. This contention was withdrawn at the hearing and is covered by the stipulation1926 BTA LEXIS 2822">2850 referred to above under "Valuation of the capital stock of the Prepayment Car Sales Co. as of 1911 * * ." 5. 5 B.T.A. 637">650 Determination of the proper deduction from invested capital on account of inadmissible assets. - Section 326(c) of the Revenue Act of 1918 provides: There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year. In making up its balance sheets the petitioner showed as a liability the difference between the amount billed on uncompleted contracts and the incurred costs on such contracts. It is the contention of the petitioner that this was in error, and that in place thereof the petitioner should have shown as an asset the entire amount billed on uncompleted contracts, and, as a liability, the incurred costs. With respect to this contention it should be noted that the entire amounts billed on uncompleted contracts appear in the balance sheets as assets either as "accounts receivable" or as "cash" or some other asset. The petitioner seeks to pad its balance sheet by adding to the asset1926 BTA LEXIS 2822">2851 side a certain amount representing the incurred costs, and to add a like amount to the liability side. It is the contention of the Commissioner that, if such an addition is made, the petitioner is in fact duplicating its admissible assets and that under the statute there is no provision for such deduction. In our opinion the contention of the Commissioner upon this point is entirely correct. The original balance sheets were properly made out. Every asset of the company was listed on the asset side of the balance sheet. We see no warrant of law for increasing those assets in any particular. 6. Loss sustained on the sale of Prepayment Car Sales Co. stock in 1918. - As a result of litigation in 1915, the patents owned by the Prepayment Car Sales Co. were adjudged invalid. The market price of the stock of the company declined vary rapidly. In 1918 the petitioner sold its 4,000 shares of the stock of that company, which had a cost and a fair market value on March 1, 1913, of $300,416.80, for $5,000. The Commissioner allowed the petitioner the deduction of a loss of $210,595.94. It is the contention of the petitioner that the loss sustained was $433,807.49. We have1926 BTA LEXIS 2822">2852 found that the cost and the March 1, 1913, value of the stock was $300,416.80. The loss sustained upon the sale in 1918 was, therefore, that amount less $5,000, or $295,616.80. 7. Whether the petitioner is entitled to a determination of its profits taxes for the year 1918 under the provisions of section 328 of the Revenue Act of 1918. - The petitioner advanced no arguments in favor of its claim that its tax for the year 1918 should be determined under the provisions of section 328. We are of the opinion, in view of the findings made herein, that there are no features of 5 B.T.A. 637">*651 abnormality of income or invested capital which warrant such consideration. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619010/	EDWARD C. MOORE, JR., AND CENTRAL UNION TRUST CO. OF NEW YORK, EXECUTORS, ESTATE OF EDWARD MOORE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moore v. CommissionerDocket No. 40790.United States Board of Tax Appeals21 B.T.A. 279; 1930 BTA LEXIS 1882; November 11, 1930, Promulgated 1930 BTA LEXIS 1882">1882 1. Transfers of securities by the decedent to his son, within two years prior to his death, are held, upon the evidence, not to have been made in contemplation of death. 2. The amount of the liability under a judgment which has become final through affirmance by the highest court of the State, is deductible as a claim against the estate. 3. An estate claiming deductions for charitable bequests, for the purpose of determining the value of the net estate, must produce evidence sufficient to establish their deductibility under the statute. Proof of the names of the legatees, the fact that they are incorporated, and their designation as a Catholic church and school, is not enough. 4. A credit claimed by an estate (sec. 301(b), Revenue Act of 1924) on account of New York inheritance tax, part of which was actually paid and part of which was deposited pursuant to the State law, is denied for failure to establish (1) what part if any of the amount deposited might fairly be regarded as actually paid, and (2) whether any of the amount actually paid or deposited is "in respect of any property included in the gross estate." John W. Drye, Jr., Esq., and Lester L.1930 BTA LEXIS 1882">1883 Colbert, Esq., for the petitioners. L. S. Pendleton, Esq., for the respondent. STERNHAGEN 21 B.T.A. 279">279 This proceeding involves a deficiency of $15,860.73 in estate taxes. Petitioners contest the inclusion in decedent's gross estate of the value of securities transferred to his son within two years of death; the disallowance of deductions of alleged charitable bequests and a claim against the estate; and the disallowance of credit for State taxes alleged to have been paid. FINDINGS OF FACT. Petitioners are the duly authorized executors of the estate of Edward Moore, deceased, who died a resident of the State of New York on August 6, 1924, at the age of 86. 1. On June 18, 1923, decedent gave to his son, Edward C. Moore, Jr., specified United States certificates or Treasury bonds amounting to $100,000. Again on October 17 and December 24, 1923, he gave his son specified United States certificates or Treasury bonds amounting to $130,000 and $150,000, respectively. The transfers of the securities were not made by decedent in contemplation of death. 2. On May 13, 1930, the Supreme Court of New York State, after affirmance on appeal to the Court of1930 BTA LEXIS 1882">1884 Appeals, entered a final judgment 21 B.T.A. 279">280 for $49,749.46 and costs of $248.90 in favor of John L. Curley and Jessica Shewan, executors, against petitioners as executors of Edward Moore's estate, and others. Of said judgment and costs, the share to be paid by the petitioners is $19,465.07. 3. By the second clause of his will decedent bequeathed $1,000 for repairs to St. Stephens Church, a Catholic church of Schuylkill County, Pennsylvania, and by the third clause he bequeathed $500 to the Sisters of St. Stephens School for the general educational purposes of the school. Both beneficiaries are incorporated. Neither bequest has yet been paid. 4. The Surrogate of Kings County, New York, on August 8, 1928, made a "Decree Assessing and Fixing Tax" of which $475.37 was upon the bequests directly to children, and $980 was upon contingent remainders. The former amount has been reduced to $451.60 and has been paid. The latter amount of $980 was deposited "as provided by section 241 of the New York Tax Law." OPINION. STERNHAGEN: 1. There is evidence to support the conclusion that the transfers of securities made by decedent to his son were not made in contemplation of death1930 BTA LEXIS 1882">1885 and there is also evidence against such conclusion. Since each case involving this question must be decided by weighing the evidence in the record, it would serve no useful purpose to narrate or discuss it at length. Bearing in mind at all stages of our consideration that the burden is upon the petitioner to prove facts sufficient to overcome the statutory presumption and the Commissioner's determination, , we think the preponderance of the evidence supports the petitioner and have therefore found as a fact that the transfers were not made in contemplation of death. The value of the securities and accrued interest should be excluded from the gross estate. 2. The respondent disallowed any deduction in respect of the Shewan judgment because "this case is still in litigation." It has now reached a final judgment and the petitioners' share of the liability is $19,465.07. It is a definitely ascertained claim against the estate and a proper deduction. 3. The only evidence to establish that the legatees St. Stephens Church and St. Stephens School are within the statutory description of corporations "organized and operated1930 BTA LEXIS 1882">1886 exclusively for religious, charitable, scientific, literary, or educational purposes * * no part of the net earnings of which inures to the benefit of any private stockholder or individual," consists of the names, the fact that they are incorporated, and their designation as a Catholic church and school. This is not enough. ; 21 B.T.A. 279">281 ; . While the Commissioner disallowed this claimed deduction for want of proof of payment, the Board must have evidence sufficient to establish deductibility under the statute. , affirming . The disallowance of the deduction is sustained. 4. The petitioners claim a credit (no doubt under section 301(b)) of $1,431.60 for New York State inheritance tax. The evidence is clear that $451.60 has been actually paid, as the statute requires. The $980 has only been deposited, and there is nothing to indicate what part if any might fairly be regarded as actually paid. The deposit1930 BTA LEXIS 1882">1887 is apparently treated in New York not as payment of the tax but as "merely security for the subsequent payment of the tax." . Nor is there any evidence to show whether any of the amount actually paid or deposited is "in respect of any property included in the gross estate." Only if it was, is the credit provided, ; ; , and in the absence of such evidence the credit must be denied. This is manifestly an unsatisfactory disposition of an issue so easily determinable on its merits. But the statute is clear, the burden of proof plainly allotted to petitioners, and it is not for us to depart from them by assuming facts which petitioners should and could so easily have proven. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619011/	R. M. WEYERHAEUSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Weyerhaeuser v. CommissionerDocket No. 54667.United States Board of Tax Appeals33 B.T.A. 594; 1935 BTA LEXIS 727; November 29, 1935, Promulgated 1935 BTA LEXIS 727">727 1. DIVIDENDS TO STOCKHOLDERS. - A corporation, organized prior to March 1, 1913, and having on hand earnings and profits accumulated prior to that date, sustained a net loss in 1927, followed by earnings in 1928. It made distributions to its stockholders during 1928 in an amount less than its earnings for that year. Held, such distributions constituted taxable income to the stockholders. Helvering v. Canfield,291 U.S. 163">291 U.S. 163. 2. TAXABLE NET INCOME - EARNINGS AND PROFITS. - A statutory net loss of a prior year can not be carried forward and deducted from receipts of a subsequent year in determining earnings and profits available for distribution to a corporation's stockholders, where the net loss of such prior year has been absorbed by being charged against surplus. Taxable net income and earnings and profits differentiated and held, not synonymous. Wayne C. Gilbert, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. MELLOTT33 B.T.A. 594">594 OPINION. MELLOTT: A memorandum opinion was entered in this proceeding under date of November 28, 1933, in which we decided, following 1935 BTA LEXIS 727">728 , that certain distributions received by the petitioner from a corporation did not constitute taxable income. The Supreme Court having reversed the decision relied upon, a motion for reconsideration and revision, timely filed by the respondent, was granted. The respondent determined a deficiency in income tax against the petitioner for the year 1928 in the amount of $1,227.87. Petitioner, a resident of Cloquet, Minnesota, contests such determination and claims he has already overpaid his tax liability for that year and is entitled to a refund. The deficiency arises by reason of the failure of the petitioner to report as taxable income, distributions received by him in 1928 (1) from the Cloquet Lumber Co. in the amount of $8,073.44, and (2) from the Edward Hines Lumber Co. 33 B.T.A. 594">595 in the amount of $1,527.75. At the hearing, the parties agreed that the tax liability by reason of the distribution made by the latter company, would be settled under Rule 50 in accordance with an agreement to be entered into between such company and the respondent. The facts concerning the distributions received by petitioner from1935 BTA LEXIS 727">729 the Cloquet Lumber Co. were stipulated. Petitioner, in 1928, owned 248.4 shares of the capital stock of this corporation, and, during the year 1928, received as a stockholder, distributions which totaled $8,073.44. The surplus of the company as of March 1, 1913, was $11,283,450.08. Between that date and December 31, 1926, it made a number of nontaxable dividend distributions, which reduced the March 1, 1913, surplus to $9,036,218.67 on December 31, 1926. During the year 1927 additional nontaxable dividend distributions, together with a net loss amounting to $794,678.10, further reduced its March 1, 1913, surplus so that on December 31, 1927, it amounted to $7,614,621.24, Its earnings available for distribution, realized during the year 1928, amounted to $416,463.62. At various times during the year 1928 it paid dividends in the total amount of $325,000. At the time these dividends were distributed it had on hand earnings realized during the year 1928 in excess of the amounts distributed. The income tax return of the company for the year 1928, disclosed a net loss of $752,651.38, which resulted principally from carrying forward and deducting in computing its net income, the1935 BTA LEXIS 727">730 statutory net loss of $794,678.10 which it sustained in 1927. The major contention of the petitioner is, that before any 1928 corporate distributions can be said to have been made from earnings or profits accumulated since March 1, 1913, all losses since March 1, 1913, must first be made good, and, inasmuch as the net operating loss of $794,678.10 for the year 1927 exceeds the earnings for the year 1928, the distribution of $325,000 made during the year 1928 simply reduced the existing March 1, 1913, surplus, and his share of such distribution, amounting to $8,073.44, is nontaxable. The respondent contends that the distributions were taxable to the recipients in their entirety, alleging, in this connection, that at the time they were made there were available for distribution, and actually distributed to the stockholders, earnings of the corporation accumulated during the year 1928. The parties agree that subsections (a) and (b) of section 115 of the Revenue Act of 1928 are applicable. These subsections, which are substantially the same as subsections (a) and (b) of section 201 of the Revenue Acts of 1921, 1924 and 1926, define a dividend as "any distribution made by a corporation1935 BTA LEXIS 727">731 to its shareholders, * * out of its earnings or profits accumulated after February 33 B.T.A. 594">596 28, 1913" and provide that "every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings and profits"; that "amy earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed * ." Our decision must be in accordance with the following rule enunciated by the Supreme Court in : Paragraphs (a) and (b) of section 201 [Revenue Act of 1921] disclose a single purpose, and are to be construed in harmony with each other. They show that the Congress was careful to arrange its plan so that the right to receive, free of tax, a distribution of surplus accumulated prior to March 1, 1913, should not be exercised in such a fashion as to permit profits accumulated after that date to escape taxation. To that end the Congress provided that "every distribution is made out of earnings or profits, and from the most recently1935 BTA LEXIS 727">732 accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913." Then follows the exemption which is strictly limited to a distribution of profits accumulated prior to March 1, 1913. Nothing is said as to a restoration of those profits out of subsequent earnings if the former have been lost. The loss sustained by the Cloquet Lumber Co. in 1927 was necessarily chargeable against, and hence reduced, its "earnings or priofits accumulated, or increase in value of property accrued before March 1, 1913." In other words, its surplus. The earnings for the year 1928 can not be applied to restore any part of such surplus. We are therefore of the opinion, and must necessarily hold, that the earnings for the year 1928 were available for distribution to the stockholders, and taxable to them as dividends at surtax rates, unless the alternative contention made by petitioner should be sustained. The alternative contention of the petitioner is that the statutory net loss of the Cloquet Lumber Co. for 1927, should be carried forward in computing its "earnings or profits" for 1928. Inferentially he argues that the phrase "earnings or profits" 1935 BTA LEXIS 727">733 should be construed to be synonymous with "taxable net income"; that since the company had no taxable net income, the distributions to its stockholders were not distributions of earnings and profits and hence were not taxable. Manifestly, this contention can not be sustained. We are here concerned with the sole question, Did petitioner receive a dividend out of earnings or profits made during the year 1928 - which were the most recently accumulated earnings or profits - or, did he receive a tax-free distribution of earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913? 33 B.T.A. 594">597 "Net income", in the language of the statute (sec. 21, Revenue Act of 1928), "means the gross income computed under section 22 less the deductions allowed by section 23." Gross income, as defined by section 22, includes gains, profits and income derived from salaries, wages or compensation for personal services, from professions, vocations, trades and businesses, as well as from interest, rent, dividends, securities and "income derived from any source whatever." The section, however, specifically provides for the exclusion of life insurance, annuities, gifts, 1935 BTA LEXIS 727">734 bequests, devises and interest upon the obligations of a state, territory or any political subdivision thereof. The deductions allowed include all ordinary and necessary expenses, interest, losses, bad debts, depreciation, depletion, net losses of prior years to the extent provided in section 117, dividends received from domestic corporations, and dividends from a foreign corporation deriving more than 50 percent of its gross income from sources within the United States. In determining the "taxable net income" of a corporation, in addition to the deductions set forth above, certain credits are allowed by section 26. It is apparent, therefore, that "taxable net income" is purely a statutory concept. Earnings and profits, on the other hand, are not defined by the act; but they have a settled and well defined meaning in accounting. Generally speaking, they are computed by deducting from gross receipts the expense of producing them. ; Fletcher Cyclopedia Corporations, vol. 6, p. 6092. Thus, under the ordinary method of accounting, in computing earnings and profits there will be deducted, not only the1935 BTA LEXIS 727">735 items shown above, but others which are not, under the statute, deductible in computing taxable net income. In this classification may be listed such items as extraordinary expenses, charitable contributions, taxes paid the Federal Government, and taxes assessed against local benefits tending to increase the value of the property. ; ; ; . Again, many items, such as interest upon the obligations of a state or political subdivision, tax-free Federal securities, and dividends from other corporations, must necessarily be considered in computing earnings and profits, though forming no part of taxable net income. In the case of , we said: This is not the only case where some income or profit free from tax in the hands of a corporation is, nevertheless, taxable to a stockholder upon distribution. Dividends and stock of domestic corporations, interest on bonds 33 B.T.A. 594">598 and obligations of States1935 BTA LEXIS 727">736 and municipalities, and statutory exemptions are not a part of the statutory net income of a corporation, but are nevertheless a part of its earnings or profits and may form a part of ordinary dividends which are taxable when received by the stockholders. On the other hand, corporations frequently make expenditures which are not deductible from gross income for income-tax purposes, but which nevertheless reduce earnings or profits. It therefore follows that the earnings or profits mentioned in section 201(a) of the Revenue Act of 1921 are not the equivalent of the taxable net income of the corporation. In this connection see , and . But it is argued that the statutory net loss as defined by section 117, "is a pure business loss", and should be considered in computing earnings and profits for 1928, "without differentiation from other losses allowed as deductions by section 23." This argument loses sight of the fact that Congress, in enacting section 23, was concerned only with deductions to be allowed in computing net income; it was neither defining earnings and profits, nor providing1935 BTA LEXIS 727">*737 a method for computing them. While we have held that in the case of a corporation organized subsequent to March 1, 1913, there can be no accumulated earnings or profits until an operating deficit is made good (), we have no such question here. The Cloquet Lumber Co. was organized prior to March 1, 1913, and its operating deficit for the year 1927 was made good out of its accumulated earnings. We therefore hold that the statutory net loss of 1927 can not be brought forward and deducted from the gross receipts of the year 1928 for the purpose of computing the earnings and profits of that year. The distributions in question were made out of the earnings and profits of the year 1928; petitioner's share thereof constituted taxable income to him, and our decision on this issue must be for the respondent. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619012/	DELRAY LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Delray Lumber Co. v. CommissionerDocket No. 41867.United States Board of Tax Appeals20 B.T.A. 8; 1930 BTA LEXIS 2220; June 2, 1930, Promulgated 1930 BTA LEXIS 2220">2220 1. The assessment by respondent of a penalty for petitioner's failure to file a new return for the fiscal year ended July 31, 1925, under the 1926 Act, a return having been filed by it for that period under the 1924 Act, is not sustained, since petitioner's tax liability computed under both acts is less than the amount shown to be due in the return filed under the 1924 Act, and assessed by respondent. M. Cohn & Sons Co.,9 B.T.A. 87">9 B.T.A. 87, followed. 2. Amounts claimed in amended returns for fiscal year ended July 31, 1926, as bad debt deductions disallowed. William S. Hammers, Esq., and P. Robert G. Sjostrom, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. ARUNDELL20 B.T.A. 8">8 Respondent has asserted a penalty of $1,318.31 for the fiscal year ended July 31, 1925, and a deficiency in income tax for the fiscal year ended July 31, 1926, in the amount of $223.05. The issue for 1925 is whether the penalty was properly assessed and the issue for the fiscal year 1926 is whether accounts, aggregating in amount $36,060.61, are deductible as bad debts. FINDINGS OF FACT. The petitioner is a Florida corporation1930 BTA LEXIS 2220">2221 with its principal office at Delray, Fla. The only return filed by petitioner for the fiscal year ending July 31, 1925, was received in the office of the collector of internal revenue, district of Florida, October 15, 1925. C. W. Garner, petitioner's general manager in 1926, did not know that subsequent to the filing of the return a law was enacted increasing the tax rate on corporate income earned during fiscal years ending in 1925 and that corporations subject to the additional tax were required to file supplemental returns for such years. Neither did he have knowledge of any communication from the Commissioner of Internal Revenue or the collector directing that a supplemental return be filed. In his audit of petitioner's return for the fiscal year 1925, respondent imposed a 25 per cent penalty in the amount of $1,318.31 because of petitioner's failure to file a supplemental return for the taxable period on or before May 15, 1926, as required by Treasury Decision 3843 (C. B. V-I, p. 99). 20 B.T.A. 8">9 In its return for the fiscal year ending July 31, 1925, received by the collector of internal revenue, district of Florida, October 15, 1926, the petitioner claimed a deduction1930 BTA LEXIS 2220">2222 for bad debts in the amount of $20,597.31. The return was prepared by an accountant from information furnished by C. W. Garner, who entered petitioner's service in October, 1925, as an assistant and clerk, and was in charge of petitioner's business. He had no previous experience in the same line of work or previous familiarity with petitioner's customers. In preparing the list of bad debts he went over the accounts and selected the ones which he was reasonably certain were bad and charged them off. In his selection of the accounts to be charged off, Garner did not have the benefit of the judgment of the other officers of petitioner, who were absent from the business. Garner realized a short time after the return was filed, and continued to be of the opinion, that he had not charged off enough of the accounts. During the early part of March, 1927, he had an amended return prepared and included therein other accounts, amounting to $21,987.10, which he was sure should have been charged off originally and which in his sole judgment were uncollectible. The amended return was received at the office of the collector of internal revenue, district of Florida, May 27, 1927. In May, 1930 BTA LEXIS 2220">2223 1927, after the amended return was filed, W. J. Cathcart, petitioner's president since its organization in 1911, returned to Delray, Fla., after an absence of two years. A short time after Cathcart returned he and Garner discussed the affairs of petitioner and in June, 1927, they had an audit made of petitioner's books. Thereafter they determined that accounts in addition to those already charged off were worthless, and on October 13, 1927, a corrected amended return was filed in which additional bad debts, amounting to $14,073.51, were claimed as a deduction, the total amount deducted as bad debts in this return being $56,657.92. The additional accounts were charged off because in the judgment of Cathcart and Garner they were uncollectible as of July 31, 1926. Of the amount of the accounts charged off, less than $1,500 was subsequently recovered. Petitioner's books were closed every year on July 31. A statement of the business for the fiscal year 1926 was completed before the original return was filed in October, 1926. The statement reflected the item of $20,597.31 claimed in the original return as a deduction for bad debts. In May, 1927, when additional accounts were determined1930 BTA LEXIS 2220">2224 to be worthless, the only record made in the books to reflect the action taken was a notation in the ledger, the books for the fiscal year 1926 not being opened. Subsequently, all of the 20 B.T.A. 8">10 bad debt accounts were charged to profit and loss. The entry was made in petitioner's books for the fiscal year 1927. Petitioner considered that that entry closed its books as of July 31, 1926. In his audit of the original and amended returns filed by petitioner, respondent allowed as a bad debt deduction the sum of $20,597.31 claimed in the original return, and disallowed the additional amounts claimed in the amended returns. OPINION. ARUNDELL: In connection with his determination of petitioner's tax liability for the fiscal year ending July 31, 1925, under the 1926 Act, respondent imposed a penalty equal to 25 per cent of the tax so computed by reason of the former's failure to file a supplemental return for the same period under the 1926 Act. Section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926, reads, so far as its provisions are material here, as follows: In case of any failure to make and file a return or list within the time1930 BTA LEXIS 2220">2225 prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount * . This provision of the statute is a reenactment of identical provisions in the Revenue Acts of 1918, 1921, and 1924. The first taxable year under the 1926 Act to be called the taxable year 1925, is, by section 200 thereof, defined as the calendar year 1925 or any fiscal year ending during the calendar year 1925. Section 207(a) of the 1926 Act provides a method of computing the tax of a taxpayer having a fiscal year ending in 1925, and subdivision (c) thereof provides for the crediting against taxes imposed by the 1926 Act amounts paid on account of taxes imposed by the 1924 Act. The Revenue Acts of 1918, 1921, and 1924 contain similar provisions for fiscal years ending in those years. Treasury Decision 3843, approved April 1, 1926, provides in part, as follows: Any corporation which has filed a return for a fiscal year ending in 1925 and paid or become liable for a tax computed under the Revenue Act of 1924, and is subject to additional tax for the same period under the revenue act of 1926, 1930 BTA LEXIS 2220">2226 must file a new return covering such additional tax on or before May 15, 1926. Similar regulations were promulgated by the Commissioner respecting supplemental returns under the 1918 and 1921 Acts. T.D. 2797 and T.D. 3310. The statement attached to the deficiency letter shows that the only adjustment made by the respondent in his audit of the return filed by the petitioner under the 1924 Act was to reduce by $26,300 20 B.T.A. 8">18 the amount of profit reported on the sale of a lot. On the adjusted net income of $41,223.94 he computed a tax of $5,273.23 under the provisions of section 207(a) of the 1926 Act in lieu of a tax of $8,440.49 shown to be due by the return, resulting in an overassessment of $3,167.26. In M. Cohn & Sons Co.,9 B.T.A. 87">9 B.T.A. 87, it was held that the amount of taxes paid under the 1917 Act should be credited against the tax determined to be due for the same fiscal year under the 1918 Act, and if the computation resulted in a balance of tax or a deficiency under the latter act, the delinquency penalty should attach to such deficiency, and if there were no additional taxes due, there was no basis for imposing a penalty for failure to1930 BTA LEXIS 2220">2227 file a supplemental return under the 1918 Act. It is admitted by respondent that the only change the 1926 Act made in the Act of 1924 affecting petitioner's tax liability was to increase the rate of taxation on net income from 12 1/2 per cent to 13 per cent. Petitioner's tax for the fiscal year 1925 was computed from the return filed by it, and the respondent's audit of the return actually resulted in a reduction of the tax liability rather than an increase in tax or a deficiency. The issue, in our opinion, is controlled by 9 B.T.A. 87">M. Cohn & Sons Co., supra. Accordingly, we hold that there is no basis for imposing the penalty. Of the amount of $56,657.92 claimed as a bad debt deduction, respondent allowed $20,597.31, the sum deducted in the original return, and disallowed the remainder of $36,060.61 claimed in the amended returns. The Revenue Acts of 1924 and 1926 allow as deductions in computing net income, "Debts ascertained to be worthless and charged off within the taxable year." Both of the conditions of the statute must be complied with to obtain the benefit of the deduction. Here, the facts clearly show that the debts disallowed by respondent were not ascertained1930 BTA LEXIS 2220">*2228 to be worthless within the taxable year and were not charged off during that period. On this issue the respondent is sustained. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619013/	MRS. A. H. MURCHISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Murchison v. CommissionerDocket No. 62838.United States Board of Tax Appeals28 B.T.A. 257; 1933 BTA LEXIS 1152; June 1, 1933, Promulgated 1933 BTA LEXIS 1152">1152 Where a right to royalty of oil produced is reserved in an assignment of a lease covering oil land, the lessee-assignor is entitled to take depletion as a deduction. Palmer v. Bender,287 U.S. 551">287 U.S. 551. Harry C. Weeks, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. SEAWELL28 B.T.A. 257">257 OPINION. SEAWELL: The respondent determined a deficiency of $415.89 in income tax for 1929, resulting, in part, from his disallowance as a deduction of depletion equal to 27 1/2 percent of the amount received from the sale of royalty oil. The issue is whether or not the petitioner is entitled to the depletion deduction. The case was submitted on a stipulation of facts, which we incorporate herein by reference as our findings of fact. It appears from the stipulation that in 1924 A. H. Murchison and E. H. Pigg obtained an oil and gas lease of certain unimproved lands in Wilbarger County, Texas. Thereafter in 1924 the lessees executed an instrument by the terms of which they "granted, sold, transferred, conveyed and delivered" to George B. Ray and J. H. Massie all of their interest in the lease except "an overriding five-sixteenths1933 BTA LEXIS 1152">1153 (5/16) royalty in and to said premises." The sale was made subject to all the covenants of the lease and in consideration of a cash payment of $15,000. Upon the death of A. H. Murchison, in 1926, his interest in the overriding royalty passed to the petitioner, his widow. During the taxable year the petitioner received the sum of $6,464.38 from the sale of her share of royalty oil produced from the premises by the assignees of the lease in 1929. In her return for 1929 she claimed 27 1/2 percent thereof as a deduction for depletion of her interest in the premises. The respondent disallowed the entire amount. 28 B.T.A. 257">258 The respondent contends that the assignment divested A. H. Murchison of his entire estate in the premises, and, accordingly, petitioner had no reversionary or other interest in the property in 1929 subject to depletion. The cases of , and , and other decisions of the courts and the Board are cited by the respondent to support his rejection of petitioner's claim to depletion. 1933 BTA LEXIS 1152">1154 In the Waller and Herold cases, supra, there was an assignment by the lessees of their interest in the leases for a cash consideration and a royalty of all oil produced and saved from the property by the assignees. The effect of the assignments of the right of the assignors to depletion on the royalty rights reserved in the assignments was before the Court in , decided since the submission of this proceeding. In holding that the assignors of the leases were entitled to deductions for depletion, the Court said, among other things: * * The language of the statute [section 214(a)(10), Revenue Act of 1921] is broad enough to provide, at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital. * * * Similarly, the lessor's right to a depletion allowance does not depend upon his retention of ownership or any other particular form of legal interest in the mineral content of the land. It is enough, if by virtue of the leasing1933 BTA LEXIS 1152">1155 transaction, he has retained a right to share in the oil produced. If so he has an economic interest in the oil, in place, which is depleted by production. * * In the present case the two partnerships acquired, by the leases to them, complete legal control of the oil in place. Even though legal ownership of it, in a technical sense, remained in their lessor, they, as lessees, nevertheless acquired an economic interest in it which represented their capital investment and was subject to depletion under the statute. Lynch v. Halworth-Stephens Co., supra. When the two lessees transferred their operating rights to the two oil companies, whether they became technical sublessors or not, they retained, by their stipulations for royalties, an economic interest in the oil, in place, identical with that of a lessor. Burnet v. Harmel; Bankers Pocahontas Coal Company v. Burnet, supra. Thus, throughout their changing relationships with respect to the properties, the oil in the ground was a reservoir of capital investment of the several parties, all of whom, the original lessors, the two partnerships and their transferees, were entitled to share in the oil produced. Production1933 BTA LEXIS 1152">1156 and sale of the oil would result in its depletion and also in a return of capital investment to the parties according to their respective interests. The loss or destruction of the oil at any time from the date of the leases until complete extraction would have resulted in loss to the partnerships. Such an interest is, we think, included within the meaning and purpose of the statute permitting deduction in the case of oil and gas wells of a reasonable allowance for depletion according to the peculiar conditions in each case. 28 B.T.A. 257">259 Section 23(1) of the Revenue Act of 1928, in so far as it relates to the right of the petitioner to depletion based upon her royalty interest in the property, is the same as section 214(a)(10) of the 1924 Act, construed by the court in the Palmer case, supra.The case of , involved the question of whether the amount of a bonus received by a lessor of unproductive oil and gas land could be reduced by an allowance for depletion, and is not contrary to the conclusion reached in this proceeding. Here the petitioner's income was not derived from a bonus paid for the assignment of the lease, but1933 BTA LEXIS 1152">*1157 from the sale of royalty oil extracted from the leased premises within the taxable year. The issue is controlled by the Palmer case. Accordingly, our decision is in favor of the petitioner. It is agreed in the stipulation that in her return for the taxable year the petitioner overstated taxable interest in the amount of $1,250. This amount will be eliminated from petitioner's gross income in the recomputation of her tax liability under Rule 50. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619014/	OLYMPIC REFINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Olympic Refining Co. v. CommissionerDocket No. 50329.United States Board of Tax Appeals32 B.T.A. 1056; 1935 BTA LEXIS 849; July 31, 1935, Promulgated 1935 BTA LEXIS 849">849 1. The ownership in the production under a certain oil and gas lease was divided into units evidenced by certificates. The management and operation of the property were under the supervision of a board of five men, designated as trustees, elected annually. These certificates were transferred by endorsement and surrender to the trustees for the issuance of new certificates. The petitioner purchased all of the units from the individual owners and thereafter merged all of the properties under the lease with its other properties and operations. Held, that the operation under the lease, prior to the purchase of the units, was an association taxable as a corporation; and, further, that the petitioner, by purchase of the unit certificates and the distribution to itself of all of the properties under the lease, became a transferee within the meaning of section 280 of the Revenue Act of 1926. 2. Notice of liability as transferee was mailed to the petitioner within the time prescribed by the statute. Arthur J. Hair, Esq., and George E. Walling, Esq., for the petitioner. J. H. Yeatman, Esq., for the respondent. TURNER 32 B.T.A. 1056">1056 The respondent1935 BTA LEXIS 849">850 has determined deficiencies in income tax for the years 1924, 1925, and 1926, in the amounts of $2,706.28, $4,176.22, and $984.40, respectively, against an oil well project known as Barham ham Well No. 1, on the ground that it constituted an association within the meaning of the income tax statute for those years. This proceeding involves the liability of the petitioner as transferee of Barham Well No. 1. 32 B.T.A. 1056">1057 FINDINGS OF FACT. The petitioner is a corporation of the State of Washington, with its principal place of business at 2425 California Avenue, Long Beach, California, and is engaged in the operation and exploitation of oil and gas properties. Early in 1922 Walter B. Barham acquired from R. T. Colter an oil and gas lease covering lot C of the Hess Tract in the Signal Hill Oil Fields in the State of California. The lease required Barham to develop the properties within a specified time and allowed him, in return for such development, 75 percent of the gross production. On May 27, 1922, he entered into a contract with the firm of Rogers and Edwards for the drilling of a well on the property. This contract required the completion of a well to a depth of 3,4001935 BTA LEXIS 849">851 feet, or less, if oil should be encountered in paying quantities before that depth was reached. The consideration to be paid for the drilling of the well was $86,000. To obtain the money with which to finance the drilling of the well, Barham divided his holdings under the lease into 2,000 units and offered them for sale at $100 per unit. By August 22, 1922, Barham had sold approximately 1,700 units. These sales had been accomplished through salesmen working on a commission basis. The interests of the purchasers were evidenced by written agreements. The terms of these agreements are shown by the agreement covering the purchase of 5 units by L. J. Adamson, as follows: No. 607 Part 5/2000 Amount $500.00BARHAM WELL NO. 1 Signal Hill, Long Beach, California. THIS CONTRACT entered into by and between WALTER B. BARHAM, party of the first part, and the party, or parties, signing this contract, or contracts, identical with this, acting severally with said WALTER B. BARHAM, hereinafter called "Party of the Second Part," WITNESSETH: IT IS MUTUALLY AGREED by and between the parties hereto as follows: Party of the first part agrees to furnish all necessary funds for1935 BTA LEXIS 849">852 the drilling of one (1) oil well to completion on that certain real property situated in Los Angeles County, California, particularly described as follows, to-wit: Lot "C" of the Hess Tract, as per map thereof recorded in Book 11, at page 23, of Maps, records of Los Angeles County; and said party of the first part agrees to see that said oil well is drilled in a workmanlike manner, and in accordance with that certain contract dated March 29th, 1922, by and between the said WALTER B. BARHAM and one R. T. COLTER, which contract is recorded in the County Recorder's office of Los Angeles County, California, IT IS UNDERSTOOD that "drilling a well to completion" means to drill a standard well, properly equipped, cased and finished, to a depth of three thousand (3,000) feet, unless oil or gas, or either of them, is found in paying quantities at a lesser depth. 32 B.T.A. 1056">1058 Party of the first part further agrees to make an assignment within thirty (30) days from this date of the interest in the production from said well belonging to him under the terms of said contract dated the 29th day of March, 1922, between said WALTER B. BARHAM and R. T. COLTER, to the several parties of the second1935 BTA LEXIS 849">853 part hereto of the proportion purchased by them, respectively, herein; and still further agrees to pay his pro rata of the operating and administration expenses of said well. IT IS MUTUALLY UNDERSTOOD AND AGREED that three-fourths (3/4) of the production from said well belongs to the party of the first part herein under the terms of the hereinbefore mentioned contract dated the 29th day of March, 1922, between WALTER B. BARHAM and R. T. COLTER, which three-fourths is of an estimated value of $200,000.00, and each of the second parties shall share in said three-fourths production in the proportion that the amount paid by such parties hereunder to said WALTER B. BARHAM bears to $200,000.00. Each of said parties of the second part agrees to pay his pro rata part of the operating and administration expenses of said well; it being understood that said pro rata part is that part of the entire operating and administrating expenses which the amount paid by the second parties bears to $200,000.00. Until further mutually agreed in writing, parties of the second part hereby authorize the said party of the first part to sell, for not less than the current market price at the well at the1935 BTA LEXIS 849">854 time produced, the production of said well belonging to the parties of the second part, and parties of the second part further hereby authorize the FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES, Fourth and Main Streets, Los Angeles, California, to receive, receipt for, and collect, all sums of money that may become due to the several parties of the second part from the sale of the production of said well, and further authorize the said FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES to pay therefrom each of the parties of the second part's pro rata share of the operating and administration expenses of said well for the previous month. Said party of the first part shall render an account monthly to said FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES of the operating and administration expenses of said well for the previous month. First party hereby acknowledges receipt of $500.00 in payment for 5/2000 undivided interest in three-fourths of all the production from said well in behalf of the second parties as herein set forth. IN WITNESS WHEREOF, we have hereunto set our hands this third day of June, 1922. Executed in triplicate. WALTER B. BARHAM, First Party.1935 BTA LEXIS 849">855 L. J. ADAMSON, Second Party.2323 So. Hoover St., Los Angeles, Cal.The unit purchase agreements were executed in triplicate. One copy was delivered to the purchaser, another to the Farmers & Merchants National Bank of Los Angeles, and the third retained by Barham. On August 22, 1922, Barham executed an assignment called for by the unit purchase agreements, and this assignment was duly recorded in the records of Los Angeles County, California. 32 B.T.A. 1056">1059 The well was completed and became a producer early in 1923. Prior to that time reports as to drilling progress had been made at intervals to the unit holders by Frank E. Leeper, who signed the reports as trustees. This continued until April 2, 1923, when the unit holders were notified in writing by Barham that a meeting would be held on April 15 for the purpose of electing a board of directors and trustees to act in conjunction with him in the management and further operation of the well. The report stated that Leeper, who had acted as trustee since the beginning of the proposition, also thought that it was only fair and proper to elect at least three more persons to act in conjunction with them upon the1935 BTA LEXIS 849">856 different propositions which might come up from time to time. At the meeting held in accordance with the notice, John E. Carson, J. E. Harrison, and George F. Cotton were elected to serve with Leeper and Barham. Elections were thereafter held on an annual basis. This group held meetings approximately once a month, at which time they checked the cost of operation and the oil sales, and prepared and transmitted to the Farmers & Merchants National Bank of Los Angeles a statement of the bills to be paid and a list of the unit holders showing the amount to be distributed to them in accordance with the holdings of the various individuals. They also considered matters pertaining to the proper and efficient management and operation of the properties. The unit holders were kept informed by reports issued at intervals by the five individuals named, and signed by them as trustees. For a short time Barham and Leeper received salaries; the records show that on certain occasions the other three received fees of $10 each for attending meetings. On September 28, 1922, Barham with the assistance of Leeper negotiated and signed a contract with the California Gasoline Co. for the sale of gas1935 BTA LEXIS 849">857 to be produced from the lease, and on February 27, 1923, signed a similar contract with the Standard Oil Co. for the sale of the oil produced. Sales were made from time to time by unit holders of their interests. The method adopted for accomplishing the transfer required the endorsement and surrender of the old agreement by its holder, whereupon a new and similar agreement was issued to the purchaser for the number of units so transferred. In 1926 Barham disposed of his units to Erle Gerard and tendered his resignation as trustee, and the remaining trustees elected Gerard in his place. Notice of this action was contained in the report to the unit holders dated December 14, 1926. This report further stated that the well had been off production due to water and that there had been some discussion as to the advisability of selling the well. On 32 B.T.A. 1056">1060 January 12, 1927, the trustees issued a report calling a meeting of the unit holders for 10:30 a.m., January 24, 1927, for the purpose of taking a vote to authorize the disposition of their holdings. A card was enclosed asking for a vote, of those unable to attend the meeting, upon the question of authorizing the trustees1935 BTA LEXIS 849">858 to act to the best of their discretion. On March 9, 1927, the unit holders were advised in Report No. 46 that about 1,700, or 85 percent, of the unit holders had voted authorizing the trustees to act and that no vote had been cast to the contrary. They were also informed that several propositions had been received and that the Olympic Refining Co.'s offer of $10 per unit had been accepted; and, further, that the Olympic Refining Co. had deposited $20,000 with the escrow department of the Farmers & Merchants National Bank of Los Angeles, to be paid out by the escrow department as the unit certificates were received by it. The trustees advised that they had already surrendered their certificates in accordance with the proposition. The offer of the Olympic Refining Co., dated February 21, 1927, reads as follows: OLYMPIC REFINING COMPANY, Refiners, Marketers and Exporters PETROLEUM AND ITS PRODUCTS P.O. BOX 544 BURNETT, LOS ANGELES COUNTY, CALIF., February 21, 1927.To The Unit holders of the Barham #1 Well Signal Hill, CaliforniaDEAR SIRS: The undersigned Olympic Refining Company hereby agrees to purchase all or any part of the units of ownership1935 BTA LEXIS 849">859 of the above property now outstanding at $10.00 per unit; payable in cash, it being understood and agreed that the total number of units issued and outstanding is two thousand. This offer is being made to the individual unit holders and the units will be accepted and paid for upon presentation, at the above office. Very truly yours, OLYMPIC REFINING COMPANY, 2425 California St. L.B. By [Signed] C. P. RITTER Pres.CPR:IBS C. P. Ritter, president of the petitioner, had originally approached the trustees with the proposition to buy the well and the lease. Upon advice of counsel, who questioned the right of the trustees to sell the property, he changed his plans and the offer above quoted, for the purchase of the unit certificates, was made. In accordance with the offer of the petitioner, all of the unit certificates were 32 B.T.A. 1056">1061 acquired except about five, which have never been acquired by the petitioner nor surrendered by the holders. The petitioner immediately took possession of the property and merged it with other property and operations belonging to it. The property of Barham Well No. 1 so acquired by the petitioner had a fair market value of $20,0001935 BTA LEXIS 849">860 on the date of acquisition. The $20,000 deposited by the petitioner with the escrow department of the Farmers & Merchants National Bank of Los Angeles was paid out at the rate of $10 per unit as the unit certificates were surrendered. Fiduciary returns were filed in the name of Barham Well No. 1 for the years 1924, 1925, and 1926; the return for 1924 was filed on March 16, 1925; the return for 1925 was filed on March 15, 1926; and the return for 1926 was filed on March 15, 1927. Under date of July 13, 1928, the respondent addressed a deficiency letter to Barham Well No. 1, showing the determination of a deficiency for the year 1925 in the amount of $4,176.22, on the ground that Barham Well No. 1 was an association and under the income tax statute was taxable as a corporation. On September 11, 1928, a petition, styled "Barham Well No. 1, Petitioner, v. Commissioner of Internal Revenue, Respondent", was filed with this Board. This petition was verified by Walker S. Clute, designated therein as engineer, representative, and agent. Clute was not a unit holder and never acted as trustee. He had served, however, as tax consultant for Barham Well No. 1. The petition so filed was1935 BTA LEXIS 849">861 dismissed by order of this Board under date of June 14, 1932, for failure to prosecute. Under date of March 14, 1929, a deficiency letter was mailed by the respondent to Barham Well No. 1, showing the determination of deficiencies for the year 1924 in the amount of $2,706.28 and for the year 1926 in the amount of $984.40. The basis for this determination was the same as that shown in the deficiency letter above referred to for the year 1925. Based on this letter, a petition was filed with this Board under date of May 10, 1929, under the style of "Barham Well No. 1, Frank E. Leeper, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent." The petition was verified by Frank E. Leeper as trustee. This proceeding was dismissed by order of the Board under date of February 6, 1932, for lack of prosecution. On August 15, 1930, the deficiency letter herein was mailed to the petitioner. OPINION. TURNER: The first question presented for our determination is whether or not the Barham Well No. 1 was properly classified by the respondent as an association, taxable under the income tax statute as a corporation for the years 1924, 1925, and 1926, and, if so, whether the1935 BTA LEXIS 849">862 petitioner herein is transferee of said Barham Well No. 1 within 32 B.T.A. 1056">1062 the meaning of section 280 of the Revenue Act of 1926. If these issues are determined for the respondent, it will then be necessary to consider the questions raised by the petition to the effect that the statute of limitations had run prior to August 15, 1930, the date on which the notice of deficiency herein was mailed by the respondent. In , we considered very carefully the questions as to whether or not Barham Well No. 1 was properly classified as an association, taxable as a corporation for the year 1923 under section 2 of the Revenue Act of 1921 and articles 1502 and 1504 of Regulations 62. We concluded that Barham Well No. 1 was an association within the meaning of the statute and regulations for the year 1923, and our finding on this point has since been affirmed by the . We have very carefully considered the evidence in the record in this case and are convinced that the same ruling should obtain for the years 1924, 1925, and 1926, and feel that nothing can be added1935 BTA LEXIS 849">863 to the discussion in , on this point. In that case we did not have before us the question as to whether or not the petitioner is a transferee of Barham Well No. 1 within the meaning of section 280 of the Revenue Act of 1926, but we did decide that the petitioner purchased the shares of the unit holders and not the assets of the association, and we find nothing in the record of this case to cause a change of our views on the nature of the transaction. The facts here show that upon the acquisition of the various units or shares of Barham Well No. 1 by the petitioner the property of the former was taken over and merged with other property and operations of the petitioner. On these facts, it is clear that the petitioner became the transferee of Barham Well No. 1 within the meaning of section 280, supra.Having determined that the petitioner is a transferee of Barham Well No. 1, it becomes necessary to consider and dispose of the contention that the period within which the deficiencies herein involved could be assessed against and collected from the petitioner had expired prior to August 15, 1930, the date on which the deficiency letter herein1935 BTA LEXIS 849">864 was mailed. Under section 277(a) of the Revenue Act of 1924 and section 277(a)(2) of the Revenue Act of 1926, it is provided that income taxes for the calendar year 1924 must be assessed within four years after the return was filed. Under section 277(b) of the Revenue Acts of 1924 and 1926, however, it is provided that where a deficiency notice has been mailed under subdivision (a) of section 274 of those acts and a petition has been filed with the Board, the running of the statute of limitations on the making of assessment is suspended until the decision of the Board has become final and for 60 days thereafter. Section 280(b)(1) of the Revenue Act of 1926 provides 32 B.T.A. 1056">1063 that assessment of liability of a transferee must be made within one year after the expiration of the period of limitation for assessment against the taxpayer. With reference to the years 1925 and 1926, the statutory provisions are the same, except that the period within which income taxes must be assessed against the taxpayer is three years from the date of the filing of the return instead of four years allowed for 1924. The petitioner takes the position that neither of the petitions filed in respect1935 BTA LEXIS 849">865 of the deficiencies determined against Barham Well No. 1 for the years 1924, 1925, and 1926 effected the suspension of the running of the statute of limitations. With reference to 1924, it is claimed that Leeper had previously, on or about March 1, 1927, disposed of all his right, title, and interest in and to the said Barham Well No. 1, and had no authority whatever to file a petition in its behalf. With reference to 1925, the petitioner relies on the fact that Walker S. Clute was never at any time a unit holder or trustee of Barham Well No. 1, and that he likewise was without any authority to file a petition. If these petitions did suspend the running of the statute of limitations until their final disposition and for a period of sixty days thereafter, it would not be necessary to trace in detail the various dates which might otherwise affect or mark the running of the statute of limitations, since we have found as a fact that the petitions were not finally disposed of until 1932, which was more than a year after the deficiency notice herein was mailed to the petitioner. In our opinion the filing of these petitions did suspend the running of the statute of limitations. 1935 BTA LEXIS 849">866 . Decision will be entered for the respondent for deficiencies in the amounts shown by the deficiency letter, plus interest as provided by law.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619016/	DOUGLAS PAGE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPage v. CommissionerDocket No. 3670-91United States Tax CourtT.C. Memo 1993-398; 1993 Tax Ct. Memo LEXIS 407; 66 T.C.M. 571; August 30, 1993, Filed 1993 Tax Ct. Memo LEXIS 407">407 Decision will be entered under Rule 155. For petitioner: Kenneth E. Keate. For respondent: Jack Forsberg. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined deficiencies of $ 20,126 and $ 11,130 in petitioner's Federal income tax for 1984 and 1985. Respondent also determined additions to tax, as follows: Internal Revenue19841985Code Sec. Tax YearTax Year6651(a)(1)1 $ 5,0321 $ 2,7836653(a)(1)1,0065576653(a)(2)2 2 6654(a)1,26563866615,0322,7836621(c) 43 3 Respondent also moved for a penalty under section 6673. 1993 Tax Ct. Memo LEXIS 407">408 All section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. The issues in this case concern petitioner's relationship to his professed charitable organization (church) and its effect upon whether income earned by petitioner's efforts is taxable to him or whether petitioner is entitled to charitable deductions for those amounts. We also consider the amount of petitioner's income and whether he is entitled to certain deductions in connection with his consulting and engineering activity and to itemized deductions for attorney's fees, interest, and real estate taxes. Finally, we consider whether petitioner is liable for various additions to tax, increased interest, and/or a penalty under section 6673. FINDINGS OF FACT 1Petitioner had his legal residence at 15817 Valley View Road, Eden Prairie, Minnesota (Valley1993 Tax Ct. Memo LEXIS 407">409 View property), at the time of the filing of his petition in this case. Petitioner, a high school graduate who completed 3 years of college, is an ordnance engineer. During 1984 and 1985 petitioner resided at the Valley View property. Petitioner purchased the Valley View property in 1974. Petitioner was married to Carolyn Page (Carolyn) from 1974 until their divorce on October 25, 1984. Carolyn, along with two children, resided in California during 1984 and 1985. Under an October 25, 1984, divorce decree, petitioner was entitled to custody of the children for 3 months each summer and for alternate birthdays, Easters, Thanksgivings, and Christmas/New Years. Petitioner paid child support of $ 225 per month for 9 months each year. These payments were made by traveler's checks, postal money orders, and checks from Kathleen Grossinger's (Grossinger) personal checking account, for which petitioner reimbursed Grossinger. Petitioner also paid the children's transportation expenses to and from his residence. During May 1978, petitioner, along with Carolyn and Jon Frayne (Frayne), formed Chapter 8035 of the Basic Bible Church of America (Chapter 8035), and petitioner purportedly took1993 Tax Ct. Memo LEXIS 407">410 a vow of poverty irrevocably transferring his property to Chapter 8035. On August 18, 1978, petitioner and Carolyn transferred the Valley View property to themselves in joint tenancy, with right of survivorship for the expressed benefit of Chapter 8035. Chapter 8035 was unsuccessful in attempting to obtain exemption from real estate tax in Minnesota or to attain tax exempt status in Minnesota. The Minnesota Tax Court, in a Judgment rendered April 21, 1980, denied an exemption, concluding that the Valley View property was not owned by a church and was not being used primarily for religious or church purposes. That judgment was affirmed by the Minnesota Supreme Court on June 3, 1981. The American Fundamentalist Church (AFC), a successor entity formed by petitioner and his associates, also sought exemption of the Valley View property from real estate taxes. That request was also denied and confirmed by the Minnesota Tax Court on March 22, 1983. AFC was not affiliated with any other church or denomination. The Basic Bible Church of America, as promoted by Jerome Daly and William Drexler, was a tax protest and tax-avoidance scheme. Because of disagreement with certain of the goals1993 Tax Ct. Memo LEXIS 407">411 of the promoters of the Basic Bible Church of America, petitioner, along with a few others, converted Chapter 8035 into the AFC during 1980. A "Certification of Ordination", dated January 1, 1980, declared petitioner to be an ordained minister of AFC. Around July 7, 1980, petitioner, Carolyn, and Jon L. Frayne (Frayne) executed a "Certificate of Incorporation of the American Fundamentalist Church". That certificate was amended by an October 29, 1980, document, executed by Carolyn, Frayne, and petitioner, which, among other statements, contained the following: the Church * * shall have the power * * * to establish a Board of Trustees, which shall be the governing body of the non-secular and business aspects of the Church's operation, which shall include appointment of the Head of the Church, who shall serve at the pleasure of the trustees. * * * The location of the Church shall be 15187 Valleyview [sic] Road, Eden Prairie, Minnesota 55344. * * * The corporation shall be managed by the Board of Trustees in all its business affairs, which Board shall be composed of not less than three nor more than seven natural persons, all of whom shall be members of the Church. 1993 Tax Ct. Memo LEXIS 407">412 * The named trustees of AFC from January 1 to February 3, 1984, were petitioner, Grossinger, Jerold Peterson (Peterson), and Ray Hartman (Hartman). From February 3, 1984, to January 7, 1985, Hartman was no longer named, and the other three were unchanged. For the remainder of 1985 Frayne was added and the other three continued unchanged. The "emergency trustees" were Sanford Brigadier of Atlanta, Georgia, and Stephen Page (petitioner's brother) of Oregon. Petitioner and/or others caused AFC to be listed as a nondenominational church in the telephone directory and on the church directory posted in hotels and local newspapers. During 1984 and 1985 petitioner and Grossinger had an intimate relationship. Grossinger, on occasion, resided at the Valley View property. Peterson has known petitioner since 1979 or 1980 and occasionally stayed at the Valley View property. Peterson, during 1984 and 1985, did not have a permanent residence and did odd jobs, including painting and selling telephones, but did not file Federal income tax returns for 1984 and 1985. During 1984 and 1985 the "ministerial duties" of the AFC were successively performed by petitioner, Peterson, and Frayne. 1993 Tax Ct. Memo LEXIS 407">413 The succession occurred because petitioner was away performing services as an ordnance engineer. Although Peterson and Frayne were described as performing ministerial duties, unlike petitioner, they did not receive any compensation or a residence. Trustees meetings were held on the first Friday of each month and minutes were maintained. Petitioner, Grossinger, and Peterson attended all 24 meetings during 1984 through 1985. Hartman attended three in 1984 and none in 1985. Frayne attended no meetings in 1984 and all 12 in 1985. The topics discussed and recorded in the minutes of the trustees' meetings were substantially concerning tax matters, tax and nontax litigation, hiring and paying attorneys, and plans for "retaliation" against various Government officials. Some illustrative excerpts from the minutes, include: [April 6, 1984] Rev. Page gave a full accounting of the legal battles to date including the ones concerning the methods by which the Church raises money and the subsequent assignment of church income to Rev. Page. * * * Church records concerning fund raising by other church members are to be destroyed to prevent a similar punitive assessment to them by1993 Tax Ct. Memo LEXIS 407">414 the IRS - this by unanimous vote of the trustees. [July 6, 1984] * * Rev. Page gave a financial report and discussed plans to phase out all bank accounts in order to assure complete financial privacy for the church and to prevent the feds from using financial data found in accounts as a means or basis for illegal and unlawful assessment of church members. It was pointed out that the IRS attempts to assign church funds as income to members and then attempts to assess the members for tax on those assigned income figures. Apparently the only basis they have for this is financial data stemming from bank accounts. * * Petitioner did not maintain a checking account in his own name during 1984 and 1985. During September 1980 petitioner opened a checking account in AFC's name with signature authority in petitioner's and Carolyn's name. Petitioner and Carolyn became separated and, around June 1, 1982, Carolyn's signature authority was canceled, and Grossinger's signature authority to withdraw funds was added. Around April 24, 1984, Peterson's signature authority was added to the account in AFC's name. For 1984 and 1985, respondent reconstructed petitioner's income by tabulating1993 Tax Ct. Memo LEXIS 407">415 all deposits to the AFC account and reducing them by the amount of any nontaxable amounts. To the resulting amounts, respondent added the child support payments that petitioner made under the divorce decree from Carolyn. The total of those two items constituted the reconstructed income of petitioner for 1984 and 1985. During 1984 and 1985 deposits to the AFC checking account totaled $ 52,116.86 and $ 34,046.68, respectively. Ten checks totaling $ 8,536.63 in 1984 and eleven checks totaling $ 6,873.50 in 1985 were deposited and can be identified as drawn by Action Manufacturing (Action), Technical Advisory Services, Inc. (TASA), or Michael Pangia, all of which represented petitioner's sources of income and/or payment or reimbursement for petitioner's expenses. Also, petitioner earned $ 50 during 1984 for officiating at a wedding. Unidentified checks and money orders in the amounts of $ 15,530.23 (represented by 16 items) for 1984 and $ 174.18 (represented by 5 items) for 1985 were also deposited. Deposits of currency and unidentified wire transfers were made in the amounts of $ 28,050 (represented by 18 items) for 1984 and $ 27,000 (represented by 28 items) for 1985 were deposited1993 Tax Ct. Memo LEXIS 407">416 to the AFC account. Respondent determined that all of these amounts represent income to petitioner. Petitioner agrees that $ 2,506.56 and $ 6,873.50 of checks from TASA in 1984 and 1985, respectively, represent payments for consulting services rendered by petitioner and/or reimbursement or payment of expenses. Petitioner also agrees that $ 6,316.26 of checks from Action during 1984 were for petitioner's services and/or reimbursement or payment of expenses. Petitioner agrees that these amounts from TASA and Action represent self-employment income to him. Respondent concedes that the following items deposited to the AFC account are nontaxable: Amount Item1984 1985Pennsylvania Bell$ 49.23-- General Motors Accept. Corp.1.55-- Minneapolis Star & Tribune13.20-- Eveready-- $ 1.00Totals63.981.00Additionally, $ 250 of the 1984 deposits was not taxable, but instead represented reimbursement for a stolen firearm. During 1984 and 1985 no checks were drawn for cash and no cash was withdrawn from the AFC account. Petitioner received no inheritances or substantial gifts or sold any assets during 1984 or 1985. Currency was maintained in a1993 Tax Ct. Memo LEXIS 407">417 "cash fund" which was secured in two lock boxes. One lock box usually held $ 400 to $ 500 in cash and was kept at the Valley View property. The other held larger amounts of cash and was kept at various locations, including the Valley View property on occasion. Food consumed by petitioner and his family was purchased by Grossinger with cash from the cash fund. During the summer months, when petitioner had custody of his children, $ 100 per week was spent on food. At other times about $ 50 per week was spent on food. Expenses incurred by petitioner in his consulting activity, with the exception of a $ 116.35 check in 1984, were paid in cash. During 1984 and 1985, petitioner attempted to structure employment relationships between himself and his clients in a manner reflecting that the client had contracted with AFC. Petitioner's intent in structuring the transactions in that manner was to avoid tax liability for income earned by him in the business relationship with his clients. In pursuing this approach, petitioner consulted with and used sample contracts provided by attorney Joe Mannikko. Attorney Mannikko also represented petitioner in connection with his purchase of the1993 Tax Ct. Memo LEXIS 407">418 Valley View property. The contracts were structured so that petitioner was to act as an agent of AFC in performing ordnance work and were signed by petitioner on behalf of AFC. Petitioner now concedes that those assignments were not valid assignments of income for Federal income tax purposes. During 1983, while petitioner was performing services in Pennsylvania, he opened a bank account in Lancaster, Pennsylvania, in the name of "AFC, Inc." at the Fulton Bank. Petitioner used that account to pay his living expenses that he incurred while performing services for Action. That account was closed in 1984 after petitioner completed his work for Action. Petitioner did not have any automobiles registered in his name, but a Cadillac, Volkswagen, Firebird, and Chevrolet pick-up truck were titled and/or registered in the name of AFC. Petitioner had the use of those automobiles and also the use of Grossinger's Mustang, and the operating expenses for all of these automobiles were largely paid from the cash fund. Monthly bills for all utilities for the Valley View property were paid from the AFC account. The Valley View property was about 30 years old, and during 1984 and 1985 painting1993 Tax Ct. Memo LEXIS 407">419 and/or substantial repairs were made to the residence and garage, including roofing, gutters, and soffits. In addition, about 20 to 25 dead elm trees had to be cut and removed. The cost of these repairs and replacements was paid out of the cash fund. Valley View had been purchased under a contract for deed, which had a November 12, 1983, balance due of $ 6,604.99. That balance was paid off during 1983 in substantial part by means of a $ 6,000 loan from petitioner's mother. The loan was evidenced by a note and signed "American Fundamentalist Church By: Rev. Douglas Page, D.D., Kathleen J. Grossinger, Sec. Treas." and provided for monthly payments with 8-1/2 percent interest, beginning December 15, 1983. During 1984, nine checks totaling $ 5,064.92 were paid to petitioner's mother from the AFC account. During 1985 a $ 750.14 check was paid to petitioner's mother from the AFC account. The note to petitioner's mother was secured by a carved ivory figurine, a warrior empress, a souvenir sword, a teak Chinese writing desk (circa 1820-1830), and a teak straight back chair, which were all antiques petitioner purchased prior to 1980. When petitioner had executed his Vow of Poverty1993 Tax Ct. Memo LEXIS 407">420 in connection with Chapter 8035, he had supposedly transferred the antiques to Chapter 8035. Following the unsuccessful attempt to gain exemption from real estate tax on the Valley View property, 4 years' taxes, special assessments, interest, and penalties totaling $ 13,718.63 were assessed and paid during May 1984. The $ 13,718.63 total was composed of ad valorem tax of $ 9,096.48, special assessments of $ 1,550.44, interest of $ 1,581.15, and penalties of $ 1,490.56. The payment was made with a $ 12,200 check which had been deposited in the AFC account and a loan of $ 1,519.63 from Grossinger, which was repaid in part by a $ 400 cash payment. During 1985, attorney Randall Tigue represented petitioner before this Court concerning petitioner's 1979 through 1982 taxable years. Attorney Tigue was paid a $ 4,025 fee during 1985 from the AFC account. Petitioner was also represented by attorney Jeff Lambert during 1984 in connection with his divorce from Carolyn, but no payments were made from the AFC account concerning that representation. Additionally, the minutes of the AFC trustees meetings reference: Litigation against a bank and bank officer who declined to cash checks made1993 Tax Ct. Memo LEXIS 407">421 out to AFC; Freedom of Information Act proceedings with respect to the Minnesota Department of Revenue, the U.S. Postal Service, the Internal Revenue Service, and the Social Security Administration; and a discrimination action filed in U.S. District Court. Minutes of a June 1, 1984, AFC trustees' meeting state the following: The church security advisor gave a report of the surveillance of certain IRS agents. It was made clear that the proper type of surveillance will yield enough evidence to indict certain agents for conspiracy to violate our civil rights. There have been direct conversations between the State and Federal IRS agents concerning a concerted effort to drive the AFC out of action and levy heavy assessments against its principal fund raisers. The board has voted to take appropriate action. The board voted $ 50,000 to cover the cost of retaliation.During 1973, petitioner purchased a Cessna Model 177 airplane for $ 9,450, including accessories. Petitioner executed documents indicating that he had transferred the airplane to Chapter 8035 during 1980. During 1984 and 1985, expenses for storage, maintenance, and insurance were paid from the AFC account. 1993 Tax Ct. Memo LEXIS 407">422 During the years in issue, petitioner was the only person associated with AFC who could fly an airplane. The following summary reflects the category and year of payments made out of the AFC account: Total Payment to PayeeCategory/Payee1984 1985 AirplaneAirguide publications$ 24.37$ 24.37Burlington Northern Airmotive270.36-- Clayton Bangs (hanger)-- 360.00John Berlin (mechanic)-- 60.00Les Johnson (hanger)655.00420.00Pioneer Agency, Inc. (insurance)550.00116.00Sundance Leasing (mechanic)60.00-- Legal feesBarry Fisher2,500.00-- Joe Mannikko9,250.005,500.00Rosenthal & Rondon-- 100.00Robert Spector1,000.007,600.00Randall Tigue-- 4,025.00VehiclesAuto Owners Insurance384.26-- Driver Vehicle Service Div.70.5091.75Dune Buggy Supply157.48-- Mobile20.008.00MiscellaneousArtistic Greetings, Inc.1.35Bank Card Center (credit card)-- 629.25Church Directory Service23.0024.00E.P. Crime Prevention Fund-- 25.00Eden Prairie News-- 10.00First Minnetonka Bank(charges and checks)33.3436.40First Minnetonka Bank (wiretransfer)10,010.00-- Minneapolis Star & Tribune273.80-- Pennsylvania Power & Light116.35-- Printing Press128.00-- RCA Service Co.24.95-- Superintendent of Documents30.0029.00Trustees & related partiesGrossinger1,700.004,700.00Hartman1,135.82-- Petitioner3,770.02-- Petitioner's mother5,064.926,260.14Valley View propertyAT&T (telephone)55.3288.79Centraire (heating & cooling)99.75Church Mutual (insurance)1,338.78851.78City of Eden Prairie (water)74.21106.13Eden Prairie Trashtronics21.00-- First Minnetonka (cashiers check --real estate tax assessment12,200.00-- Minnegasco (natural gas)1,134.03937.24Northwestern Bell (telephone)295.33321.65Northern States Power (electric)506.47547.66Record-A-Call (repairs)-- 39.95Republic Telecom (telephone)859.93750.26S&B Salvage, Inc. (shelving)82.00-- Sears38.14-- 1993 Tax Ct. Memo LEXIS 407">423 For 1984 and 1985, petitioner filed Federal income tax returns reflecting gross income figures of $ 5,270 and $ 5,525, respectively, which were composed of the following categorized components: Item 19841985Stipend$ 5,150$ 5,400Use of auto120125Totals5,2705,525No other income or deductions (business or itemized) were reported on the 1984 and 1985 income tax returns. Petitioner's 1984 return reflected no tax due, and his 1985 return reflected a $ 239 tax liability. Petitioner claimed estimated payments of $ 2,301 in both years and overpayments or refunds for each of the taxable years 1984 and 1985. In fact, petitioner, for 1984 and 1985, did not file Declarations of Estimated Tax (Forms 1040 ES) or make any deposits of estimated tax. No tax was withheld from petitioner's earnings for 1984 and 1985. OPINION A. BackgroundThis is petitioner's second controversy in this Court concerning whether his relationship to his "church" would permit avoidance of taxation on income generated by his personal services. See Page v. Commissioner, T.C. Memo. 1986-275, affd. 823 F.2d 1263">823 F.2d 1263 (8th Cir. 1987),1993 Tax Ct. Memo LEXIS 407">424 cert. denied 484 U.S. 1043">484 U.S. 1043 (1988) (Page I). In Page I petitioner argued that his relationship with his "church" placed him in a position which would permit him to pay little or no tax on income earned for his services. He argued, alternatively, that he was either an agent of his "church" so that the income was not taxable to him but to his "principal", or that he was entitled to deduct as charitable contributions any income donated to his "church". Respondent contended that petitioner earned the income individually and not as an agent and/or that petitioner was not entitled to deductions for charitable contributions because petitioner's "church" was not an organization of the type described in section 170(c)(2). Petitioner was unsuccessful in Page I and the essence of our holding was: Although petitioners in this case were more meticulous in their execution of pro forma and other documents and in organizing and operating their "church," it is abundantly clear that substantially all of the "earnings" of the "church" inured to their benefit and that of their family. Petitioner caused it to, in form, appear that he had no control over the "church" 1993 Tax Ct. Memo LEXIS 407">425 funds or bank accounts, but in reality he retained and exercised control over all money and property involved. * * * [T.C. Memo. 1986-275.]Page I involved 1979 2 through 1982, and this case involves the same entities and individuals for 1984 and 1985. Petitioner argues that several features in this case are distinguishable from the facts of Page I. As a matter of law, however, petitioner advances no new theories or criticism of the rationale of Page I. B. The Amount of Unreported Income -- Reconstruction by Means of Bank DepositsA significant difference between this case and Page I is respondent's methods of determining the amount of petitioner's income. In Page I, respondent was able to identify specific sources of petitioner's income. In this case, respondent can specifically identify only a limited amount of the total deposits to the1993 Tax Ct. Memo LEXIS 407">426 AFC bank account during 1984 and 1985. The reason for respondent's disability is to be found in petitioner's modus operandi. In Page I, petitioner deposited checks from his clients into the bank account. During the years under consideration here, petitioner began using cash instead of check deposits to thwart attempts by taxing authorities to identify the source or recipient of specific funds or revenue. Petitioner agrees that the amounts specifically identified by respondent constitute gross income to petitioner from self-employment. Respondent determined that the remainder of the AFC bank deposits were income to petitioner, with the exception of items which have been conceded or stipulated as being from a nontaxable source. Petitioner contends that the remainder of the deposits fall into three possible categories: (1) Contributions to AFC, (2) deposits from nontaxable sources, such as loans from petitioner's mother, and (3) receipts from the sale of the airplane from which petitioner's basis must be subtracted to determine the gain. It is a well-established principle in the tax law that respondent may utilize methods to reconstruct a taxpayer's income. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954).1993 Tax Ct. Memo LEXIS 407">427 Respondent is entitled to use a reconstruction method where a taxpayer has no books and records or inadequate books and records. 348 U.S. 121">Holland v. United States, supra; United States v. Johnson, 319 U.S. 503">319 U.S. 503 (1943); Campbell v. Guetersloh, 287 F.2d 878">287 F.2d 878, 287 F.2d 878">880 (5th Cir. 1961); Adamson v. Commissioner, 745 F.2d 541">745 F.2d 541 (9th Cir. 1984); Keogh v. Commissioner, 713 F.2d 496">713 F.2d 496 (9th Cir. 1983); United States v. Stonehill, 702 F.2d 1288">702 F.2d 1288 (9th Cir. 1983). In this case the record reflects that petitioner and the other "trustees" of AFC went to great lengths to secrete their activities and/or to "retaliate" against the taxing authorities. Petitioner also attempted to devise consulting contracts where the income was shown as attributable to an entity other than himself, even though the income was earned by his personal services, a point he now concedes. In any event, petitioner's lack of records, whether intentional or involuntary, is a sufficient basis for respondent's use of a method of reconstruction. This, coupled1993 Tax Ct. Memo LEXIS 407">428 with petitioner's income concession showing that there was a source of unreported income, leaves the burden of going forward as well as the ultimate burden of proving respondent's determination to be in error squarely upon petitioner. Rule 142(a); Welch v. Helvering290 U.S. 111">290 U.S. 111 (1933). Petitioner argues that during 1984 two deposits are either totally or partially 3 not subject to tax. Petitioner contends that $ 12,200 represents the sales proceeds of the airplane petitioner had originally purchased during 1973 and that the $ 10,010 wire transfer is a loan from his mother. Respondent argues that these amounts do not represent a sale or loan, but instead represent unreported income which petitioner earned from his business activity. Concerning the airplane, petitioner had purchased the airplane in 1973 and1993 Tax Ct. Memo LEXIS 407">429 he contends here, as he had in Page I, that he had contributed it to Chapter 8035. However, when he decided that he wanted to disassociate himself from the Basic Bible Church of America and its promoters, petitioner and his associates established AFC. By some unexplained mechanism, the airplane supposedly turned up in AFC. When confronted with a Minnesota real estate tax assessment approximating $ 13,000 and the potential for a Federal income tax assessment, the airplane was purportedly sold for an amount approximating the real estate taxes to a person who could not fly the airplane. That person, Frayne, is an associate of petitioner who has participated with him in these matters since the initial formation of Chapter 8035. Moreover, the expenses of storage, maintenance, and insurance continued to be paid from the AFC account after the purported sale to Frayne. These factors, coupled with petitioner's other attempts to avoid taxes (local and Federal), support the conclusion that AFC or petitioner did not actually sell the airplane to Frayne and that the true source of the $ 12,200 was not from Frayne or his company. We find petitioner's faithfulness to formality in connection1993 Tax Ct. Memo LEXIS 407">430 with the purported transfer of the airplane to be entitled to no greater credence than other attempts by petitioner to concoct an appearance of legitimacy to support his attempts to avoid tax. Concerning the $ 10,010 wire transfer, petitioner has offered no evidence other than his own self-serving testimony to support the contention that it was a loan from his mother. It should be noted that petitioner's mother had loaned him $ 6,000 to pay off the contract for deed under which Valley View had been purchased. That loan from petitioner's mother had occurred late in 1983 and was evidenced by a note to petitioner's mother providing for monthly payments with 8-1/2 percent interest. Payments were regularly made on that note to petitioner's mother during 1984 and 1985. Additionally, the loan was secured by antiques that petitioner had purchased. With respect to the alleged $ 10,010 loan, all we have been presented is petitioner's testimony, which in light of this record is not credible. We do not believe that petitioner's mother would have been so cautious and meticulous regarding a $ 6,000 loan in 1983 which was being methodically paid off in 1984 and have at the same time (1984) 1993 Tax Ct. Memo LEXIS 407">431 made a larger $ 10,010 loan with no note, security, interest, or payment schedule. Petitioner also attempted to carry his burden by offering testimony that the unidentified deposits were, to some extent, contributions to AFC from members or other contributors. Currency deposits for 1984 and 1985 totaled about $ 18,000 and $ 27,000, respectively. Respondent points out that the currency deposits were largely made in currency of $ 100 and $ 50 denominations. Petitioner's explanation that these amounts were from contributors or from certain sales of items by other members of AFC, under the circumstances of this case, is not credible. Respondent points out that the July 6, 1984, minutes of the AFC trustees' meeting contains a possible explanation for the currency deposits, as follows: Rev. Page gave a financial report and discussed plans to phase out all bank accounts in order to assure complete financial privacy for the church and to prevent the feds from using financial data found in accounts as a means or basis for illegal and unlawful assessment of church members. It was pointed out that the IRS attempts to assign church funds as income to members and then attempts to assess1993 Tax Ct. Memo LEXIS 407">432 the members for tax on those assigned income figures. * A review of the pattern of deposits reveals that after the middle part of 1984, the deposit of checks from consulting activity decreased dramatically and virtually ceased after the beginning of 1985. For 1985 the amounts of the overall deposits decreased from about $ 50,000 to about $ 30,000. In all other respects petitioner has not shown that respondent's determination and reconstruction of his income is in error. Accordingly, the deposits to the AFC account, with the exception of the findings of nontaxable sources in this opinion, plus the child support payments, constitute income to petitioner. 41993 Tax Ct. Memo LEXIS 407">433 C. Do the Facts for the 1984 and 1985 Tax Years Distinguish This Case From Page I?Petitioner contends that this case is factually distinguishable from Page I for several reasons. Petitioner envisions Page I as involving formation questions; i.e., vow of poverty and contribution of property to a church. Whereas, for the 1984 and 1985 years, petitioner contends that the record reflects that the assets now belong to a religious organization and petitioner is its minister who had no control over the disbursement of funds from the AFC account or the cash fund. 51993 Tax Ct. Memo LEXIS 407">434 The specific differences, as contended by petitioner, between this case and Page I can be summarized as follows: (1) The checks drawn on the AFC account were countersigned and in most instances by an individual other than petitioner. A review of the checks reveals that Grossinger countersigned substantially all checks during 1984 and 1985 and the other signatures appear to be those of Peterson and Frayne; and (2) the cash fund (two lock boxes) was not under petitioner's direct dominion and control. Apparently, one of the boxes was kept at Valley View and the other was moved to various locations. Although petitioner attempted to show that he had no access to the majority of the cash, it is clear from this record that the cash was used to acquire and provide petitioner's, his family's, and Grossinger's necessities and comforts. There is no evidence in this case, with the exception of limited listings of AFC in directories and politically oriented speeches (sermons) given by petitioner, that any appreciable expenditure, cash or otherwise, was for a charitable purpose. Instead, the vast amount of the expenditures were spent on petitioner, his family, and Grossinger. In substance1993 Tax Ct. Memo LEXIS 407">435 we find no difference in this respect between the years under consideration and those considered in Page I. The differences cited by petitioner do not mitigate the reality that there was substantial private inurement amply reflected in this case. 6 As noted in Page I, "Even if the benefit inuring to members is small, it would be impermissible under section 170(c)(2)(C). Unitary Mission Church v. Commissioner, 74 T.C. 507">74 T.C. 507, 74 T.C. 507">513 (1980), affd. without published opinion 647 F.2d 163">647 F.2d 163 (2d Cir. 1981)." As pointed out by the Court of Appeals for the Eighth Circuit in affirming Page I: In order for * * * [petitioners] to have been entitled to a tax deduction1993 Tax Ct. Memo LEXIS 407">436 for the sums they gave to the churches, they would have had to prove that the churches were organized and operated exclusively for religious or charitable purposes and that no part of the sums contributed inured to the benefit of any private shareholder or individual. [Page v. Commissioner, 823 F.2d at 1271.]D. Amount of Income from Self-EmploymentPetitioner agrees that he is subject to self-employment tax for the income specifically identified by respondent in the AFC deposits, but that he is not subject to self-employment tax regarding any amount developed by means of the bank deposits reconstruction or any amount received as a stipend for serving as AFC's minister. In other words, petitioner contends that respondent has not identified the source of the unidentified deposits as being from petitioner's self-employment. Actually, it is petitioner's burden to show that respondent's determination is in error. As discussed earlier in this opinion, petitioner has not carried his burden of showing that respondent's determination is in error. Accordingly, respondent's determination that the unidentified deposits are income from self-employment1993 Tax Ct. Memo LEXIS 407">437 is also sustained. We note that there is a pattern to the deposits to the AFC account which works against petitioner's position. During the 1984-85 period, the amount of identifiable deposits decreases steadily and stops during 1985. This, coupled with the avowed purpose of petitioner and his associates to secrete their assets from the taxing authorities are additional reasons why it is likely that the unidentified deposits were from petitioner's self-employment activity. Petitioner also argues that the stipend he reported is not subject to self-employment tax. The exemption from section 1401(a) self-employment tax is provided for in section 1402(e). In order to qualify for the exemption under section 1402(e)(1), the individual must be a duly ordained, commissioned, or licensed minister of a church or a member of a religious order and must file a timely application for the exemption together with a statement that he is conscientiously opposed to the receipt of public insurance benefits such as social security. Petitioner is required to receive approval for the exempt status from respondent by filing a Form 4361. The exemption is not granted until the application is approved1993 Tax Ct. Memo LEXIS 407">438 by respondent. Sec. 1.1402(e)-2A(c), Income Tax Regs. The procedures set forth in the regulations are mandatory and subject to strict compliance. Peverill v. Commissioner, T.C. Memo. 1986-354. Petitioner has shown that he attempted to obtain the exemptions, but there has been no showing that the exemption was granted or that he is entitled to such an exemption. Finally, petitioner has not specifically shown that the reported stipend was earned solely from performing services as a minister. See Templeton v. Commissioner, 719 F.2d 1408">719 F.2d 1408, 719 F.2d 1408">1411-1412 (7th Cir. 1983), affg. James v. Commissioner, T.C. Memo. 1982-456. Accordingly, no portion of the stipend was shown by petitioner to be exempt from self-employment tax, and respondent's determination is sustained. E. Itemized and Business Related Deductions Claimed by PetitionerPetitioner, if unsuccessful regarding the bank deposits and the conceded items of income, alternatively argues that he is entitled to various itemized and business deductions. It is noted that petitioner did not claim any itemized or business deductions on his1993 Tax Ct. Memo LEXIS 407">439 returns for 1984 and 1985, and his alternative position claiming the deductions assumes that the expenses were not those of AFC and/or that AFC's existence is being ignored for purposes of petitioner's tax liability. Respondent, based on the record in this case, makes the following concessions of deductibility: Item1984 1985 Real estate tax on Valley View$ 9,086.48-- Interest on tax assessment1,581.15-- Interest on loan from petitioner'smother114.92$ 260.14Legal fee paid to Attorney Tigue-- 4,025.00Total itemized deductions agreedto by respondent, withoutconsidering zero bracket amountunder sec. 63.10,782.554,285.14With respect to the $ 1,550.44 special assessment paid in connection with the Valley View property, respondent contends that the amount is not deductible because real property taxes do not include taxes "assessed against local benefits". Sec. 1.164-4(a), Income Tax Regs. Additionally, respondent did not concede as deductible the $ 1,490.56 in penalties paid on the Valley View property because fines and penalties are not provided for under sections 163 or 164 and are generally not deductible under section 162(f). 1993 Tax Ct. Memo LEXIS 407">440 Petitioner does not dispute respondent's analysis concerning which portions of the real estate tax assessment paid during 1984 are deductible. With respect to the interest on the loan due to petitioner's mother, the parties disagree somewhat on the amount, but we find that petitioner has not shown that he is entitled to more than the amounts respondent has conceded for 1984 and 1985. Finally, petitioner argues that he would be entitled to the attorney's fees other than those paid to Attorney Tigue, which respondent conceded. The legal fees reflected as being paid from the AFC account for 1984 and 1985 are as follows: Legal fees19841985Barry Fisher$ 2,500-- Joe Mannikko9,250$ 5,500Rosenthal & Rondon-- 100Robert Spector1,0007,600Randall Tigue-- 4,025Total legal fees12,75017,225Respondent conceded the amount paid to Attorney Tigue and did not concede the amounts paid to other attorneys because petitioner has not shown what portion of their fees, if any, is attributable to the determination, collection, or refund of any tax under section 212(3). Respondent agrees that attorneys Mannikko and Spector did some work on petitioner's1993 Tax Ct. Memo LEXIS 407">441 tax matters, but that petitioner has not shown the deductible portion. See Zmuda v. Commissioner, 79 T.C. 714">79 T.C. 714, 79 T.C. 714">725 (1982), affd. 731 F.2d 1417">731 F.2d 1417 (9th Cir. 1984). Our review of the record in this case reveals that a substantial portion of the legal work performed by Attorneys Mannikko and Spector concerned petitioner's tax liability or status, or that of AFC. The essence of most of the legal controversies involved attempts by petitioner to avoid paying tax on his earnings or to avoid paying real estate taxes locally. Although it may be argued that petitioner is not entitled to claim these amounts because they were paid on behalf of AFC, in substance, all of these tax-related matters are petitioner's, and AFC is being used as a means to petitioner's goal of not paying tax. Accordingly, any deductions would be attributable to petitioner, in the same manner as the income was attributable to him. Although the information in the record is not precise, there is sufficient information to reach a conclusion. We find that, in addition to the $ 4,025 conceded by respondent for 1985, petitioner is entitled to deduct attorney's fees1993 Tax Ct. Memo LEXIS 407">442 of $ 8,200 and $ 10,480 for 1984 and 1985, respectively. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Respondent also conceded that, to the extent that the Court finds that petitioner incurred the particular amounts, petitioner is entitled to deduct $ 722.18 and $ 123.44 as unreimbursed expenses in connection with business activity under section 162. We find that petitioner incurred those amounts and, accordingly, petitioner is entitled to deduct them pursuant to respondent's concession. Petitioner has not shown that he is entitled to any greater amount than the amounts conceded by respondent. In all other respects, petitioner is not entitled to deduct any amounts in excess of the amounts conceded by respondent. The areas of business expenses referred to by petitioner in his testimony and to which respondent does not make any concessions, involve expenses which may have been incurred while traveling away from home. Such expenses are subject to the strict substantiation requirements of section 274(d). The evidence presented by petitioner on these items fall far below the minimum requirements of section 274(d). Smith v. Commissioner, 80 T.C. 1165">80 T.C. 1165 (1983);1993 Tax Ct. Memo LEXIS 407">443 sec. 1.274-5, Income Tax Regs.F. Additions to Tax1. Section 6653(a)(1) and (2) -- Respondent determined that petitioner was liable for additions to tax under section 6653(a)(1) and (2). Petitioner bears the burden of proof with respect to such determinations. Rule 142(a); Clayden v. Commissioner, 90 T.C. 656">90 T.C. 656, 90 T.C. 656">677 (1988); Abramo v. Commissioner, 78 T.C. 154">78 T.C. 154, 78 T.C. 154">162-164 (1982); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 58 T.C. 757">791-792 (1972). Negligence, within the meaning of section 6653(a), has been defined as the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985). In Page I we decided that petitioner was liable for additions to tax for negligence as follows: We have repeatedly sustained the section 6653(a) addition in cases involving the use of a "church" to obtain a deduction for personal and family expenses. Although petitioners have created a more complete or elaborate facade in this instance, we believe that people with petitioner's education and intelligence1993 Tax Ct. Memo LEXIS 407">444 must have known they could not avoid tax or deduct personal or family expenses in the manner herein accomplished. Davis v. Commissioner, * * [81 T.C. 806">81 T.C. 806,] 820-821 [(1983), affd. without published opinion 767 F.2d 931">767 F.2d 931 (9th Cir. 1985)]. * * * [Page I, T.C. Memo. 1986-275.]Petitioner argues that he is not subject to the negligence addition for 1984 and 1985 because of his reliance upon two attorneys and petitioner's interpretations of conversations with internal revenue agents. Petitioner, however, did not rely upon attorneys or agents to motivate him to avoid tax by means of his association with a purported religious organization. 7 Instead, it was petitioner's intention to reach those results, and he consulted attorneys to attempt to find ways to attain his goal. Although there were some subtle differences between this case and Page I, we see no difference in the net result of petitioner's actions. Petitioner has not established that in understating the taxes due on his returns he reasonably relied upon competent professional advice. Accordingly, we find petitioner is liable for the 1993 Tax Ct. Memo LEXIS 407">445 additions to tax provided for in section 6653(a)(1) and (2) for the taxable years 1984 and 1985. 2. Section 6654 -- This addition to tax depends upon whether a taxpayer failed to pay or underpaid estimated tax. Petitioner bears the burden of showing that he is not liable for this addition to tax. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Petitioner failed to pay estimated tax. We note, however, that on his returns for 1985 and 1984 he claimed that he had made estimated payments which, based1993 Tax Ct. Memo LEXIS 407">446 on what he did report, would have resulted in overpayments or refunds. Petitioner does not now argue that estimated payments were made. Petitioner argues that the underpayment is less than $ 500 for each year and, accordingly, that the addition does not apply. Petitioner's argument is dependent upon his being successful concerning the amount of income he should have reported for 1984 and 1985. Because our findings and holding in this case will result in underpayments in excess of the threshold, petitioner has failed to establish that an addition to tax under section 6654 for 1984 and 1985 should not apply. Accordingly, respondent's determination that section 6654 is applicable in both taxable years is sustained. 3. Section 6661 -- Respondent also determined an addition to tax for substantial understatement of tax under section 6661 for both taxable years. Section 6661 provides for a 25-percent addition to tax if there is a substantial understatement of tax. An understatement is "substantial" if it exceeds the greater of 10 percent of the tax required to be shown for the taxable year, or $ 5,000. An "understatement" does not include an amount attributable to "the tax 1993 Tax Ct. Memo LEXIS 407">447 treatment of any item by the taxpayer if there is or was substantial authority for such treatment". Sec. 6661(b)(2)(B)(i). Additionally, an understatement does not include any item for which there was adequate disclosure. Sec. 6661(b)(2)(B)(ii). Petitioner's only argument concerning this addition to tax is that he does not have a substantial understatement because his tax liability should not increase by $ 5,000 in either year. Accordingly, the substantial understatement addition is applicable for the 1984 and 1985 taxable years if the threshold understatement is exceeded with respect to either year. That computation will be made in connection with the Rule 155 computations. 4. Section 6621(c) -- Section 6621(c) provides for interest at 120 percent of underpayment rate then in effect, with respect to the portion of the underpayment attributable to tax-motivated transactions. Section 6621(c)(3)(A)(v) provides that a tax-motivated transaction includes "any sham or fraudulent transaction." Section 6621 has been applied in charitable deduction cases. Snyder v. Commissioner, 86 T.C. 567">86 T.C. 567, 86 T.C. 567">588-589 (1986). It has also been applied to "phony charitable1993 Tax Ct. Memo LEXIS 407">448 contributions deductions generated by a taxpayer's use of his local ULC church. Mulvaney v. Commissioner, T.C. Memo. 1988-243." Slayback v. Commissioner, T.C. Memo. 1990-200, affd. 957 F.2d 870">957 F.2d 870 (11th Cir. 1992). In this case petitioner attempted to avoid tax liability under attempts to assign income to his "church" and also by means of claiming deductions, when the assignments were questioned. Petitioner's actions in using the church to avoid the payment of tax were tax-motivated, and the additional interest provided under section 6621(c) is applicable for interest on the entire underpayment for both taxable years. G. Section 6673Section 6673 provides for a penalty if a taxpayer maintains or institutes a proceeding primarily for delay or maintains a frivolous and groundless position. Under section 6673, the Court is given discretion to require a taxpayer to pay a penalty not to exceed $ 25,000. Respondent, without requesting a specific amount, has asked the Court to impose a penalty in this case because it was maintained or instituted for delay or because petitioner's position is1993 Tax Ct. Memo LEXIS 407">449 frivolous or groundless. In Page I we declined to award damages under section 6673 based upon the record as a whole. In that case, we considered several legal arguments and positions of petitioner. In this case, petitioner has not advanced any additional legal arguments or precedent, but instead contended that his case was factually distinguishable from the prior one. We do not find any meaningful difference between the situation in Page I and this case. We find petitioner's position in the setting of a second trial of the same matters to be frivolous or groundless. 8 The trial, briefing, and rendering of an opinion here were only necessary due to petitioner's insistence and not the need to resolve a meaningful dispute. Accordingly, we find that petitioner is liable for a $ 2,500 penalty under the provisions of section 6673. 1993 Tax Ct. Memo LEXIS 407">450 To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. Respondent, in an amended answer, conceded that petitioner is not liable for an addition to tax under sec. 6651(a)(1) for the 1984 and 1985 taxable years.↩2. If sec. 6653(a)(1) is applicable, sec. 6653(a)(2) provides for an additional 50-percent interest on the amount of any underpayment determined to be attributable to negligence in this case.↩4. Formerly sec. 6621(d)↩.3. 120 percent of sec. 6601 interest rate on any portion of the deficiency which is a substantial underpayment attributable to a tax-motivated transaction.↩1. The parties' stipulation of facts is incorporated by this reference.↩2. The year 1979 was decided in petitioner's favor due to the expiration of the period for assessment prior to respondent's issuance of the notice of deficiency.↩3. Petitioner contends that his basis in the airplane is $ 9,450 and that he would be entitled to an offset of that amount from any sales proceeds, resulting in a $ 2,750 gain.↩4. We note that respondent's reconstruction approach is conservative in this case because amounts that were not passed through the AFC account, with the exception of the child support payments, have not been included in the reconstruction to arrive at the unreported amount of petitioner's income for 1984 and 1985. The record reflects that petitioner dealt extensively in cash in order to avoid taxing authorities and avoid detection.↩5. Petitioner's position has some inherent flaws. Because petitioner claims, with the exceptions of the amounts that respondent has specifically identified, that the unidentified deposits to AFC were contributions by members and because petitioner also argues that he had no more income than the identified items, he finds himself unable to reasonably argue that the unidentified items should be treated as contributions by him if we find, as we did, that the majority of the deposits to the AFC account constituted petitioner's income. In the end result it makes no difference because petitioner has not shown here, as he did not show in Page I, that he is entitled to a charitable deduction for amounts he may have contributed to AFC.↩6. We do not question here petitioner's exercise of his religious principles or whether AFC could be classified as a organization within the meaning of sec. 501(c)(3). Instead, the question addressed concerns sec. 170 and whether any of the income earned by petitioner can be reduced by his alleged contributions.↩7. Petitioner's right to exercise his religion is not in question. Additionally, because of our finding of substantial private inurement, it is not necessary to decide whether AFC was a "church". Our opinion and resulting decision involve whether petitioner successfully diverted his earnings to another entity and whether he has shown that he is entitled to deductions for contributions and other alleged expenditures, under the appropriate sections of the Internal Revenue Code.↩8. We note that the Court of Appeals for the Eighth Circuit also rejected petitioner's legal grounds in affirming Page I. Additionally, the Circuit Court found petitioner's appeal to be frivolous and imposed a sanction directing double costs and $ 5,000 attorney's fees (damages). Page v. Commissioner, 823 F.2d at 1263, 1273 (8th Cir. 1987), affg. T.C. Memo. 1986-275↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619017/	LYLE J. AND SHIRLEY M. FRALICH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFralich v. CommissionerDocket No. 1341-87United States Tax CourtT.C. Memo 1995-257; 1995 Tax Ct. Memo LEXIS 258; 69 T.C.M. 2875; June 13, 1995, Filed 1995 Tax Ct. Memo LEXIS 258">258 Decision will be entered under Rule 155. For petitioners: Lois C. Blaesing and Chauncey W. Tuttle, Jr.For respondent: Mary P. Hamilton, Paul Colleran, and William T. Hayes. DAWSON; WOLFEDAWSON, WOLFEMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE WOLFE, Special Trial Judge: This case is part of the Plastics Recycling group of cases. For a detailed discussion of the transactions involved in the Plastics Recycling cases, see Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without published opinion1995 Tax Ct. Memo LEXIS 258">259 996 F.2d 1216">996 F.2d 1216 (6th Cir. 1993). The facts of the underlying transaction in this case are substantially identical to those in the Provizer case. Through a second tier partnership, Efron Investors, Lyle J. Fralich (petitioner) invested in the Clearwater Group limited partnership (Clearwater), the same partnership considered in the Provizer case. Pursuant to petitioners' request at trial, this Court took judicial notice of our opinion in the Provizer case. In a notice of deficiency, respondent determined deficiencies in petitioners' joint 1978 and 1981 Federal income taxes in the amounts of $ 15,367 and $ 7,416, respectively, and additions to tax for those years under section 6659 for valuation overstatements in the amounts of $ 4,610 and $ 2,225, respectively, and determined that interest on deficiencies accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c). 2 The deficiency for taxable year 1978 results from disallowance of investment tax credit carrybacks and business energy credit carrybacks from taxable year 1981. 1995 Tax Ct. Memo LEXIS 258">260 In addition to the above deficiencies and additions to tax, in an amended answer, respondent asserted that petitioners were liable for additions to tax for 1978 and 1981 in the respective amounts of $ 768 and $ 371 under section 6653(a)(1) for negligence and under section 6653(a)(2) in amounts equal to 50 percent of the interest payable with respect to the portion of the underpayments attributable to negligence. In her opening brief, respondent asserted an addition to tax in the total amount of $ 5,790 that was calculated based upon an underpayment of taxes in the amount of $ 19,302 allegedly attributable to a valuation overstatement. We consider the section 6659 additions to tax adjusted to correspond to the amounts in dispute as set forth in respondent's opening brief and treat the limitation of the total additions to tax under section 6659 to $ 5,790 as a concession by respondent. The allocation of section 6659 additions to tax between 1978 and 1981 is a matter of computation involving matters not in dispute in this case. The pleadings are amended to conform to the proof pursuant to Rule 41(b). The issues for decision are: (1) Whether expert reports and testimony offered 1995 Tax Ct. Memo LEXIS 258">261 by respondent are admissible into evidence; (2) whether petitioners are entitled to claimed deductions and tax credits with respect to Clearwater as passed through Efron Investors to petitioner Lyle J. Fralich; (3) whether petitioners are liable for additions to tax for negligence or intentional disregard of rules or regulations under section 6653(a) for 1978 and under section 6653(a)(1) and (2) for 1981; (4) whether petitioners are liable for additions to tax under section 6659 for an underpayment of tax attributable to valuation overstatement for 1978 and 1981; and (5) whether petitioners are liable for increased interest under section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated by this reference. Petitioners resided in Munster, Indiana, when their petition was filed. During 1981, petitioners were the managers and sole owners of three Shakey's Pizza franchises. Petitioners opened their first Shakey's Pizza restaurant in 1968. In 1981, petitioners opened their third Shakey's Pizza restaurant. In 1981, the gross receipts of petitioners' Shakey's Pizza enterprise were approximately1995 Tax Ct. Memo LEXIS 258">262 $ 3 million. Petitioners' gross income for 1981 from wages, interest, dividends, tax refunds, rental income, and miscellaneous income was in excess of $ 210,000. Although this amount was reduced for tax purposes by start-up expenditures for a new restaurant and limited partnership losses that were allowed by respondent, petitioners' 1981 adjusted gross income aside from matters here in dispute was still approximately $ 100,000. Consequently, in the absence of significant losses, deductions, or credits, they were subject to payment of Federal income taxes in substantial amounts. Petitioner is a limited partner in Efron Investors (EI), which is a limited partner in Clearwater. Clearwater is the same recycling partnership that we considered in Provizer v. Commissioner, supra. The underlying deficiency still in dispute in this case resulted from respondent's disallowance of claimed losses and tax credits that were passed through EI to petitioner.31995 Tax Ct. Memo LEXIS 258">263 Petitioners have stipulated substantially the same facts concerning the underlying transactions as we found in Provizer v. Commissioner, supra.4 Those facts may be summarized as follows. In 1981, Packaging Industries, Inc. (PI), manufactured and sold six Sentinel expanded polyethylene (EPE) recyclers to ECI Corp. for $ 5,886,000 ($ 981,000 each). ECI Corp., in turn, resold the recyclers to F & G Corp. for $ 6,976,000 ($ 1,162,666 each). F & G Corp. then leased the recyclers to Clearwater, which licensed the recyclers to FMEC Corp., which sublicensed them back to PI. All of the monthly payments required among the entities in the above transactions offset each other. These transactions were done simultaneously. We refer to these transactions collectively as the Clearwater transaction. The fair market value of a Sentinel EPE recycler in 1981 was not in excess of $ 50,000. 1995 Tax Ct. Memo LEXIS 258">264 PI allegedly sublicensed the recyclers to entities that would use them to recycle plastic scrap. The sublicense agreements provided that the end-users would transfer to PI 100 percent of the recycled scrap in exchange for a payment from FMEC based on the quality and amount of recycled scrap. In 1981, petitioner acquired a limited partnership interest in EI, and EI acquired a limited partnership interest in Clearwater. EI is an Indiana Limited Partnership that was formed in May of 1981 by Morton L. Efron (Efron) as the general partner and Real Estate Financial Corp. (REFC) as the initial limited partner. Fred Gordon (Gordon) is the president of REFC, which is owned by members of Gordon's family. EI was formed to acquire limited partnership interests in an office building in Buffalo, New York (the office building), and a shopping center in Haslett, Michigan (the shopping center). In contemplation of these ventures, EI prepared a private placement memorandum (the original offering memorandum) and distributed it to potential limited partners. At some time in late 1981, EI abandoned the contemplated investment in the shopping center and substituted limited partnership interests1995 Tax Ct. Memo LEXIS 258">265 in Clearwater and a K-Mart shopping center in Swansea, Massachusetts (the K-Mart investment). The revised investment objectives were presented in a revised offering memorandum (the revised offering memorandum) dated December 14, 1981. The revised offering memorandum indicated that EI intended to invest in 100 percent of the limited partnership interests in the office building (10 units), 43.75 percent of the limited partnership interests in Clearwater (7 units), and 15.625 percent of the limited partnership interests in the K-Mart investment (2 1/2 units). Potential EI limited partners were informed of the change in EI's investment objectives through informal conversations and the revised offering memorandum. Petitioner became aware of the change in EI's investment objectives in late 1981. MFA Corp. (MFA) is the ministerial agent for EI. Efron owns 50 percent of the stock of MFA and REFC owns the remaining 50 percent. The revised offering memorandum provides that Efron, as general partner of EI, and MFA, as the ministerial agent for EI, will receive substantial fees, compensation, and profits from EI. The contemplated payments to MFA include: (1) $ 100,000 for supervisory 1995 Tax Ct. Memo LEXIS 258">266 management of the office building and ministerial fees; (2) $ 100,000-$ 125,000 as loan commitment fees; (3) $ 25,000 for note collection guarantees; and (4) a maximum of $ 100,750 in investment advisory fees. In addition, MFA was also the ministerial agent for the office building limited partnership and, according to the revised offering memorandum, received substantial payments in that capacity. Efron was the general partner of EI. In addition, Efron owned limited partnership interests in EI through Efron and Efron Real Estate, a partnership owned by Efron and his wife, and AMBI Real Estate, a partnership owned by Efron and his sister. EI was the first partnership for which Efron served as a general partner. Efron organized EI so that he could earn legal fees and fees for managing the partnership. He received compensation and fees as the general partner of EI and as a 50-percent shareholder of MFA. After EI abandoned the investment in the shopping center, Efron learned of the Clearwater transaction from Gordon. In 1981 Gordon was counsel to EI, to Efron as the general partner of EI, to Efron personally, and to MFA. He and Efron have known each other since meeting at the 1995 Tax Ct. Memo LEXIS 258">267 University of Michigan in 1955. In the early 1960's Efron and Gordon began investing together in the stock market, real estate, business loans, and other investments. Gordon is an attorney who holds a master's degree in business administration and at one time was employed by the Internal Revenue Service. Prior to the date of the Clearwater private placement offering, Gordon had experience involving the evaluation of tax shelters. Gordon was paid a fee in the amount of 10 percent of some investments he guided to Clearwater; however he did not receive directly a fee from Clearwater for the EI investments. Efron was aware that Gordon received commissions from the sale of some units in recycling ventures. 5 Gordon recommended investing in the Clearwater offering to the investors in EI, as well as to some of Gordon's other clients. 1995 Tax Ct. Memo LEXIS 258">268 In 1981, petitioner subscribed to purchase 1/2 of a limited partnership unit ($ 50,000) in EI. He subscribed to purchase a 1/4 unit on December 8, 1981, and subscribed to purchase an additional 1/4 unit on December 15, 1981. He acquired his interest in EI in exchange for a cash payment in the amount of $ 20,162.50 and promissory notes bearing interest at the rate of 11 percent per year with payments due in the amounts of $ 20,902.50 and $ 8,035 on January 15, 1982, and January 15, 1983, respectively. Petitioner acquired a 3.194-percent limited partnership interest in EI, and EI acquired a 43.313-percent limited partnership interest in Clearwater. As a result of the pass through from Clearwater and EI, on their 1981 Federal income tax return petitioners deducted an operating loss in the amount of $ 8,944 and claimed an investment tax credit in the amount of $ 9,651 and a business energy credit in the amount of $ 9,651 for the recyclers. Respondent disallowed petitioners' claimed deductions and credits related to petitioner's entire investment in EI for taxable year 1981. Although the notice of deficiency states that respondent disallowed only the losses passed through both Clearwater1995 Tax Ct. Memo LEXIS 258">269 and EI to petitioner, in fact, respondent disallowed all of the deductions and losses associated with petitioner's investment in EI. On their 1981 Federal income tax return, petitioners claimed a tentative investment tax credit in the amount of $ 40,540, $ 9,651 of which was attributable to petitioner's investment in Clearwater through EI. Petitioners used $ 6,100 of that credit on their 1981 Federal income tax return and carried back the unused portion to 1978 and 1979, $ 21,557 and $ 12,883, respectively. In an amended return for 1981, petitioners also claimed a business energy credit in the amount of $ 9,651 with respect to petitioner's investment in Clearwater through EI. Petitioners carried back the entire claimed business energy credit to 1979. 6Prior to issuance of the notice of deficiency for taxable years 1978 and 1981, 1995 Tax Ct. Memo LEXIS 258">270 the parties agreed that petitioners were entitled to carry back unused investment tax credits in the amounts of $ 6,190 and $ 12,883 to 1978 and 1979, respectively. Respondent disallowed the credits claimed with respect to Clearwater; i.e, the claimed business energy credit in the amount of $ 9,651 and $ 9,651 of the claimed investment tax credit. In so doing, respondent determined that $ 15,367 of those credits were utilized in taxable year 1978 and $ 3,935 of those credits were utilized in taxable year 1981. In 1981, petitioner learned of EI and the Clearwater transaction from Lawrence Reister (Reister). In 1981, Reister was a certified financial adviser and manager of a John Hancock Insurance agency. Petitioners have purchased numerous insurance policies from Reister and have had a business association with him since 1967. Reister acted as petitioner's offeree representative with respect to the EI offering. Petitioner received a bachelor of science degree in marketing in 1957 from the University of North Dakota. Petitioner Shirley M. Fralich is a high school graduate. In 1981, petitioners' business occupation was the managing and ownership of three Shakey's Pizza restaurants. 1995 Tax Ct. Memo LEXIS 258">271 Petitioners do not have any education or formal training in investments. Petitioners do not have any education or work experience in plastics recycling or plastics materials. Petitioners did not independently investigate the Sentinel recyclers. Petitioners did not see a Sentinel recycler or any other type of plastic recycler prior to participating in the recycling ventures. OPINION In Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without published opinion 926 F.2d 1216">926 F.2d 1216 (6th Cir. 1993), a test case involving the Clearwater transaction and another tier partnership, this Court (1) found that each Sentinel EPE recycler had a fair market value not in excess of $ 50,000, (2) held that the Clearwater transaction was a sham because it lacked economic substance and a business purpose, (3) upheld the section 6659 addition to tax for valuation overstatement since the underpayment of taxes was directly related to the overstatement of the value of the Sentinel EPE recyclers, and (4) held that losses and credits claimed with respect to Clearwater were attributable to tax-motivated transactions within the meaning of section 6621(c). 1995 Tax Ct. Memo LEXIS 258">272 In reaching the conclusion that the Clearwater transaction lacked economic substance and a business purpose, this Court relied heavily upon the overvaluation of the Sentinel EPE recyclers. Although petitioners have not agreed to be bound by the Provizer opinion, they have stipulated that petitioner's investment in the Sentinel EPE recyclers was similar to the investment described in Provizer v. Commissioner, supra, and, pursuant to their request, we have taken judicial notice of our opinion in the Provizer case. Petitioner invested in EI, a tier partnership that invested in Clearwater. The underlying transaction in this case (the Clearwater transaction), and the Sentinel EPE recyclers considered in this case, are the same transaction and machines considered in Provizer v. Commissioner, supra.Issue 1: Admissibility of Expert Reports and TestimonyBefore addressing the substantive issues in this case, we resolve an evidentiary issue. At trial, respondent offered in evidence the expert opinions and testimony of Steven Grossman (Grossman) and Richard Lindstrom (Lindstrom). At trial and in their1995 Tax Ct. Memo LEXIS 258">273 reply brief, petitioners object to the admissibility of the testimony and reports. The expert reports and testimony of Grossman and Lindstrom are identical to the testimony and reports in Fine v. Commissioner, T.C. Memo. 1995-222. In addition, petitioners' arguments with respect to the admissibility of the expert testimony and reports are identical to the arguments made in the Fine case. For discussions of the reports, see Fine v. Commissioner, supra, and Provizer v. Commissioner, supra.For reasons set forth in Fine v. Commissioner, supra, we hold that the reports and testimony of Grossman and Lindstrom are relevant and admissible and that Grossman and Lindstrom are experts in the fields of plastics, engineering, and technical information. We do not, however, accept Grossman or Lindstrom as experts with respect to the ability of the average person, who has not had extensive education in science and engineering, to conduct technical research, and we have limited our consideration of their reports and testimony to the areas of their expertise. 1995 Tax Ct. Memo LEXIS 258">274 We also hold that Grossman's report meets the requirements of Rule 143(f). Issue 2: Deductions and Tax Credits With Respect to EI and ClearwaterOn their joint 1981 Federal income tax return as amended, petitioners claimed the following with respect to petitioner's investment in EI: (1) Deductions in the amount of $ 9,853; (2) an investment tax credit in the amount of $ 9,651; and (3) a business energy credit in the amount of $ 9,651. 7 Of the deductions claimed with respect to petitioner's investment in EI, $ 8,944 was attributable to EI's investment in Clearwater. 8 All the credits claimed with respect to EI were attributable to EI's investment in Clearwater. Respondent disallowed the deductions and tax credits claimed with respect to petitioner's investment in EI in their entirety. 1995 Tax Ct. Memo LEXIS 258">275 The underlying transaction with respect to Clearwater in this case is substantially identical in all respects to the transaction in Provizer v. Commissioner, T.C. Memo. 1992-177. The parties have stipulated the facts concerning the deficiency essentially as set forth in our Provizer opinion. Based on this record, we hold that the Clearwater transaction was a sham and lacked economic substance. In reaching this conclusion, we rely heavily upon the overvaluation of the Sentinel EPE recyclers. Accordingly, we sustain respondent's disallowance of the deductions and credits claimed with respect to EI's investment in Clearwater.9 Moreover, we note that petitioners have stated their concession of this issue on brief. The record plainly supports respondent's disallowance of the deductions and credits claimed with respect to Clearwater regardless of such concession. For a detailed discussion of the facts and the applicable law, see Provizer v. Commissioner, supra.1995 Tax Ct. Memo LEXIS 258">276 Issue 3: Sec. 6653(a) NegligenceIn her first amendment to answer, respondent asserted that petitioners were liable for the negligence additions to tax under section 6653(a) for 1978 and 1981. Because these additions to tax were raised for the first time in respondent's amendment to answer, respondent bears the burden of proof on this issue. Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170">103 T.C. 170, 103 T.C. 170">196 (1994). Section 6653(a) for taxable year 1978 and section 6653(a)(1) for taxable year 1981 provide for an addition to tax equal to 5 percent of the underpayment if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) for taxable year 1981 provides for an addition to tax equal to 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence. Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985). The question is whether a particular taxpayer's actions in connection1995 Tax Ct. Memo LEXIS 258">277 with the transactions were reasonable in light of his experience and the nature of the investment or business. See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 60 T.C. 728">740 (1973). Petitioner contends that he was reasonable in claiming deductions and credits with respect to EI's investment in Clearwater. To support his contention, petitioner alleges the following: (1) That claiming the deductions and credits with respect to EI's investment in Clearwater was reasonable in light of the supposed oil crisis in the United States in 1981; and (2) that in claiming the deductions and credits, petitioner specifically relied upon Reister and Donald Wilson (his accountant). When petitioners claimed the disallowed deductions and tax credits, they had little, if any, knowledge of the plastics or recycling industries and no engineering or technical knowledge. Petitioners did not independently investigate the Sentinel EPE recyclers. In fact, petitioner did not request, receive, or read a copy of the Clearwater offering memorandum, and he claims that he merely skimmed the revised offering memorandum with Reister. At trial petitioner could remember almost nothing1995 Tax Ct. Memo LEXIS 258">278 about the Clearwater transaction, the equipment involved, the parties involved, the amount of lease payments paid by Clearwater, the amount of royalty payments projected to be received by Clearwater, or the value of the recyclers. He testified he "didn't even know what the recycling part [of the EI investment] really was about". Although petitioner testified that he believed that Clearwater was going to generate income from leasing the equipment, he was unsure as to precisely how EI's investment in Clearwater was supposed to generate income. Petitioner argues, in general terms, that because of the media coverage of a supposed oil or energy crisis in the United States during 1981, he believed that an investment in recycling had good economic potential. He testified that he believed that the price of plastics would increase with the price of oil because plastics were oil derivatives. Petitioner, however, was quite candid in expressing his lack of knowledge concerning recycling and plastics. Petitioner was unaware of precisely how Clearwater was supposed to generate income. We find petitioner's vague, general claims concerning the so-called oil crisis to be without merit. Petitioners' 1995 Tax Ct. Memo LEXIS 258">279 reliance on Krause v. Commissioner, 99 T.C. 132">99 T.C. 132 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024">28 F.3d 1024 (10th Cir. 1994), is misplaced. The facts in the Krause case are distinctly different from the facts of this case. In the Krause case, the taxpayers invested in limited partnerships whose investment objectives concerned enhanced oil recovery (EOR) technology. The Krause opinion notes that during the late 1970's and early 1980's the Federal Government adopted specific programs to aid research and development of EOR technology. 99 T.C. 132">Id. at 135-136. In holding that the taxpayers in the Krause case were not liable for the negligence-related additions to tax, this Court noted that one of the Government's expert witnesses acknowledged that "investors may have been significantly and reasonably influenced by the energy price hysteria that existed in the late 1970's and early 1980's to invest in EOR technology." 99 T.C. 132">Id. at 177. In the present case, however, one of respondent's experts, Grossman, noted that the price of plastics materials is not 1995 Tax Ct. Memo LEXIS 258">280 directly proportional to the price of oil, that less than 10 percent of crude oil is utilized for making plastics materials, and that studies have shown that "a 300% increase in crude oil prices results in only a 30 to 40% increase in the cost of plastic products." While EOR was, according to our Krause opinion, in the forefront of national policy and the media during the late 1970's and early 1980's, there is no showing in this record that the so-called energy crisis would provide a reasonable basis for investing in recycling of polyethylene. Moreover, the taxpayers in the Krause opinion were experienced in or investigated EOR technology specifically. One of the taxpayers in the Krause case undertook significant investigation of the proposed investment including researching EOR technology. The other taxpayer was a geological and mining engineer whose work included research of oil recovery methods and who hired an independent geologic engineer to review the offering materials. 99 T.C. 132">Id. at 166. In the present case, petitioners were not experienced or educated in plastics recycling or plastics materials. They did not independently investigate1995 Tax Ct. Memo LEXIS 258">281 the Sentinel recyclers, and they did not hire an expert in plastics to evaluate the Clearwater transaction. We consider petitioners' arguments with respect to the Krause case inapplicable. Also, during 1980 and 1981, in addition to the media coverage of the "oil crisis", there was "extensive continuing press coverage of questionable tax shelter plans." Zmuda v. Commissioner, 731 F.2d 1417">731 F.2d 1417, 731 F.2d 1417">1422 (9th Cir. 1984), affg. 79 T.C. 714">79 T.C. 714 (1982). On their 1981 Federal income tax return alone, petitioners claimed investment tax and business energy credits related to Clearwater totaling $ 19,302, while petitioner's investment in Clearwater through EI was less than $ 11,500. 10 Therefore, like the taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-177, "except for a few weeks at the beginning, petitioners never had any money in the [Clearwater] deal." In light of the large tax benefits projected in the offering memorandum and petitioner's admitted observation of the media, we conclude that further investigation of the investment clearly was mandated. A reasonably prudent person would have asked1995 Tax Ct. Memo LEXIS 258">282 a qualified independent tax adviser if this windfall were not too good to be true. McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 92 T.C. 827">850 (1989). In fact, petitioner argues that he consulted qualified advisers and relied upon them in claiming the disallowed losses and tax credits. Petitioner argues that his reliance on the advice of Reister and Donald Wilson (Wilson) insulates him from the negligence-related additions to tax. Under some circumstances a taxpayer may avoid liability for additions to tax for negligence under section 6653(a) if reasonable reliance on a competent professional adviser is shown. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 89 T.C. 849">888 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990),1995 Tax Ct. Memo LEXIS 258">283 affd. 501 U.S. 868">501 U.S. 868 (1991). Such circumstances are not present in this case. Moreover, reliance on professional advice, standing alone, is not an absolute defense to negligence, but rather a factor to be considered. Id. In order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax, the reliance must be reasonable, in good faith, and based upon full disclosure. Id.; see Weis v. Commissioner, 94 T.C. 473">94 T.C. 473, 94 T.C. 473">487 (1990); Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 91 T.C. 396">423-424 (1988), affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991); Pritchett v. Commissioner, 63 T.C. 149">63 T.C. 149, 63 T.C. 149">174-175 (1974). We have rejected pleas of reliance when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer knew anything about the nontax business aspects of the contemplated venture. Beck v. Commissioner, 85 T.C. 557">85 T.C. 557 (1985); Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914 (1983); Steerman v. Commissioner, T.C. Memo. 1993-447.1995 Tax Ct. Memo LEXIS 258">284 The record does not show, and petitioners do not seriously contend, that either Reister or Wilson possessed any special qualifications or professional skills in the recycling or plastics industries. Petitioner does not suggest that Reister or Wilson had any peculiar or specialized knowledge of the Clearwater transaction beyond that of any financial adviser or accountant who had read the prospectus. In addition, none of the persons allegedly relied upon by petitioner hired anyone with plastics or recycling expertise to evaluate the Clearwater transaction. Petitioner first became aware of EI through Reister. Petitioner contends that he relied on Reister in making his investment in EI and in claiming the associated tax deductions and credits. Reister acted as petitioner's offeree representative with respect to the EI investment. Reister was a certified financial adviser and had sold petitioners numerous insurance policies. Petitioners began purchasing investments through Reister in approximately 1981 and consequently, did not have a long history of purchasing investments through him prior to the EI transaction in 1981. Petitioner testified that in November of 1981 Reister approached1995 Tax Ct. Memo LEXIS 258">285 him concerning the EI investment and that, although he was not interested in investing at that time, Reister persisted in recommending the investment. Thereafter, in December of 1981, petitioner invested in EI. During 1981 petitioner spoke with Reister concerning the initial EI offering. Petitioner testified that at that time Reister explained the EI offering to him and told him that his investment in EI would be a small limited interest with no managerial duties or time commitment. When the change in EI's investment objectives occurred, petitioner received a copy of the revised offering memorandum. Upon receipt of the revised offering memorandum, petitioner reviewed it with Reister for approximately 30 minutes. Petitioner testified that at that time Reister advised him that recycling made economic sense because of the so-called oil crisis. The record is devoid of any further details concerning the advice petitioner received from Reister after EI's investment objectives were changed to include an investment in Clearwater. Although petitioner did not pay a fee directly to Reister, he testified that he assumed that Reister was receiving a commission with respect to petitioner's1995 Tax Ct. Memo LEXIS 258">286 investment in EI. The record with respect to the actual payment of commissions on this investment is inconclusive. See supra note 5. Despite petitioner's contention that he relied upon Reister in making the investment in EI, petitioner testified that he sought additional advice with respect to the EI offering memoranda from his accountant, Wilson. Petitioner explained his motivation in seeking Wilson's advice as follows: I always feel like whoever's selling me something might not be totally unbiased if they're making some money off it. So I would take it to my accountant who was totally unbiased and let him decide * * to see if what [Reister] is saying is actually true and I'm not going to get stuck.In our view, petitioner's purported reliance on Reister was not reasonable. Petitioner considered Reister a compensated salesman who had been persistent in his efforts to sell the EI deal. Petitioner's own testimony demonstrates that in this matter he did not consider the salesman's pitch a reliable basis for making the purchase. Petitioners will not be relieved of the negligence-related additions to tax on the basis of their current purported reliance on Reister. 1995 Tax Ct. Memo LEXIS 258">287 Petitioner also contends that he relied on Wilson in investing in EI and in claiming the disallowed deductions and credits and that he should be relieved of the negligence-related additions to tax under section 6653(a) because of this reliance. Wilson is a certified public accountant and a member of the accounting firm Homer, Wilson & Company, formerly Russell Homer & Company (the accounting firm). Since 1967, the accounting firm has been performing all of petitioners' accounting work with respect to their Shakey's Pizza franchises. Petitioner took the initial offering memorandum to Wilson. Wilson testified that he reviewed that offering memorandum and recommended that petitioner invest in EI because EI was investing strictly in real estate. Thereafter, petitioner received the revised offering memorandum in the mail and took it to Wilson. Wilson reviewed the revised offering memorandum. Wilson did no outside investigation of EI or Clearwater. He did not request, receive, or review a copy of the Clearwater offering memorandum. Although he did not prepare a report with respect to the revised offering memorandum or verify the projections in the revised offering memorandum, 1995 Tax Ct. Memo LEXIS 258">288 Wilson did not change his recommendation that petitioner invest in EI. Petitioner testified that Wilson was not concerned by the change in EI's investments. Wilson testified that he believed that EI's Clearwater investment had good economic potential. Yet, he did not investigate or know the material processed through the recyclers, the price of resin, or the name or price of the equipment leased by Clearwater. Wilson testified that he believed that EI was a good investment because of the real estate portion of the investment. He testified that the recycling part of the investment was "an unknown". Petitioners do not seriously contend that Wilson possessed the requisite expertise in recycling or the plastics industry to enable him properly to evaluate the merits of the Clearwater transaction. Petitioner's purported reliance on Wilson was not reasonable. In our view, petitioner's purported reliance on Reister and Wilson was not reasonable, in good faith, and based on full disclosure. Accordingly, we hold that petitioners are not entitled to relief from the negligence-related additions to tax under section 6653(a) because of their alleged reliance on professional advice. Petitioners' 1995 Tax Ct. Memo LEXIS 258">289 reliance on Heasley v. Commissioner, 902 F.2d 380">902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, is misplaced. The facts in the Heasley case are distinctly different from the facts of this case. In the Heasley case the taxpayers were not educated beyond high school and had limited investment experience, while in the instant case petitioner was a financially successful, sophisticated, educated, experienced business owner who had made numerous and varied investments. The taxpayers in the Heasley case actively monitored their investment and, as the Fifth Circuit Court of Appeals stated, intended to profit from the investment. We cannot reach similar conclusions in the instant case. Although petitioner testified that he intended to profit from EI's investment in Clearwater, he has failed to provide evidence of any effort to monitor the investment or reliable evidence of any profit objective independent of tax savings. We consider petitioners' arguments with respect to the Heasley case inapplicable. Petitioner entered into the EI investment without any knowledge or background with respect to plastics or recycling1995 Tax Ct. Memo LEXIS 258">290 and without seeking the advice of anyone who had such knowledge. Petitioner did not examine any Sentinel EPE recyclers prior to investing in EI, and he did not seek the advice of an independent third party concerning the machines' values. Through his investment in EI, petitioner paid less than $ 11,500 to Clearwater and claimed a tax deduction of $ 8,944 and tax credits in the amount of $ 19,302 for the first year of the investment alone. Under the circumstances of this case, petitioner should have known better than to claim the large deductions and tax credits with respect to Clearwater on petitioners' 1981 Federal income tax return. We conclude that petitioners were negligent in claiming the deductions and credits with respect to EI's investment in Clearwater on their 1981 Federal income tax return. We hold, upon consideration of the entire record, that petitioners are liable for the negligence-related additions to tax under the provisions of section 6653(a)(1) and (2) for 1981. Respondent is sustained on this issue. Issue 4. Sec. 6659 Valuation OverstatementA graduated addition to tax is imposed when an individual has an underpayment of tax that equals or exceeds1995 Tax Ct. Memo LEXIS 258">291 $ 1,000 and is attributable to a valuation overstatement. Sec. 6659(a), (d). A valuation overstatement exists if the fair market value (or adjusted basis) of property claimed on a return equals or exceeds 150 percent of the amount determined to be the correct amount. Sec. 6659(c). If the claimed valuation exceeds 250 percent of the correct value, the addition is equal to 30 percent of the underpayment. Sec. 6659(b). The underlying facts of this case with respect to this issue are substantially the same as those in Fine v. Commissioner, T.C. Memo. 1995-222. In addition, petitioners' arguments with respect to this issue are essentially identical to the arguments made in the Fine case. For reasons set forth in the Fine opinion, we hold that petitioners are liable for the section 6659 addition to tax at the rate of 30 percent of the underpayment of tax attributable to the disallowed credits for 1978 and 1981. Respondent calculated the section 6659 addition to tax based upon an underpayment in taxes in the amount of $ 19,302. 11 On their 1981 Federal income tax return, as amended, petitioners claimed investment tax and business energy credits1995 Tax Ct. Memo LEXIS 258">292 with respect to Clearwater in the amount of $ 19,302. Petitioners are liable for section 6659 additions to tax at the rate of 30 percent of any underpayment of taxes for 1981 or, pursuant to carryback provisions, for 1978 that equals or exceeds $ 1,000 and is attributable to the investment tax credit and business energy credit claimed with respect to EI and Clearwater. Issue 5: Sec. 6621(c) Tax-Motivated TransactionsIn the notice of deficiency, respondent determined that interest on deficiencies accruing after December 31, 1984, would be calculated under section 6621(c). The annual rate of interest under section 6621(c) equals 120 percent of the interest payable under section 6601 with respect to any substantial underpayment attributable to tax-motivated transactions. An underpayment is substantial if it exceeds1995 Tax Ct. Memo LEXIS 258">*293 $ 1,000. Sec. 6621(c)(2). The underlying facts of this case with respect to this issue are substantially the same as those in Fine v. Commissioner, supra. In addition, petitioners' arguments on brief with respect to this issue are verbatim copies of the arguments in the taxpayers' briefs in the Fine case. For reasons set forth in the Fine opinion, we hold that respondent's determination as to the applicable interest rate for deficiencies attributable to tax-motivated transactions is sustained, and the increased rate of interest applies for the taxable years in issue. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the tax years at issue, unless otherwise stated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The notice of deficiency refers to sec. 6621(d). This section was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744 and repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2399, effective for tax returns due after Dec. 31, 1989 (sec. 7721(d) of the Act). The repeal does not affect the instant cases. For simplicity, we will refer to this section as sec. 6621(c). The annual rate of interest under sec. 6621(c) for interest accruing after Dec. 31, 1984, equals 120 percent of the interest payable under sec. 6601↩ with respect to any substantial underpayment attributable to tax-motivated transactions.3. In addition to disallowing the losses and credits claimed with respect to petitioner's investment in EI, in the notice of deficiency respondent determined other adjustments to petitioners' 1981 Federal income tax. The other adjustments were agreed upon prior to issuance of the notice of deficiency.↩4. The parties did not stipulate certain facts concerning the Provizers, facts regarding the expert opinions, and other matters that we consider of minimal significance. Although the parties did not stipulate our findings regarding the expert opinions, they stipulated our ultimate finding of fact concerning the fair market value of the recyclers during 1981.↩5. The Clearwater offering memorandum states that the partnership will pay sales commissions and fees to offeree representatives in an amount equal to 10 percent of the price paid by the investor represented by such person. The offering memorandum further states that if such fees are not paid "they will either be retained by the general partner as additional compensation if permitted by applicable state law, or applied in reduction of the subscription price." The Efron Investors Schedule K-1 for 1981 shows that EI paid full price, $ 350,000, for its 7 units of Clearwater, so the 10-percent commission was not applied to reduce the subscription price. Gordon specifically stated that in the case of EI he did not directly receive the sales commission. Efron expressed doubt that he individually had been an offeree representative in connection with Clearwater or any other transaction. There are suggestions that the commission might have been paid to MFA or offeree representatives of individual investors, but the record on this subject is inconclusive. Lawrence H. Reister (Reister) was petitioner's offeree representative with respect to the EI investment.↩6. Petitioners claimed the investment tax credit carryback and the business energy credit carryback on Forms 1045, Applications for Tentative Refund, for taxable years 1978 and 1979.↩7. Although petitioners did not utilize all of their claimed investment tax and business energy credits on their 1981 Federal income tax return, they claimed carrybacks for the remainder of the credits.↩8. Calculated as follows: ↩EI's Reported Loss FromPetitioner's InterestClearwaterin EI$ 280,040X3.194%=$ 8,9449. In the notice of deficiency respondent disallowed all deductions claimed on petitioners' 1981 return with respect to EI. We sustain only respondent's disallowance of the losses and credits claimed with respect to EI's investment in Clearwater.↩10. Calculated as follows: ↩EI's Investment in ClearwaterPetitioner's Share of EI$ 350,000X3.194%=$ 11,179EI's Investment in Clearwater$ 350,000XPetitioner's Investment=$ 11,290EI's Total Investment$ 50,000$ 1,550,00011. The addition to tax under sec. 6659 equals 30% of the underpayment of taxes attributable to a valuation overstatement if the claimed valuation exceeds 250% of the correct value. Sec. 6659(b)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619018/	T. C. PHILLIPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Phillips v. CommissionerDocket No. 12802.United States Board of Tax Appeals9 B.T.A. 153; 1927 BTA LEXIS 2649; November 18, 1927, Promulgated 1927 BTA LEXIS 2649">2649 The petitioner and his wife, residents of the State of Oklahoma, filed separate returns for 1923, in which each reported one-half of the income received from property acquired while residents of the State of Texas. Held, that such a method of reporting income was correct. Hubert L. Bolen, Esq., for the petitioner. D. H. Green, Esq., for the respondent. GREEN 9 B.T.A. 153">153 In this proceeding the petitioner seeks a redetermination of his income tax for the calendar year 1923, for which the Commissioner determined a deficiency of $922.80. The petitioner and his wife filed separate returns. The question is whether the petitioner, having filed a separate return for the year 1923, may be compelled to pay a tax upon the wife's share of the income of an estate accumulated under the community property laws of the State of Texas. FINDINGS OF FACT. The petitioner is an individual residing in Oklahoma City, Okla. During the period from 1889 to January, 1923, he resided at Bowie, Tex., and thereafter in Oklahoma City. The petitioner and his wife were married on January 31, 1906. At the time of his marriage he 9 B.T.A. 153">154 was engaged in the business1927 BTA LEXIS 2649">2650 of money lending and was worth about $108,000, which was all invested in personal property. A large part of his investments were in the stock of the following banks: the First National Bank of Bowie, Tex., the Mangum National Bank at Mangum, Okla., the First National Bank of Woodward, Okla., and the First National Bank El Dorado, Okla.; the remainder was in notes. The petitioner was still the owner of the above-mentioned bank stock during the taxable year 1923. During the period in which the petitioner resided in Texas, his estate was increased by "swapping around." He did business as a money lender with every one that he could and made what profit he could on such transactions. In prior years while residing in the State of Texas, the husband and wife filed separate income-tax returns in which they reported their proportionate share of the community income. In the year in question no income was acquired from real estate. Income was, however, received from personal property and $4,500 was received as dividends from the banks at Woodward and Mangum, Okla. The record is silent as to what part of the personal property owned by the taxpayer prior to his marriage had been disposed1927 BTA LEXIS 2649">2651 of before the taxable year but it does indicate that the estate during the period in which the petitioner and his wife lived in Texas was considered and treated as community property. On or before March 15, 1924, the petitioner and his wife each filed separate income-tax returns for the calendar year 1923 and each reported thereon his half of the total aggregate income. Their separate returns were prepared in the office of the collector of internal revenue at Oklahoma City, Okla., with the assistance of a deputy collector, and were signed and filed as prepared. Subsequently, the petitioner was advised by telephone by the office of the collector of internal revenue that an error had been made in his returns and he was requested to call at the office to correct it. In response to this request, the petitioner appeared at the office of the collector and was informed that he would have to make a joint return for himself and wife and that he and his wife would not be permitted to file separate returns. The deputy collector then prepared a single joint return for the petitioner and his wife for the calendar year 1923 and included therein the combined income of husband and wife. The1927 BTA LEXIS 2649">2652 single joint return was signed by the petitioner under the protest that he and his wife were entitled to file separate returns. The deputy collector who prepared the returns testified that the original returns were destroyed at the time of the preparation of the joint return but that he could not remember whether they were destroyed by the petitioner or by himself. The Commissioner denied the petitioner's protest and computed the tax on the basis of a joint return resulting in a deficiency in the sum of $922.80. 9 B.T.A. 153">155 OPINION. GREEN: The petitioner herein contends that he is entitled to have his income determined and his tax computed upon the basis of the separate returns filed by him for the taxable year 1923, and that the respondent's action in combining his income with that of his wife, and computing the tax upon the whole thereof, is erroneous. It appears that the petitioner, some time before March 15, 1924, filed with the collector of internal revenue for the Oklahoma district, where he then resided, separate income-tax returns for himself and wife. These returns were subsequently destroyed and a single joint return was filed. Section 223 of the Revenue Act1927 BTA LEXIS 2649">2653 of 1921 provides two ways in which returns for husband and wife living together may be filed. Each has a right to file a separate return or the income of each may be included in a single joint return. Either is a correct and proper return, but the return that is filed is the return, and the only return, recognized by law. Having once made the election and filed separate returns, the petitioner could not be compelled to file a return or pay tax on the other basis. See R. Downes, Jr. v. Commissioner,5 B.T.A. 1029">5 B.T.A. 1029. The record shows that the petitioner was a resident of the State of Texas from 1889 until January, 1923, at which time he moved to Oklahoma City, Okla. He was married in 1906, at which time his estate consisted entirely of personal property, part of which was invested in bank stock, some of the banks being located in the State of Oklahoma, which said Oklahoma bank stock he still owned during the taxable year. His taxable income for the year in question came partly from dividends on the Oklahoma bank stock and partly from his share of the community estate built up by the reinvestment of the income from the personal property owned by him prior to1927 BTA LEXIS 2649">2654 his marriage. The only reference in the record to property other than the Oklahoma bank stock owned prior to marriage is of Texas bank stock which was unproductive during the year 1923. Article 4621, Vernon's Anno. Civ. Stats., Sup. 1918, declares: All property, both real and personal, of the husband owned or claimed by him before marriage, and that acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired, and the rents and revenues derived therefrom, shall be his separate property. It accordingly follows that the stock in the Oklahoma banks at all times remained his separate property and that upon his removal to the State of Oklahoma the income from said stock was his separate income and properly so returnable. The remainder of the income is derived from the estate that was built up during the period of residence in Texas, in which State the income from personal property was community income. See Willcutt v. Willcutt,278 S.W. 236">278 S.W. 236. 9 B.T.A. 153">156 It appears to be well established by the Texas courts that the interests of the spouses in the community property are beneficially equal, but the legal title is in the1927 BTA LEXIS 2649">2655 husband, the wife's interest being vested but equitable. See 35 Harvard Law Review, p. 62; Burnam v. hardy Oil Co., 108 Tax. 555. When property is brought from one State to another, rights vested by the law under which it was acquired are recognized and protected. Abraham B. Johnson et al. v. Commissioner,7 B.T.A. 820">7 B.T.A. 820. The income other than that from the Oklahoma bank stock which was derived in 1923, comes from a source, the legal title to which was in the petitioner, with a vested equitable interest of one-half in his wife. A similar situation may be illustrated by the following hypothetical case. A and B, residents of Texas, each invest $1,000 in a Texas oil lease, the title to which is taken in the name of A. Oil is discovered and the property sold for 100,000. A invests the proceeds in securities, taking title in himself, and subsequently they both move to Oklahoma, where they reside when the dividends are paid. In the illustration given there is no question that both A and B should report their share of this income in their separate returns. To refuse to allow the wife to report income from property in which she had a vested1927 BTA LEXIS 2649">2656 equitable interest would be depriving her of such rights. It is held, therefore, that the income from the husband's separate property in the amount of $4,500 is his separate income, tax tax upon which should be paid by him, and that the remainder of the income was the joint income of both the husband and the wife, one half of which was properly returnable by each. Reviewed by the Board. Judgment will be entered after 15 days' notice, under Rule 50.MILLIKEN dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619019/	ATLAS TACK CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Atlas Tack Co. v. CommissionerDocket No. 4725.United States Board of Tax Appeals9 B.T.A. 1322; 1928 BTA LEXIS 4248; January 16, 1928, Promulgated 1928 BTA LEXIS 4248">4248 1. Petitioner issued its stock for the tangible and intangible assets of a predecessor business which had been unprofitable. Held, that the evidence does not establish that the intangible assets had any value for invested capital purposes in excess of that which has already been ascribed to them by including tangibles in invested capital at their value to a successfully operating concern. 2. Deductible allowance for exhaustion of power plant and machinery determined. W. E. Hayes, Esq., and Myron Heller, Esq., for the petitioner. F. O. Graves, Esq., for the respondent. PHILLIPS 9 B.T.A. 1322">1323 The Commissioner determined a deficiency of $13,836.39 in income and profits taxes for 1919. The petitioner instituted this proceeding alleging in its petition that the respondent committed error: (a) In failing to allow any amount for intangible property acquired for capital stock at the organization of the petitioner; and (b) In failing to allow adequate depreciation and obsolescence upon its power plant and upon its machinery and equipment. The parties are in accord as to the values or cost upon which such depreciation is to be computed, 1928 BTA LEXIS 4248">4249 their only difference being as to the rate of depreciation to be allowed. FINDINGS OF FACT. The petitioner is a New Jersey corporation. It was organized in July, 1900, with an authorized capital stock of $700,000, all of which was issued to a nominee of one H. H. Rogers in exahange for certain real estate, buildings, machinery, equipment, stock in trade, cash, book accounts and other assets, including patents, patent rights, licenses, and labels, of the Atlas Tack Co., a Maine corporation (hereinafter sometimes referred to as the old company). These assets were subject to certain liens and charges which were assumed by the petitioner. The opening balance sheet of the petitioner as of July 1, 1900, showed the assets taken over from the old company, the liabilities assumed and the stock issued therefor as follows: AssetsLand and buildings$145,310.00Unused land and buildings40,900.00Machinery and equipment149,827.00Unused machinery and equipment6,924.00Furniture and fixtures3,226.12Sinking fundUninvested1,180.47Invested in bonds14,000.00Interest1,680.00Cash40,927.37Accounts receivable92,347.92Notes receivable13,002.25Inventories:Raw materials131,645.13In process11,883.24Finished goods173,942.07Union Shank Co. stock6,608.50Prepaid accounts796.02Labels, trade-marks, and good will194, 207.99Total1,028,408.081928 BTA LEXIS 4248">4250 LiabilitiesCapital stock$700,000.00Bonds - First mortgage232,000.00Matured bond interest3,620.00Unpaid taxes1,155.39Accounts payable5,046.10Accrued pay roll2,904.78Notes payable80,000.00Reserve for discount and freight3,681.81Total1,028,408.08The old company was engaged in the manufacture and sale of tacks and of nails used in the making and repairing of shoes. It was a consolidation of various small companies and a substantial portion of its products were marketed under the labels and trade-marks of these companies. These labels and trade-marks, through their continued use, had become known to the trade and some of them had an international reputation for quality. Among these were the A. Fields & Sons (organized in 1827) brand, the Loring and Parks 9 B.T.A. 1322">1324 (organized in 1886) brand of rivets, the Taunton Tack Co. (organized in 1854) brand, the Dunbar, Hobart, & Whidden Co. (organized in 1865) brand, and the B. Hobart & Sons (organized in 1848) brand. Of these brands the A. Field & Sons brand was the most generally known, because it covered a wider variety of products and was1928 BTA LEXIS 4248">4251 used generally throughout the United States and in foreign countries in the shoe-repairing industry. As a result of the reputation of the Field brand it was possible for petitioner to obtain a somewhat higher price from the shoe-repairing industry for goods sold under that label than its competitors could obtain for similar goods. During 1898 the old company had a loss of $62,348.80, during 1899 profits of $52,079.78, and for the six months ending June 30, 1900, profits of $13,864.39. It had been in the hands of a receiver prior to 1897, in which year the receiver was discharged. Subsequently its assets had been acquired by Rogers. The real property taken over by the petitioner was valued at $346,187.12 at acquisition, subject to a mortgage of $232,000. During 1902 the mortgage upon this property was foreclosed, the petitioner suffering the loss of its plants. During this time, however, a new plant had been built at Fairhaven, Mass., which started active operation late in 1902 or early in 1903. The entire cost of the new plant was paid by the company with funds advanced by Rogers, the owner of all the stock of the corporation. The amount of these advances by Rogers was $613,974.28. 1928 BTA LEXIS 4248">4252 In cancellation of this account Rogers accepted $300,000 in stock. The excess of the amount paid in over the stock issued was used to reduce the good will account and eliminate the deficit caused by the foreclosure of the mortgage. The sales of petitioner for the years 1900 to 1903, inclusive, were as follows: Six months ended Dec. 31, 1900$357,678.95Year ended Dec. 31, 1901776,930.30Year ended Dec. 31, 1902893,634.92Year ended Dec. 31, 1903990,471.60The sales continued to increase in subsequent years. Approximately 40 per cent of the sales were made under the trade-marks or labels acquired at the organization of the petitioner. The net earnings and dividends paid from 1900 to 1909, inclusive, were as follows: PeriodEarningsDividends paid6 months ended Dec. 31 19001 $48,226.29Year ended Dec. 31:190167,887.46190211,169.91190340,012.321904178,405.911905$200,397.35$100,000.001906244,265.08100,000.001907122,835.85200,000.001908167,309.72100,000.001909222,449.74100,000.009 B.T.A. 1322">1325 In determining the actual cash value of property paid in for stock at1928 BTA LEXIS 4248">4253 organization for the purpose of computing invested capital, the Commissioner refused to allow any separate value for the intangible assets. On March 1, 1913, the petitioner owned a power plant which was in use in its business in 1919. The March 1, 1913, value of such power plant was $57,078.06. Additions were made thereto from March 1, 1913, to December 31, 1919, at a cost of $8,995.57. In computing net income subject to tax, the Commissioner allowed depreciation for such power plant upon a total amount of $66,073.63 at the rate of 7 1/2 per cent, representing a normal rate of depreciation of 5 per cent plus an additional 2 1/2 per cent allowed for overtime operation in 1919. A reasonable allowance for depreciation upon such power plant for the year 1919 was $6,607.36. The March 1, 1913, value of the machinery and equipment of the petitioner was $329,062.03, subject to a reserve for depreciation at that date of $119,487.43. Additions were made to such machinery and equipment from March 1, 1913, to December 31, 1919, at a cost of $118,303.77. In determining net income subject to tax, the Commissioner computed the net value of the machinery and equipment as of March 1, 1913, to1928 BTA LEXIS 4248">4254 be $209,574.60 and added thereto additions made after that date, giving a basis for depreciation of $327,878.37. Upon this basis he allowed depreciation at a rate of 9 3/8 per cent, representing a normal rate of 6 1/4 per cent, plus 3 1/8 per cent allowed for overtime operation in the taxable year. The depreciation so allowed represents a reasonable allowance for the depreciation of such assets. OPINION. PHILLIPS: The petitioner assigns as its first error the refusal of the Commissioner, in computing the actual cash value of property acquired for stock at organization for invested capital purposes, to allow any separate value for the intangible assets. The books of account of the predecessor corporation were no longer in existence at the time of the hearing and because of this and the lapse of time, the evidence as to what happened is necessarily incomplete. It appears that the predecessor corporation, the Atlas Tack Co. of Maine, was a consolidation of several companies manufacturing tacks and nails used in the shoe-manufacturing and shoe-repairing industry, as well as other articles. It had acquired from these companies labels and trade-names which had been in use for1928 BTA LEXIS 4248">4255 many years and which had an established reputation and market. Some time prior to 1897 this predecessor company had been in the hands of a receiver but was discharged from receivership in 1897. From that date to the organization of the petitioner on July 1, 1900, the earnings of the company had barely exceeded its losses. 9 B.T.A. 1322">1326 The record further discloses that the assets were acquired by the petitioner from one H. H. Rogers through a nominee. They had been acquired by Rogers, presumably, through a sale in foreclosure. The price paid by Rogers is not shown. There is in the record a closing balance sheet of the old company which discloses a second mortgage of $100,000, and since the assets were acquired by the petitioner subject only to a first mortgage, the reasonable presumption is that the company was unable to care for either the principal or interest upon its second mortgage and that it was under this mortgage that a foreclosure sale took place. The record discloses that during the first six months after its organization the petitioner had substantial sales which continued to increase from year to year. It further appears that approximately 40 per cent of the sales1928 BTA LEXIS 4248">4256 were made under the trade-names and labels acquired at organization and that by reason of the reputation and market for such labeled goods the petitioner was able to obtain a somewhat better price than that at which its competitors could sell similar goods. During the first six months of operation it sustained a considerable loss. During the following three years it had modest profits. Thereafter, its profits were substantial. On this showing we are asked to find that the Commissioner committed error in refusing to allow any separate value for trade-marks, trade-names, and labels. We believe that it will not be disputed that unless a business such as that which the petitioner acquired has some value as a going concern, its tangible assets such as machinery, equipment, mechandise inventory, and goods in process of manufacture can not be disposed of except at a sacrifice. Sound business judgment dictates that if one is to purchase the assets of a business which has not shown a profit in the past and is to pay therefor an amount which represents substantially the full value of its tangible assets as an operating business, he must be reasonably certain that the business, properly1928 BTA LEXIS 4248">4257 managed, will show profits justifying the price paid. It appears that in the present instance the Commissioner has allowed the tangible assets acquired at organization for stock to be included in invested capital at their value to a successfully operating business. In so doing he has given effect to that intangible value of an operating concern which marks the difference between a sale of its assets at full value and a sale at a liquidating value. He has assumed that there went with these tangible assets sufficient intangible value to make them worth the value which he has placed upon them. In the present instance this intangible value included an established market, and certain trade-marks, trade-names, and labels which were well known. Viewing the record as a 9 B.T.A. 1322">1327 whole and attempting to visualize the situation as it existed in July, 1900, we would not be justified in finding that the intangible assets acquired by the petitioner had at that time any value in excess of that allowed indirectly by the Commissioner. By this we do not mean that these trade-names, trade-marks, and labels had no value at that time. Undoubtedly they did have some substantial value and conceivably1928 BTA LEXIS 4248">4258 might have been sold to a competitor for some price, but here we must look to a transaction where the petitioner acquired a very large amount of tangible assets which, without these intangibles, would have had little or no value and where the stock of the company was issued for all of the assets of an operating business, both tangible and intangible. The record justified no separate valuation of the intangible assets and we approve the action of the Commissioner. The petitioner alleges error in computing the depreciation upon its power plant and upon its machinery and equipment. It appears that in 1919 the power plant was in full operation 20 hours per day. Its plant appears also to have been to some degree obsolescent for in 1922 petitioner abandoned the operation of its power plant and purchased its power from outside sources, finding this cheaper than either continuing the operation of its plant or remodeling to meet new conditions. Under the circumstances, we believe the petitioner is entitled to a 10 per cent rate of depreciation in the taxable year. Upon its machinery and equipment petitioner claims a rate of 25 per cent, basing its claim upon a normal rate of 10 per1928 BTA LEXIS 4248">4259 cent for normal years with an additional 15 per cent because of overtime operation. It appears that beginning with the year 1916, the petitioner had operated a substantial part of its plant on a 24-hour basis. If the petitioner's claim for 25 per cent is justified in 1919, a like rate is justified for the three preceding years. The effect of this would be to depreciate the entire machinery account in those four years, but it also appears that substantially all of the machinery which was in the plant in 1911 was still there and in operation in 1919. This fact appears to conclusively dispose of opinion testimony to the effect that 25 per cent was a reasonable rate of depreciation. Considerable weight is given in the testimony of the witnesses to changes in style making a part of the machinery obsolete. For instance, the petitioner was engaged in the manufacture of eyelet-making machines. High shoes and corsets went out of style and such machinery became useless to a considerable extent. This, however, constituted only a very small portion of the petitioner's business and apparently the allowance made by the Commissioner will be sufficient to care for such obsolete machinery. 1928 BTA LEXIS 4248">4260 Considerable weight 9 B.T.A. 1322">*1328 was laid upon the rapidity with which such equipment as dies had to be replaced. From the testimony, however, it is fair to assume that all such articles of equipment were charged to expense and therefore play no part in determining the rate of depreciation upon the machinery and equipment as a whole. We are satisfied that the evidence would not justify us in disturbing the determination of the Commissioner. Decision will be entered on 10 days' notice, under Rule 50.Footnotes1. Loss. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619022/	Edgar W. Waybright, Sr. v. Commissioner.Edgar W. Waybright, Sr. v. CommissionerDocket No. 27461.United States Tax Court1951 Tax Ct. Memo LEXIS 183; 10 T.C.M. 589; T.C.M. (RIA) 51189; June 21, 19511951 Tax Ct. Memo LEXIS 183">183 Roger J. Waybright, Esq., for the petitioner. Thomas C. Cravens, Jr., Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $854.60 in income tax for 1947. The issues for decision are whether the Commissioner erred in disallowing a deduction of $500 for depreciation of law books and whether he should have allowed a deduction of the entire loss of $3,293.07 from a bad debt instead of holding that it was from a non-business debt subject to the limitation on capital losses. Findings of Fact The petitioner filed his individual income tax return for 1947 with the collector of internal revenue for the district of Florida. His wife filed no return for that year. The petitioner has been engaged in the practice of law since 1912. He paid about $25,000 for a law library in 1923 and has been using that library since that time. He has claimed annual deductions of $500 for the depreciation on his library. The probable useful life of the library beginning in 1923 was fifty years. A reasonable allowance for depreciation of the library for 1947 is $500. The petitioner for a number of years has loaned money1951 Tax Ct. Memo LEXIS 183">184 from time to time usually on mortgages. The total amount of loan averaged about $15,000 for a number of years prior to 1947. He never advertised that he was in the business of lending money. He never had any regular place of business for the lending of money. There was no regular way in which people could learn that he might lend money. He never disclosed on his return that he was regularly engaged in the business of lending money, and never claimed any deductions on his returns as expenses of any such business. The petitioner and his wife learned from Alberta Scott that she wanted to own a restaurant of her own and they advanced $7,500 to her in 1946, $6,500 to be used as a down payment on the purchase of the restaurant and $1,000 to be used as operating capital. The petitioner and his wife received a second mortgage on the restaurant to secure the loan. It was to be paid off in installments. Alberta needed additional money with which to start the restaurant, and beginning in 1946 and continuing into 1947 the petitioner and his wife made additional loans to her. Those additional loans amounted to $3,293.07 and were not secured. The debt of $3,293.07 became worthless in 1947. It1951 Tax Ct. Memo LEXIS 183">185 was from a nonbusiness debt. The petitioner in 1947 had the following additional loans outstanding: $3,600for 10 years secured by a mortgage onreal estate3,500loaned in 1947 for 4 years secured by amortgage on real estate1,750secured by personal property200unsecured for a few monthsThe record does not show how many loans the petitioner made in any year. The petitioner's secretary kept a record of the loans made and the payments of interest and principal thereon. The petitioner reported interest of $295.44 on his return for 1947 and other income of $11,555.79, most of which was from the practice of law. Opinion MURDOCK, Judge: The attitude of the Commissioner on the depreciation issue is petty. He has apparently never before questioned the deduction in 24 years but now says the cost of the library is not shown despite the fact that the petitioner testified without contradiction that he paid approximately $25,000 for it. The Commissioner erred in disallowing the modest deductions claimed. The general rule of section 23(k)(1) is that debts may be deducted in full when they become worthless. But that rule does not apply in the case1951 Tax Ct. Memo LEXIS 183">186 of a taxpayer other than a corporation with respect to "a non-business debt." Section 23(k)(4) provides that the loss resulting from the worthlessness of a nonbusiness debt shall be considered a loss from the sale or exchange of a capital asset held for not more than six months, and defines a non-business debt for present purposes as one "other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business." There is a limitation on the deduction of short-term capital losses. The only question in this issue is whether the Scott debt was one "the loss from the worthlessness of which was incurred in the taxpayer's trade or business." The taxpayer has the burden of proof. Occasional loans of money do not constitute a trade or business within the meaning of section 23(k)(4). . The activities of the petitioner, with or without his wife, in lending money, as shown by this record, are not sufficient to constitute the carrying on of a trade or business. ; , certiorari denied, . Decision will1951 Tax Ct. Memo LEXIS 183">*187 be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619023/	Estate of Will Wright, Deceased, Sam J. Edwards, Independent Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentWright v. CommissionerDocket No. 9960United States Tax Court8 T.C. 531; 1947 U.S. Tax Ct. LEXIS 259; March 11, 1947, Promulgated 1947 U.S. Tax Ct. LEXIS 259">259 Decision will be entered for the respondent. The decedent at his death carried two life insurance policies, one payable to his wife and one to daughters, both with provision for double indemnity in case of accidental death, and neither being subject to claims against the estate. After his death the beneficiaries executed contracts with attorneys to recover the double indemnity, assigning them a one-third interest in the recovery. After settlement, the insurance companies paid the principal amounts of the insurance to the beneficiaries, and paid compromised amounts of the double indemnity by joint check to beneficiaries and attorneys. Held, the amounts received by the attorneys constitute a part of the gross estate, under section 811 (g) (2), Internal Revenue Code, and are not deductible under section 812 (b) (2), (3), as either administration expenses or claims against the estate. Geo. S. Atkinson, Esq., for the petitioner.Donald P. Chehock, Esq., and James L. Backstrom, Esq., for the respondent. Disney, Judge. DISNEY8 T.C. 531">532 OPINION.This case involves Federal estate tax liability. Deficiency was determined in the amount of $ 1,839.48. The petition does not assign as error some of the items entering into the deficiency. The only question left for our consideration is whether there shall be included in decedent's gross estate the entire amounts paid upon certain life insurance policies, or whether there shall be included only the amounts remaining after the deduction of certain attorneys' fees, either upon the theory of deduction of such attorneys' fees as expenses of administration, or claim against the estate, or upon the theory that the estate received only the net amount. All facts have been stipulated and we find the facts to be as so stipulated. They may be epitomized as follows:The decedent, Will Wright, died on November 30, 1943. He was at the time of his death a resident of Dallas, 1947 U.S. Tax Ct. LEXIS 259">261 Texas. The estate tax return for his estate was filed February 28, 1945, with the collector at Dallas, Texas. His will was admitted to probate by the Probate Court of Dallas County, Texas, on December 21, 1943.At the time of his death, the decedent carried two life insurance policies, one in the sum of $ 5,000, payable to two daughters, Clara Dolores Wright Pearce and Catherine P. Wright Bell, and another in the amount of $ 10,000, payable to his wife, Clare Patterson Wright. Each policy contained provision for double indemnity payment in case of accidental death and was not subject to claims against decedent's estate. The wife and daughters were all living at the time of decedent's death. The independent executors of the estate and the beneficiaries under the policies considered his death accidental. The beneficiaries, in order to enforce their claim against each of the insurance policies, on December 1, 1943, executed contracts with a firm of attorneys, Caldwell, Baker & Jordan, for the collection, under the terms of the policies, of double indemnity for accidental death. The contract as to the $ 10,000 policy was executed by the wife and the contract as to the $ 5,000 policy1947 U.S. Tax Ct. LEXIS 259">262 was executed by the decedent's wife and his daughters, together with the husband of one of the daughters. 8 T.C. 531">533 Each contract was in the same form, except as to the name of the insurance company and the parties, and each provided that the attorneys were employed to represent the beneficiary or beneficiaries to settle or prosecute to judgment the claim against the insurance company, the attorneys being fully authorized and empowered to bring suit, but the consent of the beneficiary being necessary before final settlement. In consideration of such services, the beneficiaries agreed to pay and allow as compensation one-third of the amount above the face value of the policy. "In other words (1/3) one third of the Double Indemnity of the policy, of all that they recover herein, and I and we assign said attorneys their said interest out of the avails of the recovery * ."The claims were settled by the attorneys, and in connection with the $ 5,000 policy there was paid on February 2, 1944, $ 5,000 representing the face amount of the policy, to the daughters; and in settlement of the double indemnity feature of the policy $ 4,500 was paid, the check being payable to the two daughters, 1947 U.S. Tax Ct. LEXIS 259">263 their husbands, and the attorneys above named, jointly, the $ 4,500 being a compromise settlement under the double indemnity feature of the policy. In connection with the $ 10,000 policy, decedent's wife was paid $ 10,000 by check, payable to her, and, in addition, in settlement of the double indemnity feature of the policy, a check was made payable to the wife and the attorneys in the amount of $ 7,500. Attorneys' fees and expenses as to the $ 5,000 policy were paid out of the insurance proceeds in the amount of $ 1,689, and, as to the $ 10,000 policy, attorneys' fees and expenses were paid out of the insurance proceeds in the amount of $ 2,814.80.The Federal estate tax return as to the $ 5,000 policy reported $ 7,811, representing $ 9,500 collected from the insurance company, less $ 1,689 attorneys' fees and expenses of collection; and in connection with the $ 10,000 policy it reported $ 14,685.20, representing $ 17,500 collected from the insurance company, less $ 2,814.80 attorneys' fees and expenses of collection. In the deficiency notice the Commissioner determined that under section 811 (g) of the Internal Revenue Code, as added by section 404 (2) of the Revenue Act of 1942, 1947 U.S. Tax Ct. LEXIS 259">264 the entire proceeds of the two policies, that is, the entire $ 9,500 and the entire $ 17,500, were properly returnable in the gross estate. The gross estate was thus increased by $ 4,503.80, the amount of the attorneys' fees and expenses incurred in the collection of the insurance, which were thus disallowed.It is stipulated that all other adjustments in the notice of deficiency are accepted by the petitioner and that in case this Court holds that the respondent erred in increasing gross estate by $ 4,503.80, the deficiency to be redetermined herein is $ 848.65, and that in case this Court sustains the respondent's contention in increasing gross estate by $ 4,503.80, the deficiency should be redetermined in the amount determined in the deficiency notice.8 T.C. 531">534 The only question presented to us here is whether only the net amount received by the beneficiaries under the life insurance policies paid by reason of the death of the decedent is includible in gross estate, under section 811 (g) (2) of the Internal Revenue Code, or, in the alternative, whether the estate is entitled to deduction of the attorneys' fees and expenses as administration expenses or as claims against the estate, 1947 U.S. Tax Ct. LEXIS 259">265 under section 812 (b) of the Internal Revenue Code (and section 81.35 of Regulations 105). Both sections are set forth in the margin. 11947 U.S. Tax Ct. LEXIS 259">266 The respondent denies both the principal and alternative contentions.Section 811 (g) (2) of the Internal Revenue Code provides for inclusion in the gross estate of a decedent of the amount receivable by beneficiaries other than the decedent's estate, as insurance policies upon his life. (The statute requires that such insurance be purchased with premiums or other consideration paid directly or indirectly by the decedent, or that he possessed at death incidents of ownership, but no question is suggested, or facts shown in that regard, except that the decedent at death "carried" the insurance. The parties apparently are in agreement that the statute is satisfied in that respect, and we so assume.)The first question here presented is whether the amount of a contingent fee paid to attorneys for collection of the insurance, the amount being included in a check for the insurance and paid by the insurance company's check made jointly to the beneficiaries and the attorneys, is includible in gross estate. In the alternative, if the amount of 8 T.C. 531">535 such attorneys' fees is includible in gross estate, is it then deductible under section 812 (b) (2), (3), of the Internal Revenue Code, 1947 U.S. Tax Ct. LEXIS 259">267 which, inter alia, allows deduction from gross estate for "administration expenses," and "claims against the estate"?In support of his first contention, the petitioner argues, in effect, that the situation here is analogous to one wherein the amount by which the insurance was reduced consisted of loans existing at the time of death against insurance policies, to secure which the policies had been assigned by the decedent. We do not agree, for in such a case clearly the beneficiaries had no right to receive as insurance more than the face value of the policy, less the loans. Here, the attorneys' fees were obligations of the beneficiaries, not of the decedent. We held in Leopold Ackerman, Executor, 15 B. T. A. 635, that amounts received under double indemnity provisions of life insurance policies were within the statute, section 302 (g), Revenue Act of 1924. The fact that the beneficiaries saw fit, or found it necessary, to incur expense in collection of such insurance, does not logically reduce the amount of such insurance. The insurance companies were not obligated to pay attorneys' fees or expenses, but only insurance. What they paid was 1947 U.S. Tax Ct. LEXIS 259">268 therefore "receivable * * as insurance" by the beneficiaries. That the checks were made payable jointly to beneficiaries and attorneys is of no weight, for plainly that was a matter of agreement between beneficiaries and attorneys. The insurance companies, in the acceptance and cashing of checks so drawn, under their contracts to pay "insurance," might have declined to pay to any other than the beneficiaries. Any receipt by attorneys of the moneys payable under the policies thus appears as by the permission of the beneficiaries, and the result is no different than if the entire amounts paid by the companies had been received by the beneficiaries, and they had then paid the attorneys their fees. Those fees arose merely because of the contract by the beneficiaries to pay, and not out of the insurance policies. The petitioner's view, we think, confuses what was "receivable * * * as insurance" with what was received, and appears to be based upon the idea that the beneficiaries received only the net amount after attorneys' fees (in the sense that they realized in the end only the net amount), and, therefore, only such net amount was "insurance receivable." In fact, however, 1947 U.S. Tax Ct. LEXIS 259">269 the beneficiaries can not be said not to have received the insurance money. They received a check for it, and, so far as the insurance companies were concerned, they could have insisted on the entire amount. Therefore, acceptance of the check payable jointly to them and the attorneys is seen not as proving that the insurance money was not receivable or not received by them, but merely as a convenient way of satisfying the contractual obligation to pay attorneys' fees. The estate tax is one upon transfer of the insurance as a part of the net estate of the decedent. Chase National Bank v.8 T.C. 531">536 , 278 U.S. 327">278 U.S. 327. It is clear, in our opinion, that the agreement of the beneficiaries to pay attorneys' fees for services in collection, does not diminish the amount of the net estate of the decedent transferred by death, upon which the tax is to be computed. That the beneficiaries assigned to the attorneys "their said interest out of the avails of the recovery," only serves to accentuate the fact that the insurance rights had been transferred by death to the beneficiaries. We hold that the entire amounts paid by the insurance companies1947 U.S. Tax Ct. LEXIS 259">270 were includible under section 811 (g) (2) in decedent's gross estate.Were the attorneys' fees and expenses, nevertheless, deductible as expenses, under the petitioner's alternative contention and section 812 (b) (2), (3), as administration expenses or claims against the estate? In our opinion, no. They come within neither category. The executors of the estate made no contract with attorneys, incurred no expense. They could not properly have done so, for the policies are stipulated to have been not subject to claims against the estate, and it would not have been the executors' duty to recover something neither constituting a part of the estate nor subject to claims against it. In Estate of Robert H. Hartley, 5 T.C. 645, we considered attorneys' fees claimed as administration expenses, under section 812 (b) (2), and said: * * The deduction for administration expenses is to cover the actual expenses of administering the estate of the decedent under the laws of the sovereign authority which has jurisdiction over the administration of that estate. The amounts here in controversy are not expenses of administering the estate of this decedent under1947 U.S. Tax Ct. LEXIS 259">271 the laws of Pennsylvania. They are not chargeable against the decedent's estate at all. They are amounts which his widow has agreed to pay the executors and their attorneys in connection with the filing of the decedent's Federal estate tax return. The Tax Court can not legislate, and no matter how reasonable some additional deduction might appear to be, it can allow only those deductions which are proper under the statutes which Congress has enacted. The items here in controversy are not deductible under those statutes and, therefore, can not be allowed.Petitioner's citation of Schmalstig v. Conner, 46 Fed. Supp. 531, is not helpful. Therein the attorneys' fees were paid for services in litigation necessary to the construction of the will, which was found to contain invalid trust provisions. Though there were attorneys employed by a beneficiary, it was because the executors had not instituted action, and the Ohio probate court held the fees to be a proper charge against the estate, under Ohio law. The district court considered itself without authority to interfere with the decision of the probate court. The case comes, therefore, within 1947 U.S. Tax Ct. LEXIS 259">272 the statute which provides for deduction of administration expenses allowed by laws of the jurisdiction under which the estate is being administered. Here the attorneys' fees were of no benefit or interest to the decedent's estate, under administration in the Texas probate court, for such 8 T.C. 531">537 administration was not interested in the insurance money belonging to the beneficiaries. Texas law does not countenance expense by an administrator which is not necessary to his administration. Texas Jurisprudence, vol. 14, pp. 470-471. Neblett v. Butler, 162 S. W. (2d) 458, cited by the petitioner, involved fees of guardians ad litem, necessarily appointed by the court to represent an incompetent beneficiary and a minor beneficiary under a will -- a clearly proper administration expense. Not only was there in the instant case no employment of the attorneys by executors or appointment by the court, but there is no showing of either allowance or allowability of the fees by the probate court in the pending administration. The matter was altogether outside the administration. As to the fees being "claims against the estate," though this statutory item1947 U.S. Tax Ct. LEXIS 259">273 is stated in petitioner's heading of argument, we find no argument made on its behalf. In any event, we regard it altogether clear that the attorneys' fees were never claims against the estate. Neither decedent nor executors ever incurred them. Even ad valorem taxes, assessed after decedent's death against personal property in the possession of the executors, were held not claims against the estate, Hill v. Grissom, 299 F. 641; and, for real estate taxes to be deductible from gross estate, the lien thereof must have attached before death of decedent. Estate of Theresa Seagrist, 42 B. T. A. 1159. Clearly, then, attorneys' fees incurred after decedent's death by beneficiaries as to insurance, no part of the administered estate, are not claims against it. We conclude and hold further that the attorneys' fees paid are not deductible under section 812 (b) (2), (3), of the Internal Revenue Code.Decision will be entered for the respondent. Footnotes1. SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --* * * (g) Proceeds of Life Insurance. -- * * (2) Receivable by other beneficiaries. -- To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate. --(a) Exemption. -- An exemption of $ 100,000;(b) Expenses, Losses, Indebtedness, and Taxes. -- Such amounts -- * * (2) for administration expenses,(3) for claims against the estate, * * as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619026/	JAY R. KELLEY AND GAIL B. KELLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; JAY R. KELLEY (AS TRANSFEREE OF INSULATION CONTRACTORS, INC.), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKelley v. CommissionerDocket Nos. 23020-88, 32292-88United States Tax CourtT.C. Memo 1991-324; 1991 Tax Ct. Memo LEXIS 373; 62 T.C.M. 136; T.C.M. (RIA) 91324; July 16, 1991, Filed 1991 Tax Ct. Memo LEXIS 373">373 Decisions will be entered under Rule 155. Held: One petitioner, as an individual and as a transferee, is liable for additions to tax under section 6653(b). Held further: Statute of limitations is open for years at issue. Held further: Bonus constitutes taxable income in 1981 to individual petitioners. Held further: Individual petitioners may not deduct partnership loss on their 1981 return. Samuel R. McCord, for the petitioners. John F. Driscoll, for the respondent. WHITAKER, Judge. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in, and additions to, petitioners' Federal income tax as follows: Additions to TaxPetitioners 1YearDeficiencySec. 6653(b) 2InterestJay R. Kelley &1980 $ 87,456.00$ 61,972Gail B. Kelley1981 $ 154,392.00$ 77,196Jay R. Kelley(as Transferee ofFYEInsulation5/31/81$ 143,273.00$ 71,637$ 178,816.10Contractors, Inc.)1991 Tax Ct. Memo LEXIS 373">374 After concessions by the parties, the issues before us are: (1) Whether petitioner Jay R. Kelley (Mr. Kelley) 3 is liable for the additions to tax under section 6653(b); (2) whether the notices of deficiency are barred by the statute of limitations; (3) if the answer to question (2) is in the negative, whether petitioners in docket No. 23020-88 are liable for 1981 income tax on income in the amount of $ 90,000 for a wage/bonus payment; and (4) if the answer to question (2) is in the negative, whether petitioners in docket No. 23020-88 may deduct a partnership loss on their 1981 return. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The individual petitioners in these consolidated cases resided in Alabama when their petition was filed. Mr. Kelley was in the insulation business. Commercial and Industrial Insulation Co., Inc. (C & I), 1991 Tax Ct. Memo LEXIS 373">375 was incorporated by Mr. Kelley in 1968 as a commercial and industrial insulation contractor through which he carried on his business. C & I handled only union contracts. Mr. Kelley owned 100 percent of the corporation's stock. To maintain the corporate books, C & I initially employed the bookkeeping services of petitioner Gail B. Kelley (Mrs. Kelley) and an outside accountant. In November 1969 C & I employed James V. Haynes as the full-time bookkeeper for C & I. At that time, the business maintained a small, family run office. Insulation Contractors, Inc. (IC), was formed in 1974 to handle nonunion jobs. C & I was the management company for IC. Mr. Kelley owned 100 percent of IC's stock, and Mr. Haynes was the bookkeeper for IC also. Mr. and Mrs. Kelley were the only people with checkwriting authority at that time. Mr. Haynes' job responsibilities as bookkeeper for both corporations were to record invoices on material purchases by posting them in the appropriate ledger maintained in a journal, do the payroll, and generally maintain the books of the corporate accounts. The bookkeeping systems of the two corporations were substantially identical and were comprised of the 1991 Tax Ct. Memo LEXIS 373">376 following books of account: A general ledger, an accounts receivable ledger, an accounts payable ledger, a cash disbursements journal, a cash receipts journal, a billing register, and job cost sheets. A purchase order system was used to organize the books in relation to the various jobs that the corporations were handling at any one time. When an order for materials was placed by one of the corporations in connection with a job, a special job code was placed on the purchase order so that, when Mr. Haynes received an invoice for payment, it could be identified in connection with that job. If there was no purchase order for a particular invoice, Mr. Haynes would inquire of other employees and, if he did not know how to charge the item, he would ask Mr. Kelley. After the item was charged in the invoice register to the proper job, it was posted in a chronological listing of such items, called "job cost sheets." Labor expenses were also contained in this chronological listing. Accounts were set up to reflect personal transactions between Mr. Kelley and the two corporations: Money loaned by the corporations to Mr. Kelley was recorded in the "accounts receivable officers" accounts; sometimes1991 Tax Ct. Memo LEXIS 373">377 Mr. Kelley loaned money to the corporations and these loans were reflected in other accounts. At times the corporations made payments on behalf of Mr. Kelley for insurance or paid cash advances to him. When these occurred, Mr. Haynes either knew how to charge the various personal accounts or, if he did not, he would discuss them with Mr. Kelley. When a salary or bonus accrued to Mr. Kelley, portions of these amounts sometimes were set off in the corporate accounts against an obligation Mr. Kelley owed to one of the corporations. At the close of IC's fiscal year, May 31, 1979, IC's books showed that IC owed Mr. Kelley $ 181,614. By the end of the next fiscal year, that obligation had been reduced to zero. For several years, the business of the corporations remained fairly small. Then, in July 1979, IC (the open shop) was awarded a very large job in Prattville, Alabama, called the "Union Camp" job. At first one of C & I's vice presidents appears to have been in charge, and Mr. Kelley was not in Prattville on a daily basis. However, after being warned in October 1979 that IC was about to lose the job unless things were turned around, the whole office, including Mr. Kelley and1991 Tax Ct. Memo LEXIS 373">378 Mr. Haynes, moved temporarily to Prattville. Mr. Kelley was on site and much more involved in the day-to-day operations than he had been previously for other, smaller insulation contracts. By the spring of 1980 it was clear that IC would be able to complete the job. In early 1980 while the Union Camp job was continuing, Mr. Kelley reassigned one of IC's employees, Elvin Hullett, to supervise the construction of a personal residence for Mr. Kelley located on Marsh Mountain Road. Mr. Kelley's old residence was on Etowah Street. Construction of Mr. Kelley's new residence began on March 1, 1980. While acting as foreman on the house construction, Mr. Hullett was authorized by Mr. Kelley to make purchases of materials to be used in the house construction, and Mr. Kelley instructed him to have the materials billed to IC. Mr. Kelley indicated that he wanted the purchase invoices to be marked "Union Camp Job." This is in fact what occurred in most cases. He did not explain to Mr. Hullett his reasons for requiring this, but Mr. Kelley was adamant about it. Certain other personal expenses for the Kelleys were paid for by C & I and were run through C & I's books. It seems that the corporate1991 Tax Ct. Memo LEXIS 373">379 records were carefully documented to make it appear as though the house expenses were incurred in connection with the Union Camp job. On one occasion when an invoice for house materials was not marked "Union Camp," Mr. Kelley became angry. In another case in connection with the installation of gutters in December 1980, the contractor's proposal and original estimate referring to "gutters" on Mr. Kelley's house were changed at the instruction of someone at IC so that the proposal referred to "metal fabrication" for the Union Camp job. Similarly, after one account for molding on the house was opened, the order originally written up in Mr. Kelley's name was later changed to indicate that it was a sale to C & I. Mr. Kelley personally opened an account at a hardware store that did not offer contractor discounts, and he instructed the owner to make all invoices out to IC. In connection with the purchase of concrete from a company owned by the same individual, the company did offer contractor discounts, but no such discount was allowed in its sale to IC for the house construction. The invoice in connection with the sale originally was made out to an individual, but it was later changed1991 Tax Ct. Memo LEXIS 373">380 so that it was billed to IC. In connection with two subcontracts for the house construction, the subcontractors' laborers were paid by the corporation directly, although this was contrary to the customary practice of one of these subcontractors and was a change from the original arrangement with the other. When the invoices for Mr. Kelley's house construction came to Mr. Haynes for payment, Mr. Haynes observed that the materials were different from those normally purchased by the corporations, and he inquired of Mr. Kelley as to their proper treatment on the books. Mr. Kelley told him to charge them to the Union Camp job. Mr. Kelley told Mr. Haynes that he wanted house expenses to be charged to IC in order to obtain discounts and because it was easier to open accounts in corporate as opposed to individual names. However, there is no explanation in the record as to why Mr. Kelley wanted the invoices to indicate the Union Camp job. No discounts are reflected in the record, and in several cases discounts were not available. On 10 to 15 different occasions, Mr. Haynes asked Mr. Kelley for directions on how to treat other similar house items, and each time was told to charge them1991 Tax Ct. Memo LEXIS 373">381 to the Union Camp job. After that Mr. Haynes asked Mr. Kelley about this matter only occasionally, because he assumed the answer would be the same. Labor expenses for the house construction were treated in the same manner. On several occasions during 1980 and 1981, Mr. Kelley asked Mr. Haynes to provide him with a summary of residence-related expenses. Mr. Kelley also reviewed the job cost sheets on a regular basis. While the house construction was going on, Mr. Kelley made other personal purchases through the corporations, which were not related to the house construction. On June 13, 1980, Mr. Kelley purchased a personal ownership interest in the Redmont Development Company. He used an IC corporate check in the amount of $ 18,000 to pay for it, and he instructed Mr. Haynes to charge it to the Union Camp job. IC deducted this amount on its 1980 tax return. Mr. Kelley did not report this $ 18,000 as income on his 1980 return. In addition, prior to August 1980, an unrelated company called J & S Insulators (J & S) contracted with C & I to provide insulation panels. J & S dealt exclusively with Mr. Kelley in connection with this contract. Sometime in 1980 the contract was 1991 Tax Ct. Memo LEXIS 373">382 cancelled, and J & S issued a check in the amount of $ 25,000 to resolve a dispute concerning the cancellation. Although the contract had been with C & I, the settlement check was made out to Mr. Kelley. The check amount was never recorded on C & I or IC's books or tax returns, and the $ 25,000 was deposited into Mr. Kelley's personal bank account in August 1980. The $ 25,000 was not reported on Mr. Kelley's 1980 personal income tax return. On November 18, 1980, Mr. Kelley informed Mr. Hullett that he was going to finish the house himself, and Mr. Hullett left the employ of IC. At about the same time the Union Camp job was completed. The total amount of the house expenses included on the Union Camp job cost sheets of the corporate books was $ 199,847.82. They were identifiable to Mr. Haynes as house expenses because he placed red marks next to them on the job cost sheets. House expenses continued to be entered on the books as Union Camp related until May 1981. None of the house-related expenses or the Redmont Development Company purchase were reflected by an adjustment in Mr. Kelley's corporate personal account, and they were maintained on the books of either IC or C & I as1991 Tax Ct. Memo LEXIS 373">383 business expenses and were deducted on the corporations' tax returns. Mr. Haynes believed that Mr. Kelley was aware that the books inaccurately reflected these personal expenses as Union Camp related and that he was maintaining the books according to Mr. Kelley's instructions. When he turned the books over to the accountant, Mr. Haynes did not inform the accountant of this inaccuracy because he felt that it was Mr. Kelley's responsibility to do so. At no point did Mr. Kelley advise his accountant that a personal residence had been constructed for him from, or that he had made other personal purchases with, corporate funds. None of the house expenses were actually billed to Union Camp. During the period that the house was under construction, the following transactions between Mr. Kelley and the corporations, as reflected in the corporate books, occurred: An increase in the balance owed by Mr. Kelley to C & I, as shown in C & I's 1980-81 "Accounts Receivable-Officers" account, from $ 17,012.36 on December 1, 1980, to $ 52,930.70 on November 30, 1981; a credit to IC's "Note Receivable-Stockholder" account on May 31, 1981, of $ 16,590.15; a $ 43,867.47 credit to C & I's 1981-82 "Accounts1991 Tax Ct. Memo LEXIS 373">384 Receivable-Officers" account, discussed later in this opinion in connection with the bonus; and a debit in IC's fiscal year ending March 31, 1982, "Note Receivable-Stockholder" account of $ 20,570.14. Entries in other accounts such as those dealing with advances were minimal. IC paid $ 850 in 1980 and $ 4,200 in 1981 to Mr. Kelley's sister, Betty Finch, and treated this sum as a salary expense on the corporate books as well as on the Federal tax returns. Mr. Kelley instructed Mr. Haynes to issue the checks in connection therewith, which were signed by either Mr. Kelley, Mrs. Kelley, or Mr. Haynes. Betty Finch performed no services for IC during 1980 or 1981. Mr. Kelley did not report the amount of these payments to his sister as income on his 1980 or 1981 tax returns. On February 25, 1981, Mr. Kelley opened a bank account in his own name at Birmingham Federal Savings & Loan Association (the Bank), indicating that his home address was on Etowah Street, which was his old house. The initial deposit into that account was $ 288,959.04. Mr. Kelley withdrew $ 30,044.07 from that account on November 17, 1981, and this was the only activity in connection with that account during 19811991 Tax Ct. Memo LEXIS 373">385 except for interest, which was posted on a quarterly basis. During 1981, the account accrued $ 39,338.76 in interest, which the Kelleys received but did not report on their 1981 return. A Form 1099 was issued to Mr. Kelley by the Bank for that amount in January 1982 and sent to the Etowah Street address. On January 8, 1982, Mr. Kelley made an additional deposit to this account from IC funds and then closed the account, transferring the funds therein to three other newly opened accounts. On the signature cards for those accounts, he listed his home address as Etowah Street. Two Bank earnings statements in connection with two of these accounts dated September 30, 1982, show addresses of Etowah Street. Other statements dated December 31, 1982, in connection with the same accounts show Marsh Mountain Road as the address. Several other statements of the latter date also show the Marsh Mountain Road address. No Bank documents in the record show the Marsh Mountain Road address prior to December 31, 1982. In January 1982, the same Bank issued a statement to Mr. Kelley advising him that he had paid $ 1,544.07 in connection with a loan during 1981. The statement listed his address1991 Tax Ct. Memo LEXIS 373">386 as Etowah Street. Mr. Kelley reported this amount on his 1981 return, although he incorrectly reported it as income. This error was adjusted by respondent in the notice of deficiency. C & I's "Employee Payroll Ledger" sheet, containing an entry on December 27, 1981, shows Etowah Street as Mr. Kelley's address. C & I's corporate fiscal year ran from December 1 to November 30. IC's corporate fiscal year ran from June 1 to May 30. On November 30, 1981, C & I accrued as an expense on its books a salary and bonus amount of $ 91,500, $ 90,000 of which was attributable to Mr. Kelley. Entries on Mr. Kelley's "Payroll Ledger Sheet" of C & I's books indicate that Mr. Kelley was paid on a biweekly basis during 1981, with checks of between approximately $ 850 and $ 865, after reductions for taxes. Entries to this sheet on December 27, 1981, and to various C & I accounts indicate that payment was effected by four methods: (1) A credit for the month ending December 31, 1981, to C & I's account entitled "Accounts Receivable-Officers," showing a $ 43,867.47 reduction of a debt that Mr. Kelley owed to the corporation at that time; (2) a credit for the month ending December 31, 1981, to C & 1991 Tax Ct. Memo LEXIS 373">387 I's "Federal W/H Tax Payable" account in the amount of $ 33,981.40, $ 33,000 of which was on Mr. Kelley's behalf for tax due on the bonus; (3) a credit on December 31, 1981, to C & I's "Alabama W/H Tax Payable" account in the amount of $ 3,730.44, $ 3,600 of which was on Mr. Kelley's behalf for tax due on the bonus; and (4) either in late 1981 or early January 1982, C & I issued a check to Mr. Kelley in the amount of $ 9,532.53. This check probably was dated January 5, 1982. C & I's "Payroll Ledger Sheet" indicates that the bonus was entered on the books on December 27, 1981. Another entry on another page of the "Payroll Ledger Sheet" (apparently referring to the same bonus) indicates a date of January 8, 1982, although this entry seems to have been made at a later date, since it is entered below an entry dated March 28, 1982. Respondent received a 1981 Form W-2 in connection with payment of this $ 90,000 "bonus." On December 1, 1981, C & I had $ 4,179.98 in its operating bank account. During December 1981 this account had credits of $ 21,152.49 and debits of $ 9,990.73. In addition to its operating bank account, when the above entries to C & I's books were made in December 1991 Tax Ct. Memo LEXIS 373">388 1981, C & I owned a certificate of deposit in the amount of $ 180,000, which matured on January 6, 1982. C & I's "Federal W/H Tax Payable" account shows a debit of $ 33,981.40 on January 31, 1982, indicating that the amount withheld in (2) above presumably was paid to the Government on that date. Mr. and Mrs. Kelley filed their 1980 return on June 25, 1981. The street address shown thereon is Etowah Street. On the return they reported income from "Wages, salaries, tips, etc." in the amount of $ 156,662.25. On a schedule attached to the return, $ 1,000 of that amount was from IC, and the balance was from C & I. They did not report on that return $ 163,044 in constructive dividends received by them from IC and C & I for those corporations' payments of personal expenses on their behalf. They also did not report the $ 25,000 constructive dividend received from J & S for the contract settlement. They reported interest in the amount of $ 20,982.04. IC filed a Federal income tax return for its fiscal year ended May 31, 1981, on November 13, 1981. This return was prepared by Mr. Hawley, an outside accountant. The information in the return was obtained from the corporate records 1991 Tax Ct. Memo LEXIS 373">389 maintained by Mr. Haynes, and Mr. Haynes dealt directly with Mr. Hawley in the preparation of the return. Mr. Kelley had little direct contact with Mr. Hawley in connection with preparation of the return, but he did review it and sign it. On the return, IC overstated its cost of goods sold expense by $ 206,507, which amount constituted the personal expenses incurred by IC on behalf of Mr. Kelley. C & I filed its fiscal year 1981 tax return on February 11, 1982. This return also was prepared by Mr. Hawley, based upon information from the corporate records maintained by Mr. Haynes. As with IC's return, Mr. Kelley had little direct contact with the accountant in connection with its preparation other than to review it and sign it. On that return C & I overstated its cost of goods sold expense by $ 16,531, which amount constituted the personal expenses incurred by C & I on Mr. Kelley's behalf during C & I's fiscal year December 1, 1980, to November 30, 1981. The Kelleys filed their 1981 return, which also was prepared by the accountant Mr. Hawley, on April 15, 1982. The information upon which this return was based was supplied to Mr. Hawley by Mr. Kelley. The return showed "Wages, 1991 Tax Ct. Memo LEXIS 373">390 salaries, tips, etc." in the amount of $ 41,580, $ 31,679.96 of which was reflected on a Form W-2 issued by C & I to Mr. Kelley, and $ 9,900.02 of which was reflected on a Form W-2 issued to Mrs. Kelley. There is no indication of income from IC on the return. The Kelleys did not report on this return $ 112,563 in constructive dividends received by them from C & I and IC for the corporations' payments of personal expenses on their behalf. They also did not report the $ 90,000 bonus on this return, although they did report all but approximately $ 7,500 of it on a later return. The address shown on the return is Etowah Street. They did not report the $ 39,338.76 in interest earned on the Bank account, and they incorrectly reported as income the $ 1,544 paid as interest to the Bank. This amount was correctly accounted for in the notice of deficiency. The return also shows a partnership loss from an interest in the Brahman Brangus Breeding Partnership in the amount of $ 7,509. On March 31, 1982, IC and C & I liquidated, and liquidating dividends were paid to Mr. Kelley in exchange for his stock. IC issued Forms 1099L to Mr. Kelley and an IC employee named Larry Blankenship (whose1991 Tax Ct. Memo LEXIS 373">391 name on the Form 1099L we assume from the parties' silence to be irrelevant), showing liquidating distributions to Mr. Kelley totaling $ 266,820. C & I similarly issued to Mr. Kelley a Form 1099L, showing liquidating distributions totaling $ 219,580. During the time that the corporations were being liquidated, Mr. Kelley experienced health difficulties, which was part of the reason that he determined to go forward with the liquidations. IC and C & I filed final returns in June of that year, which are not at issue herein. On July 5, 1983, the Kelleys and respondent executed a closing agreement in which it was agreed that the Kelleys were allowed a distributive share of the losses from the Brahman Brangus Breeding Partnership in the amount of $ 20,000 for the year 1976. It was further agreed that the Kelleys would not report any losses or deductions in connection with the partnership after 1976. The closing agreement was signed by both Mr. and Mrs. Kelley. During October 1984, respondent's agents, in the course of their investigation of the returns at issue herein, interviewed Mr. Kelley. During that interview, Mr. Kelley informed them that he moved to his new home in 1982. 1991 Tax Ct. Memo LEXIS 373">392 When asked if he had any bank accounts, he told them that he only had some municipal securities or bonds. In connection with this answer, it is not entirely clear whether he was referring to the time frame of the period at issue or the time of the interview. In response to subsequent questioning about the source of funds for his residence, he told respondent's agents that he paid for it from savings. After being informed that respondent was investigating the use of corporate funds to build his house, Mr. Kelley indicated that the house expenses were supposed to have been billed to his personal account. A notice of deficiency was issued by respondent in regard to Mr. and Mrs. Kelley's 1980 and 1981 Federal income tax returns on June 9, 1988. It indicated that Mr. and Mrs. Kelley had understated their 1980 taxable income by failing to report "Constructive Dividends" in the amount of $ 189,524. This figure included expenses incurred by the corporations for the house construction, the $ 25,000 check from J & S, the Redmont Development Company purchase, and the checks to Mr. Kelley's sister. The notice of deficiency also indicated that the Kelleys had understated their 1981 taxable1991 Tax Ct. Memo LEXIS 373">393 income by failing to report $ 43,189 in "Interest Income," $ 112,789 in "Constructive Dividends" in connection with the house construction and the checks to Mr. Kelley's sister, $ 91,500 in "Salaries and Bonus," and $ 7,509 in "Partnership Income." It also contained other explanations of items which have been resolved by stipulation. 4 For both years, respondent determined that all of the underpayments were due to fraud and applied the addition to tax under section 6653(b). The parties have stipulated that the amount of the 1980 and 1981 sales tax deduction should be adjusted to reflect any changes to their reported adjusted1991 Tax Ct. Memo LEXIS 373">394 gross income resulting from this litigation and that the Kelleys are entitled to a 1980 net operating loss carryback of $ 52,338 arising from their 1983 year. In addition to stipulations regarding other adjustments not at issue, the parties have stipulated that the Kelleys received constructive dividends in the amount of $ 188,044 in 1980 and $ 112,563 in 1981. Respondent by his silence appears to have conceded the balance of the constructive dividends described in the notice of deficiency. The parties also have agreed that petitioners understated their interest income on their 1981 return as stated by respondent in his notice of deficiency. It also is agreed that petitioners are entitled to an increased interest expense deduction of $ 1,134 on their 1981 return. The parties are in agreement that the $ 90,000 bonus to Mr. Kelley constituted taxable income to the Kelleys. They disagree as to the timing of its inclusion, however. Although the notice of deficiency refers to a bonus of $ 91,500, respondent apparently has conceded $ 1,500 of that amount. We see no record support for inclusion of the $ 1,500 in 1981 in any event. On June 9, 1988, respondent also issued notices 1991 Tax Ct. Memo LEXIS 373">395 of deficiency to IC and C & I, determining that the cost of goods sold amounts on those corporations' tax returns for their fiscal years ending May 31, 1981, and November 31, 1981, in the amounts of $ 206,507 and $ 16,531, respectively, were incorrect because they were "not the Corporation's expenses but those of Mr. & Mrs. Kelley." The notices of deficiency also contained other adjustments not at issue herein. Respondent also determined the addition to tax for fraud. The cost of goods sold adjustments are stipulated to be correct, and all other issues raised in these notices of deficiency have been resolved except for the addition to tax for fraud. As described earlier in this opinion, both corporate petitions have been dismissed on jurisdictional grounds. On September 16, 1988, respondent issued a notice of deficiency to Mr. Kelley as transferee of IC, stating that $ 737,264 was transferred to Mr. Kelley from IC in March 1982 and that Mr. Kelley's "Income Tax Transferee Liability" in connection with IC's tax liability for its fiscal year ending May 31, 1981, was $ 393,726.10. The parties have stipulated that Mr. Kelley as transferee is responsible for the liability of IC for1991 Tax Ct. Memo LEXIS 373">396 its taxable year ended May 31, 1981, to the extent of $ 266,820, if the statute of limitations is open for such transferee assessment. The amount referred to in the notice of deficiency in excess of that figure appears to have been conceded by respondent. Petitioners filed timely petitions with this Court. By virtue of their extensive stipulations, the issues remaining for decision involve the addition to tax for fraud (and the related statute of limitations question), the inclusion in 1981 of the $ 90,000 bonus, and the partnership loss. OPINION We first must decide whether the addition to tax for fraud applies, for, if it does not, the remaining issues are barred by the statute of limitations. Sec. 6501(a), (c)(1); sec. 6901(a), (c)(1). Section 6653(b) provides for an addition to tax if any part of a year's underpayment is due to fraud. The addition is equal to 50 percent of the amount of the underpayment. The burden of proof as to the fraud issue is on respondent, and he must meet that burden by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 56 T.C. 213">220 (1971). Fraud is defined as an intentional wrongdoing designed1991 Tax Ct. Memo LEXIS 373">397 to evade tax believed to be owing. Professional Services v. Commissioner, 79 T.C. 888">79 T.C. 888, 79 T.C. 888">930 (1982); Estate of Pittard v. Commissioner, 69 T.C. 391">69 T.C. 391, 69 T.C. 391">400 (1977). Whether fraud exists under a certain set of facts must be determined by an examination of the entire record. Plunkett v. Commissioner, 465 F.2d 299">465 F.2d 299, 465 F.2d 299">303 (7th Cir. 1972), affg. a Memorandum Opinion of this Court. Since it can rarely be established by direct proof, the requisite intent usually must be inferred from the conduct with respect to the transactions in question. Stephenson v. Commissioner, 79 T.C. 995">79 T.C. 995, 79 T.C. 995">1005-1006 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984); 56 T.C. 213">Stone v. Commissioner, supra at 223-224. The likely effect of that conduct must be that which would tend to conceal, mislead, or otherwise prevent the collection of taxes which petitioner knew or believed he owed. Spies v. United States, 317 U.S. 492">317 U.S. 492, 317 U.S. 492">499, 87 L. Ed. 418">87 L. Ed. 418, 63 S. Ct. 364">63 S. Ct. 364 (1943); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 80 T.C. 1111">1123 (1983); 79 T.C. 888">Professional Services v. Commissioner, supra at 930. Respondent1991 Tax Ct. Memo LEXIS 373">398 does not have to prove the precise amount resulting from the fraud, but only that there is some underpayment and that some part of it is attributable to fraud. Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 53 T.C. 96">105 (1969). Respondent argues that the following indicia of fraud are present in this case: Mr. Kelley was intelligent, well versed in tax matters, and generally aware of the manner in which C & I and IC's books were kept; he specifically instructed his employees to deviate from their normal routine by seeing that invoices were falsely coded and by charging his personal expenses to the Union Camp job on the corporate books; he failed to report substantial interest received by him and reported to him on a Form 1099; and he made false statements to respondent's agents during their investigation and at trial. Petitioners contend that respondent has failed to meet his burden of proof on the fraud issue for the following reasons: Mr. Kelley intended to use the corporate books for the construction of his house only as a recordkeeping convenience and to facilitate the opening of accounts and the obtaining of discounts; he merely told Mr. Haynes to "charge" the Union Camp job, 1991 Tax Ct. Memo LEXIS 373">399 and he assumed that the house expenses were being charged to his personal account; he did not hide the construction of his residence from anyone or bill Union Camp for the construction expenses; he did not personally keep the corporate books or prepare the returns at issue and was ill during the time that the returns were being prepared; and he did not report the interest earned on his bank account because he moved in November 1981 to his new residence and did not receive the Form 1099 sent to him by the Bank. We believe that respondent has met his burden of proof on the fraud issue, and that Mr. Kelley intended to build a "tax-free" house. Both Mr. Kelley's individual returns and the corporate returns are the culmination of Mr. Kelley's plan to evade taxes at both the corporate and the individual level by means of diverting corporate funds to his personal use without accurately reflecting them either on the corporate books or on his personal return. The diversion of corporate funds to petitioner's personal use to avoid tax is evidence of fraud. Truesdell v. Commissioner, 89 T.C. 1280">89 T.C. 1280, 89 T.C. 1280">1303 (1987); Estate of Clarke v. Commissioner, 54 T.C. 1149">54 T.C. 1149, 54 T.C. 1149">1164 (1970).1991 Tax Ct. Memo LEXIS 373">400 With regard to his personal returns, Mr. Kelley reviewed the job cost sheets personally and reviewed summaries of house-related expenses from time to time. Thus he clearly was aware of the approximate cost of the house. While he did not maintain the books personally, he was aware of how they generally operated and that the corporations' incurring of these expenses constituted taxable income to him, as evidenced by his statement to respondent's agents during the investigation that the expenses were supposed to be charged to his personal account. While Mr. Kelley attempts to emphasize his lack of formal education as evidence of his lack of knowledge that the returns were false, he clearly was a shrewd and intelligent businessman. Yet his personal returns obviously did not reflect these large amounts of money incurred on his behalf by the corporations. Given the sheer magnitude of the unreported income -- $ 188,044 in 1980, which is more than the gross income reported on the Kelleys' return for that year, and $ 112,563 in 1981, which is almost three times the amount of the Kelleys' salaries reported for that year -- this was clearly not a case of mere inadvertence. A consistent1991 Tax Ct. Memo LEXIS 373">401 pattern of underreporting large amounts of income is evidence of fraud. See Holland v. Commissioner, 348 U.S. 121">348 U.S. 121, 348 U.S. 121">137, 99 L. Ed. 150">99 L. Ed. 150, 75 S. Ct. 127">75 S. Ct. 127 (1954). We also note that the schedule attached to the Kelleys' 1980 return shows that all but $ 1,000 of the salary reported thereon was from C & I. Accordingly, even a cursory review by Mr. Kelley as is alleged to have occurred would have made it clear to him that the expenses incurred by IC on his behalf during that year had not been reflected on his return. The Kelleys' 1981 personal return is even more obvious in that the Forms W- 2 attached thereto contain no reference to IC. The repeated argument that Mr. Kelley believed the corporate books had been adjusted to reflect these expenses thus is irrelevant to his failure to report these large amounts on his personal returns. With regard to the corporate returns, the evidence indicates that Mr. Kelley was not closely involved with their preparation and that they were prepared by an outside accountant. Mr. Haynes provided the accountant with the data necessary to prepare these returns. The "cost of goods sold" figure in a corporate return generally is not obvious, and therefore we have1991 Tax Ct. Memo LEXIS 373">402 considered Mr. Kelley's contention that he did not know that the corporate returns were false. But any innocence alleged to exist under these circumstances is negated by the fact that, based upon the entire record, we believe the whole arrangement was set in motion by Mr. Kelley to evade taxes from the inception of the house construction. We recognize that many single shareholders of small businesses use their corporations for convenience in handling their personal transactions. There may have been a reason to run the purchases through the corporate books in order to use Mr. Haynes' services to keep track of his house expenses, to more easily open accounts, and to obtain discounts. But Mr. Kelley went much further than that. He instructed his employees to set up invoices that did not reflect the truth and were misleading. One invoice was deliberately changed from a reference to "gutters" to the more misleading term "metal fabrication," a term not commonly used by the subcontractor for gutters. The use of false invoices to increase corporate expenses is evidence of fraud. Miracle Span Corp. v. United States, 1982 U.S. Dist. LEXIS 12518">1982 U.S. Dist. LEXIS 12518, 82-1 U.S. Tax Cas. (CCH) P9365, 50 A.F.T.R.2d (RIA) 5334 (D.S.D. 1982).1991 Tax Ct. Memo LEXIS 373">403 Mr. Hullett was not told merely to use the corporate name in making purchases; he was instructed by Mr. Kelley to see that the Union Camp name was included on the invoices. Mr. Hullett's affidavit indicates that Mr. Kelley even became angry when one invoice did not refer to Union Camp. There was no legitimate rationale for charging the invoices to the Union Camp job in order to obtain corporate discounts; a simple reference to the corporation would have sufficed. Moreover, no discounts appear to have been obtained or, in some cases, available. The use of the corporate name was not necessary to open accounts, as evidenced by the fact that some accounts were originally opened under individual names and then later changed to one of the corporate names. Nor is there any explanation for Mr. Kelley's insistence upon the payment of construction workers directly, rather than paying them in the customary manner through the contractor. This would appear to be an additional attempt to mask the true purpose of the payments as they were less easily traced to the house construction. Similarly, there was no reasonable explanation for recording the materials purchases in the job cost sheets1991 Tax Ct. Memo LEXIS 373">404 of the corporate books. If Mr. Kelley had merely intended to use the services of his bookkeeper to keep track of the house expenses, this could have been accomplished much more efficiently in a separate listing. This further convinces us that the use of the corporate records was not merely for convenience but was designed to hide the truth. Respondent claims that Mr. Kelley knew that the corporate books had not been correctly adjusted to reflect the corporate purchases on Mr. Kelley's behalf. Petitioners contend that Mr. Kelley did not instruct the bookkeeper Mr. Haynes to refrain from reflecting the house and other personal expenses in the officer's personal account and that failure to make these entries on the corporate books was the result of a misunderstanding or error on Mr. Haynes' part. We hold that respondent has proven his contention. At one point during cross-examination, Mr. Haynes stated that Mr. Kelley did not tell him not to include the house and other personal expenses in the personal account. He further indicated that he was merely following Mr. Kelley's instructions of charging the expenses to Union Camp, admitting that it could have been a mere miscommunication1991 Tax Ct. Memo LEXIS 373">405 between him and the accountant. Earlier in his testimony, however, he indicated that Mr. Kelley was aware that the personal account did not reflect the personal expenses. There seems to be an inherent inconsistency in Mr. Haynes' testimony, which causes it to be somewhat unreliable. However, as we have discussed, the plan set in motion by Mr. Kelley to tailor the corporate records in connection with the house expenses to make them appear to be legitimate corporate expenses is highly indicative of knowledge. His statement at trial that he did not know that the expenses had not been charged to his personal account is also difficult to believe in view of the fact that there apparently were not many large transactions between Mr. Kelley and the corporations during this period. 5 The adjustments in the corporate records concerning loans or advances between Mr. Kelley and the corporations do not even begin to approximate the size of the constructive dividend amount at issue herein. Thus this was not a minor amount, "hidden" among many other complex transactions, which might have confused him. In addition, Mr. Kelley's personal return was filed before the corporate returns. As we1991 Tax Ct. Memo LEXIS 373">406 have found, Mr. Kelley was aware that his personal return did not reflect the personal expenses incurred by the corporations on his behalf. Yet he made no effort to identify the problem with his accountant and determine whether the same mistake had occurred in connection with the corporate returns. From this and other evidence in the record, we conclude that Mr. Kelley was aware when he filed the corporate returns that they did not reflect the truth. We also are not inclined to give much credence to Mr. Kelley's testimony of his innocence in this regard because his statements were so inconsistent that we are unable to call them reliable. For example, in the course of respondent's investigation of Mr. Kelley's returns, he first told respondent's agents that he built his new house from "savings"; 1991 Tax Ct. Memo LEXIS 373">407 then, when they showed him proof that the house had been built from corporate funds, he indicated that the house was supposed to have been charged to his personal account; then at trial he expressly denied telling the agents that he had built the house from savings. We have no reason to doubt the truthfulness of respondent's agents. It would appear that Mr. Kelley had a different picture depending upon the corner into which he had painted himself. False and misleading statements to respondent's agents are indicative of fraud. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 75 T.C. 1">20 (1980). We find that during the investigation he was attempting to divert the discussion away from scrutiny of the corporations' purchase of house construction materials because he was very aware of the falsity of the returns. Additional evidence of fraud is present in Mr. Kelley's dealings with his accountant. The accountant was not advised by either Mr. Haynes or Mr. Kelley that substantial personal expenses had been incurred by the corporations, which had not been reflected in the personal accounts. Mr. Haynes indicated that, because Mr. Kelley was aware of this, he felt that it was Mr. 1991 Tax Ct. Memo LEXIS 373">408 Kelley's responsibility to inform the accountant. Since we have found that Mr. Kelley was so aware, it was incumbent upon him to contact the accountant about it, which he failed to do. In connection with his 1981 personal return, the accountant dealt directly with Mr. Kelley, who once again did not disclose the fact that the corporations had made substantial personal purchases on his behalf. Mr. Kelley thereby provided his accountant with this false information for preparation of the 1981 individual return, which is further evidence of fraud. Korecky v. Commissioner, 781 F.2d 1566">781 F.2d 1566, 781 F.2d 1566">1569 (11th Cir. 1986), affg. per curiam a Memorandum Opinion of this Court; Foster v. Commissioner, 391 F.2d 727">391 F.2d 727, 391 F.2d 727">732-733 (4th Cir. 1968), affg. a Memorandum Opinion of this Court; Farber v. Commissioner, 43 T.C. 407">43 T.C. 407, 43 T.C. 407">420 (1965). Additional evidence of Mr. Kelley's lack of veracity and otherwise fraudulent behavior is evident in connection with his failure to report substantial interest on his 1981 return. Mr. Kelley contends that he did not report the $ 39,338.76 interest earned on his Bank account because he did not receive a Form 1099 1991 Tax Ct. Memo LEXIS 373">409 from the Bank reflecting that interest. He claims that this occurred because he moved in 1981 and inadvertently failed to change his mailing address with the Bank. Firstly, we do not believe Mr. Kelley's statement at trial that he moved prior to 1982. The dates of the invoices in the record indicate that kitchen appliances were paid for in August 1981 (and thus were probably already installed), but there is no evidence in the record of the Kelleys' moving date. Other facts, however, indicate that it was highly unlikely that they moved before 1982. Their 1981 return, filed on April 15, 1982, shows Etowah Street (the old house) as their address. Mr. Kelley's dealings with the Bank indicate that he did not change his official address until much later in 1982. C & I records containing entries as late as December 27, 1981, show Etowah Street as his address. He told respondent's agents in his initial interview with them that he moved in 1982. Furthermore, it defies reality that Mr. Kelley could deposit funds to this account in late 1981 and then in January 1982 transfer all the funds in that account to newly opened accounts bearing his old address if he had moved in 1981 to his 1991 Tax Ct. Memo LEXIS 373">410 new house. Moreover, the Kelleys reported as income the $ 1,544.07 they paid as interest to the Bank, indicating that they received the notice sent to their old address in January 1982, the same time that the Bank sent them the Form 1099 they allegedly never received. Accordingly, we do not believe that Mr. Kelley did not receive the Form 1099 sent by the Bank to his Etowah Street address because he had already moved. Secondly, even if he did not receive the Form 1099, we cannot imagine that such a large sum could be innocently "overlooked," particularly when he had recent substantial dealings with the account which would have alerted him to its substantial size. We conclude that Mr. Kelley is once again attempting to present an innocent explanation for his failure to report substantial income, but once again the explanation does not comport with logic. Finally, two additional pieces of evidence further convince us that Mr. Kelley is not the innocent victim he claims to be. Mr. Kelley further attempted to bypass the taxation of ordinary income by depositing the $ 25,000 settlement check from J & S Insulators into his personal account without reporting it either on his personal1991 Tax Ct. Memo LEXIS 373">411 return or the corporations' returns, which is yet another example of his flagrant disregard for the tax laws. In addition, the parties have stipulated that a substantial amount of corporate funds was paid in 1980 and 1981 to Mr. Kelley's sister as a "salary," and deducted on the corporate returns, when that individual did not do any work for the corporations during those years. These payments were made at Mr. Kelley's instruction, and Mr. Kelley has made no argument that these payments were legitimate corporate expenses. This was yet another "detail" in the general scheme to withdraw profits from the corporations under the guise of legitimate corporate expenses. Such an action is further evidence of fraudulent intent. Meyers v. Commissioner, 21 T.C. 331">21 T.C. 331, 21 T.C. 331">348-349 (1953). In sum, we find that the cumulative weight of all these factors has established Mr. Kelley's fraud by clear and convincing evidence in docket No. 23020-88. Accordingly, the statute of limitations is not a bar with respect to that proceeding. Sec. 6501(c)(1). In docket No. 32292-88, respondent determined Mr. Kelley's liability for deficiencies and the addition to tax for fraud as transferee1991 Tax Ct. Memo LEXIS 373">412 of IC for the fiscal year ending May 31, 1981. Normally, respondent bears the burden of proving that the petitioner is liable as a transferee of property of another taxpayer. Sec. 6902(a). In this case, however, the parties have stipulated that Mr. Kelley as transferee is responsible for the liability of IC if the statute of limitations is open for such transferee assessment. Thus, the sole issue is whether the transferor, IC, is liable in the first instance for the fraud addition to tax. As previously noted, respondent must prove fraud by clear and convincing evidence. Sec. 7454(a). We find that respondent has established by clear and convincing evidence IC's liability for the fraud addition to tax. Specifically, where, as here, a corporation is dominated and controlled by a sole shareholder-officer who is well aware that false and fraudulent corporate returns have been filed, the shareholder-officer's fraudulent intent is imputed to the controlled corporation. American Lithofold Corp. v. Commissioner, 55 T.C. 904">55 T.C. 904, 55 T.C. 904">925-926 (1971). Because of this imputed fraud, the statute of limitations is not a bar with respect to this proceeding either. Secs. 6501(c)(1), 1991 Tax Ct. Memo LEXIS 373">413 6901(c)(1). Consequently, we find Mr. Kelley liable for the deficiencies and addition to tax for fraud in his capacity as transferee of IC. We now reach the remaining issues. Petitioners bear the burden of proof. Rule 142(a). With regard to the partnership question, we fail to understand why the parties did not add this to their extensive stipulation. The Kelleys took a deduction on their 1981 return in the amount of $ 7,509 in connection with the Brahman Brangus Breeding Partnership. Two years later, they executed a closing agreement with respondent wherein they agreed that a $ 20,000 deduction was allowed for the year 1976 but no losses resulting from their investment in that partnership would be allowed thereafter. The only argument that the Kelleys make with respect to this issue is that respondent did not show that they had received the full benefit of the $ 20,000 deduction. However, the closing agreement contains no provision entitling them to any deduction except during 1976. Section 7121(b) provides that a properly approved closing agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material1991 Tax Ct. Memo LEXIS 373">414 fact -- (1) the case shall not be reopened as to the matters agreed upon * * , and (2) in any suit, action, or proceeding, such agreement * * shall not be annulled, modified, set aside, or disregarded.There is no claim by petitioners that there has been any legitimate reason under the standard set forth above to disregard the closing agreement. Accordingly, respondent correctly denied the deduction. We also note that, although there was no fraud in connection with this aspect of the deficiency in docket No. 23020-88, section 6653(b), as in effect during 1981, provided that, "If any part of any underpayment" is due to fraud, the addition to tax is 50 percent of "the underpayment" (emphasis added). Thus the fraud addition to tax applies with respect to this part of the deficiency as well. As to the wage/bonus payment, petitioners contend in essence that, because C & I had only $ 4,179.88 in its bank account on December 1, 1981, it cannot have "paid" to the Kelleys a bonus of $ 90,000 until the following year, when C & I's certificate of deposit matured and the corporation had substantial cash available. We do not agree. In view of the fact that the wage/bonus1991 Tax Ct. Memo LEXIS 373">415 at issue herein was actually or constructively "paid" to Mr. Kelley in four separate ways, it is necessary to examine each separately. The first method of payment on the corporate books was by means of Mr. Haynes' adjustment of the loan account between C & I and Mr. Kelley. The corporate account entitled "Accounts Receivable-Officers" was credited on December 31, 1981, in the amount of $ 43,867.47 to reflect a partial payment of a debt owed by Mr. Kelley to C & I. This adjustment to the corporate books constituted income from discharge of an indebtedness owed by Mr. Kelley to C & I. Sec. 61(a)(12). The discharge occurred on December 31, 1981 -- the date when the adjustments to the corporate books were made and the discharge was complete. United States v. Ingalls, 399 F.2d 143">399 F.2d 143, 399 F.2d 143">147 (5th Cir. 1968); Newmark v. Commissioner, 311 F.2d 913">311 F.2d 913, 311 F.2d 913">915 (2d Cir. 1962), affg. a Memorandum Opinion of this Court. The facts before us are very similar to those in Lehew v. Commissioner, T.C. Memo 1987-389, where an insurance salesman's commissions were paid to him by means of a credit to his outstanding advances account. We stated: 1991 Tax Ct. Memo LEXIS 373">416 When the advances were made to Mr. Lehew, he was not taxable on them because they were in effect loans. However, when the commissions earned by him in 1980 were credited to his account, his obligation to repay the loans was reduced by that amount, and the reduction of that obligation did constitute the receipt of gross income. [Citations omitted.]T.C. Memo 1987-389, 1987 Tax Ct. Memo LEXIS 386">1987 Tax Ct. Memo LEXIS 386, 54 T.C.M. 81">54 T.C.M. 81, 82, T.C.M. (RIA) 87389, at 2000. Similarly, when the adjustments to C & I's books occurred on December 31, 1981, Mr. Kelley owed C & I $ 43,867.47 less than he did before. Therefore, he received income in 1981 in the amount of the adjustment. The second means of effecting payment of the bonus to Mr. Kelley was by means of adjustments to two C & I accounts regarding Federal and State tax withholding. To these accounts, Mr. Haynes entered credits on December 31, 1981, in the amounts of $ 33,981 and $ 3,730.44, respectively, $ 33,000 and $ 3,600 of which were attributable to Mr. Kelley. These amounts represented funds that were required to be withheld and paid over to the Federal and Alabama State Governments at a future time. This situation is very similar to that in Basila v. Commissioner, 36 T.C. 111">36 T.C. 111 (1961),1991 Tax Ct. Memo LEXIS 373">417 wherein a book entry for a cash basis taxpayer's withholding was treated as constructively received in the year in which the income to which the withholding was attributable was received, even though the entry did not occur and the money was not paid over to the Government until the the following year. The reasoning used there was that it was presumed that the payor/corporation and the payee/taxpayer knew that withholding was required and intended to comply with the tax laws. Even though the corporate books did not show the withholding amount at the time the income was paid to the taxpayer, the entry on the corporate books constituted income in the year to which the withholding was attributable because the taxpayer's income actually exceeded the amount that was paid by the amount that should have been withheld. The fact that the corporation did not pay the withholding over to the Government until the following year was immaterial. 36 T.C. 111">36 T.C. 118-119. Applying that reasoning to the facts of this case, Mr. Haynes' withholding tax adjustments were part of the bonus that Mr. Kelley received in 1981, because he was required to pay Alabama and Federal taxes on the bonus1991 Tax Ct. Memo LEXIS 373">418 as entered on the corporate books. In effect, what really happened was a receipt by Mr. Kelley of $ 36,600 of the bonus in 1981, and a payment back to C & I of the $ 36,600 State and Federal income taxes required to be withheld in connection with the bonus. Accordingly, the amounts of the book entries also were income to the Kelleys in 1981. Lastly, we must consider the balance of the wage/bonus payment in the amount of $ 9,532.25. The evidence concerning the date of the check for this amount is inconsistent. The Kelleys contend that the check for this amount was not issued to Mr. Kelley until 1982, and respondent's agent indicated that he thought it was dated January 5, 1982. This is contrary to the statement of Mr. Haynes that his standard procedure was to issue a check at the same time that he made corporate entries. However, we need not decide this factual issue because, even if the check was dated 1982, the law of constructive receipt would require its inclusion in 1981. As applied to cash basis taxpayers (and there is no evidence that the Kelleys were not), "Gains, profits, and income are to be included in gross income for the taxable year in which they are actually 1991 Tax Ct. Memo LEXIS 373">419 or constructively received by the taxpayer." Sec. 1.451-1(a), Income Tax Regs. Income is constructively received by the taxpayer "in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time." Sec. 1.451-2(a), Income Tax Regs. Thus actual receipt is not necessary for there to be income. The check amount was credited to his account by means of a book adjustment in 1981 and thus was constructively received during that year. Petitioners appear to argue that the doctrine of constructive receipt does not apply, however, where the payor lacks the funds to make the payments. Estate of Noel v. Commissioner, 50 T.C. 702">50 T.C. 702, 50 T.C. 702">706-707 (1968). They claim that, because it had only $ 4,179.98 in its operating bank account on December 1, 1981, C & I lacked the funds to pay this check. This fails to recognize two important facts. First, the relevant date is not December 1, 1981, but December 31, 1981. While the corporation did have only a little more than $ 4,000 in its operating bank account on December 1, C & I's deposits to that account during the month of December exceeded its withdrawals1991 Tax Ct. Memo LEXIS 373">420 by more than $ 10,000, so that C & I would have been able to issue the $ 9,532.25 check and the Kelleys would have been able to cash it if they had wanted to. White v. Commissioner, 61 T.C. 763">61 T.C. 763, 61 T.C. 763">767 (1974). A taxpayer "may not deliberately turn his back upon income and thus select the year for which he will report it." Willits v. Commissioner, 50 T.C. 602">50 T.C. 602, 50 T.C. 602">612 (1968), quoting Hamilton National Bank of Chattanooga v. Commissioner, 29 B.T.A. 63">29 B.T.A. 63, 29 B.T.A. 63">67 (1933). More importantly, the record shows that on December 31, 1981, C & I owned a certificate of deposit in the amount of $ 180,000, which was to mature a few days later. To claim that these funds were "unavailable" until maturity is an inaccurate description of the status of those funds. Rather, they were available for a fee--a penalty for early withdrawal. Moreover, they were certainly available as security for a loan, should that have proven to be necessary. See Geiger & Peters, Inc. v. Commissioner, 27 T.C. 911">27 T.C. 911, 27 T.C. 911">919 (1957). Accordingly, the entire amount of the $ 90,00 bonus was income to the Kelleys in 1981. Decisions will be entered under Rule1991 Tax Ct. Memo LEXIS 373">*421 155. Footnotes1. The cases of petitioners were consolidated for purposes of trial, briefing, and opinion on October 23, 1989. At that time, two other docketed cases, Insulation Contractors, Inc., docket No. 22822-88, and Commercial and Industrial Insulation Co., Inc., docket No. 22909-88, were consolidated therewith. On June 4, 1991, the Court severed the latter two cases from the consolidated group and entered orders dismissing them for lack of jurisdiction on the ground that they had no capacity under applicable State law to engage in the instant litigation. The corporate petitioners in those two cases were dissolved prior to the date their petitions were filed. ↩2. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩3. In docket No. 23020-88, respondent has conceded that there are no 1980 or 1981 additions to tax under section 6653(b) as to petitioner Gail B. Kelley. ↩4. The notice of deficiency indicates the following computations in connection with the Kelley's 1982 return, which is not before the Court: ↩Salaries and Bonus ComputationsUnpaid salary for FYE 11-30-81 C & I$ 91,500Unpaid salary for FYE 03-31-82 C & I final14,393Total to 1982 calendar year $ 105,893W-2 for 1982 and 1040 shows98,529Salary unreported for 1982$ 7,3645. While IC's records indicate that Mr. Kelley had loaned IC more than $ 181,000 in earlier years, that loan apparently had been eliminated by the end of May 1980. Thus any potential confusion was thereby eliminated as well.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619028/	EUGENE V. AND FRANCES M. MILLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMiller v. CommissionerDocket No. 890-77.United States Tax CourtT.C. Memo 1978-304; 1978 Tax Ct. Memo LEXIS 210; 37 T.C.M. 1264; T.C.M. (RIA) 78304; August 7, 1978, Filed 1978 Tax Ct. Memo LEXIS 210">210 Petitioners advanced sums to a corporation in 1967 and paid out further amounts under guaranty and indemnity agreements in 1972. Held, petitioners are not entitled to a 1972 bad debt deduction for the 1967 payments since they failed to establish the debt created thereby became worthless in 1972. Held further, petitioners are entitled to a 1972 nonbusiness bad debt for the amounts expended in 1972. Kenneth C. Ellison, for the petitioners. J. Michael Adcock, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a $ 6,254.80 deficiency in petitioners' 1972 Federal income tax. After concessions, the two remaining issues are whether petitioners are entitled to a 1972 business bad debt deduction for $ 31,607.06 paid in 1967 and $ 84,340 paid in 1972. FINDINGS OF FACT Some facts have been stipulated and are found accordingly. Eugene and Frances Miller, husband and wife, were residents of Stark City, Missouri, when they filed their petition herein. Petitioners filed their 1972 income tax return with the District Director of Internal Revenue, Ogden, Utah. Eugene Miller (hereinafter petitioner) was a practicing attorney in Fairbanks, 1978 Tax Ct. Memo LEXIS 210">211 Alaska, from November 3, 1953, until November 1976. In 1962, petitioner formed a partnership with Lenny Arsenault, a licensed plumber. Arsenault was to contract out his plumbing skills and petitioner was to perform the legal work related to the business operations. On February 26, 1963, the partnership was incorporated as Globe Plumbing and Heating, Inc. (hereinafter Globe) with petitioners and Arsenault each owning 50 percent. As Globe's plumbing contract bids grew in size, its work was required to be bonded. In 1966, as a condition to obtaining bonding for Globe's work, United States Fidelity and Guaranty Company (hereinafter U.S.F. & G.), and others, required petitioners to personally execute agreements indemnifying them on all amounts expended on any guaranty for Globe. Petitioners' purpose in executing the indemnity and guaranty agreements was to enable Globe to obtain the necessary bonding so that it could conduct business. Globe never paid petitioners a fee for the execution of any guaranty or indemnity agreements. Petitioners have never been engaged in the trade or business of guaranteeing debts or obligations of corporations. In 1967, severe weather damaged Globe 1978 Tax Ct. Memo LEXIS 210">212 contract plumbing projects on which U.S.F. & G. had outstanding guarantees. Since Globe was not financially able to complete the projects, U.S.F. & G. and others were required to pay out approximately $ 200,000 to complete Globe's work. Through the above agreements, petitioners were obligated to pay this amount. In addition, petitioners personally expended $ 31,607.06 in 1967 in an attempt to assist Globe in finishing these projects. Petitioners' purpose in advancing the $ 31,607.06 was to enable Globe to complete its contracts. The minutes of an April 30, 1967, meeting of Globe stockholders reflect that Arsenault and E. Robert Horn wished to purchase petitioners' Globe stock. On November 1, 1967, the parties executed a sales agreement providing that in consideration for petitioners' stock, Arsenault and Horn were to: (1) assume and pay all Globe obligations which petitioners indemnified; (2) hold petitioners harmless from any obligation through their association with Globe; and (3) reimburse petitioners for any cash outlays they had incurred for the operation of Globe in the spring and summer of 1967. If Arsenault and Horn could not perform these conditions, petitioners' stock 1978 Tax Ct. Memo LEXIS 210">213 was to be recoveyed to them. Arsenault and Horn never satisfied the conditions of the agreement thereby nullifying the sale. Globe ceased doing business prior to January 1, 1968. Arsenault declared bankruptcy in 1972. On November 8, 1972, petitioners executed an agreement with Globe's bonding companies wherein they agreed to pay $ 80,500 to the companies if they agreed not to sue petitioners for any amounts relative to petitioners' guaranties and indemnities for Globe. Petitioners deducted the 1967 payments on their 1972 return as a business bad debt under section 166. 1 The 1972 payment of $ 80,500 was deducted as a nonbusiness bad debt on the 1972 return but, in an amended petition, petitioners assert that this amount is also a section 166 business bad debt. Respondent disallowed the $ 31,607.06 business bad debt loss on the ground that it did not become worthless in 1972 and contends here that the $ 80,500 is a nonbusiness bad debt. 21978 Tax Ct. Memo LEXIS 210">214 OPINION We must determine whether 1967 payments of $ 31,607.06 and 1972 payments of $ 80,500 constitute business bad debts in 1972. Petitioners contend these amounts were expended to protect petitioner's legal reputation in Fairbanks, Alaska, where he practiced law. Respondent contends that these sums were advanced to prevent a larger contingent liability from accruing under petitioners' guaranty and indemnity agreements with Globe's bonding companies; that the $ 31,607.06 was worthless prior to 1972; and that, therefore, petitioners are entitled only to a $ 80,500 nonbusiness bad debt in 1972. Sections 166(d)(1) and 1222(2) allow an individual shareholder a short-term capital loss for nonbusiness bad debts resulting from worthless corporate loans which are not evidenced by a security. Section 166(a)(1) allows an ordinary deduction for any business bad debt which becomes wholly worthless within the taxable year. The term "debt" as used in section 166 includes 1978 Tax Ct. Memo LEXIS 210">215 the loss sustained by a guarantor of a corporate obligation. Putnam v. Commissioner,352 U.S. 82">352 U.S. 82, 352 U.S. 82">85 (1956). A loss within the framework of sections 166(a)(1) and 166(d)(1) must be taken in the taxable year in which the worthlessness occurs. Boehm v. Commissioner,326 U.S. 287">326 U.S. 287, 326 U.S. 287">292 (1945). Worthlessness is a factual question. Sec. 1.166-2(a), Income Tax Regs.Whether a debt is business or nonbusiness is a question of fact; business bad debt status is only found where there exists a "proximate relationship" between the bad debt and the taxpayer's trade or business. Sec. 1.166-5(b)(2), Income Tax Regs. This proximate relationship is only found where the taxpayer establishes that the dominant motivation behind the loan or guaranty payment was business related. United States v. Generes,405 U.S. 93">405 U.S. 93, 405 U.S. 93">102 (1972). The issues are factual. Each case must be decided on the record presented. Respondent has determined that the dominant motivation of the 1967 and 1972 pyments was to minimize petitioners' losses and potential liability in Globe, and that the debt created by the 1967 payments became worthless in a year prior to 1972. Petitioners have the burden of proof to establish otherwise. 1978 Tax Ct. Memo LEXIS 210">216 Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.We need not determine the character of the debt created by the 1967 payments totalling $ 31,607.06 since we find the debt was worthless prior to 1972. In 1967, petitioners advanced Globe $ 31,607.06 so that it could complete certain bonded plumbing contracts. 3 On November 1, 1967, petitioners agreed to sell their Globe stock to Arsenault and Horn providing they agreed, among other things, to personally reimburse petitioners for the $ 31,607.06 in advances. Under this agreement, petitioners argue they had a reasonable expectation of reimbursement from Arsenault and Horn until 1972 when Arsenault declared bankruptcy. We disagree. The sales agreement itself was conditioned upon the purchasers' performance of certain acts. If they were unable to perform, the sale was to be nullified. Globe ceased doing any business prior to January 1, 1968. Although the November 1, 1967, agreement placed no time limit 1978 Tax Ct. Memo LEXIS 210">217 on the purchasers' performance, it is certainly reasonable to expect that they would not complete performance, thereby paying large sums of money for petitioners' stock, when the corporation ceased doing business. We are not required to identify precisely when petitioners could no longer reasonably anticipate payment by the purchasers, but it certainly was prior to 1972. On January 1, 1972, Globe had been dormant for over three years. Under these circumstances, we find that prior to January 1, 1972, petitioners should have looked only to Globe for repayment. Since the corporation was dormant for over three years, certainly the debt was worthless before January 1, 1972. Accordingly, on the basis of the record before us, we find the $ 31,607.06 debt created by the 1967 payments was worthless prior to 1972. We must next determine the character of the 1972 payments of $ 80,500 made under a guaranty and indemnity agreement. The payment of this amount created a debt on behalf of Globe to petitioners. 352 U.S. 82">Putnam v. Commissioner,supra.Petitioners argue the dominant motivation for the payments was to protect petitioner's legal practice in Fairbanks, Alaska. They support this by arguing 1978 Tax Ct. Memo LEXIS 210">218 that the 1972 payments were made voluntarily since the Alaska six-year statute of limitations on contracts ran on the guaranty and indemnity agreements. 4 Respondent asserts that the statute had not run; that in return for $ 80,500 in payments petitioners obtained a covenant not to sue on a liability of approximately $ 200,000; and that, therefore, the dominant motive for the payments was to minimize petitioners' liability exposure in Globe. We agree with respondent. No doubt petitioner's legal practice in Fairbanks benefited from his not being sued but we simply are not convinced that this was the dominant motivation for the payment. Petitioners' $ 200,000 liability exposure on the guaranty and indemnity agreements is not disputed. Absent the November 8, 1972, covenant not to sue agreement, no doubt petitioners would have faced a $ 200,000 liability. Under these circumstances, we are convinced the dominant motivation for the payments was to minimize liability exposure in Globe. See Smith v. Commissioner,60 T.C. 316">60 T.C. 316, 60 T.C. 316">319 (1973). Finally, we are not persuaded by petitioners' argument that the payments were voluntary since the statute of 1978 Tax Ct. Memo LEXIS 210">219 limitations had run. The statute of limitations on an indemnity contract does not begin to run when the contract is executed; it begins when the cause of action accrues to the indemnitee which is when it pays the money. Howarth v. First National Bank of Anchorage,540 P.2d 486, 490-491 (Alas. 1975), affd. on rehearing, 551 P.2d 934 (Alas. 1976). Accordingly, on the basis of the record before us, we conclude that petitioners sustained a nonbusiness bad debt of $ 80,500 in 1972. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended. ↩2. Petitioners deducted $ 84,340 on their 1972 return as nonbusiness bad debts and, in their amended petition, claimed this amount was a business bad debt. Since petitioners presented evidence only as to $ 80,500 of this amount, we conclude that the remaining $ 3,840 is a nonbusiness bad debt. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.↩3. The parties have assumed, and we do not question, that these advances created a bona fide debt from Globe to petitioners within the meaning of sec. 1.166-1(c), Income Tax. Regs.↩4. Alaska Stat. Tit. 9, sec. 050 (1962).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619030/	Marvin T. Blackwell, et al. 1 v. Commissioner. Blackwell v. CommissionerDocket Nos. 52701, 52702, 53880, 59625-59627.United States Tax CourtT.C. Memo 1956-184; 1956 Tax Ct. Memo LEXIS 108; 15 T.C.M. 962; T.C.M. (RIA) 56184; August 9, 19561956 Tax Ct. Memo LEXIS 108">108 Issues relating to O. K. Loan Company of Troy, Inc.: 1. Held, certain alleged interest added by the Commissioner to the income reported by petitioner on its returns for the fiscal years 1948 through 1952 was erroneously added. As to these adjustments the Commissioner is reversed. 2. Held, an amount of $3,478.80 added by the Commissioner as "deferred interest" to the income reported by petitioner in its return for the fiscal year 1948 was erroneously added. As to this adjustment the Commissioner is reversed. 3. Held, a payment of $1,407.06 made by petitioner in 1948 to its president, M. T. Blackwell, was a bona fide salary payment to Blackwell for services actually rendered by Blackwell to petitioner in its fiscal year 1948. The Commissioner erred in refusing to allow petitioner this deduction as a business expense. 4. Held, as to certain automobile expenses claimed by petitioner as business expenses for its fiscal years 1948, 1950, 1951, and 1952, and disallowed in part by the Commissioner, the Commissioner is sustained as to his disallowance for the fiscal year 1948. He is reversed in part as to his disallowances for the fiscal years 1950, 1951, and 1952. 5. Held, the1956 Tax Ct. Memo LEXIS 108">109 Commissioner's disallowances of depreciation claimed on petitioner's returns for the fiscal years 1948 through 1952 are sustained in part and reversed in part. 6. Held, the Commissioner is sustained in part in his disallowance to petitioner as deductions of certain insurance premiums claimed on its returns as deductions for its fiscal years 1951 and 1952. He is reversed as to certain portions of these deductions disallowed. 7. Held, the Commissioner is sustained in his disallowance of falsely claimed rent allegedly paid by petitioner for one of its branch offices. The rent disallowed was not paid. 8. Held, the Commissioner erred in disallowing as deductions certain business expenses incurred and paid by petitioner in its taxable years 1948 through 1952. He is sustained in his disallowance of two comparatively small portions of the deductions claimed. 9. Held, the Commissioner is sustained in his adding to the income reported by petitioner on its income tax returns for its fiscal years 1948 through 1952 of certain amounts of so-called "pulled interest" in each of the taxable years. This interest was collected by petitioner from borrowers and very soon thereafter paid over to1956 Tax Ct. Memo LEXIS 108">110 petitioner's president, Marvin T. Blackwell, for his own use. Petitioner made false entries in its records with respect to this "pulled interest" and did not return any of it for taxation on its returns for the respective taxable years. 10. Held, part of the deficiency in petitioner's tax for each of its fiscal years 1948 through 1952 is due to fraud with intent to evade the tax. The Commissioner's imposition of fraud penalties for each of the taxable years is sustained. Issues as to Marvin T. Blackwell and Clarice Blackwell: A. Held, a check of $1,407.06 paid Blackwell in January 1948 by his corporate employer was salary to him and taxable as such. It was not part of the consideration received by Blackwell for his conveyance of assets to the corporation in April of 1947. B. Held, the Commissioner erred in computing a capital gain of $205.51 to Blackwell on the sale of the assets of his loan business to the corporation in April 1947. There was a loss to Blackwell in the sale of these assets, instead of a capital gain. C. Held, the Commissioner erred in adding to Blackwell's income for 1949, $900 which he determined was paid to Blackwell for his personal use. It was not for1956 Tax Ct. Memo LEXIS 108">111 Blackwell's personal use nor was it so used by him. It was deposited by Blackwell in one of the banks for use by one of the branch loan offices and was so used by it. D. Held, the Commissioner is sustained in his action in adding to Blackwell's income for 1948, as a distribution to him of a corporate dividend, $393.36 representing the residual value of an automobile which Blackwell received from the corporation and sold to O. D. Cantwell. E. Held, the Commissioner erred in adding to the income reported by Blackwell on his returns, $3,600 which represented the purchase price of automobile trucks and an automobile which the corporation purchased for its own use and not for Blackwell's use. These motor vehicles were owned by the corporation and not by Blackwell and their purchase price should not be taxed to him. F. Held, that the action of the Commissioner in adding to Blackwell's income for 1949, 1950, and 1951 certain automobile expenses claimed as business deductions by the corporation and disallowed by the Commissioner is sustained in part and reversed in part. The amounts sustained represent amounts which petitioner concedes should be taxed to him because the expenses were1956 Tax Ct. Memo LEXIS 108">112 incurred for his personal benefit. G. Held, certain insurance premiums incurred and paid in 1951 by the corporation in insuring a Pontiac automobile and disallowed as a deduction to the corporation and added as income to Blackwell are sustained in part and reversed in part. The automobile was owned by the corporation but was used by Blackwell for his personal use 25 per cent of the time. He concedes that 25 per cent of the insurance premium should be taxed to him. H. Held, the corporation falsely claimed deduction for 17 months' rent at $20 per month for 5 months in 1950 and 12 months in 1951. The $340 falsely claimed by the corporation as rent paid was not rent but was paid over to Blackwell for his own personal use. The Commissioner is sustained in taxing the $340 to Blackwell. I. Held, the Commissioner erred in taxing as income to Blackwell in the calendar years 1948, 1949, 1950, and 1951, certain business expenses which the corporation incurred and paid in those years in its own behalf and which the Commissioner disallowed as deductions to the corporation. Held, further, the Commissioner did not err in adding to Blackwell's income two small items of $3.55 and $9, respectively. 1956 Tax Ct. Memo LEXIS 108">113 Petitioner has not shown that these two items were not expended for his personal benefit. J. Held, amounts of so-called "pulled interest" received by Blackwell in 1947, 1948, 1949, 1950, and 1951, from the corporation and deposited in his own personal bank account and used by him as his own personal funds were taxable income to him. The Commissioner's action in adding these amounts to Blackwell's taxable income is approved. The amounts of the so-called pulled interest for each of the taxable years is not in dispute. Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404, upon which petitioner relies, is distinguished. K. Held, the Commissioner erred in disallowing credit for dependents to Blackwell in the taxable years 1947, 1948, 1949, 1950, and 1951. Blackwell's stepmother and his aunt were both over 70 years of age during the taxable years and Blackwell furnished in excess of 50 per cent of their support and neither had income in excess of $500 in any of the taxable years. L. Held, part of the deficiencies in each of the taxable years is due to fraud with intent to evade tax. The Commissioner's imposition of fraud penalties in each of the taxable years is sustained. M. Petitioner1956 Tax Ct. Memo LEXIS 108">114 did not file estimated tax returns for any of the taxable years although in each of the years his income was in excess of the minimum which would have exempted him from filing an estimated tax return. Held, the Commissioner is sustained in his imposition of penalties under section 294(d)(1)(A) of the 1939 Code. Such penalties will be recomputed under Rule 50. N. Held, petitioner is liable for penalties for underestimating the tax in each of the taxable years under section 294(d)(2) of the 1939 Code, although he did not file a return of estimated tax. The penalties will be recomputed under Rule 50. G. E. Fuller, 20 T.C. 308">20 T.C. 308, followed. Fred S. Ball, Jr., Esq., First National Bank Building, Montgomery, Ala., for the petitioners. Homer F. Benson, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion BLACK, Judge: Docket Nos. 53880 and 59627 involve deficiencies in income tax and penalties which the Commissioner has determined against O. K. Loan Company of Troy, Inc. These deficiencies and penalties are as follows: Sec. 293(b)I.R.C. 1939Year EndedIncome TaxPenalty4-30-48$1,308.27$ 654.144-30-492,508.421,254.214-30-505,767.772,883.894-30-518,185.254,092.634-30-528,139.324,069.66Docket Nos. 52701 and 59625 involve deficiencies in income tax and penalties which the Commissioner has determined against Marvin T. Blackwell as follows: Sec. 293(b) § 294(d)(1)(A) § 294(d)(2)I.R.C. 1939I.R.C. 1939I.R.C. 1939Year EndedIncome TaxPenaltyPenaltyPenalty12-31-47$2,597.59$1,298.80$363.24$217.9512-31-481,844.11922.06182.92109.7512-31-494,519.532,259.77452.12271.28Docket Nos. 52702 and 59626 involve deficiencies1956 Tax Ct. Memo LEXIS 108">116 in income tax and penalties which the Commissioner has determined against Marvin T. Blackwell and Clarice Blackwell as follows: Sec. 293(b) § 294(d)(1)(A) § 294(d)(2)I.R.C. 1939I.R.C. 1939I.R.C. 1939Year EndedIncome TaxPenaltyPenaltyPenalty12-31-50$5,390.14$2,695.07$537.72$322.6312-31-515,390.302,695.15538.64323.18These proceedings were consolidated for hearing. The petitions raise numerous assignments of error to the determinations of the Commissioner. Some of the adjustments made by the Commissioner in his determination of the deficiencies are not contested. We think it would expedite the orderly disposition of the numerous assignments of error raised in the petitions to take up first the assignments of error as to the deficiencies determined against petitioner O. K. Loan Company of Troy, Inc., and then take up the assignments of error in the petitions of Marvin T. Blackwell and his wife, Clarice Blackwell. We also think it would expedite a disposition of these proceedings and, on account of the large number of issues, avoid confusion, to take up the issues separately, make findings of fact with respect1956 Tax Ct. Memo LEXIS 108">117 to them and then state our ruling in an opinion, making it as brief as possible. This we shall endeavor to do. O. K. Loan Company of Troy, Inc. General Findings In April 1946, Marvin T. Blackwell (sometimes hereafter referred to as Blackwell) began a small loan business in Troy, Alabama, and in September 1946, he opened an office in Ozark, Alabama. The loan business was conducted by Blackwell as an individual proprietorship until April 25, 1947. O. K. Loan Company of Troy, Inc. (sometimes hereafter referred to as the corporation) was incorporated on April 7, 1947, under the laws of the State of Alabama for the purpose of acquiring and operating the small loan business previously operated in Troy and Ozark as a proprietorship by Blackwell. The principal office of O. K. Loan Company was in Troy, Alabama. On April 25, 1947, Blackwell transferred the assets of the small loan proprietorship business to the corporation for certain considerations which will be hereinafter enumerated under one of the issues raised in the case. The capital stock of O. K. Loan Company of Troy, Inc., issued and outstanding from the date of its organization and throughout the taxable years involved1956 Tax Ct. Memo LEXIS 108">118 consisted of 20 shares of common stock of $100 par value. Eleven of the 20 shares of capital stock of the corporation were issued in the name of Marvin T. Blackwell, 4 shares were issued in the name of his stepmother, Mary Blackwell, 4 shares were issued in the name of his aunt, Della Blackwell, and 1 share was issued in the name of O. D. Cantwell. Cantwell did not pay anything for the 1 share of stock issued to him. No consideration was given for the 4 shares of stock issued in the name of Mary Blackwell nor the 4 shares issued in the name of Della Blackwell. Shortly after the marriage of Marvin T. Blackwell and Clarice Blackwell on May 1, 1952, Mary and Della Blackwell's shares of O. K. Loan Company stock were transferred to Clarice on the corporate stock book. So far as the record shows, no consideration was paid by Clarice for the transfer of these shares. During the taxable years April 30, 1948 through April 30, 1952, there were three directors of the corporation, namely, Marvin T. Blackwell, Mary Blackwell, and O. D. Cantwell. During the taxable years Marvin T. Blackwell served as president, Mary Blackwell as vice president, and O. D. Cantwell as secretary-treasurer. Blackwell1956 Tax Ct. Memo LEXIS 108">119 and Cantwell have served in their respective official capacities since the corporation was organized. Neither Mary Blackwell nor Della Blackwell ever performed services or had any part in the affairs of the corporation. On January 1, 1949, the corporation opened an office in Opp, Alabama, and in November 1950, it opened an office in Luverne, Alabama. The four loan offices were operated by the corporation under the supervision of Blackwell and Cantwell. The corporation, a cash receipts and disbursements taxpayer, filed its United States corporation income tax returns for the fiscal years ended April 30, 1948 through April 30, 1952, with the then collector of internal revenue for the district of Alabama, Birmingham, Alabama. The corporation kept no double entry set of books. It had certain records which it kept that amounted to a single entry set of books. Among these records which the corporation kept was a small book, referred to as a counter book, individual loan cards for each customer which showed the amount loaned and collections thereon, and certain daily reports designated daily balance sheets. Issue 1 Additional interest determined by the Commissioner for the 51956 Tax Ct. Memo LEXIS 108">120 fiscal years ending April 30, 1948 through April 30, 1952, total for all 5 years, $8,806.12. The Commissioner determined that the corporation received interest which it had not reported in its returns, as follows: Fiscal Year EndedAmount4-30-48$ 518.994-30-493,774.504-30-501,697.704-30-511,493.584-30-521,321.35Findings of Fact The Commissioner made these additions to the interest reported on the corporation's returns on the basis of a revenue agent's report in which the agent used a percentage method of determining what amount of the collections made by the corporation in each fiscal year was a collection of principal and what amount was a collection of interest or fees. The agent assumed in his computations that the ratio of principal collected to interest collected was 84.39 and thus concluded that the rest of the collections was interest. The petitioner correctly recorded on its records, with the exception of the so-called "pulled interest" which will be hereinafter discussed under another issue, the interest or fees which it collected in each of its fiscal years here involved. It correctly reported its interest or fees collected in each1956 Tax Ct. Memo LEXIS 108">121 of its fiscal years, with the exception of the so-called pulled interest which will be hereinafter discussed under another issue and which has nothing to do with the interest involved in this Issue 1. Opinion It is conceded that petitioner corporation kept its books and records on the cash basis and its returns were filed on the cash basis. Its method of recording the collection of principal and interest in its small loan business was to apply the first money collected to principal until the entire amount of principal was collected and then apply further collections to interest. This was the same method as was used by the taxpayers in Ishmael S. O'Dell, 26 T.C. - (June 20, 1956). We approved the method in that case as one which correctly reflected the income of the taxpayer on the cash basis and held that the Commissioner was without authority to use the percentage basis. In the instant case, the evidence convinces us that the corporation carefully kept records of all interest collected with the exception of the so-called pulled interest to be hereinafter discussed. We are also convinced that petitioner correctly reported on its returns for each of the taxable years the amounts1956 Tax Ct. Memo LEXIS 108">122 of its interest collected with the exception of the so-called pulled interest. We hold that the percentage method used by the Commissioner in his determination of the deficiencies was error. Issue 1 is decided in petitioner's favor. Issue 2 Did O. K. Loan Company erroneously fail to report deferred interest income in the amount of $3,478.80 on receivables purchased from Marvin T. Blackwell on April 25, 1947, as part of the assets of the proprietorship loan business? Respondent in his brief states as follows: "This item of interest was included by respondent in the taxable income of O. K. Loan Company for the fiscal year ended April 30, 1948 and it was also included in a like amount in the taxable income of Marvin T. Blackwell for the calendar year 1947. Respondent concedes this issue with respect to O. K. Loan Company. Marvin T. Blackwell does not contest this issue." In view of the foregoing concession by respondent in his brief, this issue as to $3,478.80 deferred interest, which was raised by the pleadings, is decided in favor of petitioner corporation. There is no need to make Findings of Fact or write an Opinion with reference to this issue. Issue 3 Disallowed1956 Tax Ct. Memo LEXIS 108">123 salary expense to corporation in amount of $1,407.06 for fiscal year ended April 30, 1948. The Commissioner, in his determination of the deficiency against the corporation for the fiscal year 1948, added to the net income reported by the corporation on its return, $1,407.06. This adjustment is explained in the deficiency notices as follows: (c) It is held that the payment during taxable years of the personal obligation of Mr. M. T. Blackwell, your president, for Federal income tax liability in the amount of $1,407.06, which you had assumed as part of the purchase price, of the predecessor proprietorship business, is not deductible as salary expense, and it is further held that this amount was erroneously charged to the expense account. Accordingly, the amount of $1,407.06 is restored to income." Petitioner by an appropriate assignment of error contests the correctness of this adjustment. Findings of Fact On January 9, 1948, petitioner corporation paid to M. T. Blackwell a check for $1,407.06. This check is in evidence as part of the record in this case. It was paid to Blackwell to cover his entire salary from the time petitioner was incorporated in April 1947, and took over1956 Tax Ct. Memo LEXIS 108">124 the small loan business theretofore operated by Blackwell as a sole proprietorship, to the end of the fiscal year 1948. It was a bona fide salary paid Blackwell for his services rendered to the corporation and was not, as the Commissioner has determined, a voluntary assumption and payment by the corporation of the income tax obligations of Blackwell. Opinion This issue is one of fact. The Commissioner does not deny that the $1,407.06 is deductible by the corporation as a business expense, if it was in fact paid to Blackwell as salary for his services rendered the corporation. Respondent, however, denies that it was salary paid Blackwell. The evidence convinces us that it was salary paid Blackwell for services rendered. The evidence is uncontradicted that from the date the corporation took over the small loan business from Blackwell in April 1947, Blackwell was manager of the business and its directing head. No other salary was paid him for the fiscal year ended April 30, 1948, except this $1,407.06 which was paid him shortly after the first of the year. This check is in evidence as one of the exhibits in the case. It was endorsed and cashed by Blackwell. Although Blackwell does1956 Tax Ct. Memo LEXIS 108">125 not return this $1,407.06 as salary on his income tax return for 1948, he now concedes that he should have done so and that in this proceeding the $1,407.06 should be added to his income for 1948. Issue 3 is decided in petitioner's favor. Issue 4 Disallowed automobile expenses of the corporation. In the deficiency notice the Commissioner disallowed for the fiscal year 1948, automobile expenses in the amount of $435.05. He explained this adjustment as follows: "(b) It is held that automobile expense claimed at your Troy, Alabama, office was overstated in the amount of $435.05, inasmuch as you erroneously charged to the expense account the personal obligations of Mr. M. T. Blackwell, your president, which you had assumed as part of the purchase price of his single proprietorship, when payment of the obligations in the amount of $435.05 was made during the taxable year." The Commissioner, in his determination of the deficiency for the fiscal year 1950, disallowed as a deduction automobile expense, $1,456.56. This adjustment was explained in the deficiency notice as follows: "(b) It is held that automobile expense claimed on your return for the taxable year was overstated1956 Tax Ct. Memo LEXIS 108">126 in the amount of $1,456.56, as shown as follows: "ClaimedIncreaseoninReturnCorrectedIncome"Troy, Alabamaoffice$2,720.65$1,272.01$1,448.64Ozark, Alabamaoffice738.50730.587.92Totals$3,459.15$2,002.59$1,456.56"(1) It is held that you did not consider a reimbursement by insurance for an automobile accident in the amount of $669.54 received on January 14, 1950. This amount is restored to income. "It is held that the expenses claimed for the last five (5) months of taxable year included the personal expense of your president, Mr. M. T. Blackwell, and that fifty per cent (50%) of the expense was for his personal benefit. The total expense for this five (5) month period was $2,227.74 less $669.54 insurance proceeds, or a net of $1,558.20. Accordingly, 50% thereof, or $779.10 is disallowed. "(2) It is held that as a result of a transposition in carrying expenses forward from work papers to the return, automobile expenses at your Ozark, Alabama office were overstated by $7.92." The Commissioner, in his determination of the deficiency for the fiscal year 1951, disallowed deduction of automobile expenses amounting1956 Tax Ct. Memo LEXIS 108">127 to $2,133.64. This adjustment was explained in the deficiency notice as follows: "(c) It is held that auto expense claimed on your return for the taxable year was overstated in the amount of $2,133.64." The Commissioner, in his determination of the deficiency for the fiscal year 1952, disallowed deduction of automobile expenses amounting to $2,384.03. This adjustment is explained in the deficiency notice as follows: "(c) It is determined that you are entitled to a deduction for automobile expense only in the amount of $2,114.13, and inasmuch as you deducted $4,498.16, the difference of $2,384.03, as shown below is restored to income: "ClaimedIncreaseoninReturnCorrectedIncome"Troy, Alabamaoffice$2,167.47$1,018.71$1,148.76Ozark, Alabamaoffice802.34377.10425.24Opp, Alabamaoffice909.84427.62482.22Luverne, Alabamaoffice618.51290.70327.81Totals$4,498.16$2,114.13$2,384.03"(1) Fifty-three per cent (53%) of the automobile expense claimed is held to be personal expense of your president, Mr. M. T. Blackwell." Petitioner by appropriate assignments of error contests the correctness of the foregoing1956 Tax Ct. Memo LEXIS 108">128 adjustments made by the Commissioner for the fiscal years 1948, 1950, 1951, and 1952. Findings of Fact The corporation had offices in several cities and collectors who operated their own cars. The gas, oil, and repairs were paid for by the corporation. Petitioner's trucks were used to haul in repossessions of security in petitioner's small loan business and for other corporate purposes. Blackwell did use the automobiles owned by the corporation to some extent for his own personal use. A reasonable allocation of automobile expenditures which should be allocable to the personal use of Blackwell is as follows: Fiscal year 1950$ 320.86Fiscal year 1951724.95Fiscal year 1952710.62Total automobile expense chargeableto M. T. Blackwell's personal use(Calendar years 1950, 1951, and 1952)$1,756.43 The balance of the automobile expenses disallowed by the Commissioner for the taxable years 1950, 1951, and 1952, are deductible expenses by the corporation and not income to Blackwell. Opinion Manifestly, the issue here is one of fact. The Commissioner concedes that in each of the taxable years petitioner had deductible automobile expenses and he has allowed1956 Tax Ct. Memo LEXIS 108">129 a portion of such expenses in his determination of the deficiencies, but he has disallowed other portions of the automobile expenses claimed on the ground that the expenses disallowed were incurred for the personal use of Blackwell, petitioner's president. In some years the Commissioner has disallowed 50 per cent of petitioner's claimed automobile expenses on the ground they were incurred for personal use of Blackwell. In another year he disallowed 53 per cent of claimed automobile expenses on the ground of personal use by Blackwell. We are convinced from the evidence that the disallowance of the Commissioner for the fiscal years 1950, 1951, and 1952 is erroneous in part. We have made findings as to the amounts of automobile expenses which should be attributed to the personal use of Blackwell in his taxable years 1950, 1951, and 1952. These amounts are conceded by petitioner corporation and by Blackwell. The amount of the Commissioner's disallowance in each of these taxable years is sustained to the extent of the amounts we have found attributable to Blackwell's personal use. His disallowance in the three fiscal years 1950, 1951, and 1952, is reversed except to the extent just named. 1956 Tax Ct. Memo LEXIS 108">130 So far as we have been able to ascertain, no issue is raised by the pleadings as to automobile expenses for the fiscal year 1949. As to the fiscal year 1948, as pointed out under this Issue 4, the Commissioner disallowed $435.05 of the automobile expenses claimed by petitioner on its return and petitioner assigned this action of the Commissioner as error. We find no evidence in the record which sustains this assignment of error and apparently petitioner no longer claims it. Therefore, the determination of the Commissioner that $435.05 of the automobile expenses claimed by petitioner on its return for 1948 should be disallowed, is sustained. Issue 5. Disallowance by the Commissioner of portions of the deductions by petitioner of depreciation for fiscal years 1948 through 1952. In the Commissioner's determination of the deficiency for the fiscal year 1948, the Commissioner disallowed depreciation claimed by petitioner on its return of $446.87. This adjustment is explained in the deficiency notice, as follows: "(d) It is determined that you are entitled to a deduction for depreciation at the Troy, Alabama office only in amount of $106.82, and inasmuch as you deducted $553.69, 1956 Tax Ct. Memo LEXIS 108">131 the difference of $446.87 is restored to income." In his determination of the deficiency for the fiscal year 1949, the Commissioner disallowed "Excessive depreciation $11.61." In his determination of the deficiency for the fiscal year 1950, the Commissioner disallowed "Excessive depreciation $95.53." In his determination of the deficiency for the fiscal year 1951, the Commissioner disallowed "Excessive depreciation $315.08." In his determination of the deficiency for the fiscal year 1952, the Commissioner disallowed "Excessive depreciation $944.47." This adjustment is explained in the deficiency notice, as follows: "(f) It is determined that you are entitled to a deduction for depreciation only in the amount of $1,531.23, and inasmuch as you deducted $2,475.70, the difference of $944.47, as shown below, is restored to income. "ClaimedIncreaseon ReturnCorrectedin Income"Troy, Alabama office$1,608.44$1,330.04$278.40Ozark, Alabama office761.7097.39664.31Opp, Alabama office102.22100.461.76Luverne, Alabama office3.343.34Totals$2,475.70$1,531.23$944.47"The petitioner assigned error as to each of the foregoing1956 Tax Ct. Memo LEXIS 108">132 adjustments which respondent made to the depreciation claimed by petitioner on its returns for the respective taxable years. Findings of Fact There is no evidence which we regard as sufficient to overcome the presumptive correctness of the determination of the Commissioner in disallowing certain depreciation claimed by petitioner on its returns for the fiscal years 1948, 1949, and 1950. The Commissioner's disallowance of depreciation for the years 1951 and 1952 was based on his determination that a Ford truck, a Studebaker truck and a Pontiac automobile were not the property of petitioner corporation, but were owned by its president, Blackwell. This determination of the Commissioner was in error. These motor vehicles were owned by petitioner corporation and it was entitled to take depreciation thereon in 1951 and 1952. Opinion The parties are not in dispute concerning the law which governs the allowance to a taxpayer for depreciation. The controversy is one of fact. The evidence in the record concerning the depreciation items which are in dispute is far from satisfactory. We shall have to do the best we can in dealing with a very unsatisfactory record as affecting proper depreciation1956 Tax Ct. Memo LEXIS 108">133 allowances to petitioner corporation. Of course, it requires no citation of authorities to support the proposition that the Commissioner's disallowance in each of the taxable years of part of the depreciation claimed is presumed to be correct. We do not think the evidence in the record justifies a disapproval of the Commissioner's disallowances of depreciation for the fiscal years 1948, 1949, and 1950. Therefore, petitioner's assignments of error contesting the Commissioner's disallowances of $446.87, $11.61, and $95.53, for the above respective taxable years, are overruled. The Commissioner's determination for those years is sustained. The situation is somewhat different as to the taxable years 1951 and 1952. In those two taxable years the Commissioner's disallowance is based upon his determination that a 1951 Pontiac, a 1939 Ford truck, and a 1948 Studebaker truck were not owned by petitioner corporation but that these automobiles were the personal property of Blackwell and, therefore, no allowances for depreciation should be made to petitioner on these three autos. There is no other difference, so far as we are able to ascertain, between the parties as to depreciation for these1956 Tax Ct. Memo LEXIS 108">134 two taxable years, 1951 and 1952. The weight of the evidence is to the effect that the Ford truck, the Studebaker truck, and the 1951 Pontiac were purchased and paid for by petitioner corporation and were owned by it. All three cars were used in petitioner's business. It is true that the evidence shows that the 1951 Pontiac was used to some extent by Blackwell for his personal use. The trucks were not so used. Inasmuch as all three cars were owned by the petitioner corporation in the taxable years 1951 and 1952, we think it is entitled to take depreciation thereon. There is no controversy as to the cost to be used and the rate of depreciation to be used. As to the Commissioner's disallowances of depreciation for the taxable years 1951 and 1952, he is reversed. Issue 6. Insurance on Pontiac Automobiles. The Commissioner, in his determination of the deficiency for the year 1951, disallowed as a deduction insurance in the amount of $235.64. He explained this adjustment in his deficiency notice, as follows: "(e) It is held that you are entitled to a deduction for insurance paid at your Troy, Alabama, office for the taxable year of $367.50, and inasmuch as you deducted the1956 Tax Ct. Memo LEXIS 108">135 amount of $603.14, the difference of $235.64 is restored to income." The Commissioner, in his determination of the deficiency for the fiscal year 1952, disallowed $204.45 of the claimed insurance deduction on the taxpayer's return. The Commissioner explains this adjustment in his deficiency notice, as follows: "(e) It is held that the payments made in January 1952 by your Troy, Alabama office for insurance premium in the amount of $132.00 on the Pontiac automobile driven by Mrs. Clarice Blackwell, wife of your president, and for insurance premium in the amount of $72.45 on a personal residence, are personal expenses of Mr. M. T. Blackwell, your president. Accordingly, the amount of $204.45 is restored to income." Petitioner, by appropriate assignments of error, contests the correctness of the Commissioner's disallowance of these insurance premiums for each of the fiscal years 1951 and 1952. Findings of Fact Petitioner corporation incurred and paid insurance premiums on Pontiac automobiles of $134 in January 1951 and $132 in January 1952. These Pontiac automobiles were used to some extent by Marvin T. Blackwell. Petitioner now concedes in its brief that 25 per cent of the1956 Tax Ct. Memo LEXIS 108">136 respective amounts incurred as insurance on these automobiles in each of the taxable years should be disallowed as a deduction to petitioner and contends that the balance of these insurance premiums on the Pontiac automobiles should be allowed as deductions. Opinion Respondent does not deny that petitioner is entitled in each of the taxable years to a deduction for insurance premiums paid to insure the corporation's property. He has, however, disallowed $235.64 for the year 1951 and $204.45 for the year 1952 as not being properly substantiated. Of the $235.64 disallowed for 1951, we think petitioner has properly substantiated an insurance premium of $134 for insurance on a Pontiac automobile. Petitioner concedes, however, that this should be reduced 25 per cent because of the personal use made of the automobile by Blackwell. Of the $204.45 disallowed for 1952, we think petitioner has properly substantiated $132 as an insurance premium on a Pontiac automobile. Petitioner concedes, however, that this should be reduced 25 per cent because of the personal use made of the automobile by Blackwell. The Commissioner's disallowance of insurance deductions for the respective taxable1956 Tax Ct. Memo LEXIS 108">137 years is reversed only as to the two insurance premiums on the Pontiac automobile. Petitioner corporation should be allowed deductions for the amount of these insurance premiums except as to the amounts which petitioner corporation and Blackwell concede should be attributed to Blackwell's personal use of the Pontiac. In all other respects the Commissioner's disallowance of insurance premuims in these two respective taxable years is sustained. Issue 7. Amount deductible for rent of the Luverne office for fiscal years 1951 and 1952. The Commissioner, in his determination of the deficiency for the fiscal year 1951, denied petitioner a deduction for rent, $100. This deduction is explained in the deficiency notice, as follows: "(h) It is held that you are entitled to a deduction for rent paid at your Luverne, Alabama, office for the taxable year of $56.22, and inasmuch as you deducted the amount of $156.22, the difference of $100.00 is restored to income." The Commissioner, in his determination of the deficiency for 1952, has disallowed $240 as rent deduction. This adjustment is explained in the deficiency notice, as follows: "(b) It is held that $30.00 each month during taxable1956 Tax Ct. Memo LEXIS 108">138 year was withdrawn at your Luverne, Alabama office and charged to rental expense, whereas the rent was only $10.00 per month, and the difference of $20.00 per month was retained by Mr. M. T. Blackwell, your president, for his personal use. Accordingly, $240.00 of the expense claimed is disallowed inasmuch as this does not represent an ordinary and necessary business expense." We find no assignment of error in the petition as to respondent's disallowance of $100 rent deduction for 1951. Petitioner did assign error as to respondent's disallowance of rent deduction of $240 for the year 1952. Findings of Fact Petitioner corporation rented quarters for its small loan business at Luverne, Alabama, for 17 months in the fiscal years 1951 and 1952. It incurred and paid $10 per month for the premises which it rented. It falsely claimed a deduction of $30 a month on its income tax returns in the years 1951 and 1952, as rent paid for its Luverne office. The excess of $20 per month was paid over to petitioner's president, Blackwell. Opinion Petitioner concedes in its brief that it paid only $10 per month rent for its Luverne office and that it falsely sought to deduct $30 a month as rent1956 Tax Ct. Memo LEXIS 108">139 for these premises on its income tax returns for the respective taxable years. The petitioner contends in its brief, however, that the Commissioner's rent adjustments should not be sustained for the following reason: "The respondent determined that rent at Luverne was charged on the books at $30.00 per month when actually the rent was $10.00 a month making an overstatement of rent of $20.00 per month or a total of $340.00. "The evidence shows this to be true but it is without dispute that the $20.00 per month or the total of $340.00 was deposited with the 'pulled interest' fund to Blackwell's credit in Blackwell's account and was already included in the pulled interest figure. Therefore, this is a duplication which was in error and should be eliminated." We have no stipulation in the record that this false $20 per month was included in the pulled interest items which will be discussed later in this report. Mere statements in the brief are not proof of the facts stated therein. If petitioner wanted to prove and could have proved what it states with reference to this rent item, it should have done so at the hearing. It did not do so Respondent's disallowance of these rent items1956 Tax Ct. Memo LEXIS 108">140 in 1951 and 1952 is sustained. Issue 8 Disallowance of business expenses of petitioner corporation for fiscal years 1948 through 1951 - total $1,090.33. The Commissioner in his determination of the deficiencies for the fiscal years 1948 through 1951 disallowed a total of $1,090.33 claimed by petitioner as ordinary and necessary business expenses on its returns. This total of $1,090.33 is made up of the following: Amounts expended with H. Ligger,restaurant for 1948, 1949, and 1950,in entertainment of employees andbusiness associates$ 449.14Amounts expended with Jerry's Grill,years 1948 and 1949, in entertainmentof employees and business associates54.99Florist expenses, years 1948 and 194972.92Christmas expense, 1949 - M. T. Black-well300.00Lunch tickets - M. T. Blackwell3.55Office repairs200.73Trip to Birmingham - M. T. Blackwell9.00Total$1,090.33Petitioner, by appropriate assignments of error, contests the Commissioner's action in disallowing these business expenses. Findings of Fact The $449.14 which was paid by petitioner in the years 1948, 1949, and 1950 to H. Ligger restaurant represented expenses incurred1956 Tax Ct. Memo LEXIS 108">141 by petitioner in the entertainment of employees and customers of petitioner. The amounts paid to Jerry's Grill during the years 1948 and 1949 amounting to $54.99 were for the same purpose as described above. The amount of $72.92 paid to florists in 1949 and 1950 consisted of $25 worth of flowers used at a banquet given to personnel of petitioner on August 31, 1949, at Lake Haven. The other amounts were paid to florists for flowers sent to employees while they were in hospitals or to the funerals of near relatives of some of petitioner's employees. Bills were introduced in evidence which substantiate the amounts claimed as deductions. The amount of $300 paid to M. T. Blackwell January 23, 1949, was paid to him to reimburse him for Christmas presents which he had given to petitioner's employees, Christmas 1948. These Christmas gifts consisted mostly of cash gifts given to the employees as Christmas gifts from petitioner. The $200.73 expended for office repairs during 1949 and 1950 was actually expended for needed repairs and bills were introduced in evidence which substantiated the amount of $200.73 claimed in the respective taxable years. Opinion The provision of the Internal1956 Tax Ct. Memo LEXIS 108">142 Revenue Code of 1939 which is applicable to this issue is section 23, which reads, in part, as follows: "SEC. 23. DEDUCTIONS FROM GROSS INCOME. "In computing net income there shall be allowed as deductions: "(a) Expenses. - "(1) Trade or Business Expenses. - "(A) In general. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * " Respondent states this issue in his brief, as follows: "Did respondent properly determine that certain deductions claimed by the O. K. Loan Company for miscellaneous expenses for fiscal years ended April 30, 1948 through April 30, 1951 were paid for the benefit of its major stockholder, Marvin T. Blackwell, and that such expenses are, therefore, nondeductible by the corporation for any of the said years?" The evidence establishes to our satisfaction that with the exception of some small items, which we shall presently mention, 1956 Tax Ct. Memo LEXIS 108">143 the expenditures totaling $1,090.33 were not paid for the benefit of petitioner's principal stockholder, Blackwell. For example, the item of office repairs totaling $200.73 was clearly not made for Blackwell's benefit. They were ordinary repairs incurred in petitioner's business and the receipted bills representing such payments are part of the record in the case. Also the $300 paid for Christmas gifts for Christmas 1948 was not for Blackwell's benefit. These presents were for the most part comparatively small cash gifts which were made to petitioner's employees in recognition of their services. True, they were first paid out of Blackwell's private funds but he was reimbursed for the amount thus expended, January 23, 1949. And so we might go on discussing the other items which make up the total of $1,090.33. Testimony was given about them at the hearing by petitioner's witness, Orville D. Cantwell, and by Dorothy T. Van Cleve, a certified public accountant who prepared Exhibit 5 which was introduced in evidence and which exhibit deals primarily with the matters involved in the petitioner corporation's tax liabilities for the fiscal years 1949 through 1952. There are two items, however, 1956 Tax Ct. Memo LEXIS 108">144 included in the $1,090.33 total concerning which we do not think petitioner has met its burden of proof. One of these items is $3.55 which covers lunches for M. T. Blackwell June 20, 1949 and June 22, 1949. There is no evidence in the record so far as we can see which justifies a deduction for these lunches by petitioner as its ordinary and necessary business expense. The second of these items is "Trip to Birmingham, M. T. Blackwell, 6-8-51 $9.00." We do not consider there is sufficient evidence in the record to justify us in allowing this item as a deductible business expense to petitioner. With the exceptions of the $3.55 and $9, just discussed, petitioner is sustained as to Issue 8. Issue 9 Pulled Interest. This issue involves funds which the internal revenue agent referred to in his report as pulled interest. The Commissioner in his determination of the deficiencies for each of the taxable years has added to the income reported by petitioner in its returns the following amounts: Fiscal yearAmount1948$ 5,830.0019499,750.00195013,723.00195116,670.16195214,026.73The petitioner by appropriate assignments of error contests the correctness1956 Tax Ct. Memo LEXIS 108">145 of the foregoing adjustments. Findings of Fact The evidence at the hearing was without dispute that the amounts above stated represented cash taken from the corporation's funds and deposited in Blackwell's personal bank accounts and concealed on the books by false entries. These amounts were the totals of small amounts of $2.50, $5, $7.50, or $10 taken in cash from the corporation's cash drawers at the same time the loans were made. For example, a borrower would sign a note for $99, payable in three installments of $33 each. He would receive $75 in cash. The books instead of showing that $75 cash had been loaned to the borrower would show that amount as $80. As soon as the transaction was completed, $5 would be taken from the corporation's cash drawer, separated from the rest of its funds and put with other money taken out of the cash drawer and accumulated until it was deposited in Blackwell's bank account. At that point the result was that the corporation had made a loan of $75 to the borrower, who had signed a $99 note and those acting for the corporation had paid over to $5Blackwell, which was concealed by a false book entry. As the borrower paid back the loan, the first two1956 Tax Ct. Memo LEXIS 108">146 $33 installments, or $66, would be credited to principal, and the final $33 installment would be credited, $14 to principal, which with the $66 previously credited made a total of $80 credited to principal, and the $19 balance of the installment was credited to interest. The scheme of erroneously keeping the records of O. K. Loan Company by making false entries reducing interest and increasing loan principal was the idea of Marvin T. Blackwell, president of petitioner, who was in complete charge of its business affairs and this fraudulent scheme was continued during each of the taxable years involved in these proceedings. Marvin T. Blackwell and O. D. Cantwell instructed the employees in the method of pulling interest. Either Blackwell or Cantwell made regularly weekly inspection of each of the loan offices and they received daily progress reports designated daily balance sheet showing, among other things, the number and amount of loans made, and the daily cash position of each office. Cantwell assisted Blackwell in supervising operations of the four loan offices. Instructions given to employees in pulling interest on loans by Cantwell was at the direction of Blackwell. The records1956 Tax Ct. Memo LEXIS 108">147 of loans most frequently falsified were those of loans made for 90 days and certain loans that were renewed on payment of interest and sometimes referred to as loans "balanced out." The sums pulled from interest charged on loans as explained in the above paragraphs were withdrawn from the cash of the business and accumulated during the month until about the first of the following month when the total accumulated interest pulled was delivered to Blackwell or his agent, Cantwell, or deposited by the loan office manager to one of Blackwell's two personal bank accounts. In order that they might have a record of all the interest pulled, Blackwell and Cantwell instructed the employees of each office to enter the separate sums of pulled interest in small notebooks generally referred to as pull books. The pull books were kept in the back of the cash registers in the four offices. The small notebooks in which interest pulled on loans was recorded were not kept on corporate records and the sums recorded therein were not included or reported in any of the corporation's income tax returns for any of the taxable years involved. Cantwell not only instructed employees of O. K. Loan Company1956 Tax Ct. Memo LEXIS 108">148 how to pull interest on loans, he further made no objection to the scheme of false entries and assisted in delivering the pulled interest to Blackwell. Blackwell instructed the managers of the loan offices to stop pulling interest on loans on the date special agent Bishop N. Barron was called in to assist revenue agent Thomas F. Duncan in making the investigation of the corporation and the individual tax returns of the petitioners herein. The petitioner agrees that interest on loans in the total sum of $59,999.98 for the fiscal years April 30, 1948 through April 30, 1952, consisting of the several amounts we have already enumerated, was withdrawn from O. K. Loan Company and delivered to Blackwell, or at his direction to Cantwell for Blackwell by the managers of the general loan offices, or deposited by them to one of Blackwell's personal bank accounts. Opinion Petitioner in its brief concedes that the so-called pulled interest was income to petitioner corporation and should have been reported in its income tax returns for the respective taxable years. However, it contends that petitioner should have claimed as deductible losses on its returns the amounts of this so-called pulled1956 Tax Ct. Memo LEXIS 108">149 interest. The petitioner now claims such losses and contends that they should be allowed as deductions under section 23(f), I.R.C. of 1939, which provides a deduction from gross income "In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise." Petitioner relies principally on Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404, and Dix [Dix, Inc., J.J. et al.] v. Commissioner, (C.A. 2) 223 Fed. (2d) 436. We have recently had the responsibility of considering these two cases in connection with an issue involving much the same principle as we have here in the instant case and we decided that 327 U.S. 404">Commissioner v. Wilcox, supra, and Dix v. Commissioner, supra, were not controlling. See Estate of Helene Simmons, 26 T.C. - (filed May 31, 1956). We do not think it is necessary here to discuss at length what we said in Estate of Helene Simmons, supra, concerning the same sort of issue as we have here. We would find difficulty in distinguishing the instant case from Estate of Helene Simmons in so far as the issue of pulled interest is concerned. It is true that the corporation from which the1956 Tax Ct. Memo LEXIS 108">150 funds had been taken was not before us in the Estate of Helene Simmons case and we had no occasion to pass upon the tax liability of the corporation in that case as we have here. We did hold, however, that the funds there taken from the corporation were in the nature of dividends to its principal stockholder and must be taxed as such and not treated as embezzlement losses to the corporation. That is what we are holding here. Blackwell was in full charge of the corporation's affairs. He was one of its directors. Cantwell was also a director and Blackwell's chief assistant in managing the loan offices. The so-called pulled interest was paid over to Blackwell with his full knowledge and consent, with Cantwell's full knowledge and consent, and with the knowledge of the branch office managers. It may be the branch office managers did not approve it but they knew about it and participated in it. We fail to see how, under these circumstances, petitioner can deduct the losses which it claims as embezzlement losses. As we view the evidence the corporation was a full participant in the pulled interest transactions. We sustain the Commissioner in his action in adding these amounts to the1956 Tax Ct. Memo LEXIS 108">151 income reported by petitioner for the respective taxable years. Petitioner's contention that these amounts were deductible losses is denied. See Kann v. Commissioner, (C.A. 3) 210 Fed. (2d) 247, affirming 18 T.C. 1032">18 T.C. 1032; United Mercantile Agencies, Inc., 23 T.C. 1105">23 T.C. 1105. Issue 10 Fraud Penalties. In each of the fiscal years 1948 through 1952, the Commissioner has determined fraud penalties. In Docket No. 59627, involving the fiscal years 1948, 1950, and 1952, the Commissioner stated in his deficiency notice, as follows: "II. Inasmuch as the information on file in this office shows that the deficiencies for the taxable years ended April 30, 1948, April 30, 1950, and April 30, 1952 are due to fraud with intent to evade the tax, the fifty percent penalty has been added to each such deficiency in accordance with the provisions of Section 293(b) of the Internal Revenue Code of 1939." In Docket No. 53880, involving deficiencies in income tax determined against petitioner for the fiscal years 1949 and 1951, the Commissioner made a similar statement to the above, involving 50 per cent fraud penalties imposed against petitioner for those years. The1956 Tax Ct. Memo LEXIS 108">152 petitioner, by appropriate assignments of error, contests the imposition of fraud penalties for each of the taxable years. Findings of Fact In addition to the Findings of Fact under Issue 9 of these proceedings which are incorporated herein by reference, the following findings are made: On April 1, 1955, Marvin T. Blackwell and O. D. Cantwell who were the president and secretary-treasurer, respectively, of the O. K. Loan Company of Troy, Inc., entered a plea of guilty in the United States District Court for the Northern District of Alabama to an indictment which charged that they did "wilfully and knowingly attempt to evade and defeat a large part of the taxes due and owing by the corporation to the United States of America." The indictment sets out the years involved as being the fiscal years 1949, 1950, 1951, and 1952. The judgment of the court was that each of the defendants, Blackwell and Cantwell, be "fined Two Thousand Five Hundred ($2,500.00) Dollars, to stand committed as of April 8, 1955, and is hereby placed on probation for the period of Three (3) Years, subject to the general terms and conditions of probation of record in this court, upon the special condition1956 Tax Ct. Memo LEXIS 108">153 that defendant pay the fine imposed herein and court costs on or before April 8, 1955, and that he pay all taxes and penalties due by him when determined by the proper authority; and that said defendant be imprisoned after April 8, 1955, until payment of said fine, * * " Part of the deficiencies determined by the Commissioner against the petitioner corporation for each of its fiscal years 1948 through 1952 was due to fraud with intent to evade tax. Opinion It, of course, requires no citation of authorities to support the proposition that the burden of proof is on the Commissioner to establish by clear and convincing evidence that part of the deficiencies is due to fraud with intent to evade tax. We think that the Commissioner has met his burden of proof as to each of the taxable years we have before us. See M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518. In the Gano case we said, among other things, as follows: "A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose." In our Findings of Fact on this fraud issue we have1956 Tax Ct. Memo LEXIS 108">154 made a finding that "Part of the deficiencies determined by the Commissioner against the petitioner corporation for each of its fiscal years 1948 through 1952 was due to fraud with intent to evade tax." We think that finding is amply supported by the evidence and is dispositive of the fraud issue. The imposition by the Commissioner of fraud penalties for each of the taxable years is sustained. Issues as to Marvin T. Blackwell, Docket Nos. 52701, 59625 Marvin T. Blackwell and Clarice Blackwell, Docket Nos. 52702, 59626 General Findings of Fact Marvin T. Blackwell and his wife, Clarice Blackwell, are residents of Troy, Alabama. The income tax returns for the taxable years here involved were filed with the collector of internal revenue for the district of Alabama. For the calendar years 1947, 1948, and 1949 Blackwell filed individual returns; for the calendar years 1950 and 1951 Blackwell and his wife filed joint returns. Marvin T. Blackwell did not keep a regular set of books for the calendar years 1947 through 1949, and Marvin and Clarice did not keep a regular set of books for the calendar years 1950 and 1951. In the absence of adequate books or records, it was necessary1956 Tax Ct. Memo LEXIS 108">155 for the Commissioner's internal revenue agents to use the bank deposit method as adjusted for non-income items and also other available information for the purpose of computing taxable income of Marvin for the calendar years 1947 through 1949, and for Marvin and Clarice for the calendar years 1950 and 1951. The Commissioner adopted the agents' findings. Issue A Taxability of $1,407.06 salary. Did Marvin T. Blackwell receive as salary $1,407.06 from O. K. Loan Company for his services as president of the corporation for the fiscal year ended April 30, 1948, and is petitioner taxable on that amount? The Commissioner, in his determination of the deficiency against Blackwell for the fiscal year 1948, determined that this $1,407.06 was received by Blackwell as part of the purchase price of the assets which O. K. Loan Company acquired from him April 25, 1947. Respondent computed a gain to Blackwell from the sale of these assets of $205.51 and treated it as a capital gain. Findings of Fact On January 9, 1948, the O. K. Loan Company paid a check of $1,407.06 to Blackwell. This check was to cover payment of salary to Blackwell covering his services as president of petitioner during1956 Tax Ct. Memo LEXIS 108">156 the fiscal year ended April 30, 1948. Opinion This issue involves the same transaction covered by Issue 3 in the corporation's case. In deciding that issue we decided that the corporation was entitled to deduct the $1,407.06 as a business expense and that the Commissioner erred in disallowing the deduction. Petitioner Blackwell concedes that this was salary to him and taxable to him. It should be included as part of his taxable income for the calendar year 1948, if he has not already included it in his return for that taxable year, or if the Commissioner has not included it in his determination of the deficiency. Issue B Taxability of $205.51. Did Blackwell realize income of $205.51 taxable to him during the calendar year 1947 from the sale of the assets of his small loan business to O. K. Loan Company? The Commissioner has taxed him with capital gain on the sale. Petitioner assigns error as to this determination of the Commissioner. Findings of Fact Blackwell sold the assets of his small loan business to O. K. Loan Company April 25, 1947. The Commissioner included as part of the sale price which Blackwell received for the assets, the check of $1,407.06. That was error1956 Tax Ct. Memo LEXIS 108">157 on the part of the Commissioner for, as we have just held under Issue A above, this $1,407.06 was received by Blackwell as salary from the corporation and is taxable to him as such. The same payment has been allowed as a deduction to the corporation under Issue 3. Opinion The Commissioner is reversed in his determination that Blackwell had a gain of $205.51 in the sale of these assets to O. K. Loan Company. Manifestly, there will be a loss to Blackwell on the transaction when the check for $1,407.06 is eliminated, as it should be, from the purchase price which Blackwell received in the transaction. Issue C $900 Transfer of funds. Did Blackwell realize taxable income in the sum of $900 which allegedly represented a transfer of funds from the Ozark office to the Opp office during the taxable year 1949, but which respondent has determined was appropriated by Blackwell to his own use? The Commissioner, in his determination of the deficiency in petitioner's income tax for the year 1949, determined that Blackwell received from the O. K. Loan Company a check dated April 11, 1949, for $900, which he used for his own personal use. The Commissioner added it to petitioner's income1956 Tax Ct. Memo LEXIS 108">158 for 1949. Petitioner, by appropriate assignment of error, contests this determination of the Commissioner. Findings of Fact On April 11, 1949, the O. K. Loan Company drew a check for $900, payable to cash and handed it to Blackwell for deposit to O. K. Loan Company of Troy, Inc., Opp branch. It was for use by the Opp branch. It was deposited on April 11, 1949, in the First National Bank of Opp, Alabama, to the credit of O. K. Loan Company of Troy, Inc., Opp, Alabama. It was not appropriated by Blackwell for his own personal use. Opinion It seems clear that the Commissioner erred in this $900 adjustment. A photostatic copy of the check is in evidence as is also the statement from the First National Bank of Opp, Opp, Alabama, which shows that this check was deposited to the credit of O. K. Loan Company of Troy, Inc., in this bank. There is nothing in the record to indicate to us that this $900 was used for anything else other than the corporation's business. On this issue the Commissioner is reversed. Issue D Taxability of $393.36. Did Blackwell realize taxable income during the calendar year 1948 as distribution of a corporate dividend, the sum of $393.36 representing1956 Tax Ct. Memo LEXIS 108">159 the residual value of an automobile sold by him to O. D. Cantwell? Findings of Fact The testimony in the record concerning this item is so indefinite and unsatisfactory that we are unable to make any Findings of Fact concerning it. Opinion It, of course, requires no citation of authorities to support the proposition that the determination of the Commissioner is presumed to be correct. Concerning this item of $393.36, there is no satisfactory explanation in the record regarding it. The Commissioner's determination is sustained. Issue E Taxability of $3,600. Did Blackwell realize taxable income during the calendar years 1949 and 1951, as distribution of corporate dividends amounting to $3,600 as a result of the purchase of a Pontiac automobile, a Ford truck, and a Studebaker truck by the corporation for his personal benefit. This issue has some relation to Issue 5 with reference to the allowable depreciation to the corporation on its automobiles. Petitioner Blackwell contends that the automobile and the two trucks were purchased by the corporation for its own use, that they did not belong to him and that their purchase price did not represent a dividend which was distributed1956 Tax Ct. Memo LEXIS 108">160 to him by the corporation. Findings of Fact The Commissioner in his determination has disallowed purchases of automobiles and trucks by the corporation in his computation of depreciation deduction to the corporation and has charged as dividends to Marvin T. Blackwell, as follows: 12- 1-491950 Ford Truck$ 350.0010-23-511948 Studebaker Truck550.002-21-511951 Pontiac2,700.00Total$3,600.00 These vehicles were purchased by the corporation for its own use in its business. They were the property of the corporation, and not of Blackwell. He did not receive a dividend of $3,600 by reason of the purchase of these vehicles by the corporation. They were not for his use and benefit. Opinion We think the evidence in the record is sufficient to overcome the presumptive correctness of the Commissioner's determination in adding these items to petitioner's taxable income. Some of our discussion in Issue 5 regarding depreciation deductions claimed by the corporation is applicable here and need not be repeated. This Issue E is decided in petitioner's favor. Respondent is reversed. Issue F Automobile Expenses. Did Blackwell receive income from O. 1956 Tax Ct. Memo LEXIS 108">161 K. Loan Company in the form of automobile expenses amounting to the sum of $4,350.21 which was disallowed as deductions to the corporation and which the Commissioner has determined represented taxable income to Blackwell. This issue is related somewhat to Issue 4 in the corporation's case. The Commissioner, in his determination of the deficiencies in petitioner's income tax for the years 1949, 1950, and 1951, has determined that petitioner was in receipt of taxable income because of automobile expenses incurred in his behalf by the corporation. Petitioner by an appropriate assignment of error contests this determination of the Commissioner. Findings of Fact Petitioner concedes that of the Troy automobile expense of $251.12 disallowed as a deduction to the corporation for 1949, 25 per cent, or $62.73, should be allocated to him and added to his income, that of the Troy automobile expense for 1950 of $2,736.41 disallowed by the Commissioner as a deduction to the corporation, $683.85 should be allocated to petitioner and added to his income for that year, and that of the Troy automobile expense for 1951 of $2,126.97 disallowed by the Commissioner as a deduction to the corporation, 1956 Tax Ct. Memo LEXIS 108">162 25 per cent thereof should be allocated to petitioner and added to his income for that year. Petitioner did use to some extent, for his personal use, the automobiles which were owned by the corporation. That use was not greater than 25 per cent of the time. The allocation of expenses which the petitioner concedes should be allocated to him and added to the income reported on his return is approved. Opinion This issue is largely one of fact. We think the determination of the Commissioner as to these automobile expenses which should be added to petitioner's income is excessive. We think the amounts which petitioner concedes should be allocated to him and added to the income reported by petitioner on his returns are reasonable and they are approved. To the extent of these amounts which the petitioner has conceded, respondent's determination is approved. The remainder of the adjustments made by the Commissioner to Blackwell's income in respect to these automobile expenses is reversed. Issue G Insurance on Pontiac Automobile. The Commissioner has added to the income reported by petitioner for the calendar year 1951, the amount of an insurance premium $134of, which was paid1956 Tax Ct. Memo LEXIS 108">163 by the corporation on a Pontiac automobile owned by the corporation. The petitioner by an appropriate assignment of error contests the correctness of this adjustment. Findings of Fact The corporation owned a Pontiac automobile in 1951 and insured it and paid an insurance premium of $134. This automobile was used to some extent by petitioner for his personal use. This use did not exceed 25 per cent of the time the automobile was insured. Petitioner concedes that inasmuch as he used the Pontiac automobile not to exceed 25 per cent of the time for his personal use that 25 per cent of the insurance premium paid by him or $33.50, should be added to the income reported on his return for 1951. Opinion The issue we have here is one of fact. We are convinced from the evidence that petitioner did not use the automobile for his personal use to a greater extent than 25 per cent of the time. We think his concession that 25 per cent of the insurance premium of $134 should be allocated to him and added to his income for 1951 is reasonable. The evidence at the hearing was that Clarice did not drive an automobile at all. We think the Commissioner's determination is in error and it is reversed, 1956 Tax Ct. Memo LEXIS 108">164 except to the extent of the $33.50 which the petitioner concedes. Issue H Excess Luverne Rent. The Commissioner disallowed to the corporation $100 for the fiscal year 1950 and $240 for the fiscal year 1951 as rent paid for its Luverne branch loan office. This issue as to the corporation is treated as Issue 7. The Commissioner added to petitioner's income this $340 and the petitioner assigns this action of the Commissioner as error. Findings of Fact The Findings of Fact which we made under Issue 7 of the corporation's case is incorporated herein by reference. Opinion This issue is one of fact. Petitioner concedes that the $340 involved in this issue was paid over to him, not as rent, but for his own personal use. He claims, however, that it was deposited to the extent of $240 along with the pulled interest which will be discussed under another issue later and was included in those amounts. We have no proof of this fact. If there was a duplication in the manner outlined in petitioner's brief, he should have proved it at the hearing. He did not do so. Mere statements in the brief are not evidence of the facts. Inasmuch as petitioner concedes that the $340 was paid over1956 Tax Ct. Memo LEXIS 108">165 to him for his personal use, the Commissioner's adjustment regarding this Luverne rent is sustained. Issue I Miscellaneous Disbursements by the Corporation Disallowed by the Commissioner as Business Expenses to the Corporation and Included as Income to Petitioners. Total amount, $1,090.33. In the determination of the deficiencies for petitioner's income taxes for the years 1948, 1949, 1950, and 1951, the Commissioner has added the following amounts to the income reported by petitioner on his returns: 1948$157.451949526.831950365.35195140.70 The total of the foregoing amounts is $1,090.33. Petitioner, by appropriate assignments of error contests the correctness of the action of the Commissioner in adding these amounts to his taxable income for the respective taxable years 1948, 1949, 1950, and 1951. Findings of Fact The amounts of the expenditures just described above are the same as are involved in Issue 8 of the corporation's case. The Findings of Fact already made herein under that Issue 8 are incorporated herein by this reference and are made the Findings of Fact under this Issue I. Opinion In our Opinion deciding Issue 8 of the corporation's1956 Tax Ct. Memo LEXIS 108">166 case, we held that all of the $1,090.33 expenditures there involved had been made for corporate purposes and were deductible by the corporation as business expenses, except $3.55 to cover lunches which the corporation paid for petitioner's benefit and $9 paid for a trip which Blackwell made to Birmingham and which was not shown to have been made for corporate business. We, in effect, make the same holding here and reverse the Commissioner's determination as to the entire amounts involved, except the $3.55 for lunches and $9 covering the trip to Birmingham. The Commissioner's action in adding these two latter items to petitioner's net income is sustained. Issue J Pulled Interest. This issue involves funds which the internal revenue agent referred to in his report as pulled interest. The Commissioner in his determination of the deficiencies in petitioner's income tax for each of the taxable years has added to the income reported by petitioner on his returns the following amounts: 1947$ 3,635.0019487,865.00194911,469.00195018,579.00195113,706.39 The petitioner by appropriate assignments of error contests the correctness of the action of the Commissioner1956 Tax Ct. Memo LEXIS 108">167 in adding the foregoing amounts to his taxable income. Findings of Fact Our Findings of Fact under Issue 9 of the corporation's case are incorporated by reference under this Issue J and are made a part hereof. It is unnecessary to repeat them. Opinion Our decision of Issue 9 in the corporation's case largely controls our decision on Issue J in petitioner's case and we deem it unnecessary to repeat what we said in our discussion of Issue 9 in the corporation's case. In the instant case petitioner concedes that he did receive the amounts of so-called pulled interest which the Commissioner has included in his taxable income for the calendar years 1947 through 1951, and that he did not report them on his returns. The only reason that he gives for not reporting these amounts as taxable income is that they were funds which he had embezzled from the corporation and that under the Supreme Court's decision in 327 U.S. 404">Commissioner v. Wilcox, supra, and the Second Circuit's decision in Dix v. Commissioner, supra, embezzled funds do not represent taxable income. For reasons which we set forth in our discussion under Issue 9 of the corporation's case we do not think1956 Tax Ct. Memo LEXIS 108">168 the Wilcox and Dix cases are controlling here. Cf. Estate of Helene Simmons, supra. We decide Issue J in favor of the Commissioner. Issue K Dependants. Is Marvin T. Blackwell entitled to dependency credits claimed for Mary and Della Blackwell for the calendar years 1947, 1948, and 1949, and are Marvin T. and Clarice Blackwell entitled to dependency credits for Mary and Della Blackwell for the calendar year 1950 and are they entitled to dependency credit for Mary Blackwell for the calendar year 1951? In his determination of the deficiency in petitioner's income tax for the year 1947, the Commissioner disallowed two exemption credits which petitioner had claimed on his return. The Commissioner explained this adjustment in his deficiency notice as follows: "(a) With reference to the two exemption credits not allowed, it is held that you have failed to establish the fact that you are entitled to the exemption credits for Mrs. Mary O. Blackwell, your stepmother, and Miss Della A. Blackwell, your aunt, for the taxable year ended December 31, 1947, Sections 25(b)(1)(D) and 25(b)(3) of the Internal Revenue Code of 1939." Similar adjustments were made by the Commissioner for1956 Tax Ct. Memo LEXIS 108">169 the other taxable years here involved, except 1951 where only one exemption is involved, and were explained in a similar manner by the Commissioner in his deficiency notices. The petitioner contests the correctness of these adjustments. Findings of Fact Mary Blackwell was petitioner's stepmother and during the taxable years she was more than 70 years of age. Della Blackwell was an aunt of petitioner and was more than 70 years of age during the taxable years here involved. Neither had income in excess of $500 during the taxable years here involved. Petitioner Marvin T. Blackwell furnished more than one-half the support of Mary Blackwell and Della Blackwell in each of the taxable years here involved, except 1951. Della Blackwell was not living in 1951, she died in 1950. Petitioner furnished more than one-half the support of Mary Blackwell in 1951. Opinion The applicable statute here involved is section 25 of the 1939 Code which reads, as follows: "SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME. * "(b) Credits for Both Normal Tax and Surtax. - "(1) Credits. - There shall be allowed for the purposes of both the normal tax and the surtax, the following credits1956 Tax Ct. Memo LEXIS 108">170 against net income: * * "(D) An exemption of $600 for each dependent whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $500, * * "(2) Determination of status. - For the purposes of this subsection - * * "(3) Definition of dependent. - As used in this chapter the term 'dependent' means any of the following persons over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer: * "(E) a stepfather or stepmother of the taxpayer, * "(G) a brother or sister of the father or mother of the taxpayer," The exemption under the statute applicable to the year 1947 was only $500. Respondent concedes that the two dependents for whom petitioner claimed credits were within the relationship status prescribed by the statute. Respondent contends, however, that petitioner has not proved that each of the dependents had income less than $500 per annum in each of the taxable years nor has he proved that he contributed more than one-half the support of each of the dependents during the taxable years. It is true that the evidence on this issue1956 Tax Ct. Memo LEXIS 108">171 is not as satisfactory as it should be. Della Blackwell was dead at the time of the hearing. Mary Blackwell was aged and infirm and was not present at the hearing. Petitioner Marvin T. Blackwell did not testify. He was present at the hearing and presented a certificate from his physician which reads: "This is to certify that Mr. M. T. Blackwell has been under my care for the past four years and since that time, I have treated him for coronary thrombosis for the past two years. He has been restricted on all physical activities as he still has symptoms with exercise and emotional stress. "Mr. Blackwell has been diagnosed as an uncontrolled diabetic in the last month for which hospitalization has been advised. "It is my opinion that Mr. Blackwell is not physically able to be exposed to a traumatic experience as taking a witness stand or being severely questioned." The only witness of petitioner's to testify on this dependency issue was Orville D. Cantwell, petitioner's close associate during all of the taxable years here involved. The upshot of Cantwell's testimony was that he knew Della and Mary Blackwell well during each of the taxable years, that so far as he knew neither of1956 Tax Ct. Memo LEXIS 108">172 them had any income to amount to anything, certainly not in excess of $500 in any year, and that in his opinion Marvin T. Blackwell contributed more than one-half the support to each of these dependents during the taxable years. On the strength of his testimony we have made Findings of Fact that neither of them had as much as $500 income in any of the taxable years and that in each of the taxable years Marvin T. Blackwell furnished more than one-half of their support. In view of these findings we sustain petitioner on this issue as to dependency credits and reverse the Commissioner in his disallowance of them. Issue L Fraud. In each of the taxable years 1947 through 1951, the Commissioner has determined fraud penalties. In Docket No. 59625, involving deficiencies in income tax determined against petitioner by the Commissioner for the calendar years 1947 and 1949, the Commissioner in explanation of his action in adding fraud penalties made a statement in his deficiency notice, as follows: "II. Inasmuch as you filed false and fraudulent income tax returns for the taxable years ended December 31, 1947, and December 31, 1949, with intent to evade your income tax liability, the1956 Tax Ct. Memo LEXIS 108">173 fifty percent fraud penalty has been added to the deficiencies in accordance with the provisions of Section 293(b) of the Internal Revenue Code of 1939." Similar statements as the above were made by the Commissioner in explanation of his imposing the fraud penalties as to the other taxable years here involved. The petitioner by appropriate assignments of error contests the correctness of the action of the Commissioner in imposing fraud penalties. Findings of Fact Our Findings of Fact under Issue 9 of the corporation's case are incorporated herein by reference and made a part hereof. In addition to the Findings of Fact under Issue 9, the following findings are made: On April 1, 1955, Marvin T. Blackwell entered a plea of guilty in the United States District Court for the Northern District of Alabama to an indictment charging him with the criminal offense of evading and defeating income tax due the United States by filing false and fraudulent income tax returns for the calendar years 1948 through 1951. Part of the deficiencies in income tax determined against petitioner for each of the taxable years 1947 through 1951 is due to fraud with intent to evade the tax. Opinion 1956 Tax Ct. Memo LEXIS 108">174 It, of course, requires no citation of authorities to support the proposition that the burden of proof is on the Commissioner to establish by clear and convincing evidence that part of the deficiencies was due to fraud with intent to evade tax. We think that the Commissioner has met his burden of proof as to each of the taxable years we have before us. See 19 B.T.A. 518">M. Rea Gano, supra. In the Gano case we said, among other things, as follows: "A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose." In our Findings of Fact under this fraud Issue L, we have made a finding that "part of the deficiencies in income tax determined against petitioner for each of the taxable years 1947 through 1951 is due to fraud with intent to evade the tax." We think that finding is amply supported by the evidence in these proceedings and is dispositive of the fraud issue. Clarice Blackwell, although not a participant in the fraud, is liable for the penalties imposed for 1950 and 1951 because she signed a joint return for those years. 1956 Tax Ct. Memo LEXIS 108">175 The imposition by the Commissioner of fraud penalties for each of the taxable years is sustained. Issue M Failure to File Declarations of Estimated Tax. Did the respondent correctly assert a penalty under section 294(d)(1)(A) of the 1939 Code for the erroneous failure of Marvin T. Blackwell to file a declaration of estimated tax for each of the calendar years 1947, 1948, and 1949, and did the respondent correctly determine that Marvin T. Blackwell and Clarice Blackwell erroneously failed to file a declaration of estimated tax for the calendar years 1950 and 1951, and are liable for the penalties? Petitioner by appropriate assignments of error contests the correctness of the imposition of these penalties. Findings of Fact Marvin T. Blackwell did not file a declaration of estimated tax for any of the calendar years 1947 through 1949, and Marvin T. Blackwell and Clarice Blackwell did not file a declaration of estimated tax for either of the calendar years 1950 or 1951. Opinion The petitioner in his brief concedes that there was no declaration of estimated tax filed by him for any of the taxable years and that his total income for each of the taxable years exceeded the1956 Tax Ct. Memo LEXIS 108">176 minimum which would have relieved him from the necessity of filing an estimated tax return. He also concedes that he is subject to the five per cent penalty provided by the statute for failure to file his estimated tax return. He contends, however, that the five per cent penalty should be based on his actual income for each of the taxable years as will be computed under Rule 50. In this contention the petitioner is, of course, correct and the penalty for failure to file estimated tax return will be computed under Rule 50. Issue N Penalty under Section 294(d)(2). Did the respondent correctly determine a penalty under section 294(d)(2) of the 1939 Code against Marvin T. Blackwell for the substantial understatement of estimated tax for each of the calendar years 1947, 1948, and 1949, and did the respondent correctly determine a penalty against Marvin T. and Clarice Blackwell under that section for the substantial understatement of estimated tax for each of the calendar years 1950 and 1951? The petitioner by appropriate assignments of error contests the correctness of the penalties which the Commissioner has determined against petitioner for each of the taxable years under section1956 Tax Ct. Memo LEXIS 108">177 294(d)(2). Findings of Fact Marvin T. Blackwell substantially understated taxable income realized during the taxable years 1947 through 1949 in failing to file a declaration of estimated tax for the said calendar years, and Marvin T. Blackwell and Clarice Blackwell substantially understated taxable income realized during the calendar years 1950 and 1951 in failing to file a declaration of estimated tax for the said calendar years. Opinion The petitioner concedes in his brief that the Tax Court has decided against his contentions as to the imposition of penalties under section 294(d)(2). In his brief, he states: "Although this court held for example in the Fuller case, 20 T.C. 308">20 TC 308, that the penalty for underestimation applies while there was no estimation at all, there is authority holding to the contrary as, for example, U.S. v. Redley, 120 Fed. Supp. 530." We followed G. E. Fuller, 20 T.C. 308">20 T.C. 308, in Harry Hartley, 23 T.C. 353">23 T.C. 353. Issue N is decided against petitioner. The penalty for each taxable year will, of course, be recomputed under Rule 50 in accordance with petitioner's correct income as recomputed under Rule 50. 1956 Tax Ct. Memo LEXIS 108">*178 So far as we have been able to ascertain from the pleadings and the evidence, we have now decided all the numerous issues raised by the pleadings. Decisions will be entered under Rule 50. Footnotes1. The following proceedings are consolidated herewith: Marvin T. Blackwell and Clarice Blackwell, Docket No. 52702; O. K. Loan Company of Troy, Inc., Docket No. 53880; Marvin T. Blackwell, Docket No. 59625; Marvin T. Blackwell and Clarice Blackwell, Docket No. 59626; O. K. Loan Company of Troy, Inc., Docket No. 59627.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619031/	RAGNAR V. HOKANSON and MARILYN L. HOKANSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHokanson v. CommissionerDocket No. 7549-81.United States Tax CourtT.C. Memo 1982-414; 1982 Tax Ct. Memo LEXIS 324; 44 T.C.M. 550; T.C.M. (RIA) 82414; July 26, 1982. Robert G. Burt and Jeffrey L. Dye, for the petitioners. Carmen J. Santamaria, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined deficiencies of $56,953 and $48,969 in petitioners' Federal income tax for 1977 and 1978, respectively. After concessions, the sole issue is whether petitioners are entitled to an investment credit for certain new section 38 property. 1FINDINGS OF FACT Most of the facts are stipulated and are found accordingly. Petitioners, Ragnar V. Hokanson and Marilyn L. Hokanson, resided in Oregon City, Ore., when they filed their petition herein. Since 1941, Ragnar V. Hokanson (hereinafter petitioner) has been involved in the trucking business. In 1947, he started leasing trucks. The issue herein arises from a leasing transaction begun in 1971 with the North Pacific Canners and Packers, Inc., (hereinafter Nor-Pac). Nor-Pac is an Oregon corporation formed in the early 1930s by various food processing organizations which distributes1982 Tax Ct. Memo LEXIS 324">326 food in the Pacific Northwest for those organizations. The shareholders of Nor-Pac are the member food processing organizations; there are no individual shareholders. Consistent with the goal of marketing its cooperative members' products, Nor-Pac pursued the most efficient transportation services available at the lowest possible cost. Prior to its affiliation with petitioner, Nor-Pac looked to commercial organizations for its transportation needs. Due to unreliable service and high costs, these commercial arrangements proved unsatisfactory. Daniel Clausen (Clausen), general manager of Nor-Pac, proposed to the Board of Directors of Nor-Pac (hereafter the Board), that Nor-Pac establish its own transportation department. Due to a lack of capital, Nor-Pac decided against the purchase of equipment and, instead, opted for a leasing arrangement. Knowing of petitioner's good reputation in the leasing business, Clausen contacted petitioner who, at that time, was operating a transportation division in Texas. Their discussions culminated in a combination lease-employment arrangement, wherein, Nor-Pac hired petitioner as Transportation Director and also agreed to lease certain transportation1982 Tax Ct. Memo LEXIS 324">327 equipment from petitioner. Petitioner served as Transportation Director of Nor-Pac during the years 1970 through 1978. Petitioner also leased equipment to Nor-Pac from the beginning of 1971 through March 1980. All such equipment, including the equipment at issue herein, was subject to a "master" lease agreement which was signed on November 15, 1970, and became effective January 1, 1971. 2 Generally, Nor-Pac agreed to pay a fixed rate per mile (with a minimum mileage requirement per piece of equipment) while petitioner bore all risk of loss and was responsible for all maintenance and repairs of the equipment. That lease provided that both lessor and lessee had the power to terminate the lease at the expiration of one (1) year from the date of this agreement, or at the expiration of each successive period of one (1) year thereafter by giving the [other party] at least thirty (30) days written notice of the election so to do. Thus, while1982 Tax Ct. Memo LEXIS 324">328 both parties had a right to cancel the lease, neither had an option to renew the lease. All equipment leases between Nor-Pac and petitioner, including the leases herein, were examined and reviewed on an annual basis. Petitioner attended each annual meeting and presented both a written statement and an oral presentation to the Board providing a detailed analysis of that year's trucking operations. The Board then decided whether to continue and/or modify the leasing arrangement. The lease was periodically amended to incorporate higher lease rates. In 1977 and 1978, petitioners, then doing business as Hokanson Fleetways, 3 purchased and leased to Nor-Pac the following new section 38 property: 1982 Tax Ct. Memo LEXIS 324">329 Date of LeaseQuantityDescriptionPurchase PriceMarch 1, 197751977 Freightliner Truck Tractors$42,000 eachMarch 1, 197751977 Timpte Semi-Trailers$24,000 eachJune 1, 197841978 Freightliner Truck Tractors$45,600 eachJune 1, 197841978 Timpte Semi-Trailers$26,000 eachThe parties have stipulated the useful life of each of the tractors and trailers listed above is eight years.Petitioners arranged for and incurred sole liability for all financing of the equipment purchased herein. Nor-Pac did not guarantee any portion of petitioners' loans. Petitioners had no significant source of income outside their leasing and employment relationship with Nor-Pac. Due to petitioner Ragnar V. Hokanson's bad health, petitioners terminated the lease on March 31, 1980. In his notice of deficiency, respondent disallowed the investment credit claimed by petitioners in 1977 and 1978 with respect to petitioners' purchase and lease of the above-described tractors and trailers. OPINION At issue is whether petitioners are entitled to an investment credit with respect to certain new section 38 equipment. Section 38 allows a credit against1982 Tax Ct. Memo LEXIS 324">330 tax for investments in certain depreciable property. When a noncorporate taxpayer acquires and leases section 38 property, an investment credit is allowed only if one of two tests set forth in section 46(e)(3) is met. 4 Such a taxpayer must establish that (1) he manufactured or produced the leased property or (2) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the first 12 months after the property is transferred to the lessee the section 162 deductions (with certain exceptions) with respect to such property exceed 15 percent of the rental income produced by such property. Sec. 46(e)(3)(A) and (B). Petitioners did not manufacture or produce the equipment at issue herein. Thus, the first test of section 46(e)(3) cannot be met. With respect to the second test, the parties have stipulated that the section 162 deductions exceed 15 percent of the rental income produced by the property. Thus, the only issue is whether the1982 Tax Ct. Memo LEXIS 324">331 term of the lease is less than four years (50 percent of the stipulated eight year useful life of the leased property). There is no dispute over the legal rights and obligations arising out of the lease agreement. The parties recognize that both the lessor and lessee were bound by the lease for at least the first year and, thereafter, either party could terminate the lease at the expiration of any succeeding one-year lease term by giving the other party 30 days' written notice. Thus, the lease was an open-ended one which continued until either party affirmatively terminated it. The difficulty arises in the parties' attempt to ascertain the "term" of the lease for purposes of section 46(e)(3)(B). Understandably, the statute, which looks to the lease "term," does not easily lend itself to a clear application of an open-ended lease of this type. We recently considered the application of section 46(e)(3)(B) to a similar open-ended lease in Ridder v. Commissioner,76 T.C. 867">76 T.C. 867 (1981). In that case, the taxpayer purchased a new tractor-truck and leased it to his employer for an indefinite lease term which either party could cancel upon 30 days' written notice. Presented1982 Tax Ct. Memo LEXIS 324">332 with little evidence other than the relevant lease provision, we denied the investment credit since the taxpayer failed to show the term of the lease was less than 50 percent of the useful life of the property. Petitioners contend that facts herein are distinguishable from the facts presented in Ridder. Petitioners point to the annual meetings wherein petitioner defended the merits of his trucking operation. Petitioners note the distinct possibility the lease might have been terminated had Nor-Pac determined its transportation needs would be served better by commerical firms. Petitioners emphasize that Nor-Pac, basically a conservative organization, was unwilling to commit itself beyond the initial year of the lease.Thus, petitioners argue this arrangement constituted a one-year lease for purposes of section 46(e)(3)(B). 5 Respondent, on the other hand, contends the lease cannot be viewed as a short-term lease because it was an open-ended agreement with no set termination date. For the following reasons, we find for respondent. 1982 Tax Ct. Memo LEXIS 324">333 Section 46(e)(3)(B) requires a determination of the "term" of the lease. A taxpayer is not necessarily denied the investment credit simply because the lease is open-ended with no definite termination date. On the other hand, he is not assured of the credit merely because neither party was committed under the lease beyond 50 percent of the useful life of the leased property. See 76 T.C. 867">Ridder,supra.6 Similarly, that the parties recognized a distinct "possibility" the lease might be terminated within that period is not determinative. Rather, a taxpayer must at least give some reason to indicate that termination of the lease was "realistically contemplated" by the parties within the statutorily specified period. 76 T.C. 867">Ridder,supra, at 875. The burden of proof is on petitioner. 76 T.C. 867">Ridder,supra;Rule 142(a), Tax Court Rules of Practice and Procedure. The evidence herein gives no indication the parties contemplated terminating the lease within the four-year period. 1982 Tax Ct. Memo LEXIS 324">334 In fact, it appears more likely the parties intended this equipment to be leased for its entire useful life. 7 Petitioner leased equipment to Nor-Pac continuously from 1971 through 1980, and in no instance during that period does the record indicate the lease of any piece of equipment was terminated prior to half of that property's useful life. 81982 Tax Ct. Memo LEXIS 324">335 Moreover, the circumstances indicate an undertaking of a long-term nature by both parties.Consummation of the leasing arrangement resulted in major overhauls of each party's method of conducting business. Where Nor-Pac originally depended exclusively on commercial firms to supply its transportation needs, it now looked almost exclusively to petitioner for those needs. Petitioner, likewise terminated a trucking business he operated in Texas in order to move to Oregon and take charge of Nor-Pac's transportation department. Nor only did petitioner lease a fleet of trucks to Nor-Pac, he also managed that trucking operation as an employee of Nor-Pac. It is apparent that significant moves were made by petitioner and Nor-Pac upon entering this leasing arrangement. Such an arrangement bespeaks substantial and long-term undertakings by each party. In addition, the loan officer of the bank that financed petitioner's purchases of the equipment testified that normally the bank does not extend a loan beyond that time a lease can be terminated since the bank's primary source of repayment is the lease income. Based on his understanding of the leasing arrangement, the loan officer concluded1982 Tax Ct. Memo LEXIS 324">336 this lease would continue even though it could be terminated. Thus, the loans were granted. The terms and maturity dates of those loans are not disclosed. Pointing to the annual reviews of the lease conducted by the parties, petitioners contend this arrangement constitutes a series of one-year leases that were "renegotiated" on an annual basis. We disagree. We are not faced with two or more successive short-term leases, each of which, standing alone, meets the 50 percent test of section 46(e)(3)(B). Rather, we view these annual reviews as periodic examinations of a continuing and indefinite lease. 91982 Tax Ct. Memo LEXIS 324">337 In short, we find no meaningful distinction between the facts presented herein and the facts described in Ridder. Petitioners have failed to establish the "term" of the lease is less than 50 percent of the useful life of the leased property. 10Finally, petitioners argue they are not within the class of persons Congress meant to deny the investment credit by enacting section 46(e)(3). This section was enacted to limit the availability of the investment credit to those noncorporate lessors actually using the property in an active business and not to those leasing arrangements motivated largely by tax reasons. H. Rept. No. 92-533, 1982 Tax Ct. Memo LEXIS 324">338 1972-1 C.B. 498, 513; S. Rept. No. 92-437, 1972-1 C.B. 559, 583. Congress determined that only lessors who manufactured or produced the property or short-term lessors should qualify for the credit. Thus, Congress enacted two hard-and-fast tests, neither of which petitioners meet. We realize petitioners may not be within the targeted class. However, as we noted in 76 T.C. 867">Ridder,supra, Congress chose an easily administered approach and sacrificed a degree of equity, and it is not for us to pass upon the wisdom of legislation.11In summary, we find petitioners are not entitled to the investment credit with respect to the equipment at issue herein. 12To reflect concessions and the foregoing, Decision will1982 Tax Ct. Memo LEXIS 324">339 be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in issue.↩2. The "master" lease served as the governing instrument for all equipment thereafter acquired and leased to Nor-Pac. Schedules describing equipment subject to the lease were periodically attached and incorporated into the agreement.↩3. Until July 1, 1975, petitioner and his wife, petitioner Marilyn L. Hokanson, conducted the leasing operation as a proprietorship. On that date, petitioners formed Hokanson Fleetways, a general partnership from which the business was operated. At all relevant times, petitioners were the sole owners of the Hokanson Fleetways' partnership interests. For the sake of simplicity, we refer to petitioner, Ragnar V. Hokanson, or petitioners as the lessor(s) to all transactions even though the husband-wife partnership, Hokanson Fleetways, was the leasing entity during the years in issue.↩4. Even though an individual lessor is denied the credit with respect to new sec. 38 property, generally he may still elect to pass it through to the lessee.See sec. 48(d).↩5. Since the "master" lease was entered into on January 1, 1971, and sec. 46(e)(3)(B) applies only to leases entered into after September 22, 1971, Pub. L. 92-178, section 108(a), 85 Stat. 497, 508, petitioners argue the statute is not applicable herein. However, we find that, at the time each piece of equipment was placed in service, a separate lease of that particular piece of equipment arose which was merely subject to the terms of the "master" lease. Thus, when petitioners acquired and leased the equipment at issue herein, separate leases for that equipment were entered into in 1977 and 1978. Accordingly, sec. 46(e)(3)(B) applies to all leased property in question.↩6. See also Xerox Corp. v. United States,656 F.2d 659">656 F.2d 659 (Ct. Cl. 1981), wherein the taxpayer's contention that its customer's right to cancel the rental agreement of copying machines on 15 days' notice created a "short term" lease for purposes of sec. 1.48-1(k), Income Tax Regs., was rejected. That regulation excludes property leased on a casual or short-term basis from the application of sec. 48(a)(5) which precludes the investment credit for property used by governmental units. In accord is Stewart v. United States,40 AFTR 2d 77↩-5735, 77-2 USTC par. 9648 (D. Nebr. 1977), wherein it was held the minimum legally enforceable period of the lease did not control the question of whether the lease was short term for purposes of the same regulation.7. Due to petitioner Ragnar V. Hokanson's bad health, petitioners gave written notice of their election to terminate the master lease on March 31, 1980. There is no basis for petitioners' contention, that termination of the lease in March 1980, (less than four years after the equipment herein was leased) entitles them to the investment credit. Allowance of an investment credit is based on facts and circumstances in existence in the year property is placed in service. Ridder v. Commissioner,76 T.C. 867">76 T.C. 867 (1981); Bloomberg v. Commissioner,74 T.C. 1368">74 T.C. 1368 (1980); World Airways, Inc. v. Commissioner,62 T.C. 786">62 T.C. 786 (1974), affd. 564 F.2d 886">564 F.2d 886 (9th Cir. 1977). Unforeseeable subsequent events do not change the result. 76 T.C. 867">Ridder,supra.↩8. While neither party placed significance on these facts, we think petitioners' history for holding this property, particularly for years before the subject equipment was leased, has a bearing on this issue.↩9. To prevent an end-run around the statute, the regulations provide that when two or more successive leases are entered into with respect to the same property, the terms of such leases shall be aggregated for purposes of the 50 percent test of sec. 46(e)(3)(B). Sec. 1.46-4(d)(4), Income Tax Regs. See also Rev. Rul. 76-266, 1976-2 C.B. 10↩, wherein respondent would not require the terms of two leases on the same property to be aggregated where it is shown that the subsequent lease was entered into at the expiration of the first lease and the leases were not interrelated and were negotiated independently of each other.10. See World Airways, Inc. v. Commissioner,564 F.2d 886">564 F.2d 886 (9th Cir. 1977), affg. 62 T.C. 786">62 T.C. 786 (1974) wherein the taxpayer-lessor, who was awarded three successive one-year leases of its aircraft from the Federal Aviation Administration, but was unsuccessful in its bid for an additional one-year lease, was denied the investment credit since the aircraft was "used by the United States," sec. 48(a)(5), and the lease did not constitute a "casual or short term" lease within the meaning of sec. 1.48-1(k), Income Tax Regs.↩11. As the statute applies to noncorporate taxpayers only, we note that had petitioners incorporated their business, the credit would have been allowed.↩12. Arguing respondent's position was not substantially justified, petitioners claim an award for attorney's fees pursuant to 28 U.S.C. section 2412(d). Petitioners, claim is rejected. McQuiston v. Commissioner,↩ 78 T.C. (May 13, 1982).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619032/	RICHARD G. WAGNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wagner v. CommissionerDocket No. 4265.United States Board of Tax Appeals9 B.T.A. 925; 1927 BTA LEXIS 2496; December 27, 1927, Promulgated 1927 BTA LEXIS 2496">2496 In 1918 the Alien Property Custodian illegally seized the property of petitioner, an American citizen, his records and bank accounts, which included his income for that year. The cost of the property seized, and its value at that time, was in excess of $5,000,000. In 1921, after making due efforts to secure the return of the property, petitioner was forced to assign to a creditor his claim against the Custodian. At that time the property had depreciated to a value of less than $1,500,000. In 1923 the Custodian released what remained of the property and turned it over to petitioner's assignee. Held, petitioner had no taxable income in 1918. Ben A. Matthews, Esq., for the petitioner. S. Duffield Mitchell, Esq., for the respondent. ARUNDELL9 B.T.A. 925">925 This is a proceeding for the redetermination of a deficiency in income tax in the amount of $827,515.19 for the calendar year 1918. FINDINGS OF FACT. The petitioner is a native-born citizen of the United States and has always lived in this country. In 1918 the petitioner was the largest individual holder of stock of the Foreign Transport & Mercantile Corporation, and the American Transatlantic1927 BTA LEXIS 2496">2497 Co., both organized under the laws of Delaware. The Foreign Transport & Mercantile Co. had been organized in 1917 for the purpose of taking over certain vessels owned by the American Transatlantic Co., which the petitioner caused to be incorporated in 1915 for the purpose of acquiring and placing under American registry a number of ships theretofore purchased by one Jensen, a citizen of Denmark, and such ships as he, Jensen, might thereafter purchase. Eleven vessels were acquired by the American company in 1915. Due to objections of the United States Department of Commerce to giving the vessels American registry under the proposed plan to issue about 80 per cent of the stock to Jensen, that plan was abandoned and in lieu thereof, the petitioner gave Jensen his personal notes aggregating $2,654,850 in payment of the ships, and the stock of the American company was issued to the petitioner. 9 B.T.A. 925">926 The stock of the Foreign Transport & Mercantile Corporation issued to the American Transatlantic Co. was in turn distributed among the shareholders of the latter company in proportion to their holdings therein. All of the capital stock of both companies was issued to and held by1927 BTA LEXIS 2496">2498 native-born American citizens, all of whom resided in the United States during the World War, and all the directors and officers of both companies were at all times American citizens. In August, 1918, all of the petitioner's property, consisting of securities, including his stock in the above mentioned corporations, bank accounts, which included his income for that year, and his records were seized by the Alien Property Custodian. All of the petitioner's securities and bank accounts were transferred out of his name and from the time of the seizure the property was entirely out of his possession and control. At the same time the Custodian seized all the remaining stock of the corporations, with the exception of 403 shares belonging to one Lynch. The Custodian caused all the seized shares to be surrendered to the corporations and canceled and had new certificates issued in the name of the Alien Property Custodian, and thereafter assumed the entire control and management of both of the corporations under a board of directors and officers of his own selection. From time to time thereafter the earnings derived from the operation of these companies were distributed in dividends1927 BTA LEXIS 2496">2499 and paid to the Alien Property Custodian in cash and were by him covered in to the Treasury of the United States and invested in Liberty bonds in the amount of $681,150. Certain other moneys derived from the earnings of the companies were paid in to the United States Treasury. The seizure of petitioner's property and the other stock in the two corporations was made as a result of the Custodian's belief that certain German subjects had an interest in the profits of the corporations. This belief arose, it appears, from the fact that in 1914 and 1915 Jensen had borrowed money from German subjects which he had used to purchase some of the ships later taken over by the American corporations heretofore mentioned. However, prior to the seizure Jensen had paid off his entire indebtedness to the German subjects and they had no interest whatever in the ships or properties of the American corporations. The cost of the property seized from the petitioner and its value at the time of the seizure was in excess of $5,000,000. At that time there remained unpaid the amount of $1,500,000 on the notes theretofore given by petitioner to Jensen for the ships taken over by the American corporations. 1927 BTA LEXIS 2496">2500 Thereafter and until December, 1921, the petitioner made due efforts to secure the return to him from the Alien Property Custodian of the property seized, but was unsuccessful 9 B.T.A. 925">927 in such efforts. In December, 1921, under threat of legal action by Jensen to enforce payment of the notes, the petitioner assigned to Jensen his claim against the Alien Property Custodian for the seized property and Jensen surrendered to the petitioner the latter's unpaid promissory notes. The value of the property at that time had depreciated to an amount less than the amount of $1,500,000 unpaid on the petitioner's notes. On June 16, 1923, the Acting Attorney General of the United States submitted to the President a recommendation for the allowance of Jensen's claim for the return of seized property, which included the property seized from the petitioner. The recommendation stated that the Alien Property Custodian was favorable to the allowance of the claim. On June 19, 1923, the President approved the recommendation. The petitioner did not file an income-tax return for the year 1918. The respondent computed the deficiency here involved on dividends paid to the petitioner in 1918, which1927 BTA LEXIS 2496">2501 were a part of the property subsequently seized in that year by the Alien Property Custodian. OPINION. ARUNDELL: The parties to this proceeding have filed a stipulation reading as follows: If such seizure resulted in a loss to the taxpayer, such loss was in excess of the income received by the taxpayer during that year, and if deductible under the law the taxpayer received no net income during that year which would subject him to tax. The Commissioner's position is that a seizure by the Alien Property Custodian under the facts set forth in the findings is not such a taking as would entail passage of the general title to the property and consequently title remained vested in petitioner until he assigned his interest to Jensen in 1921 and no determinable loss was sustained until that time. If the question as framed by the Commissioner is determinative, we feel that his position would have to be sustained, for while the powers granted to the Alien Property Custodian were exceedingly broad under the Trading with the Enemy Act, 1 we do not feel that they were sufficiently broad to vest in him the absolute title to the property seized. In the case of In re9 B.T.A. 925">928 1927 BTA LEXIS 2496">2502 Gregg's Estate,266 Pa. 189">266 Pa. 189; 109 A. 777 (certiorari denied, 252 U.S. 588">252 U.S. 588), it is said: The Trading with the Enemy Act is not for confiscation of property. It is rather for its conservation. While if the President so direct, the money or property of an alien enemy may be taken by the government for its own purposes, the owner does not part absolutely with it. For after the end of the war his claim to it "shall be settled as Congress shall direct * ." 1927 BTA LEXIS 2496">2503 In the case of the United States v. Chemical Foundation (Dist. Ct.), 294 F. 300 (affd. C.C.A., 5 Fed.(2d) 191, and 272 U.S. 1">272 U.S. 1), it is said: Yet it is of course true that neither the President nor the custodian is the owner of enemy property. "As though he were the absolute owner" was inserted in the Act merely to state the extent and scope of the grant of additional power - not to confer upon the President or custodian personally the beneficial interest in the property. Hence, in the sale of enemy property all officers act in an official or fiduciary capacity. 9 B.T.A. 925">929 The above cases, it will be noted, involve property where the claimant's recovery was required by the terms of the act to be postponed until "after the end of the war" (Sections 10 and 12 of the Trading with the Enemy Act). One "not an enemy or ally of the enemy," however, was in a much more favorable situation. Under section 9 of the Trading with the Enemy Act he could immediately upon the seizure of his property, file a claim with the Alien Property Custodian to establish his interest therein, or at will bring suit in equity to establish his right thereto, 1927 BTA LEXIS 2496">2504 and should he prevail in either proceeding, provision was made for the issuance of an order requiring the Custodian to deliver to him the seized property to the extent of his interest. That section 9 supra served to safeguard petitioner's rights is apparent from the Supreme Court's decision in Stoehr v. Wallace,255 U.S. 239">255 U.S. 239, 255 U.S. 239">245, wherein it is said: The present act commits the determination of that question [enemy ownership] to the President, or the representative through whom he acts, but it does not make his action final. On the contrary, it distinctly reserves to any claimant who is neither an enemy nor an ally of an enemy a right to assert and establish his claim by a suit in equity unembarrassed by the precedent executive determination. Not only so, but pending the suit, which the claimant may bring as promptly after the seizure as he chooses, the property is to be retained by the Custodian to abide the result and, if the claimant prevails, is to be forthwith returned to him. Thus there is provision for the return of property mistakenly sequestered; and we have no hesitation in pronouncing it adequate, for it enables the claimant, as of right, 1927 BTA LEXIS 2496">2505 to obtain a full hearing on his claim in a court having power to enforce it if found meritorious. We thus find that not only was the Alien Property Custodian not the owner of the seized property, but that an adequate opportunity was given by law to the petitioner to establish his ownership, and during the pendency of such proceedings the property was required to be held in the hands of the Custodian. But we do not think that this is decisive of the question. It is not always necessary that title be lost before a deduction is allowable. For instance, the revenue statutes specifically recognize losses by theft and yet the owner does not lose title to stolen goods. While ordinarily the rule may be sound that a loss to be allowable under the statute must be evidenced by a closed and completed transaction, we have as authority the Supreme Court that one need not be an incorrigible optimist in order to secure a loss under the Revenue Acts. United States v. White Dental Manufacturing Co.,270 U.S. 398">270 U.S. 398. Petitioner cites, in support of the position that a loss of possession is sufficient to warrant the allowance of a loss under the Revenue Acts, the case of 1927 BTA LEXIS 2496">2506 Rhinelander v. Pennsylvania Insurance Co., 4 Cranch, 28, and a number of cases in which that decision has been followed. The Rhinelander case involved the question of whether a 9 B.T.A. 925">930 loss for the purpose of recovering insurance had been sustained where a neutral vessel was captured by a belligerent cruiser and the captured vessel abandoned by the owners to the insurers. The opinion of the court reads in part as follows: It is, therefore, the unanimous opinion of the court that where, as in this case, there is a complete taking at sea by a belligerent who has taken full possession of the vessel as a prize and continues that possession to the time of the abandonment, there exists in point of law a total loss. * * Concerning captures at sea, Mr. Justice Story in the case of The Star, 3, Wheat. 78, 85, said: It is admitted on all sides by public jurists that in cases of capture, a firm possession changes the title to the property; and although there has been in former times much vexed discussion as to the time at which this change of property takes place * * * it is universally allowed that at all events a sentence of condemnation completely1927 BTA LEXIS 2496">2507 extinguishes the title of the original property and transfers a rightful title to the captors or their sovereign. The case books are replete with decisions relating to war-time seizures of vessels, but as they treat largely of admiralty law and international law as applied to seizures, most of them are beside the mark. Here we are concerned only with two pieces of statutory law - the Trading with the Enemy Act and the Revenue Act of 1918 - and if (as stipulated by the parties) the seizure under the former gives rise to a loss recognized by the latter, we have an end to our problem. We do not care to go, however, so far as to hold that in all cases an illegal seizure by the Alien Property Custodian of a citizen's property would, as a matter of law, give rise to a deductible loss under the revenue statutes. The temporary sequestration of property, followed by its return intact (even though the return be in a later year), may well indicate that in fact no loss was suffered. The situation present in the instant case is extraordinary. Ordinarily, in determining whether income is realized or deductions are allowable we view the facts as they exist during the taxable year. It1927 BTA LEXIS 2496">2508 has been said that such a course is impelled by administrative necessity. But in the extraordinary case we feel that a broader view may be necessary. In the case of Bowers v. Kerbaugh Empire Co.,271 U.S. 170">271 U.S. 170; 46 Supreme Court Report 449, the Supreme Court viewed the entire transaction through a series of years and found that a loss had been sustained rather than taxable income realized. In the case of Forstmann v. Ferguson, 17 Fed.(2d) 659; 6 Am.Fed.Tax Rep. 6530, the Commissioner sought to compel the return as income in one year of the entire amount of dividends, impounded over a series of years as the result of suits by the Alien Property Custodian, and released to the taxpayer within the year, but under such facts the court held that the income should be 9 B.T.A. 925">931 returned as and for the years in which the taxpayer would have received it but for the interposition of the Government. So here, we feel warranted in viewing all the facts. Within the year the petitioner has been illegally dispossessed by the Government of his property, including the income now sought to be taxed. The Government at the time charged that1927 BTA LEXIS 2496">2509 both the principal and the income were enemy owned and that the income now sought to be taxed was not the income of petitioner, but of an alien enemy. Along with his property the Government seized his records. Under such circumstances he made no return, but awaited the outcome of the proceedings. Property of a value of $5,000,000 when seized had shrunk in value by the year 1921 to $1,500,000 and what is left is turned over to a creditor in payment of the balance due on the purchase price of the property seized. Petitioner has lost $3,500,000 in the transaction. To hold that petitioner is in receipt of income under such circumstances offends both reason and morals. Considering the transaction as a whole, as under the facts here we must, petitioner had no net taxable income for the year 1918. Reviewed by the Board. Judgment will be entered for the petitioner.TRAMMELL and PHILLIPS dissent. Footnotes1. The pertinent parts of the Trading with the Enemy Act are asfollows: Section 6 (40 Stat. 415). That the President is authorized to appoint, prescribe the duties of * * * an official to be known as the Alien Property Custodian who shall be empowered to receive all money and property in the United States due or belonging to an enemy or ally of enemy which may be paid, conveyed, transferred, assigned or delivered to said custodian under the provisions of this Act; and to hold, administer, and account for the same under the general direction of the President and as provided in this Act. * * * Section 7(c). If the President shall so require, any money or other property owing or belonging to or held for, by, on account of, or on behalf of, or for the benefit of an enemy or ally of enemy, * * * shall be conveyed, transferred, assigned, delivered, or paid over to the Alien Property Custodian. Section 9. That any person, not an enemy, or ally of enemy, claiming any interest, right, or title in any money or other property which may have been conveyed, transferred, assigned, delivered, or paid to the Alien Property Custodian hereunder, and held by him or by the Treasurer of the United States, * * * may file with the said Custodian a notice of his claim; * * * and the President, if application is made therefor by the claimant, may, * * * order the payment, conveyance, transfer, assignment or delivery to said claimant of the money or other property so held by the Alien Property Custodian or by the Treasurer of the United States or of the interest therein to which the President shall determine said claimant is entitled. * * * If the President shall not so order within sixty days after the filing of such application, or if the claimant shall have filed the notice as above required and shall have made no application to the President, said claimant may * * * institute a suit in equity in the district court of the United States * * * (to which suit the Alien Property Custodian or the Treasurer of the United States, as the case may be, shall be made a party defendant), to establish the interest, right, title, or debt so claimed, and if suit shall be so instituted then the money or other property of the enemy, or ally of enemy, against whom such interest, right or title is asserted, or debt claimed, shall be retained in the custody of the Alien Property Custodian, or in the Treasurer of the United States, as provided in this Act, and until any final judgment or decree which shall be entered in favor of the claimant shall be fully satisfied by payment or conveyance, transfer, assignment, or delivery by the defendant or by the Alien Property Custodian or Treasurer of the United States on order of the court, or until final judgment or decree shall be entered against the claimant, or suit otherwise terminated. Section 12. (As amended by 40 Stat. ch. 26, p. 460) That all moneys * * * paid to or received by the Alien Property Custodian pursuant to this Act shall be deposited forthwith in the Treasury of the United States * * . All other property of an enemy or ally of enemy conveyed, transferred, assigned, delivered or paid to the alien property custodian hereunder shall be safely held and administered by him, except as hereinafter provided * . The Alien Property Custodian shall be vested with all of the powers of a common-law trustee in respect of all property, other than money, which has been or shall be * * required to be conveyed, transferred, assigned, delivered, or paid over to him in pursuance of the provisions of this Act, and, in addition thereto, acting under the supervision and direction of the President, and under such rules and regulations as the President shall prescribe, shall have power to manage such property and do any act or things in respect thereof or make any disposition thereof or of any part thereof, by sale or otherwise, and exercise any rights or powers which may be or become appurtenant thereto or to the ownership in like manner as though he were the absolute owner thereof * * *. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619034/	HAROLD ROBERT COLTMAN and JOY LYNN COLTMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent HELEN COLTMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentColtman v. CommissionerDocket Nos. 5342-76, 5514-76.United States Tax CourtT.C. Memo 1978-181; 1978 Tax Ct. Memo LEXIS 335; 37 T.C.M. 779; T.C.M. (RIA) 780181; May 16, 1978, Filed 1978 Tax Ct. Memo LEXIS 335">335 Entitlement to dependency exemptions for four children of divorced parents determined. Harold Robert Coltman, pro se. Ronald T. Murphy, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: In these consolidated cases respondent determined the following deficiencies: Docket No.PetitionerYearDeficiency5342-76Harold Robert Coltman andJoy Lynn Coltman1972$ 6605514-76Helen Coltman1972366The issue presented for decision is which of the petitioners is entitled to claim on their 1972 Federal income tax returns exemption deductions under section 151 (e), I.R.C. 1954, 1 for their four children. Resolution is dependent upon which petitioner provided more for the support of the children pursuant to the tests set forth in section 152(e). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached herein thereto, are incorporated herein by reference. Petitioners Harold and Joy Lynn Coltman1978 Tax Ct. Memo LEXIS 335">337 were married and resided in Rochester, Mich., at the time their petition was filed in docket No. 5342-76. Petitioner Helen Coltman resided at 435 Madison in Birmingham, Mich., at the time her petition was filed in docket No. 5514-76. Harold and Helen had been married to each other but obtained a divorce in June 1969. Under the terms of the divorce decree Helen was awarded custody of their four children. These children are Robert Coltman, born August 22, 1954; Ronald Coltman, born October 12, 1956; David Coltman, born November 23, 1958; and Timothy Coltman, born May 13, 1965. The divorce decree ordered Harold to pay Helen $12.50 per child per week in child support. The decree also ordered Harold to pay all medical bills incurred by or on behalf of his four children and to maintain health insurance for their benefit. The decree did not specify which of the parties was entitled to claim personal exemptions on their Federal income tax returns for the four children. Harold and Joy Lynn were married on March 3, 1972. Living with them after their marriage were Joy Lynn's son and daughter from her previous marriage. On their joint Federal income tax return for 1972, Harold and1978 Tax Ct. Memo LEXIS 335">338 Joy Lynn claimed as their dependents Robert, Ronald, David, and Timothy. Both Harold and Joy Lynn were employed and their combined income during 1972 was $18,674. Several of the checks offered by Harold as evidence of support payments made by him during 1972 were drawn on Harold and Joy Lynn's joint account and were signed by Joy Lynn. No effort was made by Harold to trace the source of the monies used to make payments for the support of his four sons. Helen claimed as her dependents Robert, David, and Timothy on her Federal income tax return for 1972. 2In February 1972 Helen commenced employment with Mathes Enterprises in Birmingham. Prior to that time she was employed by a bank. Her total wages earned during 1972 amounted to $4,830.43. She also obtained a $1,500 personal loan sometime during 1972 from Beneficial which she used1978 Tax Ct. Memo LEXIS 335">339 to pay household expenses. She estimated that she repaid $300 to $400 to Beneficial during 1972. During 1972 Harold paid $12.50 per week to Helen as support for Ronald, David, and Timothy or approximately $650 per child. He paid $12.50 per week to Helen as support for Robert until Robert's 18th birthday on August 22, 1972. During 1972 Helen and the four boys were living with Helen's mother, Alberta Stanley, in a house at 435 Madison, Birmingham, Mich. In 1972 the house was owned by Helen's five brothers and sisters and Helen as tenants in common. However, Helen's mother possessed a life estate in one-half of this property. Helen did not pay rent to her mother or her co-tenants. The fair rental value of the house in 1972 was approximately $350 per month. This estimate was made by a realtor in a letter written in 1975 in response to Helen's inquiry. The letter does not state whether the fair rental value includes utilities. Both Harold and Helen testified with respect to various items of support they provided for the children. Harold testified that he had supplied health insurance, medical and dental expenses, some clothing and food, vacation trips, and miscellaneous1978 Tax Ct. Memo LEXIS 335">340 items for each of the children. He supported some of his testimony with bills and checks in payment thereof, but his testimony with respect to other items was estimates based on his best recollection. Helen's testimony, except for the fair rental value of the house, was based almost entirely on her estimates of what she paid for food and utilities for the entire family, including her mother, herself, and the four boys, and what she paid for the boys for clothing, school, bus fares, vacations, and other miscellaneous items. Apparently, as might be expected, neither Harold nor Helen kept a running account of their expenditures for the support of the children. It would be impossible to determine with any degree of certainty on this record exactly how much either parent spent for support of each of the children during 1972. Doing the best we can on the evidence presented, we find the following ultimate facts with regard to the year 1972: 1. Harold provided more than $1,200 for the support of all of the children. 2. Harold provided more than one-half of the support of Robert, Ronald, and David. 3. Helen provided more than one-half of the support for Timothy. OPINION1978 Tax Ct. Memo LEXIS 335">341 The issue in this case is which of the petitioners, Harold and Joy Lynn, or Helen, is entitled to exemptions under sections 151(e)(1) and 152(a)(1)3 of the Code for the four children of the former marriage of Harold and Helen, being Robert, Ronald, David, and Timothy. Respondent acknowledges that one or the other sets of petitioners is entitled to an exemption for each child but not both, and that he is a stakeholder in this proceeding. 1978 Tax Ct. Memo LEXIS 335">342 On their joint income tax return for 1972, Harold and Joy Lynn claimed exemptions for all four of the children, naming them by name. Respondent disallowed all four exemptions. In their petition to this Court, filed pro se, Harold and Joy Lynn alleged, in part, that: I claimed three of my children by a previous marriage as dependents for the year 1972. I have checks, receipts, etc. showing everything I paid in support for Robert, David and Timothy to show that I paid more than half of their support. My ex-wife does not have cancelled checks or receipts. * * I know she did not pay, and therefore, I feel she is entitled to deduct only Timothy. * * * We interpret this rather inconsistent language to mean that petitioners were still claiming exemptions for three of the children, probably Robert, Ronald, and David, but conceded that Helen was entitled to an exemption for Timothy. For some unexplained reason, Helen claimed only three of the children as dependents on her income tax return for 1972, namely, Robert, David, and Timothy. Respondent disallowed all three of the exemptions claimed. In her handwritten letter that was filed as a petition in this Court Helen simply1978 Tax Ct. Memo LEXIS 335">343 indicated that she wished to protest the findings of respondent's agents. Since Harold and Joy Lynn appear no longer to be claiming Timothy as an exemption, and Helen has not claimed Ronald as an exemption, we feel justified in concluding without more that Harold and Joy Lynn are entitled to an exemption for Ronald and Helen is entitled to an exemption for Timothy. See Lally v. Commissioner,T.C. Memo. 1958-188.See also Prophit v. Commissioner,57 T.C. 507">57 T.C. 507 (1972), affd. per curiam 470 F.2d 1370 (5th Cir. 1973). In addition, however, we believe the relevant and material evidence can reasonably be interpreted to find that Harold and Joy Lynn provided more than one-half the support for Ronald, and that Helen provided more than one-half the support for Timothy, and we have so found in our findings of fact. Because Harold and Helen were divorced prior to the taxable year 1972, the answer to the issue herein lies in the provisions of section 152(e) of the Code as it read in 1972. 4 Essentially, in this case the the exemptions would be allowed to Helen as the custodial parent unless Harold as the noncustodial parent provided $1,200 or1978 Tax Ct. Memo LEXIS 335">344 more for the support of the four boys.If that is established, then Harold is entitled to the exemptions unless Helen clearly establishes that she provided more for the support of one or more of the boys than did Harold in 1972. 1978 Tax Ct. Memo LEXIS 335">345 It is clear from the stipulation of facts that Harold paid $12.50 per week for the support of each of the boys during 1972 and that Harold provided more than $1,200 for their combined support in 1972. Therefore, the burden shifts to Helen to "clearly establish" that she provided more support for one or more of the boys during 1972 than did Harold. We have interpreted "clearly establish" as used in the statute to mean a showing by a clear preponderance of the evidence, i.e., "something more positive and explicit, as opposed to inferences to be drawn from ambiguous and equivocal proof * ." However, the failure to substantiate expenses paid for support with cancelled checks or receipts or the reliance on estimates to establish amounts paid for support does not necessarily mean that the burden of proof has not been carried. Labay v. Commissioner,55 T.C. 6">55 T.C. 6, 55 T.C. 6">13 (1970), affd. per ciruam 450 F.2d 280 (5th Cir. 1971); Pierce v. Commissioner,66 T.C. 840">66 T.C. 840, 66 T.C. 840">848-849 (1976). Under that test we have concluded that Helen has shown by a clear prepondernace of the evidence that we consider to be material and relevant that she provided more than1978 Tax Ct. Memo LEXIS 335">346 one-half of the support for Timothy during 1972, but that she failed to clearly establish that she provided more than one-half of the support for Robert, Ronald, and David during 1972. Thus, under the law, Helen is entitled to an exemption for Timothy, and Harold and Joy Lynn are entitled to exemptions for Robert, Ronald, and David for 1972. In reaching these conclusions, we have given consideration to the following factors, among others, which may answer some of the questions raised by petitioners. Amounts expended for the support of a child shall be treated as received from the noncustodial parent to the extent the noncustodial parent provided amounts for the support of the child (Harold's $12.50 per week per child), whether or not such amounts provided for the noncustodial parent are actually expended for child support. Sec. 1,152-4(d)(4), Income Tax Regs.Since Helen was part owner of and she and her mother had the right to use the home wherein they and the four boys resided in 1972, and Harold owned no interest therein, Helen is entitled to include the fair rental value of the home in her support computation even though Harold may have contributed to payment of the property1978 Tax Ct. Memo LEXIS 335">347 taxes on the property. Cf. Wood v. United States,287 F. Supp. 90">287 F. Supp. 90, 287 F. Supp. 90">91 (D. Ore. 1968). Support provided by a parent and his or her new spouse may be combined in computing the total support provided by that parent, particularly where they file a joint return claiming exemptions for the children of the parent's former marriage. Colton v. Commissioner,56 T.C. 471">56 T.C. 471 (1971); Rev. Rul. 73-175, 1973-1 C.B. 59. The term "support" is construed in section 1.152-1(a)(2)(i), Income Tax Regs., to include food, shelter, clothing, medical and dental care, education, and the like. The payments Helen made during 1972 to acquire a vacant lot do not fit into the meaning of support as amplified in the regulations. Decisions will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue, unless otherwise specified.↩2. The record does not indicate why Helen claimed exemptions for only three of her sons. In Harold's petition, he refers to Robert, David, and Timothy but does not mention Ronald. Because testimony and documentary evidence was presented at trial concerning expenditures on Ronald's behalf during 1972, we will include him in our decision.↩3. Sec. 151(e)(1) provides: (e) Additional Exemption for Dependents.-- (1) In general.--An exemption of $750 for each dependent (as defined in section 152)-- (A) whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $750, or (B) who is a child of the taxpayer and who (i) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student. Sec. 152 provides in pertinent part: (a) General Definition.--For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection * * as received from the taxpayer): (1) A son or daughter of the taxpayer * * .↩4. Prior to its amendment in 1976, sec. 152(e) provided in pertinent part: (e) * * (1) General rule.--If-- (A) a child (as defined in section 151(e)(3)) receives over half of his support during the calendar year from his parents who are divorced * * * under a decree of divorce * * * and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, such child shall be treated, for purposes of subsection (a), as receiving over half of his support during the calendar year from the parent having custody for a greater portion of the calendar year unless he is treated, under the provisions of paragraph (2), as having received over half of his support for such year from the other parent (referred to in this subsection as the parent not having custody). (2) Special rule.--The child of parents described in paragraph (1) shall be treated as having received over half of his support during the calendar year from the parent not having custody if-- * * *(B)(i) the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody. For purposes of this paragraph, amounts expended for the support of a child or children shall be treated as received from the parent not having custody to the extent that such parent provided amounts for such support. Sec. 2139(a) of P.L. 94-455 amended Code sec. 152(e)↩ by substituting "each" for "all" in the third line of subparagraph (B)(i) above.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619035/	APPEAL OF ESTATE OF SAMUEL P. SCHWING, J. L. HORTENSTINE, COADMINISTRATOR.Schwing v. CommissionerDocket No. 3633.United States Board of Tax Appeals3 B.T.A. 697; 1926 BTA LEXIS 2578; February 13, 1926, Decided Submitted November 16, 1925. 1926 BTA LEXIS 2578">2578 1. Transfer of stock by decedent about fourteen months prior to his death, where promissory notes equal to the par value of the stock were given in payment, the stock certificates being attached to the notes as security, held to have been a bona fide sale for a fair consideration. 2. The decedent a few days before his death surrendered the notes to the makers thereof, with instructions to destroy them. Held, the unpaid balance of the notes was a gift made in contemplation of death. 3. Deduction claimed as fee paid to a physician for services rendered the decedent disallowed for lack of evidence. G. A. Ruhl, C.P.A., for the taxpayer. John F. Greaney, Esq., for the Commissioner. GRAUPNER 3 B.T.A. 697">698 Before GRAUPNER, TRAMMELL, and PHILLIPS. This is an appeal from the determination of a deficiency in estate tax for the year 1921 in the amount of $2,694.98, of which $2,579.37 is in controversy. The disputed portion of the deficiency arises from the inclusion by the Commissioner, in the gross estate of the decedent, of certain shares of stock which had been transferred by the decedent to his son and daughter. The value of the1926 BTA LEXIS 2578">2579 stock is also in controversy, the taxpayer contending that unrealized appreciation should not be used in determining the value. The petition further alleged error on the part of the Commissioner in disallowing a doctor's fee and one-half the amount of the executor's fee. The allegations with respect to the executor's fee were withdrawn. FINDINGS OF FACT. 1. Samuel P. Schwing died on February 19, 1921, at an age in excess of 60 years, and J. L. Hortenstine and Samuel P. Schwing, Jr., were duly appointed administrators of his estate. 2. The decedent was educated and licensed as a physician, but did not follow his profession. For a number of years he was president of the Schwing Lumber & Shingle Co., of Plaquemine, La., and looked after the logging and timber part of the business. His brother, Edward B. Schwing, was secretary and treasurer of the company, and some time prior to the transaction hereinafter described the brothers had agreed that they would gradually work their sons into the business, so that they would be able in time to take charge of it. 3. On December 19, 1919, the decedent surrendered 1,163 shares of stock which he held in the company, and, at his1926 BTA LEXIS 2578">2580 direction, the secretary issued certificates for 580 shares thereof to Samuel P. Schwing, Jr., 580 shares to Carrie B. Schwing Hortenstine, who was a daughter of the decedent, and 3 shares to the decedent. At or about the same time the son and daughter each gave the decedent a promissory note in the amount of $58,000 in payment for the stock at $100 per share and attached the stock certificates to the notes as collateral security. The notes and stock certificates were placed in a 3 B.T.A. 697">699 safe deposit box in a New Orleans bank, which the decedent and his wife held jointly. 4. At the time this transfer was made the decedent contemplated retiring from the business in about five years and so expressed his intention. 5. Dividends in the amounts of $5,800 and $11,600, representing 10 per cent and 20 per cent dividends, were paid on January 6, 1920, and January 10, 1921, respectively, by the company to each of the transferees of the stock here involved. The dividend checks were endorsed by the payees and turned over to the decedent to be applied against the purchase price of the stock as evidenced by the note. 6. In December, 1920, decedent and his brother made a trip to1926 BTA LEXIS 2578">2581 Havana, Cuba, where they were entertained and kept late hours. On their return from Havana they went to Chicago. The decedent was quite active while in Chicago, but while in New Orleans on his way home from Chicago he spent a short time in a hospital, and at that time advised members of his family that he had high blood pressure. Until the time of the illness which preceded his death, he never expressed any alarm as to his condition. On January 26, 1921, Mrs. Schwing insisted upon knowing the condition of the health of her husband and was informed by a physician that he was in the last stages of Bright's disease. 7. On or about February 7, 1921, Mrs. S. P. Schwing, at the direction of her husband, secured the stock certificates and notes from the safe deposit box. The decedent thereupon delivered to his son and daughter the certificates standing in their names and the notes they had executed, stating that the balance due on the notes was canceled and directing them to destroy the notes. 8. At the time the stock certificates and the notes above mentioned were delivered by decedent to his son and daughter there was due on the notes $81,200, after crediting the dividends1926 BTA LEXIS 2578">2582 received. One-half of this amount, or $40,600, was included in the estate-tax return, in accordance with the community property law of Louisiana, as a transfer made in contemplation of death. The Commissioner decreased the gross estate by the amount of $40,600 and increased it by adding thereto $121,220, representing one-half the value of 1,160 shares of stock at $209 per share. This increase was made on the theory that the stock was transferred in contemplation of death and to take effect in possession and enjoyment at or after death. 9. The book value of the stock of the Schwing Lumber & Shingle Co., as disclosed by its balance sheet of December 31, 1920, which did not include appreciation of timber, was $137 per share. The value of $209 per share was determined by the Commissioner by 3 B.T.A. 697">700 including appreciation of the value of timber. The valuation of the timber was the subject of conference in the Bureau of Internal Revenue at the time the Commissioner's answer in this appeal was filed. The timber questionnaire filed by the company in 1920 shows the unrealized appreciation in value of the timber to be $358,429.95, equal to $71.68 per share. 10. In 1923, 2601926 BTA LEXIS 2578">2583 shares of stock were sold at $140 per share; in 1924, 80 shares at $140; and in 1925, 150 shares at $130. 11. The decedent was attended in his final illness by a physician who gave the decedent constant attention during the last 30 days and even slept at his home. In accordance with the custom of the medical profession, this physician never rendered a bill to the estate for his services. However, relatives of the decedent later mailed the physician a check for the services he had rendered. DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice, under Rule 50. OPINION. GRAUPNER: The principal question for determination is whether the transfer of 1,160 shares of stock by the decedent to his son and daughter in December, 1919, was a bona fide sale for a fair consideration or a transfer made in contemplation of death, within the meaning of section 402(c) of the Revenue Act of 1918. The evidence is that the transferees gave the decedent their notes, each in the amount of $58,000, and deposited the stock certificates as security. The notes were therefore valuable to the extent1926 BTA LEXIS 2578">2584 of the value of the stock given as security, which, from the evidence, was not less than the face of the notes. This, in our opinion, constituted a bona fide sale of the stock, and the transaction is accordingly removed from the operation of the presumption created by section 402(c) of the 1918 Act. The taxable amount was that of the unpaid balance of the notes which was canceled by the decedent early in February, 1921, within two weeks prior to his death. The decedent forgave the indebtedness amounting to $81,200, one-half of which, or $40,600, in accordance with the community property law of Louisiana, should be included in the gross estate of the decedent. In view of this holding, it is unnecessary to determine the value of the stock here involved at the time of the decedent's death. 3 B.T.A. 697">*701 The deposition of the physician who attended the decedent discloses that he received a check for services rendered, but there is no evidence of the amount of the check, and the disallowance by the Commissioner of the amount claimed as a doctor's fee is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619037/	SECURITY STATE BANK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSecurity State Bank v. CommissionerTax Ct. Dkt. No. 15478-96United States Tax Court111 T.C. 210; 1998 U.S. Tax Ct. LEXIS 44; 111 T.C. No. 8; September 3, 1998, Filed 1998 U.S. Tax Ct. LEXIS 44">44 Decision will be entered for petitioner. P is a bank that uses the cash method of accounting. During 1989, P made short-term loans to customers. The principal and interest on the loans were payable at maturity. R determined that P must accrue interest and/or original issue discount on the loans pursuant to sec. 1281(a)(1) and ( 2), I.R.C.HELD: Sec. 1281(a)(2), I.R.C., does not require a bank to accrue interest on short-term loans made in the ordinary course of its business. Security Bank Minn. v. Commissioner, 98 T.C. 33">98 T.C. 33 (1992), affd. 994 F.2d 432">994 F.2d 432 (8th Cir. 1993).HELD, FURTHER: Sec. 1281(a)(1), I.R.C., does not require a bank to accrue original issue discount on short-term loans made in the ordinary course of business. Martin J. Peck, for petitioner.Charles M. Berlau, for respondent. RUWE, JUDGE. RUWE111 T.C. 210">211 OPINIONRUWE, JUDGE: Respondent determined a deficiency of $ 29,972.41 in petitioner's 1989 Federal corporate income tax. The issue for decision is whether section 1281(a)1 requires petitioner, a cash basis taxpayer, to accrue interest and/or original issue discount earned on short-term loans.1998 U.S. Tax Ct. LEXIS 44">47 BACKGROUNDThe parties submitted this case fully stipulated. The stipulation of facts and supplemental stipulation of facts are incorporated herein by this reference. Petitioner is a corporation whose principal place of business was in Wellington, Kansas, at the time it filed the petition.Petitioner is a commercial bank that makes a variety of loans in the ordinary course of its business. These loans are of varying duration, including loans of less than 1 year, loans of 1 year, and loans of more than 1 year. Petitioner had, and still has, business reasons for using notes with a term of 1 year or less.During 1989, petitioner made some loans that were documented by promissory notes with a stated maturity date that was 1 year from the date the notes were issued. Such loans will be referred to as category X loans. Petitioner held the category X loans on December 31, 1989. During 1989, petitioner also made some loans that were documented by promissory notes with a stated maturity date that was less than 1 year from the date the notes were issued. Such loans will be referred to as category Y loans. Petitioner held the category Y loans on December 31, 1989. The interest and principal payable1998 U.S. Tax Ct. LEXIS 44">48 on all categories X and Y loans were due at maturity.Petitioner reported its taxable income using the cash method of accounting. Petitioner reported interest income from its categories X and Y loans as it was received pursuant to the cash method of accounting.Petitioner had interest income of $ 60,086.89 during 1989 that had accrued, but was not yet paid, on its category X loans. 111 T.C. 210">212 Petitioner had interest income of $ 65,687.11 during 1989 that had accrued, but was not yet paid, on its category Y loans.DISCUSSIONPetitioner uses the cash method of accounting to report its taxable income. Consistent with that method, it did not report as income on its 1989 return any accrued interest or original issue discount that was earned but unpaid at the end of 1989. Respondent does not contest petitioner's general use of the cash method. 2 Rather, respondent relies on the specific provisions of section 1281 requiring the accrual of income earned on short-term obligations.1998 U.S. Tax Ct. LEXIS 44">49 The pertinent provisions of section 1281(a) are as follows: SEC. 1281. CURRENT INCLUSION IN INCOME OF DISCOUNT ON CERTAIN SHORT-TERM OBLIGATIONS.(a) General Rule. -- In the case of any short-term obligation to which this section applies, for purposes of this title --(1) there shall be included in the gross income of the holder an amount equal to the sum of the daily portions of the acquisition discount for each day during the taxable year on which such holder held such obligation, and(2) any interest payable on the obligation (other than interest taken into account in determining the amount of the acquisition discount) shall be included in gross income as it accrues.(b) Short-Term Obligations to Which Section Applies. --(1) In general. -- This section shall apply to any short-term obligation which --* * * * * * (C) is held by a bank (as defined in section 581), * (c) Cross Reference. -- For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c).Certain pertinent provisions of section 1283 are as follows:SEC. 1283. DEFINITIONS AND SPECIAL RULES.(a) Definitions. -- For purposes1998 U.S. Tax Ct. LEXIS 44">50 of this subpart -- 111 T.C. 210">213 (1) Short-term obligation. --(A) In general. -- Except as provided in subparagraph (B), the term "short-term obligation" means any bond, debenture, note, certificate, or other evidence of indebtedness which has a fixed maturity date not more than 1 year from the date of issue.(B) Exceptions for tax-exempt obligations. -- The term "short-term obligation" shall not include any tax-exempt obligation (as defined in section 1275(a)(3)). * (c) Special Rules for Nongovernmental Obligations. --(1) In general. -- In the case of any short-term obligation which is not a short-term Government obligation (as defined in section 1271(a)(3)(B)) --(A) sections 1281 and 1282 shall be applied by taking into account original issue discount in lieu of acquisition discount, and(B) appropriate adjustments shall be made in the application of subsection (b) of this section. Respondent's first argument is that petitioner is required to accrue interest income from its categories X and Y loans pursuant to section 1281(a)(2). This is not an issue of first impression. Indeed, respondent recognizes that in Security Bank Minn. v. Commissioner, 98 T.C. 33">98 T.C. 33, 98 T.C. 33">42 (1992),1998 U.S. Tax Ct. LEXIS 44">51 affd. 994 F.2d 432">994 F.2d 432 (8th Cir. 1993), we held that section 1281(a)(2) does not apply to short-term loans made by banks in the ordinary course of business. Respondent recognizes that our prior opinion precludes application of section 1281(a)(2) to the facts in the instant case, unless we choose to overrule it. Respondent urges us to do just that.98 T.C. 33">Security Bank Minn. v. Commissioner, supra, was a Court-reviewed opinion. The majority opinion contains an extensive analysis of the statute, its evolution, the context in which it appears, and its legislative history. There was a dissenting opinion which was joined by five Judges. In affirming our opinion, the Court of Appeals for the Eighth Circuit also made an extensive analysis of the same factors. One of the judges on the Court of Appeals panel dissented.No purpose would be served by repeating the statutory analysis that led this Court and the Court of Appeals to decide that section 1281(a)(2) does not apply to loans made by banks in the ordinary course of business. Suffice it to say that this matter has been thoroughly considered and decided. The doctrine of stare decisis generally1998 U.S. Tax Ct. LEXIS 44">52 requires that we follow the holding of a previously decided case, absent special justification. 111 T.C. 210">214 This doctrine is of particular importance when the antecedent case involves statutory construction. Hesselink v. Commissioner, 97 T.C. 94">97 T.C. 94, 97 T.C. 94">99-100 (1991). While respondent has skillfully rearticulated his arguments in support of a different interpretation of the statute, we find nothing therein that would cause us to refrain from applying the doctrine of stare decisis with respect to the section 1281(a)(2) issue. 3Respondent alternatively argues that the loans in question were made in return for notes that contained "original issue discount" within the purview of sections 1281(a)(1) and 1283. According to respondent, section 1281(a)(1) requires petitioner to accrue the daily portion of that discount during the year in which the note was held, regardless of whether 1998 U.S. Tax Ct. LEXIS 44">53 petitioner actually received anything in that year.In Security Bank Minn. v. Commissioner, supra 98 T.C. 33">98 T.C. 37, the Commissioner refrained from arguing that section 1281(a)(1) applied, although he stated on brief that it "arguably does." it was therefore not necessary for us to make a specific holding regarding the application of section 1281(a)(1). In a technical sense, respondent's proposed application of section 1281(a)(1) presents an issue of first impression. However, we believe that the analysis upon which the holding in Security Bank Minn. was based compels us to hold against respondent's argument that section 1281(a)(1) applies in the instant case.Our holding in Security Bank Minn. that section 1281(a)(2) did not apply to loans made by banks in the ordinary course of business was based on our interpretation of section 1281 as originally enacted in 1984. As originally enacted, section 1281(a) applied only to acquisition discount or original issue discount. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 41, 98 Stat. 548. Section 1281 was amended in 1986 to add the provisions of section 1281(a)(2). Tax Reform Act of 1986, Pub. L. 99-514, sec. 1803, 1001998 U.S. Tax Ct. LEXIS 44">54 Stat. 2791. In Security Bank Minn., we first analyzed section 1281 in its original form. On the basis of that analysis, we stated: We conclude that the legislative history supports petitioner's interpretation of section 1281, i.e., that it was enacted in 1984 to deal with problems 111 T.C. 210">215 associated with purchased debt instruments involving a discount and not with loans made by a bank in the ordinary course of its business. Accordingly, we hold that the loans here in dispute are not the sort of obligations or instruments to which section 1281 applied as enacted in 1984. 98 T.C. 33">Security Bank Minn. v. Commissioner, supra at 42. We then concluded that the addition of section 1281(a)(2) in 1986 was not intended to cover loans made by banks. We do not believe that the 1986 amendment, which originated as a technical correction, was intended to increase the coverage of section 1281(a) to loans made if, as we have concluded, such loans were not covered by the 1984 Act. The amendment, in our view, was intended to express the amounts to be taken into current income and not to expand the category of instruments covered by section 1281(a). 98 T.C. 33">Id. at 43. 1998 U.S. Tax Ct. LEXIS 44">55 Our analysis in 98 T.C. 33">Security Bank Minn. v. Commissioner, supra, makes clear that we have interpreted section 1281 as having no application to loans made by banks in the ordinary course of business, regardless of whether the loans are characterized as generating interest or original issue discount. 4 We, therefore, hold that section 1281(a)(1) does not apply to the loans in issue.Decision will be entered for petitioner. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue.↩2. Although it is not explicitly indicated in the record, it appears that petitioner was allowed to use the cash method of accounting in 1989 because it had gross income of less than $ 5 million. See secs. 446(a), (c)(1), 448(b)(3).↩3. Respondent has made no argument that the issues presented are of great overall significance. Sec. 448 generally precludes corporations with more than $ 5 million in gross receipts from using the cash method of accounting. Thus, our holdings appear to have application only to small banks.↩4. Because of our legal conclusion, there is no need to decide whether respondent is correct in characterizing the loans in issue as generating original issue discount.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619038/	Alma M. Myer, Petitioner, v. Commissioner of Internal Revenue, RespondentMyer v. CommissionerDocket No. 5085United States Tax Court6 T.C. 77; 1946 U.S. Tax Ct. LEXIS 314; January 17, 1946, Promulgated 1946 U.S. Tax Ct. LEXIS 314">314 Decision will be entered for the petitioner. Petitioner was the settlor-trustee of a trust created for the benefit of her son. As trustee she had broad managerial powers and the right to distribute or accumulate the income until the beneficiary reached the age of 30 years, at which time the accumulated income as well as the corpus of the trust was distributable to him. Held, no part of the income of the trust is taxable to petitioner under section 22 (a), Internal Revenue Code. J. M. Leonard, 4 T.C. 1271, and cases cited therein. Stanley S. Waite, Esq., and H. M. Stolar, Esq., for the petitioner.Loyal E. Keir, Esq., for the respondent. Arundell, Judge. Opper, J., dissenting. ARUNDELL6 T.C. 77">77 This proceeding seeks redetermination1946 U.S. Tax Ct. LEXIS 314">315 of deficiencies in income tax for the years and in the amounts as follows:1938$ 497.091939564.1819401,219.3219414,020.82Total6,301.41The sole issue is whether certain income of a trust, to the extent derived from property contributed thereto by petitioner, is taxable to petitioner under the provisions of section 22 (a).6 T.C. 77">78 FINDINGS OF FACT.Petitioner, an individual residing in Clayton, Missouri, filed her returns for the taxable years in question with the collector of internal revenue for the first district of Missouri.In 1932 petitioner orally created an irrevocable trust for the benefit of her son, Leo A. Drey, and thereafter on December 19, 1934, reduced its provisions to writing. In its preliminary declarations the written trust agreement recites the transfer of various items of cash and securities to the trust by petitioner and her parents and by an aunt of petitioner's son, and that the property, or its accumulations, except that used for the payment of premiums on the son's life insurance, was now held in trust by her. The list that followed consisted of some $ 5,000 cash and numerous Federal, state and municipal bonds. The agreement 1946 U.S. Tax Ct. LEXIS 314">316 further recited that petitioner was transferring other property to herself as trustee, such property being listed and comprised of foreign, railroad, and industrial bonds.The trust provided in part as follows:1. To take and hold the legal title to all the property given to me, in the manner above stated, and any other property of any character, real, personal or mixed, that may be received by me, in any manner, under the terms hereof (property now held by me, under the terms hereof, above described in Schedules A and B), and to exercise the exclusive management and control of all such property, designating myself as such trustee so far as convenient to me, it being understood that my failure to designate myself as such trustee in any matter or thing, or in taking or holding the title to any such property, shall, in no manner, be a breach of this trust, and that I may so designate myself at my discretion. I shall at all times keep full and proper books of account and records of my transactions as such trustee, and the property held by me as such trustee, and, so far as practicable, shall keep and hold the trust bonds, certificates of stock and other investments in the separate receptacle1946 U.S. Tax Ct. LEXIS 314">317 or package, properly marked, and provided by me for that purpose.(a) To sell, assign, transfer, convey, exchange, pledge, mortgage, lease or otherwise dispose of, conditionally or absolutely, at public or private sale, and on such terms and for such consideration as I think proper, the whole or any part of the property belonging to the trust, in whatever state of investment the same may be, and receive and compel payment of all rents, profits and income, of every character, arising therefrom, and of all other claims of said estate and rights and demands and indebtedness due said estate.(b) To pay out and expend such part of the net income for the use and benefit of my son Leo A. Drey as I, in my sole discretion, shall deem proper and in such manner and for such purposes as I shall deem proper; to hold and accumulate any unexpended part of the net income until the time hereinafter stated.(c) To invest the proceeds of sales of trust property or other moneys belonging to the trust, including all surplus of income after expenses, in such manner and in such property as to me may seem best, without any restriction as to the manner or form of investment, or the property in which the funds1946 U.S. Tax Ct. LEXIS 314">318 of said trust shall be invested. * * 6 T.C. 77">79 (f) To borrow money for the purchase of property or for other purposes of the trust, and to give notes, make contracts or enter into other obligations therefor, and to pledge or mortgage the property of the trust, or any part thereof, to secure such notes, contracts and obligations.(g) To vote in person or by proxy, in my discretion, at all times and on all occasions, upon all shares of stock belonging to the trust.(h) And generally, in all matters not hereinbefore specified, to deal with the trust property and to manage and conduct the trust hereof, in any manner that I shall deem for the interest of the trust beneficiaries, as fully as if I were the absolute owner of the trust property; and to execute and make all contracts, deeds, transfers and other instruments necessary and proper in the exercise of any or all of the aforesaid powers.* * * It was also provided that petitioner should not be required to give bond; that when the beneficiary became 30 the trust was to terminate and all trust property was to be his absolutely; that should he die before reaching 30 the trust property was to be paid to his children, if any, upon1946 U.S. Tax Ct. LEXIS 314">319 their attaining the age of 21; that during the child's minority petitioner could pay such part of the net income as she deemed necessary or proper for his education, comfort, maintenance, or support; that if the son died before reaching 30, leaving no children, the trust was to be paid and distributed in accordance with the direction of his last will, or failing which, in accordance with the direction of the petitioner's last will; that, if the son by reason of illness or misfortune needed help, authority was given to use as much corpus in addition to income as was necessary, except that corpus in amount in excess of $ 5,000 was not to be distributed in any one calendar year. The trust instrument had a spendthrift provision. Petitioner reserved the power by writing or by her last will to appoint a successor trustee, who was to have the trust upon the terms and conditions stated in the instrument. Such designated trustee in turn had the right to designate his successor.As of the date of the integration of the trust agreement the approximate value of the property transferred by petitioner to the trust was $ 140,000. Subsequent gifts by petitioner to the trust were of the approximate1946 U.S. Tax Ct. LEXIS 314">320 value of $ 59,000. Petitioner made and filed gift tax returns with respect to the gifts whenever such returns were required by law.Petitioner has acted as trustee from the date of the creation of the trust to the present time and has received no compensation for her services.Petitioner was born on May 23, 1890. She married Leo A. Drey, Sr., on April 16, 1916, and Leo A. Drey, the above named beneficiary, was born on January 19, 1917. Leo A. Drey, Sr., died December 22, 1920, as a result of an accident, and by the terms of his will left to petitioner his net estate, approximating $ 300,000. The principal asset of the estate consisted of stock in the Schramm Glass Co., upon 6 T.C. 77">80 the liquidation of which in 1925 petitioner received about $ 900,000. Petitioner married Max W. Myer in 1926, and has been married to him ever since.Leo A. Drey is the only child of petitioner and is not married. Except when he was away at college, he lived at home with petitioner until 1941, when he became a member of the armed forces. He has not been adopted by Myer. Petitioner felt that her first husband would have wanted her to make adequate provision for their son out of the substantial estate1946 U.S. Tax Ct. LEXIS 314">321 he had left to her.Petitioner's personal net worth on December 19, 1934, and for a number of years prior thereto and since has averaged approximately $ 1,000,000. Her estate has been invested principally in municipal bonds. Since 1925 her income has averaged in excess of $ 35,000 annually, of which $ 20,000 to $ 30,000 was from tax-exempt securities.Since 1932 petitioner has kept separate books of account showing the assets, income, and disbursements of the trust in question. During 1932, and until March 1933, petitioner kept the cash of the trust in her own bank account. Thereafter such cash has been deposited in a bank account in her name as trustee.Each year during the administration of the trust the trustee applied so much of the net income of the trust as was needed to pay the premiums on the following described policies insuring the life of Leo:(1) Two policies issued by the Sun Life Assurance Co. of Canada on March 21, 1929. Myer applied for these policies and reserved the incidents of ownership. The annual premium on each policy was $ 317. They each provided for the payment of endowment proceeds in the amount of $ 10,000 to Leo on March 11, 1959, but in the event1946 U.S. Tax Ct. LEXIS 314">322 of his death prior thereto this sum was payable to petitioner if living; if not, to Myer or his executors, administrators, or assigns. On November 4, 1943, Myer converted one of the policies into paid-up life in the amount of $ 9,215, and assigned the incidents of ownership to Leo. On December 10, 1943, Leo executed a revocable request for change of beneficiary which provided that on his death the proceeds were to be payable to petitioner, if living; otherwise to Myer or to the executors, administrators, or assigns of the last survivor of petitioner, Myer, and Leo. The other policy was assigned by Myer to Leo on December 8, 1943, and on December 10, 1943, Leo effected a revocable beneficiary change comparable to the one under the other policy. On March 8, 1944, this other policy was converted into a paid-up life policy in the amount of $ 9,580.(2) A policy issued by the Travelers Insurance Co. on March 8, 1937, on application of Leo, which called for the payment of 40 premiums of $ 502.18 per annum. The incidents of ownership were retained by Leo. On maturity of the policy in 1977 Leo, if living, 6 T.C. 77">81 will receive $ 21,315.28 cash, or in the event of his prior death $ 34,0001946 U.S. Tax Ct. LEXIS 314">323 is payable to his executors, administrators, or assigns.(3) A participating whole life policy issued by the John Hancock Mutual Life Insurance Co. on January 10, 1938, on application of Leo, in the face amount of $ 30,000, with an annual premium of $ 507.90. The incidents of ownership are vested in Leo, and on his death the proceeds are payable to Myer, if living; if not, to petitioner, if living; otherwise to Leo's executors, administrators, or assigns.At no time was petitioner an officer, director, or employee of any of the corporations the securities of which were held by the trust as part of the trust property during the taxable years here involved. At no time did the trust have enough stock or other securities in any company which when added to any of the same kind of stock or securities owned individually by petitioner would be sufficient if voted by her to elect petitioner a director of any of the corporations.With the exception of the application of portions of the net income to pay premiums on the above named insurance policies, all of the net income of the trust prior to 1938 was accumulated and invested. During three of the years here involved the trust made distributions1946 U.S. Tax Ct. LEXIS 314">324 directly to Leo in the following amounts:1938$ 1,282.4019392,647.1719414,075.02During the taxable years in question the income of the trust which was not distributed to the beneficiary and not used to pay insurance premiums was accumulated in the trust. The following schedule shows the income of the trust during the taxable years from property contributed by petitioner and from property contributed by others than petitioner:From Property Contributed by PetitionerInterestCapitalIncome taxOrdinaryon U. S.gain orTotalpaid atincomeobligations(loss)source1938$ 4,370.86$ 992.25$ 5,363.11$ 9.0019395,306.04975.76($ 1,324.70)4,957.108.3519404,417.07958.29472.34 5,847.702.4019414,177.843,842.74(2,014.35)6,006.23From Property Contributed by Others1938$ 535.56$ 252.75$ 788.3119392,009.18269.24($ 19.86)2,258.5619403,128.3993.38(35.00)3,186.7719413,304.251,051.5217.20 4,372.97Respondent has attributed to petitioner only that part of the income derived from the property contributed by her.6 T.C. 77">82 During the taxable year the trust income 1946 U.S. Tax Ct. LEXIS 314">325 distributed to Leo was returned by him in his individual tax returns and the income not distributed was returned by the trust in separate income tax returns. The trust adopted the calendar year basis.None of the trust income has ever been used for the discharge of petitioner's legal obligations to support any member of her family, and such distributions as were made to Leo were reinvested for him in his own name.OPINION.The petitioner asserts error on the part of the respondent in attributing to her, under section 22 (a) of the Internal Revenue Code, that portion of the trust income derived from property placed in the trust by her. She contends that her gifts were complete and that even though she was trustee with wide management powers, she had no taxable interest whatsoever in the corpus or the income thereof and that she enjoyed no economic advantages as a result of her trusteeship. The respondent, in support of his determination, relies principally upon Joel E. Hall, 4 T.C. 506, and Louis Stockstrom, 3 T.C. 255 (appeal pending when the briefs were submitted). In the interim the Stockstrom case has, in so1946 U.S. Tax Ct. LEXIS 314">326 far as here material, been affirmed, 148 Fed. (2d) 491; certiorari denied, 326 U.S. 719">326 U.S. 719, and the Hall case has been reversed, 150 Fed. (2d) 304.We are of the opinion that the petitioner should prevail. She did not enjoy the important attributes of ownership so as to warrant charging her with receipt of the income in question. Certainly Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, does not go so far. The Stockstrom case, supra, probably represents the furthest extension of the Clifford principles that has yet been approved, and in that case this Court fixed upon the factor that the settlor-trustee "was not required to distribute any part of the income to any of the beneficiaries during his lifetime." Such is not the situation here. It may be true that the extent of the managerial powers here is comparable to those of the trustee in the Stockstrom case but, even so, we have uniformly held that management powers through which no economic gain may be derived are not sufficient to justify holding the settlor-trustee chargeable with the income. Estate of Benjamin Lowenstein, 3 T.C. 1133;1946 U.S. Tax Ct. LEXIS 314">327 Lura H. Morgan, 2 T.C. 510; David Small, 3 T.C. 1142; Herbert T. Cherry, 3 T.C. 1171; W. C. Cartinhour, 3 T.C. 482. And see the following Circuit Courts of Appeal cases: Commissioner v. Branch, 114 Fed. (2d) 985; Jones v. Norris, 122 Fed. (2d) 6; Helvering v. Palmer, 115 Fed. (2d) 368; Armstrong v. Commissioner, 143 Fed. (2d) 700.Here the petitioner could distribute the income at her discretion until the beneficiary reached the age of 30 years. At that time the 6 T.C. 77">83 accumulated income, as well as the corpus of the trust, became payable to him. Hence, the trust indenture fixed a time for payment of the income and distribution of the principal which permitted of no variation by the trustee. We considered almost the same situation in the light of the Stockstrom decision in J. M. Leonard, 4 T.C. 1271; in Alice Ogden Smith, 4 T.C. 573; and in connection1946 U.S. Tax Ct. LEXIS 314">328 with the trusts for the primary benefit of the children, in Alex McCutchin, 4 T.C. 1242. In each of those cases, now acquiesced in by the Commissioner, we held that the settlor-trustee was not taxable on the income of the trusts. The instant case should be accorded the same treatment. See also Hawkins v. Commissioner, 152 Fed. (2d) 221.Decision will be entered for the petitioner. OPPEROpper, J., dissenting: Decision of this proceeding for respondent seems to me to be compelled by Louis Stockstrom, 3 T.C. 255; affd. (C. C. A., 8th Cir.), 148 Fed. (2d) 491; certiorari denied, 326 U.S. 719">326 U.S. 719, and similar authorities, particularly Joel E. Hall, 4 T.C. 506. The latter case was reversed by a divided court, 150 Fed. (2d) 304 (C. C. A., 10th Cir.), but I think we should adhere to our original view. Cf. Talbot Mills v. Commissioner, 326 U.S. 521">326 U.S. 521, majority and dissenting opinions. See also Edison v. Commissioner (C. C. A., 8th Cir.), 148 Fed. (2d) 810;1946 U.S. Tax Ct. LEXIS 314">329 Funsten v. Commissioner (C. C. A., 8th Cir.), 148 Fed. (2d) 805; Stockstrom v. Commissioner (C. C. A., 8th Cir.), 151 Fed. (2d) 353; Miller v. Commissioner (C. C. A., 6th Cir.), 147 Fed. (2d) 189; Anna Morgan, 5 T.C. 1089.It is the degree of control which is determinative; petitioner, the grantor, was vested with extremely broad power of management, and in addition the power to make or withhold payments of income. She was thus, as in Anna Morgan, supra, "in a position to accumulate trust income, add it to principal, and thereby succeed in changing the recipient from the income beneficiary to the remainderman * * ." It does not suggest any diminution of her retained interest that she would herself be that remainderman upon her childless son's intestate death before reaching thirty. The breadth of petitioner's potential benefit from the trust is instanced by the insurance transactions. That there were not more is evidence not of a lack of control, but of an absence of desire to exercise it.I think the determination1946 U.S. Tax Ct. LEXIS 314">330 should be sustained.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619039/	IDA STEPHENSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stephenson v. CommissionerDocket No. 62825.United States Board of Tax Appeals33 B.T.A. 252; 1935 BTA LEXIS 782; October 22, 1935, Promulgated 1935 BTA LEXIS 782">782 1. Where in the State of Texas decedent died January 19, 1929, and left a will bequeathing and devising to his wife all of his property and appointing her independent executrix without bond and directing that no action should be had in any court except to probate the will and return an inventory appraisement and list of claims of the estate, and the executrix duly qualified under the laws of the state, and at the time of decedent's death there were certain lawsuits pending against him which were not concluded until subsequent years and there were other claims against the estate to be settled, held that at least until the end of the year 1929 there was an administration open and pending within the meaning of section 161, Revenue Act of 1928. 2. Where an independent executrix of an estate, who was also sole legatee and devisee, received certain interest and dividend payments from property which was owned one half by the estate and one half by her in her individual capacity, held that the interest and dividends so received were taxable, one half to her in her fiduciary capacity and one half to her in her individual capacity. M. J. Arnold, Esq., and R. S. Cozby,1935 BTA LEXIS 782">783 Esq., for the petitioner. P. A. Bayer, Esq., and R. B. Cannon, Esq., for respondent. BLACK 33 B.T.A. 252">252 Petitioner contests a deficiency in income tax for 1929 in the amount of $8,976.14. The entire amount is in controversy, plus an overpayment claimed in the amount of $2,125.66. The only questions involved are whether the estate of petitioner's deceased husband, who died January 19, 1929, was in process of administration or settlement from the date of his death to at least the end of the calendar year 1929, and, if so, whether certain items of income and an item of deduction included by respondent in petitioner's net income for the calendar year 1929 should have been included in a return filed for the alleged estate, as was originally done. 33 B.T.A. 252">253 The parties have filed a stipulation of facts and offered certain other documentary and oral evidence, from which we make the following findings of fact. FINDINGS OF FACT. Petitioner is an individual. She and L. L. Stephenson were married about the year 1901 and had at all times lived together as husband and wife and as resident citizens of the State of Texas until January 19, 1929, when L. L. 1935 BTA LEXIS 782">784 Stephenson dies. All of the property which was owned by petitioner and her husband at the time of the latter's death was community property. L. L. Stephenson left surviving him his widow (the petitioner), two minor children, and an adopted daughter. He also left a will, which was duly probated in the County Court of Bexar County, Texas, on March 4, 1929, and reas as follows: San Antonio, Texas, 12/12/28. I, L. L. Stephenson, Sr., do hereby revoke all wills heretofore made and constitute the following as my will: I hereby will all of my property unto my wife, Ida Stephenson, and appoint her Independent Executrix without bond and direct that no action shall be had in any court except to probate this will and return an inventory, appraisement and list of claims and as Independent Executrix she shall have full power to sell and in every other way handle and dispose of all or any property as she deems best without reporting to any court. L. L. (His X Mark) STEPHENSON WITNESSED BY M. J. ARNOLD A. NONAK, R. N. H. G. TERRY. On December 11, 1928, L. L. Stephenson entered into a written agreement with the American Service Co. wherein Stephenson agreed to sell and the purchaser1935 BTA LEXIS 782">785 agreed to buy certain specified property at a cash price of $1,700,000, to be paid "at the time of the consummation of the purchase * * ." The twelfth paragraph of the contract provided: This contract shall be binding upon, and shall inure to the benefit of, the Purchaser, and the Purchaser's successors and assigns, and Mr. Stephenson and his heirs, executors, administrators and assigns. The American Service Co. was desirous of completing the contract it had with L. L. Stephenson as soon as possible. In order that this might be done petitioner, on January 23, 1929, duly applied for appointment, was duly appointed, and duly qualified as the temporary administratrix of the estate of L. L. Stephenson, deceased, with bond fixed at $25,000, which position she occupied until March 4, 1929, when she was duly appointed, qualified, and sworn as the independent executrix of the will and estate of L. L. Stephenson, deceased. 33 B.T.A. 252">254 While acting as temporary administratrix, petitioner, in order to carry out the contract between her deceased husband and the American Service Co., entered into certain additional contracts of sale with the latter on January 23, 1929, and consummated, 1935 BTA LEXIS 782">786 so far as possible, the sale of the property covered by the earlier contract dated December 11, 1928. On February 5, 1929, the purchaser deposited $850,000 of the purchase price in the City National Bank of San Antonio to the credit of "Mrs. Ida Stephenson individually and the Estate of L. L. Stephenson, Deceased." On March 4, 1929, when the decedent's will was probated, petitioner, as temporary administratrix, acting pursuant to the orders of the County Court of Bexar County, delivered over to herself as independent executrix all of the property in her hands belonging to the estate of L. L. Stephenson, deceased. On the same date petitioner was duly discharged as temporary administratrix, and the sureties on her bond as such were likewise released and discharged. The oath petitioner took as independent executrix on March 4, 1929, was as follows: I DO SOLEMNLY SWEAR that the writing which has been offered for probate is the last will of L. L. Stephenson, deceased, so far as I know or believe, and that I will well and truly perform all the duties of Independent Executrix of said will of the estate of said L. L. Stephenson, deceased. On March 23, 1929, the county judge of Bexar1935 BTA LEXIS 782">787 County examined and approved in open court an inventory, appraisement, and list of all the property, real and personal, and claims belonging to the estate which were transferred to petitioner as independent executrix. On March 29, 1929, petitioner, as independent executrix, paid an amount of $9,393.58 as Federal estate tax; and on April 1, 1929, she paid an amount of $45,934.43 as the inheritance tax due the state. On April 30, 1929, the entire balance of the purchase price of the property purchased by the American Service Co. was paid over to petitioner individually and as independent executrix, conditioned upon her compliance with the following arrangement (quoted from the stipulation): In order to draw down said balance, which was so covered by the Escrow agreement, the said Mrs. Ida Stephenson, individually and as Independent Executrix, on April 17, 1920, deposited in escrow with the City National Bank of Dallas certain United States Government Bonds of the par value of $100,000.00, to so remain in escrow under the same conditions as set forth in said original Escrow contract; and these bonds were released and returned to her on or about April 4, 1930, as provided by said1935 BTA LEXIS 782">788 escrow contract. The above arrangement was fully carried out in every respect. All of the money representing the proceeds of the said sale was deposited, as and when received, in a bank account in the name of and to the credit of "Ida Stephenson, Individually and as Independent 33 B.T.A. 252">255 Executrix of the Estate of L. L. Stephenson, Deceased." All checks against this account were likewise signed in both capacities. This account was carried in this manner from the time the first payment was received until December 31, 1930. In this account was also deposited practically all moneys received by petitioner from other sources. On May 2, 1929, petitioner, for herself individually and as independent executrix, paid M. J. Arnold, an attorney, his fee of $10,000 for the services rendered by him. The fee also covered payment for any subsequent services which might be necessary in connection with the estate's affairs. Such services did become necessary and were performed by Arnold in the spring of 1930. No application for partition of the estate was ever filed in the county court, or in any other court, and no court has ever made any order with reference thereto. At the time1935 BTA LEXIS 782">789 of the death of L. L. Stephenson certain lawsuits were pending in which the decedent was involved either as sole defendant or as one of several defendants. Some of these lawsuits were not settled and disposed of until in years subsequent to the taxable year in question. On February 15, 1930, petitioner filed with the collector of internal revenue for the first district of Texas two returns, one for herself individually and one for the estate of L. L. Stephenson, deceased. The return for herself was on form 1040, which is captioned "Individual Income Tax Return." The return for the estate was on form 1041, which is captioned "Fiduciary Return of Income." A transcript of the latter return is as follows: INCOMEItem No.2 Interest on Bank Deposits, etc$30,379.717 Dividends, Domestic Corporations44,300.648 Other Income, Insurance Dividend8.659 Total Income in Items 1 to 8$74,689.00DEDUCTIONS10 Interest Paid3.3611 Taxes Paid (State Inheritance and Federal Estate)55,328.0116 Total Deductions in Items 10 to 1555,331.3717 Net Income (Item 9 minus Item 16)$19,357.6318 BENEFICIARIES' SHARES OF INCOME AND CREDITS(a) Mrs. Ida Stephenson, Dividends (Item 7 above, or Item 17, whichever amount is smaller$19,357.631935 BTA LEXIS 782">790 33 B.T.A. 252">256 The above item of $19,357.63 was included by petitioner in her individual return (form 1040) as dividends on stock of domestic corporations, and in that return she reported a net income of $43,905.37 taxable at normal and surtax rates, and a capital gain of $614,457.45 taxable at capital gain rates. The respondent in his determination of the deficiency herein increased petitioner's net income, in part, by the net amount of $55,328.01, which equals the state inheritance and Federal estate taxes paid by the estate. In addition to the net amount of $55,328.01, the respondent increased petitioner's net income as reported by her by the amount $8,108.04, as profit from the sale of certain stock. The respondent thus determined that petitioner's net income taxable at normal and surtax rates was the total amount of $107,341.42. The respondent also determined that petitioner's capital gain was the amount of $586,759.24 instead of $614,457.45, a reduction of capital gain of $27,698.21. The petitioner does not question the respondent's determination relative to the reduction of capital gain and the increase in net income by the item of $8,108.04. OPINION. BLACK: Petitioner's1935 BTA LEXIS 782">791 only contention is that the respondent erred in adding to her net income the above described net amount of $55,328.01. She contends that the three items of income and the deduction making up this net amount were the income and deduction of the estate of L. L. Stephenson, deceased, and were correctly reported by petitioner as independent executrix on the fiduciary return, form 1041. The respondent's position is contained in the opening statement and oral argument of his counsel, made in place of a brief. In his opening statement counsel said: Of course, it is our position that the petitioner and her husband owned certain property as community property. When the husband died she was the sole beneficiary named in the will, and having first of all one-half of the community property, and having inherited the second half, subject to any debts, I assume that she owned the entire property, and that the income from the property is the income of the petitioner. In support of the above stated position, counsel for the respondent in his oral argument cited as authority articles 3662, 3449, and 3436 of Vernon's Annotated Texas Statutes, and 1935 BTA LEXIS 782">792 ; . These articles are as follows: ART. 3662. (3593) (2220) (2165) Where there is no child.Where the husband or wife dies intestate, or becomes insane, having no children, and no separate property, the common property passes to the survivor, charged with the debts of the community; and no administration thereon or guardianship of the estate shall be necessary. 33 B.T.A. 252">257 ART. 3449. (3376) (2009) (1956) Administration under will.The administration of an estate under a will shall in all respects be governed by the provisions of the law respecting the administration of intestates' estates, except where it is otherwise provided by law or by the provisions and directions of the will. ART. 3436. (3362) (1995) (1942) Testator may provide that no action be had in court, etc.Any person capable of making a will may so provide in his will that no other action shall be had in the county court in relation to the settlement of his estate than the probating and recording of his will, and the return of an inventory, appraisement and lists of claims of his estate. Under the above articles1935 BTA LEXIS 782">793 the respondent contends that no administration of the decedent's estate was necessary or in fact took place; that therefore there was no "Income received by estates of deceased persons during the period of administration or settlement of the estate" as that clause is used in section 161(a)(3) of the Revenue Act of 1928; that there was no net income of an estate to be computed under section 162, no tax to be paid by the fiduciary under section 161(b), and no return to be filed under section 143, all of the Revenue Act of 1928; that the three items of income and the one item of deduction for interest paid that were reported on form 1041 should have been reported in petitioner's own individual return; and that, under section 23(c) of the Revenue Act of 1928 and article 154 of Regulations 74, petitioner was not entitled to deduct on her own individual return the state inheritance and Federal estate taxes paid in the total amount of $55,328.01. Petitioner is not contending that she is entitled to deduct the state inheritance and Federal estate taxes amounting to a total of $55,328.01 in her individual income tax return. She concedes that under section 23(c), supra, such taxes are1935 BTA LEXIS 782">794 "allowed as a deduction only to the estate." She merely contends that certain income which the respondent has determined to be her income was in fact and in law the income of the estate, so that the estate would have income from which such taxes could be deducted. Since the decedent herein died testate rather than intestate, since he was not insane, and since he and the petitioner had two minor children and an adopted daughter at the time of his death, we fail to see wherein article 3662, supra, is at all applicable to this case. Of course, it is the respondent's contention that, since article 3449, supra, provides that except for certain stated provisions the administration of an estate under a will shall be governed by the "law respecting the administration of intestates' estates", it is the last clause of article 3662 that is applicable here. We doubt very much the correctness of this contention for the reason that the estate here in question was being administered by an independent executrix. See 33 B.T.A. 252">258 ; 1935 BTA LEXIS 782">795 . In that case the court, after quoting in full article 3449 (then art. 2009, Rev. Stat.), said: It is doubtful if this provision was intended to apply to independent executors. It appears rather to be intended to apply to a judicial administration by an administrator under the will, or by an executor without independent powers. In any event, we are clearly of the opinion that there was an "administration" of the decedent's estate within the meaning of that term as used in section 161 of the Revenue Act of 1929. ; ; . In the Todd case the Supreme Court of Texas said: We have no doubt that the management of the estate of a deceased person, and the disposition of property by executors acting under a will which withdraws the estate from the general control of a probate court, is to be deemed, within the meaning of the law, an "administration." We have examined , and find nothing therein which is contrary to our holding in the Donnelly case, supra, which was1935 BTA LEXIS 782">796 exactly in point with the instant case. It only remains for us to decide whether the estate of L. L. Stephenson, deceased, was in process of administration until at least the close of December 31, 1929, and whether the three items of income and one item of deduction for interest paid were the income and deduction of the estate or the income and deduction of petitioner in her individual capacity. We think the evidence clearly shows that the estate was in process of administration until at least the close of December 31, 1929. At that time the lawsuits in causes numbered B-47878, 33796, and 8585 were still pending and the $100,000 in bonds deposited in escrow on April 17, 1929, by Ida Stephenson individually and as independent executrix of her deceased husband's estate had not then been released and were not in fact released until about April 4, 1930. We therefore find as a fact that the estate of L. L. Stephenson, deceased, was in process of administration or settlement until at least the close of December 31, 1929. We come now to the more troublesome question of fact as to whether the evidence offered by petitioner proves that the three items of income and one item of deduction1935 BTA LEXIS 782">797 for interest paid were in fact the estate's income and deduction rather than petitioner's. The respondent has determined that the net amount of these four items, namely, $55,328.01, was taxable to petitioner in her individual capacity, and the burden of showing otherwise is on the petitioner. . 33 B.T.A. 252">259 The theory of petitioner is that there was an estate in process of administration during the taxable year (and on this point we have sustained petitioner); that the property which was owned by L. L. Stephenson and his wife, Ida Stephenson, prior to his death was community property in which each owned a one-half interest and upon the death of L. L. Stephenson, his estate continued to own his one half of the property and Mrs. Stephenson owned her one half; that during the taxable year petitioner, in her individual capacity and as independent executrix of her husband's estate, partitioned the property, distributing one half thereof to herself and one half to the estate; that she returned on her individual income tax return the income from the one half of the property which was distributed to her as an individual and on the fiduciary1935 BTA LEXIS 782">798 return which she filed for the estate she reported the income from the property which was partitioned to the estate; and that, after giving effect to certain deductions, the remainder of the income partitioned to the estate, amounting to $19,357.63, was distributed to petitioner as the sole beneficiary of the estate and returned by her on her individual income tax return. There seems to be no doubt that under the laws of Texas an independent executor has the right to make such a partition. The case of , holds as follows: Being authorized by will to administer independently of the probate court, the executors could determine for themselves when they would surrender their rights and powers over the estate to the distributees. Where executors are empowered to act independently of the probate court, they may close the administration, or surrender all or any portion of the property to the heirs or devisees, without the formality of judicial sanction. and the same legal consequences follow. Was there such a partition made as the petitioner claims? We do not think the evidence is sufficient to establish such a partition. The stipulation1935 BTA LEXIS 782">799 which has been filed does not show any partition. The only witness who testified concerning the alleged partition was E. G. Hendrix, accountant and business manager of both the estate and petitioner. He testified: "We assigned certain of those properties to her (Mrs. Ida Stephenson as an individual) and certain of them to the estate." On cross-examination the following questions and answers of the witness relating to the above testimony appear: Q. How was that done? A. By segregating them and keeping them separate in the books. Q. In other words, the only segregation as I understand it, is on this book which you have in your lap at the present time, is that right? A. Segregation of the properties, yes sir. Q. Did anybody else know anything about that besides you and Mrs. Stephenson? A. No, and the attorney. 33 B.T.A. 252">260 Q. So that when you have been referring to partitions here during your direct examination, what you meant was that an account was opened in this book in which certain assets were listed as being estate assets, is that right? A. Correct. From a careful review of all the evidence we conclude that what was actually done was substantially1935 BTA LEXIS 782">800 this: The estate was a large estate, thoroughly solvent, and there was no need for the independent executrix to retain in the estate all the decedent's interest in the community property, so she distributed certain of the property, bonds, notes, etc., to herself as an individual. This she had a right to do, being the sole legatee and devisee under the will. The income from the property thus distributed is not in controversy here. Certain other of the community property was not distributed during the taxable year. The estate owned a one-half interest in this property and Mrs. Stephenson owned the other half. The instant case is distinguishable from that of In that case the decedent, A. M. Donnelly, and his wife, Catherine, owned as community property 5,373 2/3 shares of stock in the Eastland Oil Co. After Donnelly's death, the stock was divided and certificates were issued for 2,686 5/6 shares to Catherine Donnelly and 2,686 5/6 shares to her as executrix of the estate of A. M. Donnelly, deceased. Under those circumstances we held that the dividends on the 2,686 5/6 shares belonging to the estate were not taxable1935 BTA LEXIS 782">801 to Catherine Donnelly in her individual capacity. As we have already pointed out, we can not hold under the evidence in this case that there was any such definite partition of the assets as there was in the Donnelly case. Therefore the resulting taxation is not the same. We therefore find as ultimate facts that the item of interest amounting to $30,379.71, reported as item No. 2 on form 1041, was the total interest received between January 19, 1929, and December 31, 1929, on community property or on the investment of the proceeds from such property owned by decedent and his wife at the time of his death and in which the estate still owned a one-half interest; that the item of dividends, amounting to $44,300.64, reported as item No. 7 on form 1041, was the total dividends received between January 19, 1929, and December 31, 1929, on community property or on the investment of the proceeds from such property owned by decedent and his wife at the time of his death and in which the estate still owned a one-half interest; that the item of other income amounting to $8.65, reported as item No. 8 on form 1041, was one half of an insurance dividend received between January 19, 1929, and1935 BTA LEXIS 782">802 December 31, 1929, on community property owned by decedent and his wife at the time of his death; and that the other one half of the insurance dividend just referred to was 33 B.T.A. 252">261 reported by petitioner in her individual return, form 1040. No evidence was offered with respect to the item of interest paid in the amount of $3.36, reported as item No. 10 on form 1041. The conclusions we reach from the findings set forth in the previous paragraph are that the respondent erred in increasing petitioner's net income taxable at normal and surtax rates by one half of $30,379.71, plus one half of $44,300.64, plus $8.65, or a total amount of $37,348.82. The evidence offered by petitioner proves to our satisfaction that this total amount of $37,348.82 was properly the income of the estate of L. L. Stephenson, deceased. Under sections 161, 162, and 143 of the Revenue Act of 1928, we think petitioner, as independent executrix, was not only entitled, but was required by law, to file a return for the estate and report therein the said amount of $37,348.82, from which she was entitled to take allowable deductions. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619040/	Bradley C. Miller and Dianne M. Miller, Petitioners v. Commissioner of Internal Revenue, RespondentMiller v. CommissionerDocket No. 7263-93United States Tax Court104 T.C. 330; 1995 U.S. Tax Ct. LEXIS 15; 104 T.C. No. 14; March 20, 1995, Filed 1995 U.S. Tax Ct. LEXIS 15">15 Decision will be entered under Rule 155. Ps sustained a net operating loss (NOL) and an alternative minimum tax (AMT) NOL in 1985. Ps elected on their 1985 tax return as follows: "In accordance with Internal Revenue Code Section 172, the Taxpayers hereby elect to forego the net operating loss carry back period and will carryforward the net operating loss." P's then sought to carry back only their 1985 AMT NOL by filing an amended 1984 tax return. Ps contend that the two types of NOL's from a single year may be carried into separate tax years, and that their election did not waive the carryback period as to their AMT NOL.1. Held: In accordance with Plumb v. Commissioner, 97 T.C. 632">97 T.C. 632 (1991), NOL's and AMT NOL's from a single year cannot be carried into separate taxable years. The NOL deductions are governed by a single carryback period, for which only a single election may be made under sec. 172(b)(3)(C), I.R.C.2. Held, further, Ps did not show that the election they communicated was unavailable to them and, therefore, invalid (i.e., Ps did not show that their 1985 return language reflected that they were electing to separately use 1995 U.S. Tax Ct. LEXIS 15">16 the two NOL's, or that they attempted to waive the carryback period for only one of the NOL's).3. Held, further, although Ps intended to make an election that was unavailable to them, the language they used manifested an available election to which they are bound. Mark A. Brown and David P. Burke, for petitioners.Steve R. Johnson, for respondent. GerberGERBER104 T.C. 330">331 GERBER, Judge: Respondent determined a deficiency in petitioners' 1984 income tax in the amount of $ 40,117. After concessions, the issue remaining for our consideration is whether petitioners were entitled to carry their 1985 net operating loss (NOL) and alternative minimum tax net operating loss (AMT NOL) to different tax years, and, if not, whether petitioners' election manifested an intent to achieve an unavailable result and is therefore of no effect (i.e., by their attempting to use the NOL's separately or to waive the carryback period as to only one of the NOL's).FINDINGS OF FACT 11995 U.S. Tax Ct. LEXIS 15">17 Petitioners, who were at all pertinent times husband and wife, resided in Tampa, Florida, at the time the petition in this case was filed.Petitioners' certified public accountant (C.P.A.), Robert E. Krusoe, prepared the tax returns at issue in this case. On April 13, 1985, petitioners' original 1984 tax return was filed, showing no tax liability computed by the "regular" method. Their 1984 return did, however, show an alternative minimum tax liability of $ 45,784. Petitioners paid the AMT liability.104 T.C. 330">332 For 1985, petitioners reported an NOL of $ 331,958 and an AMT NOL of $ 156,014. Petitioners' C.P.A. became aware of an article from the Journal of Taxation stating that "It is unclear whether both a regular NOL and AMT NOL from the same year must be given the same carryover treatment." The article contained the conclusion that "Independent treatment would seem appropriate", and that "it may be possible to carryback a regular NOL and elect to carry forward an AMT NOL even though both NOLs originated in the same year." Stout & Weiss, "Analysis of the alternative minimum tax net operating loss: The second NOL", 61 J. Taxn. 418, 422 (1984).Mr. Krusoe1995 U.S. Tax Ct. LEXIS 15">18 then consulted an associate of his, former IRS employee Harry "Bud" S. Morrison. Mr. Morrison concluded that the two carryback periods could be split, and reduced his conclusions to writing for Mr. Krusoe. Based on the Journal of Taxation article, Mr. Morrison's comments, and his own research, Mr. Krusoe concluded that NOL and AMT NOL carrybacks and carryovers could be split.Mr. Krusoe prepared petitioners' 1985 tax return and sent it to them on January 10, 1986. The cover letter informed petitioners that, for 1985, they had sustained a "regular net operating loss of $ 331,958, which * * * [had] been elected to be carried forward * * * [and] an alternative minimum tax net operating loss of $ 156,014, which * * * [petitioners, with the assistance of Mr. Krusoe, would] carryback after * * * [the] return * * * [was] filed."For 1985, petitioners' Federal income tax return reported taxable income (loss) of ($ 331,958) and alternative minimum taxable income (loss) of ($ 156,014), and included the following statement:In accordance with Internal Revenue Code Section 172, the Taxpayers hereby elect to forego the net operating loss carry back period and will carryforward the net1995 U.S. Tax Ct. LEXIS 15">19 operating loss. [Emphasis added.]Mr. Krusoe prepared this election statement in accordance with the language in section 172(b)(3), 2 believing that the NOL and AMT NOL from the same year could be split and carried back or forward to different years. He thought that the term "net operating loss" delineated only "regular" NOL's and, thus, that there was no need to mention the AMT NOL. Mr. 104 T.C. 330">333 Krusoe believed that, by choosing such language, he would communicate petitioners' intent to waive only their NOL carryback, while separately reserving their AMT NOL carryback for use in a different tax year.On February 3, 1986, respondent received petitioners' 1984 amended tax return. In the 1984 amended return, petitioners carried back their 1985 AMT NOL, thus reducing their 1984 AMT liability. Consequently, petitioners claimed a refund for $ 1995 U.S. Tax Ct. LEXIS 15">20 34,372 and included this statement:The amended return is filed to carryback an alternative minimum taxable net operating loss in accordance with Internal Revenue Code § 55(d). AMT NOL computations are on page 5 and first carried back to 1983, on page 6, then to 1984 also on page 6.In March 1986, respondent returned petitioners' 1984 amended tax return with instructions that additional calculations were needed. In June 1986, petitioners filed both a revised 1984 amended return and a 1985 amended return. Subsequently, in September 1986, respondent refunded the $ 41,090 that petitioners requested on their revised 1984 amended return.Legislative commentary was issued on September 18, 1986. A House report contained the comment 3 that "an election under section 172(b)(3)(C) to relinquish the carryback period applies both for regular tax and for minimum tax purposes." H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 1, 262. Likewise, in June 1987, respondent, in Rev. Rul. 87-44, 1987-1 C.B. 3, announced the position that the election was indivisible.1995 U.S. Tax Ct. LEXIS 15">21 On January 6, 1993, respondent sent petitioners a notice of deficiency, arising from the refunded alternative minimum tax.OPINIONIndividuals are permitted to carry net operating losses from one taxable year to another. Sec. 172(a). An individual's NOL, with certain adjustments, is generally composed of the excess of deductions allowed over gross income. Sec. 172(c). An NOL deduction computed for a particular year can include NOL carryovers and carrybacks from other taxable years. Sec. 104 T.C. 330">334 172(a). Section 172(b) provides for the manner in which NOL's are to be carried back and carried forward. Generally, the entire amount of an NOL is carried back to the earliest year of the carryback period (i.e., 3 years prior), the excess being carried to succeeding years. Any excess NOL is then carried forward (for up to 15 years) until the NOL is depleted.Taxpayers may elect to waive the carryback of an NOL from a particular tax year. Sec. 172(b)(3)(C). If such an election is made, a taxpayer may only carry the NOL forward, starting with the earliest year in the carry-forward period. A section 172(b)(3)(C) election is irrevocable; it waives the opportunity to carry back the NOL. Plumb v. Commissioner, 97 T.C. 632">97 T.C. 632, 97 T.C. 632">636 (1991).1995 U.S. Tax Ct. LEXIS 15">22 The alternative minimum tax requirements for taxpayers, other than corporations, are set forth in section 55. In 1982, the AMT rules were amended to provide for the carrying back and carrying forward of AMT NOL's. 4Section 55(d)(1) provides that the "alternative tax net operating loss deduction" should be deducted in arriving at alternative minimum taxable income. In 97 T.C. 632">Plumb v. Commissioner, supra at 638, we held thatSection 55(d)(1) states that "The term 'alternative tax net operating loss deduction' means the net operating loss deduction allowable for the taxable year under section 172," subject to the exceptions contained in section 55(d)(1)(A) and (B). This definition thus requires that the amount of the alternative minimum tax NOL deduction for a particular taxable year must equal the amount of the regular NOL deduction for that year, except to the extent that subparagraphs (A) and (B) of section 55(d)(1) require a difference between the two amounts. Neither of these provisions, however, states or implies that a separate carryback period exists with respect to the alternative minimum tax NOL.1995 U.S. Tax Ct. LEXIS 15">23 Despite the section 55 language and our holding in Plumb, petitioners contend that, in 1985, they could have split their NOL by electing to send their NOL's (NOL and AMT NOL) off in different directions. Petitioners sought to carry their NOL forward and their AMT NOL back.Prior to 1984, separate net operating loss treatment was necessary because a 1983 AMT NOL could not be carried back to a pre-1983 year. Even though pre-1984 AMT NOL's could not be carried back, NOL's computed under the regular 104 T.C. 330">335 method could be carried back. See sec. 55(d)(2)(B). Section 55(d)(2)(B), however, does not apply to a 1985 loss. For 1985, petitioners had the option under section 55(d)(1)(A) of carrying back or carrying forward AMT NOL's; the latter could be accomplished only by waiving the carryback period for both AMT and regular NOL's. In 97 T.C. 632">Plumb v. Commissioner, supra, we held that a "split" election, attempting to forgo a carryback of a regular NOL while retaining a carryback of the AMT NOL was impermissible. We must decide whether the language of petitioners' election impermissibly attempted to split their NOL and AMT NOL into separate tax years.Both parties1995 U.S. Tax Ct. LEXIS 15">24 rely on 97 T.C. 632">Plumb v. Commissioner, supra. In Plumb, the taxpayers elected to relinquish the carryback period with respect to their 1984 and 1985 NOL's. 97 T.C. 632">Id. at 633. In that case, we held thatSection 172(b)(3)(C) * . * * does not mention either a regular net operating loss or an alternative minimum tax net operating loss. It is concerned simply with relinquishing the entire carryback period, without in any way distinguishing between a regular NOL and an alternative minimum tax NOL. [97 T.C. 632">Id. at 638.]Consequently, this Court held that "In the absence of * * * clear expression of legislative intention * * * there is but a single election contemplated by section 172(b)(3)(C)". 97 T.C. 632">Id. at 639. Thus, any election under this section must apply to both types of NOL's. Id.A 1986 House report contains the commentary that AMT NOL's are to be carried over under a separate, yet parallel, system from that applying to NOL's. H. Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 1, 262. That House report also contained the comment that NOL's could not be split and1995 U.S. Tax Ct. LEXIS 15">25 carried in different directions, whether forward or back. Respondent echoed the same position in Rev. Rul. 87-44, 1987-1 C.B. 3. 5 This ruling provides that an election for any taxable year under section 172(b)(3)(C) to relinquish the carryback period applies to both types of NOL'S.We recognize that petitioners' carryback election was attempted in 1986, before the 1986 congressional report and the 1987 revenue ruling. Despite petitioners' accountant's belief, our holding in 97 T.C. 632">Plumb v. Commissioner, supra, confirms that NOL's and AMT NOL's cannot be split and carried 104 T.C. 330">336 in different directions, and that a valid section 172(b)(3)(C) election governs both types of losses.Petitioners, in turn, argue that if they are not permitted to split their NOL's, then their attempt to do so renders their election invalid. Specifically, petitioners ask that we follow a line of cases1995 U.S. Tax Ct. LEXIS 15">26 referenced in 97 T.C. 632">Plumb v. Commissioner, supra at 640, holding that "a taxpayer who attempts to make an election that is not legally available to him will be treated as having made no election". We have little doubt that petitioners, at all relevant times, intended to split their NOL's; however, petitioners' subjective intent is not the measure of whether a valid election was made. We must objectively examine petitioners' statement on the 1985 return to decide the manifested intent. Young v. Commissioner, 783 F.2d 1201">783 F.2d 1201, 783 F.2d 1201">1206 (5th Cir. 1986), affg. 83 T.C. 831">83 T.C. 831 (1984). To be valid, an election must be unequivocally manifested to the Commissioner. 783 F.2d 1201">Id. at 1204-1206. One method of unequivocally manifesting an election is to use the words of and/or a reference to the statute granting taxpayers the option to elect.In 97 T.C. 632">Plumb v. Commissioner, supra at 633, the taxpayers ncluded the following statement with their 1984 tax return:Taxpayers elect to forego [sic] the carryback period for the regular NOL in accordance with section1995 U.S. Tax Ct. LEXIS 15">27 172(b)(3)(C) and will carry forward this NOL."In Plumb we found that the taxpayers did not attempt to waive their AMT NOL carryback; rather, they only attempted to waive their NOL computed by the regular method. Petitioners here did not use the word "regular" in their statement. Petitioners manifested their election to waive the "net operating loss carry back period" and also referenced section 172. Hence, petitioners must show that the use of "net operating loss carry back period" did not unequivocally manifest an election to waive the period for all carrybacks. Petitioners point out that, after using the language "net operating loss carry back period", they used the following language: "and will carryforward the net operating loss". Petitioners argue that the reference to "loss " in the singular indicates that their statement did not involve both NOL's; in other words, that "net operating loss" is synonymous with "regular net operating loss" (as used in Plumb).104 T.C. 330">337 Petitioners contend that, during the relevant years, the phrase "net operating loss" quite often referred to NOL's computed by the regular method. Petitioners' expert witness, Barton Terry Aidman, has1995 U.S. Tax Ct. LEXIS 15">28 been a C.P.A. since 1970, and he now specializes in taxation. Mr. Aidman understood the term "net operating loss", in early 1986, to mean a "regular net operating loss". He testified that "Most any document you pick up will refer to net operating loss and it will mean the regular net operating loss." He also referred to publications and respondent's materials to illustrate that the term "regular" was not used to denote NOL's computed by the regular method. 6 We do not put much weight on this testimony because it is the expert's subjective point of view based on his personal observations. More importantly, the absence of the term "regular" leaves the more general and all-inclusive category "net operating loss". That category could include any type of net operating loss (e.g., "regular", AMT). Although petitioners' accountant possessed an article which contained the opinion that NOL's could be separately used, it seems clear to us that the statute did not permit waiving carrybacks with respect to only one type of NOL.1995 U.S. Tax Ct. LEXIS 15">29 We are compelled to hold that the term "net operating loss" objectively and on its face, when considered in the context of the election, does not create ambiguity or show that petitioners attempted to carry forward only NOL's computed by the regular method. The operative language in petitioners' election included the phrase "to forego the net operating loss carry back period". Under the statute, that necessarily would include NOL's and AMT NOL's. To hold otherwise would create confusion and unduly hamper the administration of the return filing process. Respondent would be in the position of having to guess or hypothesize about all possible meanings of taxpayers' elections. Considering the statute (section 172), respondent would have been expected to treat petitioners' election, as manifested, as waiving the carryback period for all of petitioners' NOL's. Petitioners' language unequivocally manifests such an intent and therefore creates a valid election, unlike the taxpayers' language in Plumb (attempting to 104 T.C. 330">338 waive the NOL carryback period as to their "regular net operating loss").The Court of Appeals for the Fifth Circuit, citing Plumb, recently held that a taxpayer1995 U.S. Tax Ct. LEXIS 15">30 who referred to the wrong section of the Internal Revenue Code when attempting to make a section 172(b)(3)(C) election had not made an election at all. In Powers v. Commissioner, 43 F.3d 172">43 F.3d 172, 43 F.3d 172">176 (5th Cir. 1995), affg. in part, revg. in part and remanding 100 T.C. 457">100 T.C. 457 (1993), 7 the taxpayer attached the following statement to his 1978 and 1979 tax returns:"Pursuant to Section 56(b)(3)(C), Taxpayer elects to carryforward to 1979 the net operating loss of 1978" * .The Court of Appeals for the Fifth Circuit held that, pursuant to the section 172 regulations, a taxpayer must cite the proper Code section (i.e., section 172) when seeking to make the carryback waiver election. The taxpayer in Powers referred to section 56 (a minimum tax section) in his election statement. The taxpayer further argued to the court that, although he was not permitted to do so, he thought that he could relinquish the carryback period solely for AMT purposes. The Court of Appeals held that the reference to section 56 instead of section 172 was fatal to the taxpayer's attempted election.1995 U.S. Tax Ct. LEXIS 15">31 In the instant case, however, the Millers used language that correctly referred to section 172 and triggered their election.In Branum v. Commissioner, 17 F.3d 805">17 F.3d 805 (5th Cir. 1994), affg. T.C. Memo. 1993-8, the taxpayer made the following section 172(b)(3)(C) election on his 1985 tax return:"Taxpayer, in accordance with I.R.C. section 172(b)(3)(C) hereby elect [sic] to carry foreward [sic] all losses sustained in the calendar year 1985 and forego [sic] carry back of such losses to prior years." [17 F.3d 805">Id. at 807; emphasis added.]The taxpayer later sought to repudiate his section 172(b)(3)(C) election because, like the Millers, the Branum taxpayer benefited from waiving the carryback only as to his NOL, not his AMT NOL. The Court of Appeals for the Fifth Circuit 104 T.C. 330">339 held that the phrase "all losses" in the taxpayer's election "[left] no trail of ambiguity". 17 F.3d 805">Id. at 809. The Court of Appeals indicated that, for an election under section 172(b)(3)(C) to be valid, it must be "unequivocal". Id. The court noted that the taxpayer's burden of showing that1995 U.S. Tax Ct. LEXIS 15">32 he did not make an "unequivocal" election is to "cast a shadow of ambiguity over his intent so that, at the very least, it falls short of 'unequivocal'." 17 F.3d 805">Id. at 809 n.10. In Branum, the court held that "all losses" was unequivocal.Respondent states on brief that petitioners should not be allowed to repudiate their own carefully selected language by showing a "mere shadow of ambiguity". We agree. Insignificant flaws should not allow a taxpayer to revoke an otherwise valid section 172(b)(3)(C) election. 8 Petitioners followed the language of section 172 in making their election. We also note that petitioners are motivated to show that their election is flawed because they would benefit in this unusual situation. Most taxpayers attempt elections in order to obtain some tax benefit. To require the type of precise language inherent in petitioners' argument would serve to poison the well.Petitioners (or1995 U.S. Tax Ct. LEXIS 15">33 their professional tax advisers) were the authors of their election. Petitioners did not choose words that indicated their intent to split their NOL. Instead, they used the language of the Internal Revenue Code, which does not permit separate use of the NOL's.In Carlstedt Associates, Inc. v. Commissioner, T.C. Memo. 1989-27, a corporate taxpayer provided the following statement with its 1982 tax return:"IN ACCORDANCE WITH CODE SECTION 172(b) TAXPAYER HEREBY ELECTS TO RELINQUISH THE ENTIRE CARRYBACK PERIOD WITH RESPECT TO THE CURRENT NET OPERATING LOSS." * * [Emphasis added.]In Carlstedt, we held that, even though the taxpayer failed to sign the above statement, a valid section 172(b)(3)(C) election was made. Petitioners, in the instant case, referred to their NOL by using the same language as that used by the corporate taxpayer in Carlstedt (i.e., "net operating loss"). By using the section 172 language verbatim, without any qualifier 104 T.C. 330">340 (i.e., the word "regular"), petitioners in the instant case elected to waive the carryback period for both types of their net operating losses. If their intent was otherwise, the failure 1995 U.S. Tax Ct. LEXIS 15">34 of the election to manifest that intent seems to have resulted from an erroneous interpretation of the statute by petitioners and/or their advisers.In Santi v. Commissioner, T.C. Memo. 1990-137, the taxpayers attached a statement to their return indicating that their "'NOL will be carried over to future years'" (emphasis added) without reference to "regular tax". The taxpayers sought to invalidate their election in order to carry it back, just as petitioners here seek to do. In Santi, we held that the tax return showed that the taxpayers clearly intended to relinquish their NOL carryback and that the election was valid.Carlstedt v. Commissioner, supra, and Santi v. Commissioner, supra, dealt with pre-1983 tax years, when AMT NOL's could not be carried back. However, those cases dealt with taxpayers who referred to a "net operating loss" when they drafted their elections. They chose the words and language of section 172(b)(3)(C), which is concerned with the carryback of all NOL's. Plumb v. Commissioner, 97 T.C. 632">97 T.C. 632 (1991).Income tax elections can be1995 U.S. Tax Ct. LEXIS 15">*35 demanding and technically difficult to manifest. 9 The election process need not be made more arcane by stretching to find slight potentially invalidating ambiguities--especially when a taxpayer follows the words of the statute.Petitioners' election statement clearly manifested an intent to make the section 172(b)(3)(c) election and must therefore stand.To reflect the concessions of the parties,Decision will be entered under Rule 155. Footnotes1. The parties' stipulated facts and documents are included by this reference.↩2. Section references are to the Internal Revenue Code in effect for the taxable years under consideration. Rule references are to this Court's Rules of Practice and Procedure.↩3. The comment is not related to any legislation from the 99th Congress.↩4. See Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 201, 96 Stat. 411.↩5. Revenue rulings are considered solely as the position of respondent.↩6. See, e.g., IRS Form 1045 Schedule A, "Computation of Net Operating Loss" (Rev. 11-85), and other Treasury forms that do not use the word "regular" when referring to regular-tax items (e.g., Form 1040, "U.S. Individual Income Tax Return").↩7. The Tax Court filed two opinions regarding this taxpayer. The Court of Appeals for the Fifth Circuit reversed the holding in Powers v. Commissioner, T.C. Memo. 1986-494↩, which addressed the taxpayer's NOL election.8. See Santi v. Commissioner, T.C. Memo. 1990-137↩.9. See, e.g., Wong v. Commissioner, T.C. Memo. 1994-202↩. Despite the taxpayer's having met other requirements, we held that, because the taxpayer failed to maintain records of his sec. 1244 stock election, pursuant to the Internal Revenue regulations, he was not entitled to ordinary loss treatment upon the stock's worthlessness.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619041/	Estate of Peter A. Gasser, Deceased, Vernice H. Gasser, Executrix, and Vernice H. Gasser, Petitioners v. Commissioner of Internal Revenue, Respondent; Vernice H. Gasser, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Gasser v. CommissionerDocket Nos. 43573-86, 43574-86United States Tax Court93 T.C. 236; 1989 U.S. Tax Ct. LEXIS 118; 93 T.C. No. 22; August 16, 1989August 16, 1989, Filed 1989 U.S. Tax Ct. LEXIS 118">118 Decisions will be entered under Rule 155. Peter and Vernice Gasser owned certain properties in California as community property prior to Peter's death in 1982. They placed the property in service prior to 1981. Held, Vernice is not entitled to use ACRS deductions for depreciation of her one-half interest in the property after Peter's death. Julian N. Stern, for the petitioners.Neal O. Abreu, Theodore Garelis, and Kathryn Vetter, for the respondent. Drennen, Judge. 1DRENNEN93 T.C. 236">236 OPINIONIn statutory notices of deficiency issued to petitioners in these consolidated cases, respondent determined deficiencies in petitioners' Federal income tax as follows: 93 T.C. 236">237 PetitionerDocket No.YearDeficiencyEstate of Peter A. Gasser,43573-861982$ 15,998Deceased, Vernice H. Gasser,Executrix, and Vernice H.GasserVernice H. Gasser43574-861980$ 53,048After concessions, the sole issue for our decision is whether petitioners are entitled to Accelerated Cost Recovery System (ACRS) depreciation deductions, section 168, 2 with respect1989 U.S. Tax Ct. LEXIS 118">119 to a surviving spouse's share of community property which was originally placed in service by the surviving spouse and the then-living deceased spouse before 1981, if that property was confirmed to the surviving spouse after the deceased spouse's death in 1982.The facts of this case have been fully stipulated pursuant to Rule 122, and are so found. At the time the petitions were filed in this case, petitioner and executrix Vernice H. Gasser resided in Napa, California.Peter A. Gasser (Peter) and petitioner Vernice H. Gasser (Vernice) were husband and wife who resided in California during their marriage. Peter died on May 22, 1982. Vernice is Peter's surviving spouse and is the executrix of his estate.Peter and Vernice (the Gassers) owned certain depreciable assets as community property (the Property). 1989 U.S. Tax Ct. LEXIS 118">120 All of the Property was acquired and placed by the Gassers in a condition or state of readiness and availability for a specifically assigned function, either for use in a trade or business or for the production of income, in the 1960's or the 1970's. The Property was depreciated by the Gassers during the years prior to Peter's death using the straightline method of depreciation with useful lives ranging from 5 to 15 years for tangible personal property and 20 to 33 years for real property.Upon Peter's death on May 22, 1982, all of the Gassers' community property, including the Property, was included in Peter's gross estate for Federal estate tax purposes, 50 percent thereof being subject to Federal estate tax. Vernice's undivided 50-percent community property interest 93 T.C. 236">238 in the Property was confirmed to her at the time of Peter's death under the community property laws of the State of California and Peter's duly probated will.The returns of the petitioners for the years 1982 and 1983 used ACRS depreciation from and after Peter's death with respect to the properties listed on an exhibit attached to the returns (including the Property) and used as the cost basis of the properties1989 U.S. Tax Ct. LEXIS 118">121 their fair market value as determined for Federal estate and gift tax purposes in Peter's estate. The basis and value of Vernice's one-half interest in the Property is not at issue. (Respondent's brief.) As a result of those ACRS deductions, Vernice incurred a net operating loss in 1983 which she carried back to the 1980 calendar year.OPINIONThe primary issue presented in this case is whether section 168(e) operates to deny petitioners' ACRS deductions with respect to the Property. We conclude that it does and hold for respondent on this issue.In 1982 and 1983, section 168 provided for the ACRS deductions which were used by Peter (deceased) and Vernice in 1982, and Vernice individually in 1983. At that time, ACRS provided for relatively rapid depreciation for "recovery property." Sec. 168(a). 3 Recovery property was defined as tangible property of a character subject to the allowance for depreciation which was used in a trade or business or held for the production of income. Sec. 168(c)(1). The Property fits this broad general definition of recovery property.1989 U.S. Tax Ct. LEXIS 118">122 Section 168(e) excludes certain assets from the general definition of recovery property set forth in section 168(c)(1). The effect of that exclusion is to preclude the availability of ACRS depreciation. Section 168(e)(4) provides that recovery property does not include section 1245 or 1250 property acquired by the taxpayer after December 31, 1980, if inter alia, the property was owned or used at any time during 1980 by the taxpayer or a related person. Secs. 168(e)(4)(A)93 T.C. 236">239 and (B). For purposes of section 168(e)(4), a spouse is considered to be a related person. Secs. 168(e)(4)(D), 267(b)(1), 267(c)(4).Section 168(e)(4) does not apply to the acquisition of any property by the taxpayer if the basis of the property in the hands of the taxpayer is determined under section 1014(a). Sec. 168(e)(4)(H). Section 1014(a) provides for a step-up in basis, to fair market value at the date of decedent's death, for property acquired from a decedent. Sec. 1014(a)(1). Section 1014(b)(6) provides that, for purposes of section 1014(a), property may be considered to have been acquired from the decedent if:(6) In the case of decedents dying after December 31, 1947, property which represents1989 U.S. Tax Ct. LEXIS 118">123 the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939.In this case, at least one-half of the whole of the community interest in the Property was includable in determining the value of Peter's estate. Therefore, the basis of the Property was determined pursuant to section 1014(a).Respondent argues that section 1014(b) serves only to determine basis and has no application to section 168(e)(4). We agree that section 1014(b) serves to determine basis by way of section 1014(a). However, the Property falls within the exception of section 168(e)(4)(H) and section 168(e)(4) does not apply to exclude Vernice's one-half interest from the definition of recovery property.Recovery property does not include property which was placed in service by taxpayers1989 U.S. Tax Ct. LEXIS 118">124 before January 1, 1981. Sec. 168(e)(1). "Placed in service" is defined in section 1.168-2(l)(2), Proposed Income Tax Regs., as:(2) Placed in service. The term "placed in service" means the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity. In the case of a building which is intended to house machinery and equipment, such readiness and availability 93 T.C. 236">240 shall be determined without regard to whether the machinery or equipment which the building houses, or is intended to house, has been placed in service. However, in an appropriate case, as, for example, where the building is essentially an item of machinery or equipment, or the use of the building is so closely related to the use of the machinery or equipment that it clearly can be expected to be replaced or retired when the property it initially houses is replaced or retired, the determination of readiness or availability of the building shall be made by taking into account the readiness and availability of1989 U.S. Tax Ct. LEXIS 118">125 such machinery or equipment. For a building which becomes available for use in separate stages, see paragraph (e)(3) of this section. 4 [49 Fed. Reg. 5956 (Feb. 16, 1984).]The stipulation of facts tracks the regulatory language when it says the Property was "acquired and placed by the Gassers in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business or for the production of income in the 1960's or the 1970's." Therefore, there is little doubt that the Property was placed in service before 1981. The question then becomes who placed it in service during that time.According1989 U.S. Tax Ct. LEXIS 118">126 to the stipulation of facts, Vernice and Peter placed the property in service during the 1960's and 1970's. Petitioners argue that Vernice did not actually place the Property in service prior to Peter's death in 1982 because she had not yet acquired the Property. Respondent argues that Vernice's community property interest in the Property was hers before Peter's death and remained hers thereafter.Where the incidence of Federal taxation depends upon property ownership, State law determines who owns the property. Poe v. Seaborn, 282 U.S. 101">282 U.S. 101, 282 U.S. 101">110 (1930); Estate of Stewart v. Commissioner, 79 T.C. 1046">79 T.C. 1046, 79 T.C. 1046">1048 (1982). Peter and Vernice were husband and wife and resided in California, a community property State, during their marriage. The California Civil Code defines community property interests as follows:Sec. 5105. Community property; interests of partiesThe respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests. This section shall be construed as defining the 93 T.C. 236">241 respective interests and rights of husband and1989 U.S. Tax Ct. LEXIS 118">127 wife in community property. [Cal. Civ. Code sec. 5105.]The effect of this statute to create in the wife a present interest in the property was upheld in United States v. Malcom, 282 U.S. 792">282 U.S. 792 (1931). Since the 1927 statute, it has been the settled law of California that the wife has a present interest in community property. Estate of Murphy v. Murphy, 15 Cal. 3d 907">15 Cal. 3d 907 (1976), 544 P.2d 956">544 P.2d 956.Under California law, Peter and Vernice had present equal interests in the Property at the time it was placed in service. As community property owners, both Vernice and Peter placed the Property in service prior to 1981. They also depreciated the Property during that period. Therefore, Vernice is not eligible for ACRS depreciation because she placed the Property in service prior to 1981. Sec. 168(e)(1).Petitioner argues that section 1.168-4(d)(9), Proposed Income Tax Regs., operates to permit ACRS deductions in this case. That regulation provides as follows:Acquisitions by reason of death. Property acquired by the taxpayer after December 31, 1980, by reason of death, for which the basis is determined under1989 U.S. Tax Ct. LEXIS 118">128 section 1014(a), is eligible for ACRS. [Sec. 1.168-4(d)(9), Proposed Income Tax Regs., 49 Fed. Reg. 5961 (Feb. 16, 1984).]Since we have found that Vernice had a present existing and equal interest in the property before Peter's death, she cannot be said to have acquired that interest later for purposes of the regulation.At first blush, section 168(e)(1) seems to conflict with the exception to section 168(e)(4) set forth in section 168(e)(4)(H). However, those paragraphs can be reconciled. Section 168(e)(1) looks to prevent different perceived abuses than does section 168(e)(4). Section 168(e)(1) precludes ACRS deductions for property placed in service by the taxpayer prior to 1981, whereas section 168(e)(4) denies ACRS depreciation deductions in cases where the property was owned or used by the taxpayer or a related person during 1980. For example, in many situations, depreciable property could pass by devise to a surviving spouse who had no preexisting ownership rights and who had not, together with the deceased spouse, placed the property in service prior to 1981. Section 168(e)(1) would not apply there. Section 168(e)(4)(H) might, depending on1989 U.S. Tax Ct. LEXIS 118">129 the circumstances, prevent 93 T.C. 236">*242 the application of the related party "anti-churning" rules of section 168(e)(4).Because of concessions, including one by respondent, 5Decisions will be entered under Rule 155. Footnotes1. This case was assigned and deemed submitted to Judge Drennen by order dated Apr. 10, 1989.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩3. Sec. 168 was amended by the 1986 Tax Reform Act. As stated in note 2, supra, references herein to sec. 168↩ and its subsections refer to the law prior to its amendment. ACRS depreciation deductions first became available for 1981.4. While we recognize that proposed regulations are not entitled to the usual weight accorded to final regulations, Eller v. Commissioner, 77 T.C. 934">77 T.C. 934, 77 T.C. 934">946↩ (1981), this proposed regulation has been outstanding since 1984 and both parties refer to it. We use the language of the proposed regulation to express our own views.5. Respondent indicated in its brief that a Rule 155 computation would not be necessary if we found for respondent. However, in the stipulation of facts respondent concedes that petitioners are entitled to claim depreciation relating to the "Peace House" on their 1982 return in the amount of $ 528.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619043/	Arnold Levy v. Commissioner. Louise B. Levy v. Commissioner.Levy v. CommissionerDocket Nos. 31256 and 31257.United States Tax Court1953 Tax Ct. Memo LEXIS 345; 12 T.C.M. 235; T.C.M. (RIA) 53074; March 9, 19531953 Tax Ct. Memo LEXIS 345">345 Deductions: Business expense: Loss. - Petitioner, in the jewelry and antique business, occupied premises under a five-year lease. Lessor was obligated to make major repairs. In 1946 the roof began to leak and upon investigation was found to be in unsafe condition because of gradual deterioration. With the lessor's consent, petitioner undertook to see that repairs were made. A controversy developed over the cost which the lessor thought was excessive. Thereupon, petitioner paid $21,721.91 for same in 1946. No attempt was made to collect from the lessor. Petitioner purchased the leased premises in 1947. Held, petitioner was not entitled to a deduction of the amount paid as casualty loss or business expense in 1946. Edward J. Nelson, Esq., and James I Keller, C.P.A., 1701 du Pont Building, Miami, Fla., for the petitioners. F. L. Van Haaften, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: These consolidated proceedings involve income tax deficiencies for the calendar year 1946 in the amounts of $6,060.07 determined against Arnold Levy and $6,251.36 determined against Louise B. Levy. In both proceedings the issue1953 Tax Ct. Memo LEXIS 345">346 presented is whether the respondent, in determining the petitioners' distributive shares of the net income of a partnership, erred in disallowing a claimed deduction of $21,721.91 as a business expense or loss on account of expenditures for alleged emergency repairs on leased premises occupied by the partnership business. Findings of Fact The petitioners Arnold and Louise B. Levy are husband and wife. During the taxable year 1946 they were equal partners in a business conducted at Miami Beach, Florida, under the firm name of Antique Dome engaged in the retail sale of antiques, art works, and jewelry. For the year 1946 each petitioner filed a separate individual income tax return on Form 1040. The partnership Antique Dome kept its books on the accrual and calendar year basis and on that same basis filed a 1946 partnership return of income on Form 1065. Those returns were filed with the collector of internal revenue for the district of Florida. Prior to 1929 the petitioners operated their business on Flagler Street, Miami. In 1929 Calvin P. Bentley of Detroit, Michigan, erected a store building at 910 Lincoln Road, Miami Beach, especially for petitioners who leased the premises1953 Tax Ct. Memo LEXIS 345">347 for business purposes for a term of five years. Throughout the following years, including 1946, the petitioners' partnership business continuously occupied those premises under a succession of five-year leases which varied as to rental and other terms. On April 30, 1945, Bentley as the landlord and Arnold and Louise Levy doing business as "Antique Dome" as the tenants, executed a lease for the building at 910 and the building in the rear thereof at 910-1/2 Lincoln Road for a term of five years from September 1, 1945 to August 31, 1950, at a total rental of $25,000 payable $1,000 on the first day of January, February, March, April, and May of each year ($5,000 per annum) beginning January 1, 1946. In addition to the rental and as part of the consideration for the lease, the tenants agreed, inter alia, to pay all taxes levied on the premises, and to carry fire and extended coverage insurance on 910 Lincoln Road in the amount of $25,000 and 910-1/2 Lincoln Road in the amount of $5,000. In addition to various covenants as to use and occupancy of the premises, etc., the lease provided, in part, as follows: "In the event the buildings on the premises hereby demised, or any part thereof, 1953 Tax Ct. Memo LEXIS 345">348 shall be destroyed or so damaged by fire or other casualty during the term of this Lease as to be untenantable, then the lessor shall have the option to terminate this Lease, or to repair or rebuild the damaged premises and put them in tenantable condition, remitting the rents hereby reserved, or a fair and just proportion thereof according to the damage sustained, until the said premises are made fit for occupancy and use, notice of the lessor's option in any event to be given to the Tenants in writing within ninety days from the date of such damage or destruction. "The Tenants will pay all charges for light, power and water and will make any and all repairs at their own expense and no removal of partitions or changes in the interior arrangement, duration, or construction of the buildings on said premises shall be made without the written consent of the Landlord. However, all repairs shall not be construed as requiring the Tenants to rebuild the roof or walls or to replace rafters or to make like major repairs." The building number 910 fronting on Lincoln Road was approximately 40 feet wide and 80 feet long erected on reinforced footings and constructed of concrete block walls1953 Tax Ct. Memo LEXIS 345">349 with pilasters. The structure had a balcony extending over a portion of the ground floor. The roof was low peaked from the center to the sides of the building to provide drainage and the covering was some sort of roofing paper or composition. The roof and the ceiling were supported by seven wooden trusses having a 40-foot span. The bottom or main beams of the trusses extended below the ceiling and were boxed in and plastered to match the ceiling. The structure, which cost about $23,000 to build, was used continuously by petitioners for displaying and selling merchandise from 1929 to about May 1946 without any substantial repairs or replacements. At the rear of that structure there was a two-story building known as 910-1/2 Lincoln Road. For several years prior to 1946 there was a noticeable sag in the center of the 40-foot trusses and the plaster boxing around the main beams thereof showed a tendency to crack open. At the time the above-mentioned lease was entered into on April 30, 1945, it was known that the roof was in need of some repairs, but the extent thereof had not been determined. In May 1946 the roof leaked and an inspection of the roof by John L. Berry, a general contractor, 1953 Tax Ct. Memo LEXIS 345">350 disclosed that the central portion of the roof had sagged to a point where instead of a low peak to shed water there was a depression which accumulated rain water and, also, that the roof was shaky to walk on. Berry advised that there was no use trying to stop the leak without first determining the actual condition of the sagging trusses. Barry knocked out some of the plaster around the main beams of several trusses and found one beam had cracked and he immediately shored it up with eight by eight supports to prevent possible collapse. In other trusses there was a deflection or sag of about three or four inches. Petitioner Arnold Levy went to see Bentley, the landlord, who lived in Florida part of the year, and explained the condition of the roof. Bentley told Levy to go ahead and see what work had to be done and attend to fixing the roof. Shortly thereafter Levy met Bentley and the latter's son-in-law Al Smith in the bank. Levy asked Bentley to look at the condition of the building and to have Al Smith handle the repair job, but Bentley refused and instructed Levy to go ahead and handle the whole job. Levy asked if he should pay the bills and be reimbursed by Bentley and the latter1953 Tax Ct. Memo LEXIS 345">351 instructed him not to pay the bills but to send them to Detroit and the Detroit Trust would pay them as they came due. Berry, the contractor, feared that a storm or heavy rainfall might collapse the roof and advised Levy to move his merchandise out of the building, which was done. Also, at Berry's insistence Levy procured the services of a Miami Beach engineering firm to determine the extent and nature of the necessary repairs or replacement of the trusses. The Building Department of the City of Miami Beach was notified and the chief building inspector determined that the condition of the roof was such as to make the building unsafe for use. The engineers drafted plans and specifications to strengthen the wooden trusses rather than rebuild the roof. The plans called for cradling each truss between two L-shaped steel channels, bolted together at frequent intervals with the ends resting on steel bearing plates on the pilasters. Under date of May 28, 1946, Arnold Levy executed and filed with the National Production Authority an application for authority to strengthen the roof trusses with steel in the described manner and stated the estimated total cost of that project at $4,000. 1953 Tax Ct. Memo LEXIS 345">352 That application was granted and the steel was ordered. Sometime after May 1946 Bentley returned to Detroit. When Berry, the contractor, requested the first payment of $6,000 so he could pay for the steel, Bentley was notified thereof. Bentley did nothing about paying that $6,000 bill. Under date of June 24, 1946 and July 1, 1946, respectively, Bentley wrote the following two letters to Levy: "Mr. Arnold Levy: "Needless to say I was much surprised to hear from Al that the cost of fixing the roof on Antique Dome was running $12,000.00 or more. Do you realize that this is more than 2 1/2 years rent? "I feel that you should never have obligated me for such amount without taking the matter up with me first. When you stop to think of it, the building only cost a little over $23,000.00, and it will cost half of the price of the building to fix the roof. I think it is entirely out of reason. I don't know what can be done about it now, but I certainly am very much disappointed. "I got your telegram last Friday in Detroit about buying the building. You know I am not anxious to sell the building and if I did, it would be only for cash." Very truly yours," "Dear Arnold: "I have1953 Tax Ct. Memo LEXIS 345">353 your letter of the 28th with explanations and I still feel that putting 12-18inch beams across the top of the Antique Dome to hold the roof at the price of $12,000 is altogether too much and I still feel that you should have taken the matter up with me one way or the other and let me know definitely about going into a much larger proposition than we figured. "Of course your statement about my paying any labor repairs is correct. I have never intimated any other understanding, but I believe that things could be fixed up at a much cheaper price than the costs which you have sent me. We are using I beams here at the factory and I cannot understand any such price. However, I can't see that the matter can be helped now. "When the bills are all in, kindly send them to the Detroit Trust Company. Very truly yours," Levy was anxious to have the work completed as rapidly as possible so he could move back into his long established place of business prior to the start of the next winter season and, also, he was desirous of avoiding any friction or possible suits over nonpayment of the repair bills as they were presented. Levy paid the contractor's first bill for $6,000 and thereafter paid1953 Tax Ct. Memo LEXIS 345">354 all the bills for materials, labor, etc. as they were presented until completion of the job in October 1946. Levy paid out a total of $21,721.91 for the cost of all the work done on the leased premises for which he was to be reimbursed by Bentley. Levy advised Bentley, the owner, as to such costs, but he never received any reply or reimbursement from Bentley during 1946. In the middle of December 1946 and in connection with securing new insurance on the buildings on the leased premises, Levy wrote to the Detroit Trust Company expressing his desire for a quick settlement of the amount Bentley owed him on account of the aboue mentioned expenditures. The work done on the leased premises with respect to the trusses included, inter alia, removal of the boxing and plaster around the trusses; the removal of at least portions of the ceiling; the reaising of the trusses and roof; the hoisting of 18 inch wide L-shaped steel channels in place so that the ends of the bottom flanges rested atop the walls and the sides and bottom of the wooden trusses were encased in steel; and the welding of the edges of the flanges under the wooden trusses and also the placing of bolts through the steel channels1953 Tax Ct. Memo LEXIS 345">355 and wooden trusses to provide for greater strength. The steel cost $3,758. Additional costs included the structural engineering fee, labor, miscellaneous materials, etc. The work done with respect to the roof included, inter alia, the removal of the roofing material down to the sheathing boards and applying felts and gravel covering; installing and sealing flashing; removal of hood barrel tile coping and re-laying after roofing, removal of two skylights and replacing after roofing; installing copper outlets, etc. New roofing material was also put on the two-story building in the rear. The roofing bills amounted to $2,100. The work done on the interior of the building included, among other things, lathing and plastering including ornamental work covering the beams at a total cost of about $6,963; installing and/or relocating electric wiring, outlets, switch panels and fluorescent lighting fixtures at a total cost of about $2,185; installing partly asphalt tile and partly terrazzo chip flooring and cleaning and polishing at a total cost of about $1,030; and painting exterior front cornice and entrance and interior balustrade and woodwork at a cost of $705. Lumber and other materials1953 Tax Ct. Memo LEXIS 345">356 used, drayage, insurance, etc. cost varying amounts. The extensive work completed during 1946 on the leased premises was done for and on behalf of the owner thereof. The structural weakness of the roof trusses was a cumulative thing resulting from deterioration over a period of time and was known to be in need of some repair when the lease of April 30, 1945, was entered into. The work, in toto, done on the building in 1946 prolonged the useful life and materially increased the value thereof and constituted a rehabilitation of the building. The expenditures were for capital improvements. During the summer of 1946 Levy started negotiations for the purchase of the leased premises and made an offer of $100,000. Sometime in the fall of 1946 Bentley agreed to sell the property for $120,000 which was the then market value as appraised by Bentley's son-in-law Al Smith. The agreed sale price was not diminished by the cost of the improvements paid for by Levy on behalf of Bentley and for which Levy had not been reimbursed. A sales contract was entered into toward the end of 1946 and Levy's deposit was placed in escrow pending the clearing up of some title technicality because a third party1953 Tax Ct. Memo LEXIS 345">357 had at one time owned part of the land. On January 2, 1947, Bentley executed a warranty deed to Arnold and Louise Levy for the leased premises in consideration of payment of $45,000 plus a purchase money mortgage for $75,000, payable $7,500 a year for ten years. At that time the lease on the premises would have run until August 31, 1950, and the rental payments thereunder would have amounted to $20,000. On the partnership return of income for 1946 a deduction of $21,721.91 was claimed with the following explanation: "THIS AMOUNT WAS EXPENDED IN ORDER TO PROTECT THE BUSINESS OF THE TAXPAYER AND WAS CAUSED BY A SUDDEN CASUALTY TO THE PREMISES IN WHICH THE TAXPAYER DID BUSINESS AND WAS NOT REIMBURSED BY THE LESSOR. THE AMOUNT WAS ALSO PAID IN LIEU OF LITIGATION AND IN ADDITION THE VALUE OF THE EXPENSE TO THE TAXPAYER WAS EXTINGUISHED UPON THE EXPIRING OF THE LEASE AND PURCHASE OF THE PROPERTY JANUARY 1, 1947…" The expenditures in question made by Arnold Levy in the total amount of $21,721.91 during 1946 for permanent betterment and improvement of the leased premises, for and on behalf of the owner thereof, did not constitute emergency or other business expenses of the partnership1953 Tax Ct. Memo LEXIS 345">358 Antique Dome. Opinion Our conclusion of fact that the expenditures in question did not constitute business expenses of the partnership during 1946, is dispositive of the issue involved herein, which is essentially a question of fact. The record is clear that the expenditures were for permanent betterment and improvement of the leased premises; that is, capital improvements, for which the owner was admittedly obligated but which petitioner Arnold Levy volunteered payment with the expectation of reimbursement. At the end of the taxable year 1946 petitioners were still the lessees of the improved premises and the owner thereof was, so far as this record shows, still obligated to reimburse them for those expenditures. The petitioners' purchase of the premises at an agreed price of $120,000 in the following year 1947 does not alter the factual circumstance existing during the taxable year 1946 here in question which, boiled down, is simply that the owner of the leased premises owed petitioners for the cost of the improvements. For the year 1946 there is no factual basis for an allowable1953 Tax Ct. Memo LEXIS 345">*359 deduction either as a business expense because of emergency repairs, an expense to protect the business, a casualty loss, or, an expenditure the benefit of which was extinguished upon cancellation of a lease, as variously contended by petitioners, and the authorities cited on brief are not applicable here. The respondent's determination is sustained. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619044/	Thomas H. Hannaford v. Commissioner.Hannaford v. CommissionerDocket No. 63844.United States Tax CourtT.C. Memo 1960-78; 1960 Tax Ct. Memo LEXIS 211; 19 T.C.M. 409; T.C.M. (RIA) 60078; April 22, 19601960 Tax Ct. Memo LEXIS 211">211 Raymond F. Barrett, Esq., and William G. Shea, Esq., 60 State Street, Boston, Mass., for the petitioner. John M. Doukas, Esq., and Charles T. Shea, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined deficiencies in income tax and additions to tax as follows: Additions to TaxSection 293(a),Revenue Actof 1938Section 293(a),YearDeficiencyI.R.C. 19391938$18,501.13$1,039.87194012,832.27641.6119414,862.20243.11194351,401.872,570.0919461,511.601947125.3619481,772.19 1942 is involved by reason of the Current Tax Payment Act. The issues said to be remaining are: (1) and (2) Whether petitioner's liquidation of two completely controlled corporations, and his receipt and assumption of their respective assets and liabilities, occurred in 1938; if so, whether in 1938 petitioner realized a long-term capital gain of $75,221.04 from these liquidations, and whether in 1938 petitioner realized additional income in the amount of $14,814.95 from items accrued by each of the corporations on their respective books as due petitioner; 1960 Tax Ct. Memo LEXIS 211">212 (3) Whether unexplained deposits of $10,553.16 to petitioner's bank accounts in 1938 constituted taxable income in that year; (4) Whether assessment of the deficiency and addition to tax for 1938 is barred by the statute of limitations; this depends upon whether petitioner omitted from gross income in 1938 an amount properly includible therein which is in excess of 25 per cent of the gross income stated in his 1938 return; (5) Whether unexplained credits of $5,106.26, $10,644.85 and $7,187.68 to petitioner's drawing accounts in his sole proprietorship businesses in 1940, 1941 and 1942, respectively, constituted taxable income in those years; (6) Whether in 1940 and 1941 petitioner expended amounts up to $2,250 and $1,500, respectively, for travel and entertainment, and if so, whether such amounts constituted deductible business expenses in those years; (7) Whether petitioner realized a net profit of $9,009.46 in 1940 from a construction contract; (8) Whether in 1940 petitioner expended an amount of $778.10 for selling expenses, taxes, steel file and fee for land survey, and if so, whether such amount constituted a deductible business expense in that year; (9) Whether in1960 Tax Ct. Memo LEXIS 211">213 1940 petitioner expended the amount of $1,081.54 for salesman's expenses, and if so, whether such amount constituted a deductible business expense in that year; (10) Whether in 1940 and 1941 petitioner occupied as a personal residence an apartment in one of his rental-producing properties, and if so, whether the respective amounts of $1,191 and $600 represented deductible expenses or personal nondeductible expenses; (11) Whether the amount of $5,963.41 received by an attorney in 1941 upon settlement of petitioner's law suit constituted taxable income to petitioner in that year; (12) Whether in 1940, 1941 and 1942, petitioner expended the respective amounts of $400.96, $2,300 and $3,427.35 for legal expenses, and if so, whether such amounts constituted deductible business expenses in those years; (13) Whether in 1942 petitioner sustained abandonment losses in the amounts of $23,106.76 (Ryder, Terrel and Richard lots) and $8,750 (So. Braintree Plant); (14) Whether in 1942 the $21,800 purchase price of the Pantano Farm constituted a deductible business expense; (15) Whether certain obsolescence deductions claimed by petitioner, and disallowed by respondent, in 1942, were reasonable1960 Tax Ct. Memo LEXIS 211">214 in amount; (16) Whether petitioner received a constructive dividend of $3,166.46 from a controlled corporation in 1943; (17) Whether certain depreciation deductions claimed by petitioner, and disallowed by respondent, in 1940, 1942, 1943, 1946, 1947 and 1948, were reasonable in amount; (18) Whether in 1940, 1942 and 1943 petitioner realized income from the sale of assets in the respective amounts of $7,766.73, $2,233.79 and $468, as determined by respondent; (19) Whether in 1948 petitioner realized a $3,481.62 loss on the sale of certain securities; (20) Whether respondent properly reduced petitioner's basis in certain securities sold in 1948 in the amount of $848.63; and (21) Whether any part of any deficiency for 1938, 1940, 1941 and 1943 is due to negligence or intentional disregard of rules and regulations pursuant to section 293(a), Revenue Act of 1938 and section 293(a), I.R.C. 1939. Other adjustments referred to in respondent's deficiency notice were disposed of by stipulation or were conceded or abandoned in brief. Findings of Fact Petitioner Thomas H. Hannaford is an individual residing in South Weymouth, Massachusetts. He filed timely Federal income tax1960 Tax Ct. Memo LEXIS 211">215 returns for the years in issue with the then collector of internal revenue for the district of Massachusetts. Petitioner and respondent executed timely forms 872 for 1940, 1941, 1943, 1946, 1947, 1948, which extended the period of limitation upon assessment of income, "excess profits, or war profits" taxes to June 30, 1956. On March 7, 1944, petitioner and respondent executed form 872 which extended the period of limitation upon assessment of income tax for 1938 to June 30, 1956. On May 29, 1956, respondent mailed to petitioner a notice of deficiency for the years in issue. At all material times petitioner kept his books and filed his returns on a cash method of accounting and on a calendar year basis. Corporate Liquidations Issue No. 1. Long-term Capital Gain Issue No. 2. Ordinary Income During 1936, 1937 and 1938, petitioner was the sole stockholder of Crystal Concrete Corporation, hereafter called Crystal, and Braintree Realty Corporation, hereafter called Braintree. Crystal and Braintree were Massachusetts corporations with usual places of business at South Braintree and Braintree, Massachusetts, respectively. On January 25, 1933, Crystal Sand and Gravel Company1960 Tax Ct. Memo LEXIS 211">216 sold certain equipment and machinery to Crystal at a price of $41,300. On the same date, Crystal issued to petitioner its note in the amount of $41,300 bearing 6 per cent annual interest. A mortgage on the above property sold by Crystal Sand and Gravel Company to Crystal secured this note. On December 31, 1938, the fair market value of Crystal's assets and liabilities were as follows (in even dollars): AssetsCash$ 2,617Accounts receivable44,719Delivery equipment$85,910Machinery and equip-ment52,373Real estate16,837$155,122Less: Depreciation reserve41,713$113,409Prepaid items1,182Total$161,928LiabilitiesAccounts payable$ 50,778Loans and mortgage payable83,232Accrued taxes7,163Accrued wages315Total$141,489 The liability item designated as "Accounts payable" consisted of trade accounts payable in the amount of $13,431.65 and a credit balance in petitioner's drawing account in the amount of $37,347.01. On July 22, 1920, petitioner purchased the "Pond and Derby Street" property and on January 24, 1933, petitioner purchased the "Fogg" property. There were buildings1960 Tax Ct. Memo LEXIS 211">217 on both properties. On December 31, 1935, Braintree was incorporated. Petitioner transferred to it the "Pond and Derby Street" and "Fogg" properties. Prior to January 1, 1936, petitioner's cost bases for the "Fogg" building and the "Pond and Derby Street" property were $18,500 and $10,000, respectively. On December 31, 1938, the fair market value of Braintree's assets and liabilities were as follows (in even dollars): AssetsCash$ 19"Fogg" building$76,092Hannaford building95,124Garage20,000Residential property7,500Boston plant14,845Land properties61,035Machinery and equip-ment25,952$300,549Less: Depreciation reserve17,752282,797Total$282,816Liabilities Total$162,141Among the liabilities was a credit balance in petitioner's drawing account in the amount of $107,735.49. For the year 1936, Crystal accrued on its books the following items as due petitioner: DateItemAmount2/29/36Interest on mortgage$ 7,702.6512/31/36Salary5,200.0012/31/36Salary5,200.0012/31/36Rental of equipment5,793.3312/31/36Credit for loam and gravel1,700.00Total$25,595.981960 Tax Ct. Memo LEXIS 211">218 Of this total petitioner reported $9,980 as taxable income for 1936 and consented to the inclusion of $9,213.33 as taxable income for 1938. Petitioner did not report the remaining amount of $6,402.65 as taxable income. For the year 1938, Crystal accured on its books the following items as due petitioner: DateItemAmount12/31/38Salary$15,000.0012/31/38Interest for prior years7,408.1512/31/38Interest3,063.00Total$25,471.15 Of this total petitioner reported $18,063 as taxable income for 1938 and $2,263 as taxable income for a year prior to 1938. Petitioner did not report the remaining amount of $5,145.15 as taxable income. For the year 1937, Braintree accrued on its books $3,267.15 as interest due petitioner. Petitioner did not report this amount as taxable income. On Crystal's books and records there were two entries dated January 1, 1939 with the following respective explanations: "[First] To close out the Corporation's asset a/c as they appeared this date on Corporation's books of record in liquidation to T.H.H. [petitioner] Personal as per agreement of stockholders December 28, 1938 on file in Minute Book of Corporation per1960 Tax Ct. Memo LEXIS 211">219 E. A. Kane. * * "[Second] The liabilities and reserves were likewise closed out to Mr. Hannaford as he agreed to assume same in liquidation Per E. A. Kane." In Braintree's books and records there were two entries dated January 1, 1939 with the following respective explanations: "[First] To close out Corporation Assets in Liquidation to T. H. Hannaford per E. A. Kane. * "[Second] To close out liabilities to be assumed by T.H.H. in liquidation per E. A. Kane." On October 9, 1940, petitioner filed a claim for refund of income taxes for the year 1939 and stated, inter alia, the following: " * * [Petitioner] on December 31, 1938 took over the assets and assumed the liabilities of the Crystal Concrete Corporation and the Braintree Realty Co. Inc." This claim was subscribed and sworn to by petitioner. Crystal and Braintree discontinued their respective businesses on December 31, 1938. They were dissolved under the laws of Massachusetts in 1939. Respondent determined that petitioner liquidated Crystal and Braintree in 1938 and that petitioner's gains in 1938 from the respective liquidations were as follows (in even dollars): Fair market valueof assets re-ceived inliquida-Long-termName of cor-tionCost basiscapitalporation(net)of stockgainCrystal$ 20,4380$20,438Braintree120,675$65,89354,7821960 Tax Ct. Memo LEXIS 211">220 In addition, respondent determined that petitioner received taxable income in 1938 from unreported accruals realized on the respective liquidations of Crystal and Braintree as follows: Name ofcorpora-tionAccrualAmountCrystalSalary and interest, 1936$ 6,402.65BraintreeSalary and interest, 19373,267.15CrystalSalary and interest, 19385,145.15Total$14,814.95Petitioner liquidated Crystal and Braintree in the taxable year 1938. Upon these liquidations, petitioner received and assumed the corporations' respective assets and liabilities in the taxable year 1938. Subsequent to the liquidations of Crystal and Braintree, petitioner operated the businesses formerly conducted by each under the respective names of Thomas H. Hannaford, d/b/a Crystal Concrete Company, sometimes hereafter called Crystal Concrete, and Thomas H. Hannaford, d/b/a Braintree Realty Company, sometimes hereafter called Braintree Realty. Issue No. 3 Unexplained Bank Deposits - 1938 In 1938, petitioner deposited $148,731.94 to his bank accounts at the Quincy Trust Company, Quincy, Massachusetts, and the Weymouth Trust Co., Weymouth, Massachusetts, later known1960 Tax Ct. Memo LEXIS 211">221 as the Granite Trust Co. Of these deposits an amount of $10,553.16 was unexplained and unidentified. Petitioner concedes that none of these unexplained and unidentified deposits was received from any source other than one or more of his business enterprises. Respondent determined that these unexplained deposits constituted unreported taxable income in 1938. Issue No. 4 Statute of Limitations - 1938 Petitioner's 1938 return reported gross income in the amount of $22,327. For the taxable year 1938, respondent determined that petitioner had unreported income from "Accrued salary, interest, rent" in the amount of $9,213.33. Petitioner was in receipt of additional unreported income in 1938 of $9,213.33. Petitioner omitted from gross income in 1938 an amount properly includible therein which is in excess of 25 per cent of the gross income stated in his 1938 return. The statute of limitations does not bar assessment of the deficiency and addition to tax for 1938. Issue No. 5 Unexplained Credits to Drawing Accounts 1940, 1941, 1942 In 1940, 1941 and 1942, petitioner's "Advance and Drawing Accounts" on his books for Crystal Concrete and Braintree Realty were credited with1960 Tax Ct. Memo LEXIS 211">222 various amounts. Credits totaling $5,106.26 in 1940, $10,644.85 in 1941 and $7,187.68 in 1942 were unexplained. Petitioner concedes that none of these unexplained credits was received from any source other than one or more of his business enterprises. Respondent determined that these unexplained credits constituted unreported taxable income in 1940, 1941, and 1942, respectively. Issue No. 6 Travel and Entertainment - 1940, 1941 In 1940, petitioner went to Milwaukee, Wisconsin and Columbus, Ohio for the purpose of purchasing machinery and construction equipment for his business. He traveled to, and entertained, customers such as contractors, and officials of municipalities, counties and states. On the books of Crystal Concrete under date of November 8, 1940, an amount of $2,250 was credited to petitioner's drawing account and debited to an expense account, with the explanation that this item was for money estimated to be paid out of petitioner's personal funds for travel and entertainment. In 1941, petitioner traveled to various concrete plants in Philadelphia and New York for the purpose of looking over their methods and operations. In 1941, an amount of $1,500 was1960 Tax Ct. Memo LEXIS 211">223 credited to petitioner's drawing account on the books of Crystal Concrete. This item was identified as estimated traveling expenses. Petitioner claimed the respective amounts of $2,250 and $1,500 as deductions on his 1940 and 1941 returns. Respondent disallowed these deductions. In 1940 and 1941, petitioner expended the respective amounts of $500 and $350 for travel and entertainment which constituted ordinary and necessary trade or business expenses for those years. Issue No. 7 Construction Contract - 1940 In 1934, petitioner entered into a contract with the Public Works Administration to erect a filter plant in Weymouth, Massachusetts. Under this contract he received the following payments: YearAmount1934$ 1,905.70193559,752.7019367,440.69194013,230.36Respondent determined that petitioner realized additional income of $9,009.46 for the taxable year 1940. Such amount was computed as follows (in even dollars): Total receipts$80,329Less total costs71,320Total$ 9,009Petitioner's total cost under this contract was $83,878.80. The stipulated fact that the total amount received was $80,329.54 is apparently in error. 1960 Tax Ct. Memo LEXIS 211">224 Even employing the payment figure of $82,329.45, petitioner realized a net loss from this contract. Issue No. 8 Miscellaneous Expenses ($778.10 - 1940) In 1940, petitioner expended $100 for a steel file, $118 for land surveys and $575 for a new automobile for one of his salesmen. The $575 represented the trade-in difference between the salesman's old automobile and the price of the new one. Respondent disallowed the following items claimed by petitioner as deductions on his 1940 return: Selling expenses$575.00Prior year's taxes45.10Expenditures for steel file100.00Fee for land survey, charged togeneral administrative expense118.00Total $778.10The amounts of $100, $118 and $575, which petitioner expended in 1940, were capital expenditures and not ordinary and necessary trade or business expenses for that year. Issue No. 9 Salesman's Expenses - 1940 Petitioner's return for 1940 reported a deduction for selling expenses in the amount of $1,081.54 which respondent disallowed. This adjustment was not assigned as error. Issue No. 10 Personal1960 Tax Ct. Memo LEXIS 211">225 Expenses - 1940, 1941 Petitioner's returns for 1940 and 1941 reported as deductions all expenses incurred with respect to the "Fogg" building. Of such expenses respondent disallowed $1,191.81 for the year 1940 and $600 for the year 1941. These adjustments were not assigned as error. Issue No. 11 Attorney's Receipt of Law Suit Damages - 1941 On May 8, 1936, petitioner as lessor entered into a lease with the town of Braintree, Massachusetts. Subsequently, petitioner sued the town of Braintree for damages suffered under the lease. Ralph B. Heaven acted as petitioner's attorney in this proceeding. On September 3, 1941, the suit was settled. The town of Braintree drew a check in the amount of $5,963.41 payable to Crystal Concrete or the attorney and delivered it to the latter. On September 6, 1941, the attorney endorsed the check and deposited it in a bank. On occasion petitioner unsuccessfully requested from the attorney the amount of $5,963.41. The attorney, who in the interim had closed down his law practice, promised to pay it to petitioner. Shortly after September 6, 1941, the attorney died. Petitioner never received payment of the $5,963 $41 and neither his books1960 Tax Ct. Memo LEXIS 211">226 nor 1941 return reflected the receipt of such amount. Respondent determined that the $5,963.41 constituted taxable income to petitioner in the year 1941. Issue No. 12 Legal Expenses - 1940, 1941, 1942 On his 1940 return, petitioner claimed as deductions for legal expenses the following items: 2/ 5/40P. J. Williams$182.352/ 6/40W. J. Holdbrock125.004/25/40Ben Levy15.005/ 1/40John B. Smith6.007/20/403.008/ 1/40Monthly charge G.T.C..8012/31/40Credit to petitioner68.81Total$400.96 Respondent disallowed these deductions. This adjustment was not assigned as error. On his 1941 return, petitioner claimed as deductions for legal expenses the following items: 12/27/41Frank Ness$ 45012/31/41Frank Ness90012/31/41Frank Ness4502/24/41McKay500Total$2,300 Respondent disallowed these deductions. This adjustment was not assigned as error. In 1942, petitioner, in the operation of his businesses, required the services of attorneys. On his 1942 return, petitioner claimed the amount of $2,777.35 as a deduction for legal expenses pertaining to his Braintree Realty operations. In1960 Tax Ct. Memo LEXIS 211">227 addition, petitioner claimed as an expense deduction on his 1942 return the amount of $650 which represented a debit to legal expense and credit to reserve for legal expense on the books of Crystal Concrete under date of December 31, 1942. This entry was made "to provide for payment of legal fees to Edward Dangel, Esq., at a later date." Respondent disallowed the claimed deductions for $2,777.35 and $650. $750 of the $2,777.35 claimed as a deduction was expended for legal services in 1942 and constituted ordinary and necessary trade or business expenses for that year. The amount of $650 claimed as a deduction on petitioner's 1942 return does not constitute an ordinary and necessary trade or business expense for that year. Issue No. 13 Abandonment Losses - 1942 Ryder, Terrel, Richard Lots; South Braintree Plant From 1929 through 1942, petitioner was engaged in the business of preparing and selling ready-mixed concrete. In 1940, petitioner owned two concrete plants located at Massachusetts Avenue, Boston, Massachusetts, and Main Street, Braintree, Massachusetts. Petitioner's employees investigated and tested 167 acres of land, hereafter called the Ryder lot, at Granite1960 Tax Ct. Memo LEXIS 211">228 Street, Braintree, Mass. The land was rough and hilly, and had a dense growth of trees and brush. Petitioner estimated the Ryder lot to have 10 million cubic yards of sand and gravel. In 1939, petitioner, through his Braintree Realty operations, purchased the Ryder lot at a price of $23,548.76. In addition, petitioner purchased the following land: NameCostTerrel lot, Winter St., Weymouth, Mass $360Richard lot, Winter St., Weymouth, Mass.200Shortly after the purchase of the Ryder lot, he acquired a right of way over other property in order to make the Ryder lot more accessible to Granite Street. In 1940, petitioner built a 1200-foot road from Granite Street into the Ryder lot and a tunnel plant on the land for purposes of washing, crushing and screening gravel. In 1940, petitioner extracted 25,000 to 40,000 cubic yards of material from the Ryder lot in order to build the 1200-foot road. Sometime in 1942, petitioner discovered that the Ryder lot did not contain the quantity of sand and gravel originally determined. He contemplated closing down the concrete plant and selling the equipment. In December 1942, petitioner closed down the concrete plant1960 Tax Ct. Memo LEXIS 211">229 on the Ryder lot. During 1940 and 1941, sand and gravel were removed from the Ryder, Terrel and Richard lots for the purpose of manufacturing cement mix for sale to customers in petitioner's trade or business. Petitioner does not have records from which an accurate determination of the amount of sand and gravel removed during 1940 and 1941 can be made. Petitioner determined the salvage value of the Ryder, Terrel and Richard lots to be $1,002 and claimed $23,106.76 as an abandonment loss on his 1942 return. Respondent disallowed this abandonment loss and allowed petitioner depletion deductions for the years 1940 and 1941 in the respective amounts of $10,629.11 and $12,477.65. In 1942, petitioner owned the following properties: Rice & Hutchins land, So. Braintree, Mass. W. B. Babbit and B. & C. Wandelon, So. Braintree, Mass. Main and Winter Street, Braintree, Mass.These properties will hereafter be called the South Braintree Plant. In 1942, petitioner ceased doing business on the South Braintree Plant. He removed all the material that could be used in his business operations. Petitioner did not claim depletion deductions on his returns for prior years with respect1960 Tax Ct. Memo LEXIS 211">230 to the South Braintree Plant. On his 1942 return petitioner claimed an abandonment loss of $8,750 for the South Braintree Plant. Respondent disallowed the claimed deduction. Issue No. 14 Miscellaneous Purchases - 1942 (Pantano Farm) During 1942, petitioner contracted to sell loam to the city of Boston, Massachusetts. For purposes of this contract petitioner purchased approximately 28 acres of land, known as the Pantano Farm for $21,800. The Pantano Farm was on low land. It was approximately 1-2 feet above the Quincy, Massachusetts, reservoir. Petitioner stripped the top soil or loam of the Pantano Farm and sold it to the city of Boston. The proceeds were reported as sales by Crystal Concrete. In 1942, petitioner ceased doing business on the Pantano Farm. Crystal Concrete's books on December 31, 1942 reflected the $21,800 Pantano Farm purchase as a debit to miscellaneous materials purchased and a credit to the land account. Petitioner claimed the entire purchase price as a deduction on his 1942 return. In 1943, petitioner sold the Pantano Farm for $10,000 and reported this amount on his 1943 return as a long-term capital gain. For the taxable year 1942, respondent1960 Tax Ct. Memo LEXIS 211">231 disallowed $10,000 of the $21,800 claimed deduction and allowed $11,800 as a depletion deduction. The purchase of the Pantano Farm was not an ordinary and necessary business expense in 1942. Issue No. 15 Obsolescence - 1942 On his 1942 return, petitioner claimed a deduction for obsolescence in the amount of $4,843.88. Of this claimed deduction, respondent disallowed $3,387.91, which amount consisted of items totaling $169 and $3,218.91. Issue No. 16 Constructive Dividend - 1943 In 1943, C. Healy and Co., a Massachusetts corporation, and hereafter called Healy, constructed a wing on property owned by petitioner. The cost of this construction, $3,166.46, was charged to expense on Healy's books. At the time of this construction petitioner was the sole stockholder of Healy. On December 31, 1946, the following was entered on the books of Thomas H. Hannaford, d/b/a Braintree Realty Company: Dr.Cr.Buildings (1943)$3,166.46Res. Depr. Bldgs.$ 253.32T.H.H. [petitioner] Capital2,913.14Respondent determined that petitioner realized dividend income of $3,166.46 from Healy in 1943. In 1943, petitioner received a constructive dividend1960 Tax Ct. Memo LEXIS 211">232 from Healy in the amount of $3,166.46. Issue No. 17 Depreciation - 1940, 1942, 1943, 1946, 1947, 1948 Petitioner's returns reported, for the respective years, the following amounts of depreciation deductions: Amount of depreci-Year ofaction deductionreturnclaimed1940$38,054.04194254,355.01194326,792.6019469,874.6419479,994.90194810,297.26Respondent disallowed certain amounts of the depreciation deductions claimed by petitioner on his returns as follows: Amount of depreci-Year ofaction deductionreturndisallowed1940$ 699.9919422,150.0019433,423.6219462,116.5319471,296.1019481,489.78Issue No. 18 Sale of Assets - 1940, 1942, 1943 Petitioner's return for 1940 reported a loss of $6,912.16 from the sale of business assets. Respondent determined that petitioner received income from the sale of business assets in the amount of $7,766.73, as follows: Gain derived from sale of assets$ 854.57Loss disallowed from sale of assets6,912.16Total$7,766.73Petitioner's return for 1942 reported a net loss of $1,000 from the sale of capital assets. Respondent1960 Tax Ct. Memo LEXIS 211">233 determined that petitioner received a capital gain in the amount of $2,233.79, as follows: Long-term capital gain - 50%$1,233.79Disallowed loss reported on return1,000.00Total$2,233.79Petitioner's return for 1943 reported a net gain of $52,922.81 from the sale of capital assets. Respondent determined that petitioner received an additional capital gain in the amount of $468.52. This adjustment was not assigned as error. Issue No. 19 Loss on Sale of Securities - 1948 On his 1948 return, petitioner reported a capital loss in the amount of $3,481.62 for certain securities sold on December 30, 1948. Respondent disallowed this loss for the reason that such "sale * * was not consummated until January 4, 1949." Issue No. 20 Reduction in Basis of Securities Sold - 1948 Respondent reduced petitioner's cost of certain stock sold in 1948 in the amount of $848.62. Issue No. 21 Additions to Tax - Sec. 293(a) 1938, 1940, 1941, 1943 Respondent determined additions to tax pursuant to section 293(a), Revenue Act of 1938, and section 293(a), I.R.C. 1939, as follows: 1938$1,039.871940641.611941243.1119432,570.09 These determinations1960 Tax Ct. Memo LEXIS 211">234 were not assigned as error. Part of each deficiency for 1938, 1940, 1941 and 1943 is due to negligence or intentional disregard of rules and regulations. Opinion Petitioner lists 15 and respondent 16 separate issues. All are not duplications, and by attempting to set the one alongside the other we conclude that there are - according to the parties - 21 issues which they say we are required to decide. 1The totally inadequate, not to say emotional, manner in which this confused and complicated controversy has been pleaded, presented and briefed has required us to devote an inordinate amount of time and effort in an attempt to clarify the issues described, to attempt to isolate and decide on the voluminous and obscure record those which remain for decision. In order to endeavor to bring some order out of the chaotic mass before us, we first list and enumerate the non-duplicating issues appearing to be urged or suggested in some form by the parties: Issue No. 1 - Corporate liquidations - longterm capital gain - (1938 - $75,221) Issue No. 2 - Corporate liquidations - ordinary1960 Tax Ct. Memo LEXIS 211">235 income - (1938 - $14,814) Issue No. 3 - Bank deposits - (1938 - $10,553) Issue No. 4 - Statute of limitations (1938) Issue No. 5 - Credits to drawing accounts - (1940 - $5,106; 1941 - $10,644; 1942 - $7,187) Issue No. 6 - Travel and entertainment - (1940 - $2,250; 1941 - $1,500) Issue No. 7 - Profit from construction contract - (1940 - $9,009) Issue No. 8 - Deductions for selling expenses, prior year's taxes, steel file and fee for land survey - (1940 - $778) Issue No. 9 - Salesman's expenses - (1940 - $1,081) Issue No. 10 - Personal expenses - (1940 - $1,191; 1941 - $600) Issue No. 11 - Amount received by attorney upon settlement of law suit - (1941 - $5,963) Issue No. 12 - Legal expenses - ((a) 1940 - $400; (b) 1941 - $2,300; (c) 1942 - $2,777;(d) 1942 - $650) Issue No. 13 - Abandonment loss - Ryder, Terrel and Rchard lots - (1942 - $23,106); Abandonment loss - South Braintree Plant - (1942 - $8,750) Issue No. 14 - Miscellaneous purchases - Pantano Farm - (1942 - $21,800) Issue No. 15 - Obsolescence - (1942 - $169; 1942 - $3,218) Issue No. 16 - Constructive dividend - (1943 - $3,166) Issue No. 17 - Depreciation - (1940 - $699; 1942 - $2,150; 1943 - $3,423; 1960 Tax Ct. Memo LEXIS 211">236 1946 - $1,113; 1946 - $1,003; 1947 -$7; 1947 - $1,288; 1948 - $1,489) Issue No. 18 - Computation of gain on sale of assets - ((a) 1940 - $7,766; (b) 1942 - $2,233; (c) 1943 -$468) Issue No. 19 - Loss on sale of securities - (1948 - $3,481) Issue No. 20 - Reduction in basis of stock - (1948 - $848) Issue No. 21 - Addition to tax - Sec. 293(a) - (1938, 1940, 1941, 1943) As we discuss these questions we shall refer to them by the foregoing numerical designations. Many of these issues are entirely factual and have been primarily disposed of in our findings. This applies among others to traveling and entertainment expense for 1940 and 1941 (No. 6) and legal expense of $2,777 for 1942 (No. 12(c)) where we have made the best estimate available from the record, Cohan v. Commissioner, (C.A. 2) 39 F.2d 540, and to the additions to tax for negligence (No. 21). To some extent our conclusions follow from the inadequate, vague, evasive, and sometimes conflicting evidence introduced on behalf of petitioner and to the consequent failure on his part to sustain his burden of overcoming the presumption of correctness attaching to the determination. Petitioner's repeated attempts1960 Tax Ct. Memo LEXIS 211">237 to shift the burden to respondent 2 do not convince us that this obligation can thereby be escaped. The statute of limitations issue (No. 4) must be disposed of in respondent's favor. For 1938, the1960 Tax Ct. Memo LEXIS 211">238 only year involved, respondent made 5 adjustments to petitioner's net income. One was the disallowance of a deduction; the other 4, additions to gross income. Of these, 3 are contested, having been assigned as error in the petition. (Nos. 1, 2 and 3.) The remaining item, accrued salary, interest and rent, in the amount of $9,213 was not raised as an issue and must be regarded as having been conceded by petitioner. That one item is alone sufficient to require the conclusion that more than 25 per cent of petitioner's gross income was omitted from the 1938 return. 3 Sec. 275(c), Revenue Act of 1938. It is true that respondent, for some undisclosed reason, makes no reference to this situation in his brief. But the facts seem to us inescapable, nevertheless. Petitioner's gain in 1938 on the liquidation of two corporations, Crystal and Braintree, as well as ordinary income items (see Harriet Aldrich, 1 T.C. 602">1 T.C. 602) determined by respondent to have been collected by him from them in that year (Nos. 1 and 2), must be disposed of in respondent's favor. Factually there is no reliable evidence that1960 Tax Ct. Memo LEXIS 211">239 tends to overcome the presumption of correctness of the deficiency. And as a matter of law, petitioner evidently intended to, and did liquidate the corporations at the end of 1938 and not in 1939 as he now contends. This is borne out, not only by petitioner's statement under oath soon after the event, but also by his apparent failure to report the income for 1939, either. Cook v. United States, (Ct. Cl. 1933) 3 F. Supp. 47">3 F. Supp. 47, held only that taking over assets after the close of the year created a liquidation in the subsequent period. Those were not the facts here. And subsequent dissolution (in 1939) would not be inconsistent with prior liquidation (in 1938). Edward S. Harkness, 31 B.T.A. 1100">31 B.T.A. 1100, 31 B.T.A. 1100">1106. Petitioner also contends that the basis determined by respondent for the stock of each of the corporations is too low. As to this, as well, there is no reliable evidence. The items claimed as deductions for 1940 as miscellaneous expenses (No. 8) are practically all capital items, 4 such as the purchase of a salesman's automobile, and a steel file, and the cost of a land survey. As such they may not be deducted currently. And if any small amount is allowable1960 Tax Ct. Memo LEXIS 211">240 as depreciation, this issue has not been raised, and in any event we are not in possession of sufficient facts to determine what that is. As to the item of $5,963 for 1941 which respondent contends petitioner should have included (No. 11), it is undisputed that petitioner never received these funds and that they were obtained by his attorney by means of a check delivered to the latter made payable in the alternative to the attorney and as to which presumably he would have had a lien for his fee. Under these circumstances, we cannot distinguish the case from A. L. Voyer, 4 B.T.A. 1192">4 B.T.A. 1192, in which the headnote reads: "Payments made to an attorney for his client, and retained in part by the attorney to secure payment of his fees and disbursements, are taxable income to the client on a cash basis in the [subsequent] year in which paid over by the attorney." In this case, as we have said, no such payment ever took place. Frank E. Best, 26 B.T.A. 1070">26 B.T.A. 1070, is distinguishable from the present case on the same ground that it distinguished the Voyer1960 Tax Ct. Memo LEXIS 211">241 case. There we said (p. 1077): "We held in that [Voyer] case that both parties had a claim to the amount retained by the agent and that the taxpayer had no right to receive the full amount, and since it was not known exactly how much he would receive, he was taxable on only the amount actually received from the agent in the taxable year. In the instant case the instrument creating the agency provides that the agent shall retain the proceeds as a loan. It was a voluntary act on the part of the petitioner, and the agent retained the proceeds with the consent of the principal." See also J. E. Farrell, 45 B.T.A. 162">45 B.T.A. 162, 45 B.T.A. 162">172, affd. (C.A. 5) 134 F.2d 193, certiorari denied 320 U.S. 745">320 U.S. 745. On this issue the deficiency is disapproved. Several other questions, although discussed by the parties on brief, do not appear to us to have been properly raised as issues. Under Rule 7(c)(4)(B)4, Tax Court Rules of Practice, the petition is required to contain "[clear] and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency." As to salesman's expenses (No. 1960 Tax Ct. Memo LEXIS 211">242 9), legal expenses for 1940 and 1941 (No. 12(a) and (b)), personal expenses (No. 10), and gain on sale of assets for 1943 (No. 18(c)), as well as the additions to tax (No. 21) to which we have already referred, we find no such assignment of error in the petition as would place these items properly in controversy. We accordingly find it unnecessary to consider them further. H. D. & J. K. Crosswell, Inc., 6 B.T.A. 1315">6 B.T.A. 1315, 6 B.T.A. 1315">1320; F. P. Dastague, 19 B.T.A. 1324">19 B.T.A. 1324, 19 B.T.A. 1324">1327; Samuel E. Hirsch, 16 T.C. 1275">16 T.C. 1275, 16 T.C. 1275">1279; Lynne Gregg, 18 T.C. 291">18 T.C. 291, 18 T.C. 291">303, affirmed per curiam (C.A. 3) 203 F.2d 954. In addition to the issues already mentioned, we are unable to obtain from the record any facts respecting a number of other disputed items upon which we could possibly make findings adequate to sustain petitioner's burden. This applies to unexplained bank deposits (No. 3), credits to drawing accounts (No. 5), to gain on sale of assets for 1940 and 1942 (No. 18(a) and (b)), and to deductions for obsolescence (No. 15). This is also true as to the depreciation question running through a number of years (No. 17) where there is not even any possibility1960 Tax Ct. Memo LEXIS 211">243 of applying the Cohan formula, since, with one minor exception, 5 in each relevant year some allowance for depreciation was given petitioner; and to the constructive dividend (No. 16) where the only facts before us are those stipulated and an unexplained book entry, and these are at least as consistent with the correctness of the deficiency as the reverse. In a sense the same consideration also applies to legal expense of $650 for 1942 (No. 12(d)) although apparently even petitioner now concedes that the item in question was not paid in cash in that year and should not have been deducted by petitioner as a cash basis taxpayer. The profit on the construction contract in 1940 (No. 7) raises the question whether petitioner's cost of completing a contract with the Public Works Administration, for which he received a final payment in 1940, was greater than the total amount he received so that there was no profit to be reported. Petitioner's testimony as to this cost was, if not precise and categorical, at least some evidence. It was not weakened by any inherent contradiction or qualified by cross-examination. It appears in fact1960 Tax Ct. Memo LEXIS 211">244 to be supported by a stipulated exhibit which is said by the parties to be "self-explanatory." We conclude as to this issue that respondent's determination was erroneous. As to the deductions covering the alleged abandonment in 1942 of the South Braintree properties and the Ryder lots (No. 13), the only specific evidence relates to the latter. We have found on the record as a whole that petitioner extracted sand and gravel in 1940 and 1941 from the Ryder lots for the purpose of manufacturing cement mix for sale to customers in his concrete business. We have no way of knowing how much it was. There is nothing to demonstrate that respondent's allowance for depletion was erroneous. That being so, there was no basis to recover in 1942 even if the property was abandoned in that year. An identical conclusion applies to the South Braintree properties, there being no evidence as to cost basis, adjusted basis and amounts removed in prior years as well as in 1942. As to the Pantano Farm (No. 14), while it is true that petitioner used it for removing a part of the realty, the evidence is lacking that it was either completely worthless or abandoned in that year, and the implication is to the1960 Tax Ct. Memo LEXIS 211">245 contrary because almost immediately, in the following year, it was sold. We cannot conclude that petitioner was entitled to any more depletion in 1942 than respondent finally gave him. The remaining basis was consequently left to be recovered when he sold the property in 1943. As a matter of fact, petitioner is not materially worse off with this determination as he reported the gain on such sale in 1943 using a zero basis. In effect, the present result has given him the benefit of eliminating the gain in 1943 since his remaining basis is exactly equal to what he received; and as we understand it respondent has reduced the 1943 gross income accordingly. This disposes of all the questions that we regard as being still in controversy. No mention is of course made of matters not argued in petitioner's brief, which we must hence regard as having been abandoned, such as the reduction in basis of certain stock sold in 1948 (No. 20), nor of several other adjustments not in issue because not assigned as error in the petition. In addition, as we have said, either by stipulation or on brief there have been specific concessions 6 by both parties, the latter consisting particularly of the loss1960 Tax Ct. Memo LEXIS 211">246 on the sale of securities sold in 1948 (No. 19). We have not attempted to consider the numerous portions of the determination in which respondent reduced petitioner's net income either by determining additional deductions or by eliminating items of gross income, since there is no reason for petitioner to object to such adjustments in his favor. Decision will be entered under Rule 50. Footnotes. In his brief petitioner concedes the amount determined by respondent.↩. The correct addition of these items is $838.10. The discrepancy is unexplained.↩1. This is in addition to a number that were apparently recognized as having been conceded.↩2. E.g., "The Commissioner has merely determined that of sums credited to the petitioner's drawing accounts for this year items totaling $5,106.26 could not be identified by him. He has not established that these credits were not reported as income among the more than $778,000.00 of gross income reported by the petitioner on his return filed for that year. "The petitioner submits that Commissioner failed to show that the balance of unidentified credits in the amount of $5,106.26 represented income which the petitioner failed to include in his tax return filed for the year 1940. " * * "Nowhere has the Commissioner established that the petitioner has failed to report these items for tax purposes. He has merely established that these were items which the petitioner could not specifically identify. "* * * "The burden was on the Commissioner as well as on the taxpayer to adopt a method that would clearly reflect income * * * and this he failed to do." [Petitioner's brief.]↩3. Petitioner reported $22,327 as gross income, 25 per cent of which is $5,582.↩4. One slight item of $45.10 is referred to as "Prior year's taxes." We have no further information as to this.↩5. An amount of $126 was disallowed in its entirety.↩6. See footnote 1, supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619046/	WILLIAM A. BEETON, JR. AND ANNE H. BEETON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBeeton v. CommissionerDocket No. 37872-85.United States Tax CourtT.C. Memo 1987-472; 1987 Tax Ct. Memo LEXIS 468; 54 T.C.M. 583; T.C.M. (RIA) 87472; September 17, 1987. William A. Beeton, Jr., pro se. Wilton A. Baker, for the respondent. SCOTT 1987 Tax Ct. Memo LEXIS 468">470 MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1982 in the amount of $ 2,260.73 and an addition to tax under section 6651(a)(1) 1 in the amount of $ 1,329.53. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision: (1) whether petitioner, William A. Beeton, Jr., is entitled to the deductions and investment tax credit he claimed from selling Shaklee products; (2) whether petitioner, William A. Beeton, Jr., correctly determined his self-employment tax liability; and (3) whether petitioners are liable for the addition to tax under section 6651(a)(1) for failure to timely file their income tax return for taxable year 1982. FINDINGS OF FACT At the time of filing their petition herein, petitioners resided in Fauquier County, Virginia. Petitioners filed their Federal income1987 Tax Ct. Memo LEXIS 468">471 tax return for the calendar year 1982 on April 9, 1984. During the year in issue, 1982, William A. Beeton, Jr., (hereinafter "petitioner") was an attorney practicing law in Alta Vista, Virginia. In the fall of 1981, petitioner campaigned for and was elected to a one-year term in the Virginia General Assembly ("General Assembly") to commence serving January 13, 1982. In 1981 petitioner was sponsored to sell Shaklee products by his father-in-law, an ophthalmologist and Shaklee distributor. Shaklee is a distributor of vitamins and a liquid protein product used by individuals in a weight loss program. The Shaklee program works in a pyramid fashion. Individual distributors purchase their products from their distributor-sellers who purchased from the company. Only when a distributor's sales reached a certain level could he purchase directly from Shaklee. Distributor-sellers received a percentage of the amount their distributor-purchasers bought from them. To be successful with Shaklee, a distributor must sell both to end-users and to other distributors. Petitioner made no substantial sales of Shaklee products in 1981. He had hoped his wife would help with this activity but1987 Tax Ct. Memo LEXIS 468">472 she did not. From January 13, 1982 through March 13, 1982, the General Assembly was in session and petitioner remained in Richmond. During that time petitioner was not paid by his law firm and due to the lag time in being paid by the State he borrowed money for living expenses and expenses connected with selling Shaklee products. In the fall of 1982, petitioner campaigned for but was defeated in his bid for reelection to the General Assembly. In 1982 petitioner, after the conclusion of the session of the General Assembly, spent a considerable amount of time campaigning for reelection. Petitioner's activities connected with serving in the General Assembly and campaigning for reelection, took away from the time his father-in-law had thought he would devote to Shaklee sales. Petitioner would talk with people he saw in the General Assembly and in his law practice and with his friends about Shaklee products. After his defeat for reelection in 1982 petitioner did not actively attempt to sell Shaklee products for awhile. In late fall of 1982 he decided to devote more time to Shaklee sales. During November and December of 1982 petitioner devoted approximately twice as much time1987 Tax Ct. Memo LEXIS 468">473 per day to Shaklee as he had previously done. During this time petitioner spent "an hour or two a day" on his Shaklee activities although he did not regularly go to see people solely to attempt to sell them Shaklee products. Petitioner's total sales of Shaklee products in 1982 amounted to only $ 350. He sold Shaklee products to 10 to 12 persons, two of whom were his parents, one was his secretary and the remainder friends who he visited for primary purposes other than selling Shaklee products to them. Petitioner never made a profit selling Shaklee, did not keep a separate set of books or a journal with respect to this activity, and did not have a separate bank account for his Shaklee activities. As a member of his law firm, petitioner was provided with a leased Ford Fiesta which he drove to work, for his law firm business and in his General Assembly duties. Petitioner also owned a station wagon which his wife drove and which was generally used as the family car. On December 30, 1982, petitioner purchased a Volkswagen Jetta automobile ("Volkswagen"). He picked up the car on December 30, 1982, spoke to the salesman about Shaklee vitamins, and drove home. Petitioner could1987 Tax Ct. Memo LEXIS 468">474 not specifically recall where he drove the Volkswagen on December 31, 1982 but did not recall using it in connection with Shaklee activities on this day. The only use made by petitioner of the Volkswagen in 1982 other than personal use was for storing his plastic Shaklee briefcase full of glossy Shaklee brochures. Petitioner used the car for personal driving on December 30 and 31, 1982. On January 1, 1983, petitioner withdrew from his law firm. After withdrawing from his firm, he returned the Ford and began to use the Volkswagen for commuting and in his law practice. In early 1983 petitioner began to practice law in Warrenton, Virginia. Commuting between Alta Vista and Warrenton required substantial travel time leaving petitioner little time for his Shaklee activities. In 1983 petitioner was no longer involved in selling Shaklee products. On a Schedule C with respect to Shaklee products included with petitioner's 1982 Federal income tax return he claimed the following deductions: Car and truck expenses$ 1,050.00Depreciation5,000.00Dues and publications15.00Insurance80,80Interest on businessindebtedness612.24Office supplies and postage25.00Taxes377.22Travel and entertainment165.00Utilities and telephone180.00TOTAL DEDUCTIONS$ 7,505.261987 Tax Ct. Memo LEXIS 468">475 From the sale of Shaklee products in 1982, petitioner reported a loss in the amount of $ 7,460.73 computed on Schedule C as follows: Sales$ 350.00Cost of goods sold305.47Total income44.53Total deductions7,505.26LOSS$ 7,460.73The $ 5,000 depreciation deduction claimed by petitioner on the Schedule C with respect to the sale of Shaklee products was with respect to the Volkswagen purchased on December 30, 1982. This claim was made pursuant to an election under section 179, to expense the cost of the Volkswagen. Petitioner on his 1982 return claimed an investment tax credit of $ 270 based on the entire cost of the Volkswagen, with an assertion that the vehicle was used exclusively for business. In the notice of deficiency respondent determined that petitioner had not established that the $ 7,460.73 amount was a loss sustained by petitioner, that petitioner was not entitled to the claimed investment tax credit, that petitioner had erroneously computed his self-employment income tax liability and that petitioners did not file their return within the time prescribed by law or establish that such failure was due to reasonable cause. OPINION 1987 Tax Ct. Memo LEXIS 468">476 Petitioner contends that he was in the trade or business of selling Shaklee products with the objective of making a profit and therefore all of his ordinary and necessary expenses incident to that "business" should be deductible. Respondent contends that petitioner has failed to substantiate the expenditure of any of the amounts claimed as deductions in connection with the Shaklee products sales except the cost of goods sold and the cost of the Volkswagen. Respondent contends that petitioner is not entitled to the claimed deduction and investment tax credit with respect to the Volkswagen since this automobile was not used in connection with petitioner's sales of Shaklee products. Alternatively, respondent contends that the Volkswagen was not used in a trade or business as required by section 179(d) since petitioner's sales of Shaklee products in 1982 did not constitute a trade or business. We agree with respondent that petitioner has totally failed to substantiate the claimed car and truck expenses, dues and publication expenses, insurance, interest on business indebtedness, office supplies and postage, taxes, travel and entertainment, and utilities and telephone. Petitioner1987 Tax Ct. Memo LEXIS 468">477 offered no evidence to support the claimed deductions for dues and subscriptions, insurance, taxes, and travel and entertainment. The only evidence offered to support the car and truck expense was some checks made to gasoline companies. Petitioner was unable to say how much of the amount was allocable to his business as an assemblyman and to the personal use of his automobile for himself and his family. Petitioner testified that he borrowed money to pay his living expenses while he was in the General Assembly and for his Shaklee activities. He made no showing that any interest was paid on this indebtedness in 1982 or how much, if any, of the amount borrowed was used in connection with Shaklee sales. Petitioner offered some checks made to the postal service and to the telephone company but again made no showing that any of these amounts were for other than personal use. We hold that petitioner has failed to substantiate any of his claimed deductions in connection with Shaklee other than cost of goods sold, which respondent has in effect allowed since he disallowed only the claimed loss deduction and the cost of the Volkswagen. We therefore sustain respondent's disallowance of1987 Tax Ct. Memo LEXIS 468">478 the deductions other than the Volkswagen depreciation claimed by petitioner in connection with the sale of Shaklee products for lack of substantiation. To be entitled to the deduction under section 179, the property expensed must have been acquired by purchase for use in a trade or business. Specifically, section 179 allows a taxpayer to elect "to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service." Section 179(a). For taxable years beginning in 1982 the aggregate cost which may be treated as a deduction under section 179(a) is $ 5,000. Section 179(b)(1). "Section 179 property" was defined as "section 38 property * * which is acquired by purchase for use in a trade or business." Section 179(d)(1). Consequently, if petitioner's Shaklee activities do not rise to the level of a trade or business, petitioner is not entitled to this expense deduction. Similarly, the investment credit of $ 270 is subject to a trade or business requirement. Section 38 authorizes a credit against tax for investment in1987 Tax Ct. Memo LEXIS 468">479 certain depreciable property. Section 48(a) defines "section 38 property" as including certain types of tangible personal property but only recovery property within the meaning of section 168. Section 168(c)(1) then defines "recovery property," in pertinent part, as "tangible property of a character subject to the allowance for depreciation -- (A) used in a trade or business, * ."Thus, unless petitioner's Shaklee activities were such as to constitute a trade or business, petitioner is not entitled to the investment credit. The cases considering what constitutes a trade or business are numerous. The Supreme Court recently in Commissioner v. Groetzinger, 480 U.S. (Feb. 24, 1987), after discussing the distinction between a trade or business and "transactions entered into for profit" which do not satisfy the narrow category of trade or business, stated: We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. 1987 Tax Ct. Memo LEXIS 468">480 In our view petitioner's activities with respect to Shaklee products in 1982 were not carried on with continuity and regularity. Rather these activities were sporadic. Petitioner's activities had none of the indicia of a trade or business. He kept no books, he had no separate bank account, he spent little time on the activity and treated it as only incidental to his regular business activities. We therefore conclude that petitioner's activities with respect to Shaklee products did not constitute a trade or business. Therefore, petitioner is not entitled to the claimed deduction for the Volkswagen under section 179 or the claimed investment tax credit with respect to this car. Since we have concluded that petitioner was not engaged in a trade or business of selling Shaklee products it is unnecessary to consider respondent's contention that the Volkswagen was not "placed in service" in 1982. However, it is apparent that the only use of the Volkswagen in connection with Shaklee products in 1982 was that petitioner put some Shaklee brochures in it. All other uses of the Volkswagen in 1982 were personal uses by petitioner and his family. Petitioner argues that he did intend1987 Tax Ct. Memo LEXIS 468">481 to make a profit from sale of Shaklee products but was sidetracked from this intent by his service in the General Assembly and his race for reelection. Because of petitioner's failure to substantiate any deductions with respect to Shaklee products which would be allowable in connection with a transaction entered into for profit under section 212, we need not reach this contention of petitioner. However, we do point out that whatever may have been petitioner's intent at some future time, the objective facts show no intent to make a profit in 1982. Based upon our conclusions above, petitioner has in fact miscalculated his self-employment income. The disallowed net loss of $ 7,460.73 from the Shaklee activity is not deductible in determining his self-employment income and his self-employment tax. Consequently, the self-employment income should be adjusted pursuant to section 1401 et seq., to reflect the findings of this Court. The remaining issue for decision is the addition to tax under section 6651(a)(1).2 Section 6651(a)(1) provides for an addition to tax for the failure to file a return on the date prescribed therefor unless the failure is shown to be due to reasonable1987 Tax Ct. Memo LEXIS 468">482 cause and not due to willful neglect. Petitioner has the burden of proof on this issue. Rule 142(a); Bebb v. Commissioner,36 T.C. 170">36 T.C. 170, 36 T.C. 170">173 (1961); Estate of Johnson v. Commissioner, 89 T.C. No. (slip opinion at 11) (filed July 20, 1987). Petitioner's return was not filed until April 9, 1984. Petitioners have not shown that they had an extension of time to this date to file their return and have presented no evidence to show reasonable cause for the late filing. Petitioners neither at trial nor in their brief contested respondent's determination of the addition to tax under section 6651(a)(1). Accordingly, we find petitioners have failed to sustain their burden of proof on this issue and respondent's determination is sustained. 1987 Tax Ct. Memo LEXIS 468">483 Decision will be entered under Rule 155.Footnotes1. Unless otherwise stated to the contrary, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Section 6651(a)(1) reads in pertinent part as follows:SEC. 6651. FAILURE TO FILE TAX RETURN OR TO PAY TAX. (a) Addition to the Tax. -- In case of failure -- (1) to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; * *In the case of a failure to file a return of tax imposed by chapter 1 within 60 days of the date prescribed for filing of such return (determined with regard to any extensions of time for reasonable cause and not due to willful neglect, the addition to tax under paragraph (1) shall not be less than the lesser of $ 100 or 100 percent of the amount required to be shown as tax on such return. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619053/	STEVEN GEORGE PORTEN AND SHANN CATHRO WESTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPorten v. CommissionerDocket No. 10915-91United States Tax CourtT.C. Memo 1993-73; 1993 Tax Ct. Memo LEXIS 71; 65 T.C.M. (CCH) 1994; March 3, 1993, Filed 71 Decision will be entered under Rule 155. Steven George Porten, pro se. For respondent: Cheryl B. Harris. GOLDBERGGOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge: This case was heard pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. All section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined a deficiency in petitioners' Federal income tax for tax year 1988 in the amount of $ 268. After allowance of additional Schedule C deductions by respondent, the sole issue for decision is whether petitioners are required to recognize income from cancellation of debt as a result of the partial forgiveness of a student loan made to Shann Cathro Weston by the State of Alaska. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated by this reference. Petitioners resided in Portland, Oregon, when they filed their petition. In 1984, 1985, and 1986, Shann Cathro Weston (hereinafter referred to as petitioner) received student loans from the State of Alaska to cover the expenses of her72 tuition and books. Petitioner signed promissory notes which contained provisions granting partial cancellation of her debt if she resided and worked in Alaska. The amount of the loan forgiveness was proportionate to the number of years petitioner worked in Alaska. The note also provided that petitioner was eligible for cancellation of debt if she was employed outside the geographical boundaries of Alaska but remained a resident of Alaska and was subject to Alaska State income tax. Petitioner earned her Master's degree in 1986, obtained a job working for a native nonprofit corporation, and worked for approximately 2 years in Alaska. She was then eligible for partial cancellation of her loan balance. Petitioner applied for loan cancellation in 1988 and was informed that $ 1,690 of her debt was cancelled. She did not report this cancellation of debt as income for 1988. After the cancellation, the amount of petitioner's monthly payments on the loan remained the same, but fewer payments were required. In 1990, the Legislature of the State of Alaska passed a joint resolution expressing its view of the Federal income tax treatment of forgiveness of Alaska student loans as follows: 73 BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF ALASKA: WHEREAS the original intent of the forgiveness provision in the state student loan program was to provide a nontaxable grant to the student; and WHEREAS many student loans made before July 1, 1987, are eligible for up to 50 percent forgiveness under the state student loan program; and WHEREAS the Internal Revenue Service is currently treating Alaska student loans that are discharged through the forgiveness provision as taxable income; and WHEREAS state residents who benefited from the student loan program were unaware of their tax liability and assumed that a forgiven student loan was not subject to taxation under federal law; and WHEREAS the Internal Revenue Service is currently interpreting the Internal Revenue Code as imposing tax liability in a year in which the student actually receives no cost saving from loan payments because of the student's eligibility for forgiveness; and WHEREAS the Congress is considering S. 1803 and H.R. 3518, both of which would change the taxable status of student loans and allow loans that are forgiven by this state to be excludable from gross income for purposes of federal income74 taxation; BE IT RESOLVED that the Alaska State Legislature urges the Congress to consider and pass either S. 1803 or H.R. 3518, thereby allowing that portion of a student loan made by this state that qualifies for forgiveness to be excludable from gross income for purposes of federal income taxation; and be it FURTHER RESOLVED that the Internal Revenue Service is urged to reconsider and reverse its decision that Alaska student loans discharged through the forgiveness program are taxable income. [Legislative Resolve No. 95, State of Alaska Legislature, 1990.]Respondent determined that petitioner received income from cancellation of debt. Petitioner argues, in the alternative, that the cancellation of her debt does not give rise to income (1) because it constitutes a scholarship, (2) because it constitutes a gift, (3) because it falls within the income exclusion provision of section 108(f), or (4) because the loan was a contingent liability. Petitioner also argues that it is unfair for her to be charged interest on the deficiency, as respondent had not previously enforced the law by imposing tax on income from cancellation of debt for Alaska student loans. The determination75 of respondent is presumed to be correct, and petitioner bears the burden of proving respondent erred in the determination. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Section 61(a) provides that gross income means all income from whatever source derived, including income from discharge of indebtedness. Sec. 61(a)(12). Obtaining a loan is not a taxable event, despite the accession to wealth, because of the obligation to repay the loan. But when a taxpayer is released from that obligation, he or she has realized an accession to income because the cancellation effects a freeing of assets previously offset by the liability arising from such indebtedness. United States v. Kirby Lumber Co., 284 U.S. 1 (1931); Cozzi v. Commissioner, 88 T.C. 435">88 T.C. 435, 445 (1987). In other words, at the moment when petitioner became entitled to cancellation of debt, her net worth increased, giving rise to income from cancellation of debt, regardless of the fact that she was required to continue repaying the loan in 1988. ScholarshipPetitioner argues that the forgiveness of her loan is a scholarship76 and hence does not give rise to taxable income. "Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii)." Sec. 117(a). A "qualified scholarship" means any amount "received by an individual as a scholarship or fellowship grant" to the extent the individual establishes it was used for tuition and fees and related expenses such as books, supplies, and equipment required for courses. Sec. 117(b). Section 117(b) requires that the amount be "received * * * as a scholarship or fellowship grant". Amounts received by petitioner were received as loans, for which she signed promissory notes. These amounts did not have the normal characteristics associated with the term "scholarship", i.e., a relatively disinterested, "no-strings" educational grant, with no requirement of any substantial quid pro quo from the recipient. Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 752 (1969); Meek v. United States, 608 F.2d 368 (9th Cir. 1979). The amounts received by petitioner were evidenced by a note which gave77 rise to a true debt: a sum certain payable over a specific period of time at a stipulated rate of interest. Church of Scientology v. Commissioner, 823 F.2d 1310 (9th Cir. 1987), affg. 83 T.C. 381">83 T.C. 381 (1984). Petitioner argues that it was the forgiveness of her loan which constituted the scholarship. Petitioner directs our attention to the Alaska Statutes, which describe a student loan as a "scholarship loan". Alaska Stat. sec. 14.43.090(a) (1992). The 1990 joint resolution of the Alaska Legislature states that "the original intent of the forgiveness provision in the state student loan program was to provide a nontaxable grant to the student". These provisions make it clear, however, that a "scholarship loan" was a loan to promote scholarship, not a "scholarship" in the usual sense of the term. The grant was seen as taking place at the time the loan was partially forgiven. The characterization provided by State law is not binding for purposes of determining taxability under Federal income tax statutes. To hold otherwise would permit state legislatures to define taxable income for purposes of Federal taxation. Turner v. Commissioner, T.C. Memo. 1978-16578 (holding State characterization of payments as educational stipend not binding for Federal income tax purposes); Batson v. Commissioner, T.C. Memo. 1977-339 (same); Haygood v. Commissioner, T.C. Memo. 1977-71 (same). It is clear that the State of Alaska offered the loan forgiveness to induce college graduates to remain in Alaska. Alaska Congressman Don Young stated in a letter dated October 12, 1989, to Treasury Secretary Nicholas Brady that, prior to the enactment of the loan forgiveness clause, Alaska was experiencing a "brain drain"; consequently, "The State of Alaska, with its own funds, created this forgiveness clause as a way to encourage its students to return." This statement sums up the quid pro quo in the loan forgiveness. Petitioner was relieved of her obligation to repay $ 1,690 of her student loan in exchange for having lived and worked in Alaska for a certain period of time after graduation. The facts of this case differ from the typical compensation-related educational grant, where an employee receives funds from an employer to pursue his or her education in exchange for future services to the employer. 79 See Bingler v. Johnson, supra.Here the State of Alaska extended petitioner a loan. Petitioner earned her loan forgiveness by fulfilling a condition subsequent to the granting of the loan: completing her degree program and working in Alaska for a certain period of time. The offer of loan forgiveness thus represented consideration to petitioner for remaining in Alaska. For the reasons stated above, we hold that cancellation of petitioner's debt under the Alaska student loan program does not constitute a scholarship. GiftPetitioner argues in the alternative that the forgiveness of her loan constitutes a gift. Section 102(a) provides that gross income does not include the value of property acquired by gift. Our finding above of a quid pro quo effectively rules out the possibility of a gift. The term "gift" was defined in Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 285 (1960), as a transfer resulting from a "detached and disinterested generosity * * out of affection, respect, admiration, charity or like impulses". (Citations omitted.) See Hoptowit v. Commissioner, 709 F.2d 564">709 F.2d 564 (9th Cir. 1983),80 affg. 78 T.C. 137">78 T.C. 137 (1982). The fact that Alaska offered the loan forgiveness as an incentive for continued residence in the State and forgave student loans only when the residency requirement was fulfilled indicates that the forgiveness was not a gift. Section 108(f) ExclusionPetitioner argues that the loan forgiveness falls within the exclusion of section 108(f) and hence does not give rise to income. Section 108(f)(1) provides: In General. -- In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.A student loan is any loan to an individual to assist the individual in attending an educational organization made by, inter alia, a State. Sec. 108(f)(2). The main clause of section 108(f)(1) contemplates that forgiveness of student loans81 generally gives rise to income: "gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan". The following subordinate clauses add a condition: "if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers." The clear implication is that forgiveness of student loans, other than those identified in the statute, gives rise to income from discharge of indebtedness. Sec. 108(f)(1). 1 The condition to forgiving a portion of petitioner's loan was that she remain for a minimum of 2 years an employed resident of Alaska. This requirement has no reference to "certain professions" or "a broad class of employers." Petitioner was entitled to enter any occupation and work for any employer. Although she began a career of public service, she was not required to do so to obtain loan forgiveness. 82 If we were to read section 108(f)(1) as petitioner suggests, we would have to read the phrase "in certain professions" out of the subordinate clauses of the statute. We follow the "'elementary rule of construction that effect must be given, if possible, to every word, clause and sentence of a statute.' A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant". 2A Sutherland Statutory Construction, sec. 46.06 (1986) (citations omitted). See United States v. Fields, 783 F.2d 1382">783 F.2d 1382, 1384 (9th Cir. 1986) (statute should be interpreted to give full meaning to all provisions); Vetco v. Commissioner, 95 T.C. 579">95 T.C. 579, 592 (1990). We hold that section 108(f) does not apply in this case to protect petitioner from income from cancellation of debt. Contingent ObligationPetitioner's fourth theory is that she realized no income from cancellation of debt because her obligation was contingent. Petitioner cites Corporacion de Ventas de Salitre Y Yode de Chile v. Commissioner, 141">130 F.2d 141 (2d Cir. 1942),83 revg. 44 B.T.A. 393">44 B.T.A. 393 (1941), holding that extinguishment of a debt payable only out of future corporate profits did not give rise to income. Petitioner's reliance on this case is misplaced. We do not agree. The reason that there is no income from cancellation of contingent debt is that a contingent liability gives rise to no fixed obligation. A debt is an obligation to pay a fixed amount of money at a certain date at a fixed rate of interest. In Corporation de Ventas v. Commissioner, supra, a Chilean corporation reacquired debentures of its predecessor at a discount. The corpoation's liability was limited under Chilean law: it was under no obligation to pay principal or interest on the debentures unless it had net earnings sufficient for that purpose. At the time the debt was acquired, the amount of the obligation could not be ascertained. Hence there was no cancellation of debt. Similarly, in Hunt v. Commissioner, T.C. Memo. 1990-248, a contractual obligation to make payments based on the contingency of the amount of future profits was not a true debt. Its cancellation did not give84 rise to income. By contrast, when petitioner signed the promissory notes, she agreed to pay a fixed sum on a fixed date at a fixed rate of interest. Her debt arose at that time. Fulfillment of a condition subsequent entitled her to partial cancellation of the debt. But this does not shield her from discharge of indebtedness income on the theory that the amount of the debt or the obligation to repay was contingent when the debt was incurred. The facts of this case are more similar to cases in which a creditor discharges a debtor's obligation in exchange for services or some form of nonmonetary consideration. See OKC Corp. v. Commissioner, 82 T.C. 638 (1984) (holding section 108 does not apply where creditor discharges debtor's obligation in exchange for settlement of a lawsuit). We hold that petitioner realized income on the partial cancellation of her State of Alaska student loan. InterestPetitioner contends that interest should not accrue on the deficiency because the lack of enforcement of the provisions of the law governing income from discharge of debt has left her without warning of her impending tax liability. As a general rule, 85 this Court does not have jurisdiction over questions concerning interest under section 6601(a). LTV Corp. v. Commissioner, 64 T.C. 589">64 T.C. 589, 597 (1975); Hudgins v. Commissioner, 55 T.C. 534">55 T.C. 534, 538 (1970); Chapman v. Commissioner, 14 T.C. 943">14 T.C. 943, 946-947 (1950), affd. per curiam 191 F.2d 816">191 F.2d 816 (9th Cir. 1951). There are certain narrowly defined exceptions, but none of them apply to this case. See, for example, section 7481(c) (giving this Court jurisdiction to review the amount of interest, but only after it has been assessed and paid). On the basis of the foregoing, Decision will be entered under Rule 155. Footnotes1. The certain professions are medicine, nursing, and teaching. Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (J. Comm. Print 1984) at 1199. Cf. Rev. Rul. 73-256, 1 C.B. 56">1973-1 C.B. 56, as modified by Rev. Rul. 74-540, 2 C.B. 38">1974-2 C.B. 38↩ (under prior law, cancellation of student loan for attending medical school, where recipient practiced medicine in rural area for specified period after completing education, was not tax-free scholarship but was taxable income from discharge of indebtedness).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/2719375/	CHARLES E. WADE AND BETTY G. WADE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWade v. Comm'rDocket No. 19934-12United States Tax CourtT.C. Memo 2014-169; 2014 Tax Ct. Memo LEXIS 167; 108 T.C.M. (CCH) 195; August 20, 2014, FiledDecision will be entered under Rule 155.167 C. Jerre Lloyd, for petitioners.Kristen I. Nygren and Susan S. Canavello, for respondent.GOEKE, Judge.GOEKEMEMORANDUM FINDINGS OF FACT AND OPINIONGOEKE, Judge: Petitioners own stock in two S corporations, Thermoplastic Services, Inc. (TSI), and Paragon Plastic Sheeting, Inc. (Paragon). On their 2008 Federal income tax return they claimed a deduction for nonpassive losses from the companies which they also carried back to 2006 and 2007. Respondent determined that petitioners had not materially participated in the 170 companies' activities in 2008 and accordingly reclassified the losses as passive. On the basis of his reclassification, he determined income tax deficiencies for taxable years 2006, 2007, and 2008. The issue for decision is whether, under section 469,1 petitioners materially participated in TSI and Paragon in 2008. We hold that they did.FINDINGS OF FACTSome of the facts have been stipulated and are so found. Petitioners are married and resided in Florida when they filed their petition.Petitioners filed a joint168 Form 1040, U.S. Individual Income Tax Return, for 2008 wherein they claimed a deduction for nonpassive losses from flowthrough entities totaling $3,808,709. In 2009 petitioners filed Form 1045, Application for Tentative Refund, requesting a refund for tax years 2006 and 2007 resulting from their carryback of the 2008 losses. In 2010 petitioners amended their 2006 and 2007 returns to reflect the carryback.Respondent determined that $3,403,536 of the losses petitioners had reported was passive. Accordingly, he issued a notice of deficiency on June 23, 2012, disallowing a portion of the deduction petitioners claimed for the losses.171 The losses respondent determined were passive and the companies to which they are attributable are summarized below:CompanyLoss amountCharles WadeThermoplastic Services, Inc.$1,473,581Betty WadeThermoplastic Services, Inc.1,453,826Charles WadeParagon Plastic Sheeting, Inc.125,777Betty WadeParagon Plastic Sheeting, Inc.125,777Villa Soleil, Inc.224,575Petitioners concede that the losses from Villa Soleil, Inc., are passive.In 1980, in response to increased attention on the environmental impact of plastic waste materials, Mr. Wade and a colleague founded the company169 that later became TSI. TSI's business involved acquiring plastic waste from chemical companies and converting it into usable products. Paragon receives raw materials from TSI and uses them to make building and construction materials. Mr. Wade developed the manufacturing processes TSI and Paragon use and established and managed their industrial facilities.172 In 1994, after several years at Lockheed Corp., petitioners' son, Ashley, moved to Sulphur, Louisiana, and began helping Mr. Wade manage TSI and Paragon. Ashley received stock in each company and in 2008 owned 30% and 70% of the shares of TSI and Paragon, respectively. Petitioners each owned half of the remaining stock. With Ashley there to handle day-to-day management, Mr. Wade became more focused on product and customer development. He did not have to live near business operations to perform these duties, so petitioners moved to Navarre, Florida. After the move he continued to make periodic visits to the facilities in Louisiana and regularly spoke on the phone with plant personnel.2In 2008 TSI and Paragon began struggling financially as prices for170 their products plummeted and revenues declined significantly. Mr. Wade's involvement in the businesses became crucial during this crisis. To boost employee morale, he made three trips to the companies' industrial facility in DeQuincy, Louisiana, during which he assured the employees that operations would continue. He also redoubled his research and development efforts to help TSI and Paragon recover from the financial downturn. During this time Mr. Wade invented a new technique for fireproofing polyethylene partitions, and he 173 developed a method for treating plastics that would allow them to destroy common viruses and bacteria on contact. In addition to his research efforts, Mr. Wade ensured the companies' financial viability by securing a new line of credit. Without Mr. Wade's involvement in the companies, TSI and Paragon likely would not have survived.OPINIONI. Burden of ProofGenerally, the taxpayer bears the burden of proving, by a preponderance of the evidence, that the determinations of the Commissioner in a notice of deficiency are incorrect. Rule 142(a)(1); Welch v. Helvering, 390 U.S. 102">390 U.S. 102, 115, 88 S. Ct. 733">88 S. Ct. 733, 19 L. Ed. 2d 936">19 L. Ed. 2d 936 (1933). This burden may shift to the Commissioner if the taxpayer introduces credible evidence with respect to any relevant factual issue and171 meets other conditions, including maintaining required records. Seesec. 7491(a). We decide this case on the preponderance of the evidence and accordingly need not address whether the burden of proof has shifted. Estate of Bongard v. Commissioner, 124 T.C. 95">124 T.C. 95, 111 (2005).II. AnalysisUnder section 469, individuals may not deduct passive activity losses for the year in which they are sustained. A "passive activity loss" is the amount by 174 which the aggregate losses from all passive activities for a taxable year exceed the aggregate income from all passive activities for such year. Sec. 469(d)(1). A passive activity is any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). Section 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), provides a series of tests under which we evaluate whether a taxpayer materially participated in a given trade or business. Respondent argues that petitioners did not satisfy any of these tests with respect to TSI and Paragon and accordingly did not materially participate in their activities.Petitioners claim that they satisfy two of the tests. First, petitioners claim that Mr. Wade spent more than 500 hours in 2008 working on the companies' activities.3Seesec. 1.469-5T(a)(1), Temporary Income Tax Regs., supra. Second, they contend that he participated in the companies' activities on a172 regular, continuous, and substantial basis during 2008. Seesec. 1.469-5T(a)(7), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). We agree with petitioners' second contention and therefore do not address their first.175 A taxpayer materially participates in an activity for a given year if, "[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year." Id. A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity. Seesec. 1.469-5T(b)(2)(ii) and (iii), (f)(2)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5726, 5727 (Feb. 25, 1988). The record reflects that Mr. Wade spent over 100 hours participating in TSI and Paragon during 2008, and his participation consisted primarily of nonmanagement and noninvestment activities. Ashley managed the day-to-day operations of the companies; Mr. Wade focused more on product development and customer retention.Although Mr. Wade took a step back when Ashley became involved in the companies'173 management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous, 176 regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon.Respondent argues that petitioners have not proved that Mrs. Wade actively participated in TSI and Paragon. This argument is irrelevant because for purposes of the passive loss limitation, we treat married taxpayers who file a joint return as a single taxpayer, sec. 1.469-5T(f)(3), Temporary Income Tax Regs., supra, and because we treat participation by a married taxpayer as participation of his or her spouse, sec. 1.469-1T(j)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988). Mr. Wade's material participation in the companies is sufficient to establish material participation for both petitioners.TSI and Paragon are complex businesses that Mr. Wade built from the ground up and in which he continued to play a vital role. He was not merely a detached investor, as has often been the case when we174 have found that a taxpayer did not materially participate.4See Lapid v. Commissioner, T.C. Memo. 2004-222; Scheiner v. Commissioner, T.C. Memo. 1996-554; 177 Chapin v. Commissioner, T.C. Memo 1996-56">T.C. Memo. 1996-56. Mr. Wade brought something to TSI and Paragon that no one else could have, and they could not have continued to operate without his contacts and expertise. Accordingly, we hold that respondent erred in classifying as passive petitioners' losses from TSI and Paragon.In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.To reflect the foregoing,Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2008, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The record shows that Mr. Wade participated in 273 phone calls with the plant in 2008.↩3. We will treat the companies as a single economic unit for the purpose of applying sec. 469. We find this appropriate under sec. 1.469-4(c), Income Tax Regs.↩, because the companies are interdependent and share common ownership and control.4. Congress enacted sec. 469 to reduce the opportunity "for taxpayers to offset income from one source with tax shelter deductions and credits from another." S. Rept. No. 99-313, at 713 (1986), 1986-3 C.B. (Vol. 3) 1, 713. Congress' concern was over taxpayers who invested in businesses simply to benefit from losses. The tests and standards in sec. 469↩ were not meant to apply to taxpayers in petitioners' situation.	01-04-2023	08-20-2014
https://www.courtlistener.com/api/rest/v3/opinions/4619055/	Fairmount Park Raceway, Inc., et al. 1 v. Commissioner. Fairmount Park Raceway, Inc. v. CommissionerDocket Nos. 68442, 70279, 70280, 70318 - 70333, 70352 - 70354, 71924, 81571, 81713 - 81715, 81749 - 81751, 81762 - 81767, 81818, 81819, 82143, 82144, 82202 - 82204, 82481, 82482, 82506, 82517 - 82520, 82570, 82617, 82667, 82923, 85545, 88158.United States Tax CourtT.C. Memo 1962-14; 1962 Tax Ct. Memo LEXIS 293; 21 T.C.M. (CCH) 52; T.C.M. (RIA) 62014; January 26, 1962Sidney B. Gambill, Esq., Union Trust Bldg., Pittsburgh, Pa., and William W. Scott, Jr., Esq., for the petitioners. David L. Ketter, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined deficiencies in income and excess294 profits taxes, additions to taxes and/or liabilities as transferees of assets of the corporate petitioner, Fairmount Park Raceway, Inc., as follows: Additions to Tax1939 Code1954 CodeDkt.TaxableTransfereeIncomeSec. 294Sec. 294Sec. 294No.YearLiabilityTax(d)(1)(A)(d)(1)(B)(d)(2)Sec. 6654684424-30-54$250,801.944-30-55109,598.42702794-30-53$140,070.39702804-30-53142,520.01703184-30-5314,007.04703194-30-5321,010.57703204-30-5335,017.59703214-30-5328,014.08703224-30-53142,520.01703234-30-5315,088.15703244-30-5315,088.16703254-30-53142,520.00703264-30-5324,770.72703274-30-5315,088.16703284-30-5335,017.60703294-30-5335,017.59703304-30-53142,520.02703314-30-5330,176.32703324-30-5314,007.03703334-30-53142,520.02703524-30-53142,520.02703534-30-5314,007.03703544-30-53142,520.0171924195431,693.67195520,728.148157119542,629.4619552,099.21$ 33.03817131954477.81$ 134.181955388.74817141954477.81140.56$120.471955385.423.66817151953339.51210.4719541,205.41345.4972.631955989.94817491954851.64205.501955765.32817501953305.82187.7119541,041.39244.74156.851955965.918175119543,963.4319552,955.918176219541,183.191955910.298176319542,493.07328.1119551,476.378176419542,754.161,869.83612.8619556,026.93173.408176519543,483.531,268.89431.0119552,686.7323.498176619552,361.4498.418176719545,079.31818181955502.23818191954657.25175.31123.818214319561,424.7519571,551.988214419561,915.6019571,740.01822021956745.261957761.91822031956546.921957541.17822041956345.921957322.34824811956289.241957320.458248219542,126.3719551,432.728250619563,294.6289.0919572,706.8960.6982517195434,628.8619555,410.5682518195413,877.83195512,539.73825191956730.411957732.6782520195434,628.8719555,410.568257019541,332.4819551,229.878261719561,015.671957945.688266719563,705.3519573,014.66829231956331.021957332.028554519548,395.0419555,239.80881581956786.8919571,024.861958378.18295 By an amended answer filed at the trial the Commissioner would increase the deficiency for 1955 in Docket No. 71924, by $1,526.02. The questions remaining for decision are: Whether deductions for rental claimed by petitioner, Fairmount Park Raceway, Inc., in its returns filed for the fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955 are unreasonable and excessive in and by the amounts of $346,790.08, $412,359.50, and $221,343.12, respectively. Whether the amounts of excessive and unreasonable rentals, if any, received by individuals who were partners in Fairmount Park Association and who were also shareholders in Fairmount Park Raceway, Inc., constitute taxable ordinary income. Whether the transactions entered into in 1954 and 1957 between Fairmount Park Association, the partnership, and Fairmount Park Jockey Club, Inc., a corporation, with respect to a lease constituted installment sales or subleases. Whether the petitioners in Docket No. 81751 are entitled to any capital loss deductions in the year 1955 in excess of the amount of $1,000. Whether the individual petitioners in Docket Nos. 81571, 81714, 81764, 81765, 81766, and 82506 are liable for296 additions to the tax under the provisions of section 6654 of the Internal Revenue Code of 1954. Whether the petitioner in Docket No. 81819 is liable for an addition to tax in the year 1954 under the provisions of section 294(d)(1)(A) of the Internal Revenue Code of 1939. Various concessions made by the Commissioner at the trial will be reflected in the Rule 50 computation. Findings of Fact The stipulated facts are hereby found. The petitioners appearing below filed their income tax returns for the years and with the district director of internal revenue for the district indicated: PetitionerYearWhere FiledRussell R. Casteel and1954, 1955Springfield, Ill.Katherine CasteelRichard E. King and June P.1954, 1955Columbus, OhioKing1956, 1957Pittsburgh, Pa.William C. O'Mara and Nora1954, 1955, 1956, 1957Pittsburgh, Pa.S. O'MaraWayne W. McBeth and Lucille1954, 1955, 1956, 1957Pittsburgh, Pa.P. McBethCharles K. Winsor and1954, 1955, 1956, 1957Pittsburgh, Pa.Adaline P. WinsorRoy F. O'Mara and Claire L.1954, 1955, 1956, 1957Pittsburgh, Pa.O'MaraJohn C. Moon and Marion A.1954, 1955, 1956, 1957Pittsburgh, Pa.MoonEdwin C. Moon and Martha H.1954, 1955Pittsburgh, Pa.MoonSherry M. Young1954, 1955Pittsburgh, Pa.Ludwig T. Petersen and Ruth1954, 1955, 1956, 1957Pittsburgh, Pa.P. PetersenM. H. Parish and Mae Parish1954, 1955Jacksonville, Fla.1956, 1957Pittsburgh, Pa.Dan Parish and Gladys M.1954, 1955, 1956, 1957Pittsburgh, Pa.ParishVera J. Newman1955, 1956, 1957Pittsburgh, Pa.Roy S. Newman and Vera J.1954Pittsburgh, Pa.NewmanWilliam J. Parish, Jr., and1955, 1956, 1957Pittsburgh, Pa.Nancy L. ParishWilliam J. Parish, Jr.1954Pittsburgh, Pa.Edmund R. Casteel and Maud1954, 1955St. Louis, Mo.L. CasteelVirlee Stacy Trust, Melville1954, 1955Pittsburgh, Pa.Bitner, TrusteeRay C. Bennigsen and1954, 1955Chicago, Ill.Veronica BennigsenIrene Stacy Trust, Melville1954, 1955Pittsburgh, Pa.Bitner, TrusteeJ. Clair Vance and Isabel M.1954, 1955, 1956, 1957, 1958Cleveland, Ohio.VanceWillibald Schaefer and1954, 1955St. Louis, Mo.Cecile L. Schaefer297 The Fairmount Park Raceway, Inc., filed its returns with the district director of internal revenue at Springfield, Illinois. The Fairmount Park Association filed its appropriate partnership information returns for 1952 to 1956 with the district director of internal revenue at Springfield, Illinois, and for 1957 and 1958 with the district di-ector of internal revenue at 0pittsburgh, Pennsylvania. A group of ten individuals, composed of Dan Parish, Willibald Schaefer, Walter H. S. Wolfner, Edwin C. Moon, Walter H. S. Wolfner, Trustee, Ray C. Bennigsen, Russell R. Casteel, Michael H. Parish (also sometimes referred to as M. H. Parish), Festus Stacy, and A. B. Weingard, by an agreement dated July 9, 1947, formed a partnership to be known as Fairmount Park Association. The partners lived in various places in Missouri, Pennsylvania and Illinois. Their occupations varied from contractors to attorney and corporate official, and tallow, coffee and oil businesses. The partnership agreement provided, inter alia, as follows: WHEREAS, the undersigned as limited partners have executed a certain Lease Agreement with R. E. COSTELLO, Trustee, dated the 9th day of July, 1947; and, * * 298 WITNESSETH: * * 1. Each of the undersigned have paid, as of this date, the sum of Six Thousand Seven Hundred Fifty Dollars ($6,750.00), to R. E. COSTELLO, Trustee, representing the total minimum rental for the year 1948, covering the premises set forth in the said Lease. 2. Each of the undersigned agrees to subscribe to the stock of a corporation to be organized under the laws of the State of Illinois, to be known as Fairmount Park Raceway, Inc., or other suitable corporate name, in the amount of Twenty-five Hundred Dollars ($2,500.00) each, such subscription to be paid in cash, on October 6, 1947, and each such subscriber to receive one-tenth (1/10) of the common capital stock of the said corporation to be issued pursuant to such subscription. Each of the undersigned partners agrees to pay into the partnership on October 6, 1947, the sum of Fifteen Thousand Seven Hundred Fifty and no/100 Dollars ($15,750.00) to be used by the partnership in improving the leasehold and for such other purposes as may be decided by the undersigned. On July 9, 1947, the same date as the partnership agreement, the partnership entered into a written lease agreement with R. E. Costello, 299 Trustee, representing persons who were strangers and not related to the partners, for leasing the 151-acre tract of land together with buildings known as Fairmount Park Racetrack located in Collinsville, Illinois. Costello would not lease the racetrack to a corporation. However, the ten individuals did not discuss whether a corporation could have obtained the lease by giving their personal individual guarantees. The lease of July 9, 1947 between the partners of Fairmount Park Association and Costello provided, inter alia, as follows: WITNESSETH, That the said party of the first part [Costello, Trustee] does hereby lease to the said parties of the second part [Wolfner, Stacy, Casteel, Wolfner, Trustee, Moon, Schaefer, Dan Parish, Dan Parish, Trustee, Weingard and Bennigsen] the following described property in the County of Madison and State of Illinois, to be used only as a race course for the racing of thoroughbred or harness horses, viz: The property located on the North side of U.S. Route No. 40 in Madison County, Illinois, and containing approximately One Hundred Fifty-one (151) acres and which is presently being used as a thoroughbred race course operated by the Fairmount300 Park Jockey Club, Inc., together with all of the personal property belonging to the party of the first part which is now located at said race track and which is presently being used by the Fairmount Park Jockey Club, Inc., in the operation of its business. This lease is to cover the land and all buildings located on said land including the club house, grandstand, bleachers, secretary's office, feed barns, track kitchen, barns and any other buildings which are located on said property, * * for the term of three years beginning on the 6th day of October, A.D. 1947, and ending on the 5th day of November, A.D. 1950, and the parties of the second part agree to pay as rent for said premises the sum of Two Hundred Two Thousand Five Hundred Dollars ($202,500.00), said payments to be made in the following manner: The sum of Sixty-seven Thousand Five Hundred Dollars ($67,500.00) to be paid upon the execution of this agreement; the sum of Thirty-three Thousand Seven Hundred Fifty Dollars ($33,750.00), to be paid on the 6th day of July, 1948, the sum of Thirty-three Thousand Seven Hundred Fifty Dollars ($33,750.00), to be paid on the 6th day of October, 1948; the sum of Thirty-three Thousand301 Seven Hundred Fifty Dollars, to be paid on the 6th day of July, 1949, and the sum of Thirty-three Thousand Seven Hundred Fifty Dollars ($33,750.00) to be paid on the 6th day of October, 1949. And it is further understood and agreed that the parties of the second part will pay all taxes and carry Fire and Tornado insurance on said premises to the amount of not less than Two Hundred Eighty-five Thousand Seven Hundred Sixty Dollars ($285,760.00), during the term of this lease and deliver the policies of insurance to the party of the first part. And it is further understood and agreed between the parties that the rental hereinabove provided for is to be a minimum rental, and the parties of the second part will pay to the party of the first part one per cent (1%) of the total mutuel handle of the meeting of the greatest mutuel handle, in lieu of rental, whether the operation be by them or their assigns, provided that the word "meeting" contemplates sixty (60) days of racing, whether consecutive or not; however, if the aggregate racing days shall be less than sixty (60) in any year that shall constitute a meeting as herein contemplated, if in the course of the operation of said rental302 plant the said one per cent (1%) shall be greater at any meeting in any year than the sum of Sixty-seven Thousand Five Hundred Dollars ($67,500.00), said payments, if any, to be made each year. The "total mutuel handle" means the gross amount wagered. The lease then provided for the right of renewing the lease for consecutive additional periods of three and four years on the same terms and an additional period of five years with the minimum rental increased to $75,000 per year, and a further additional period of five years with the minimum rental increased to $80,000 per year. It continued: And it is further understood and agreed that the parties of the second part shall have the right and option to remove any improvements which they might put on said property during the course of this lease, or any extension thereof, provided that by so doing they do not deface the property or render it unfit for the operation of a race track, and provided further that the right of removal herein provided for shall not be in effect if there is a default in the payment of any amounts due under the terms and conditions of this lease, or any renewal thereof. * * And it is further expressly303 agreed between the parties that if default shall be made in the payment of the rent above reserved, or any part thereof, or in any of the covenants or agreements herein contained to be kept by the parties of the second part, their heirs, executors, administrators or assigns, it shall be lawful for the party of the first part, or his legal representatives, to re-enter into and upon said premises or any part thereof, either with or without process of law, and repossess the same and to distrain for any rent that may be due thereon, at the election of said party of the first part; and in order to enforce a demand and refusal or failure to pay at any time on the same day, or at any time on any subsequent day, shall be sufficient; and after such default shall be made, the parties of the second part and all persons in possession under them shall be deemed guilty of forcible detained of said premises under the statute. The lease also provided that the lessees were to pay all taxes and water assessments on the trade properties, to make any necessary repairs to keep the premises in a clean and healthy condition, and to turn back the properties in as good condition as when received. The racetrack304 was situated directly across the river, via Veterans' Bridge, from St. Louis, Missouri, about fifteen minutes from the Statler Hotel. It was 31 years old and had been in operation since 1926. Its facilities included a one mile racing strip, a grandstand having a seating capacity of 3,900 and a total capacity of 22,000, a club house having a total capacity of 5,000, stalls for 1,100 horses and the usual backstretch facilities. In 1947 it was in a rather dilapidated condition. Pursuant to the terms of the July 9, 1947 partnership agreement, the ten partners caused Fairmount Park Raceway, Inc. (hereinafter sometimes referred to as the corporation) to be incorporated under the laws of Illinois on September 23, 1947, and, during all periods material hereto, its office and place of business was located at the track, Collinsville, Illinois. Each of the ten partners became an original shareholder of the corporation and owned 25 shares of its common capital stock having a par value of $100 per share and for which each of the shareholders paid into the corporation $100 per share. Because the laws of Illinois limited harness racing operations of any one entity to a particular number of305 days, the ten individuals also formed a second corporation, Madison Raceway, Inc., shortly after the formation of the partnership in order to obtain a greater number of racing days by running two race meetings. In the fall of 1950, Madison Raceway, Inc., was dissolved because of the entry of Fairmount Park Raceway, Inc., into thoroughbred racing following the change in Illinois law in 1950 permitting night thoroughbred racing, and because a thoroughbred race meeting under Illinois law was limited to sixty days for any one enclosure or race course. The minutes of a meeting of the board of directors of the corporation held on December 21, 1947, at which all its directors (comprised of Parish, Schaefer, Wolfner, Stacy, Weingard, and Moon) were present, state: that it is understood that this Corporation is to function only as an agent for said partnership, both in handling the preparation of Fairmount Park for harness racing and the operation of racing meets under a lease from said partnership. In all cases this Corporation will serve only as the agent of the partnership, be supplied with operating and construction funds by the partnership, and will account to the partnership for306 all actions taken and monies expended on its behalf. In addition the major decisions are not to be made by this Board of Directors, but are to be made by the Fairmount Park Association partnership, which will advise this Board on all questions of the expenditure of money and policy with respect to operating the racing meet. In December 1947, following the formation of the corporation, a letter was addressed to it by the ten individual partners containing the following: We, as members of the partnership which holds the lease on the Fairmount Park race track and who are leasing to you those premises for a spring harness race meet in 1948, enclose herewith $157,500.00 payable to your account. We hereby authorize you as our agent to make such capital improvements to said Fairmount Park race track as will place it in condition for night harness racing. Such capital improvements are to be made for our account and to be our property. You are to account to the undersigned for the cost of such expenditures. We appreciate that you will probably require funds in excess of your present capital for operation and maintenance expense in connection with the 1948 racing meet. You are authorized307 to use any portion of the sum advanced herewith which remains after you have made the capital expenditures for our account, for the purpose of paying such expense. However, all expenditures made by you of that nature are to be for your account and funds so used are to be repaid by you to the undersigned, together with the unused balance of the $157,500.00 hereby advanced, on or before August 15, 1948, without interest. A lighting system for night racing was originally installed for the corporation's harness racing operation in 1948 at a cost of $142,290.66. During the year 1948, the partnership subleased the racetrack to the corporation under a written lease whereby the corporation was to pay rental to the partnership of "fifty (50%) per cent of any amounts which it has on hand after the payment of all bills and expenses incurred in the operation of said track." During the years 1949 and 1950, the partnership subleased the racetrack to the corporation under annual written leases whereby the corporation was to pay rental to the partnership of "seventy-five (75%) per cent of any amounts which it has on hand after the payment of all bills and expenses incurred in the operation308 of said track." The necessary amount of capital to fund the pari-mutuel pool for the initial 1948 race meeting, approximately $200,000 was borrowed by the corporation from a bank, with the personal guarantees of the ten individuals who were partners and shareholders. The operations of the 1948 and 1949 racing seasons, which occurred during the corporation's fiscal years ended April 30, 1949 and April 30, 1950, respectively, consisted of running night harness races and resulted in net losses reported by that corporation on its tax returns filed for those fiscal years in the amounts of $10,257.63 and $31,857.43, respectively. After the law of Illinois was changed in 1950 to permit, for the first time, night thoroughbred racing, the corporation commenced a night thoroughbred racing operation for the 1950 racing season (the corporation's fiscal year ended April 30, 1951). The corporation, in its income tax return filed for its fiscal year ended April 30, 1951, reported net income in the amount of $76,438.32, which amount was after deduction of rental of 75 percent of net profits but before application of any net operating loss carryforward due to losses reported in the fiscal years309 ended April 30, 1949 and April 30, 1950. At a meeting of the partnership held on September 16, 1950, the partners were advised that Weingard, Wolfner and Dyer (for whom Wolfner had signed the partnership agreement as trustee) had withdrawn from the partnership, had contributed their stock to the corporation, and wished to be relieved of all liability under the partnership agreement of July 9, 1947. Costello, who was present at the meeting, agreed to relieve those three from liability under the lease dated July 9, 1947. The withdrawal of these three partners was approved by the remaining partners. Immediately thereafter, the remaining partners and the shareholders of the corporation, each owning an equal one-seventh interest in each, were Dan Parish, Schaefer, Moon, Bennigsen, Casteel, Michael H. Parish and Stacy. Also at the September 16, 1950 meeting of the partnership, a lease agreement was entered into between the seven remaining partners and Costello under the date of November 3, 1950 for the period from November 6, 1950 to November 5, 1953, constituting the period covered by the first renewal option contained in the original lease of the racetrack. The lease agreement of310 November 3, 1950 on the racetrack between the seven remaining partners and Costello provided substantially the same terms as the original lease including the rights to renew. Following a meeting of the partnership held on July 4, 1951, a lease covering the racetrack was executed between the partnership and the corporation on July 6, 1951 for the period from July 6, 1951 to November 15, 1951. That lease provided, inter alia, as follows: WHEREAS, the Party of the Second Part [the corporation] has been duly incorporated under and by virtue of the laws of the State of Illinois and under its charter has authority, To operate a raceway for the running of harness horse races; To operate a track, or course, for the purpose of running races involving thoroughbred horses; To operate a race track for the running of races under the supervision of the Illinois Racing Board; To operate a track for the purpose of running races for harness horses; To operate a race course for the purpose of running races under the supervision of the Illinois Harness Racing Board; To buy or lease property to be used in connection with the operation of said track; To operate concessions at which311 food or drinks may be sold in connection with the operation of said race track; To conduct sporting events, exhibitions or amusements; and, WHEREAS, the Party of the Second Part is desirous of sub-leasing from the Parties of the First Part the real estate and personal property used in connection with the operation of the race course at Fairmount Park. NOW, THEREFORE, IT IS AGREED By and between the Parties to this agreement that the Parties of the First Part do hereby, by these presents, lease to the Party of the Second Part all of the real estate necessarily used in connection with the operation of the race track, or race course, at Fairmount Park, * * * said lease to extend for a period from the date hereof to the 15th day of November, 1951, with the privilege on the part of the Party of the Second Part to renew said lease for a comparable period each year thereafter during the life of a certain lease between the Parties of the First Part and R. E. COSTELLO, TRUSTEE, if it desires so to do, subject to it agreeing with the Parties of the First Part on any changes in the terms and conditions of said renewal period. And the Party of the Second Part, as a consideration for said312 lease, agrees to pay to the Parties of the First Part the sum of One and no/100 ($1.00) Dollars, and agrees to pay all expenses incurred in connection with the management and operation of said race track, or race course, including all salaries, commissions, taxes, interests, repairs, improvements and betterments which might become necessary or convenient in order to operate said property. And the Party of the Second Part further agrees that if any races are conducted on said property, or if any money is derived from the operation of said property under this lease, that after the payment of all of the expenses necessarily incurred in the operation of said race meeting, or meetings, or any other operations that might be conducted by the Party of the Second Part, that it will, on or before thirty (30) days after any race meeting or venture conducted by it in each that it has a lease on said property, deliver to the Parties of the First Part 100% of the net profits, before taxes, of the current year's operation, said payment to be part of the consideration for this lease, or any renewal of the same. The corporation also agreed, inter alia, that it would comply with the terms of the313 lease between the partnership and Costello covering the property in question; that the partnership would have the right to examine its books, and that it would avoid the imposition of mechanics' liens on the property. The corporation was given the right to use any improvements put on the property. The corporation, in its income tax return filed for its fiscal year ended April 30, 1952, reported no net taxable income or loss. On October 6, 1951, 1952, and 1953, leases covering the racetrack were executed between the partnership and the corporation for the period from October 6, 1951 to November 15, 1957. The provisions of these leases, except for the period thereof, were identical to those contained in the immediately preceding lease. At various partnership meetings held on February 1, 1951, February 14, 1952, and December 20, 1952, numerous assignments of portions of partnership interests were made to relatives of the partners, or to conclude fiduciary relationships. The partners amended the partnership agreement to admit the assignees into this partnership. The partners of Fairmount Park Association and their respective partnership interests remained the same during the calendar314 years 1954 to 1958, inclusive, and the partners continued to share income and/or losses in those years in accordance with their respective fractional interests. At a partnership meeting held on September 11, 1953, at which Costello was also present, the form of lease agreement for the next four-year period, being the second renewal period contained in the original lease of July 9, 1947, was agreed upon. At this meeting, Costello was advised of the various transfers by some of the partners of their partnership interests, in whole or in part. Costello insisted that the lease for the second renewal period be signed only by the seven of the ten remaining original partners who were still liable and whose signatures were on the original lease, and in this connection refused to release Festus Stacy even though he was no longer a partner. Festus Stacy, who attended the meeting, agreed to sign the lease in order to satisfy Costello, and a lease agreement was so executed on September 11, 1953 for the period from November 6, 1953 to November 5, 1957. The lease of September 11, 1953 provided for a minimum rental for the four-year period of $270,000, payable $67,500 on the execution of the315 lease and payments of a like amount on November 6, 1954, 1955, and 1956. The maximum rental for any year was three-fourths of one percent of the total mutuel handle (i.e., the total or gross amount wagered) for any racing meeting of 60 days or less, which was payable in lieu of the yearly minimum of $67,500. The lease of September 11, 1953 gave the lessees options to renew the lease for a period of five years beginning November 6, 1957, and ending November 5, 1962, under the same terms and conditions as the lease agreement of September 11, 1953, except that the minimum rental was $75,000 per year, and then to similarly renew for another five-year period ending November 5, 1967, except that the minimum rental was $80,000 per year. The leases of September 11, 1953, November 3, 1950, and July 9, 1947 contained substantially the following provisions: It is further understood and agreed that the Parties of the Second Part shall have the right and option to assign this lease to any person, firm, association or corporation, upon giving notice to the Party of the First Part and with the express understanding that said agreement of interest shall not release the Parties of the Second316 Part from their liability under this lease, or any renewal of the same, it being understood that the liability of the Parties of the Second Part shall be several and not joint. An agreement was also made on September 11, 1953, between the partnership and the seven individuals who had just executed the second renewal lease agreement with Costello which, among themselves, obligated the actual partners under the lease and relieved the seven signatory parties from liability thereunder upon the assignment of all of their interest in the leasehold to the partnership. At all times subsequent to September 16, 1950 and during all periods material hereto, the stockholders of the corporation were Festus Stacy, Russell R. Casteel, Edwin C. Moon, Willibald Schaefer, Daniel C. Parish, Michael H. Parish and Ray Bennigsen, each of whom owned 25 shares of its common capital stock. Since that time, the corporation's paid-in capital has been the amount of $17,500. The corporation kept its books and filed its corporation income tax returns on the accrual method of accounting and on the basis of fiscal years ending April 30 of each year. There is set forth below, the net income or loss reported317 by the corporation on its returns from the operation of the racetrack for each of its fiscal years ended April 30, 1948 to April 30, 1952, inclusive: Net IncomeFiscal Year Endedor (Loss)April 30, 1948NoneApril 30, 1949($10,257.63)April 30, 1950( 31,857.43)April 30, 195176,438.32April 30, 1952NoneThe net income in the amount of $76,438.32 shown above for the fiscal year ended April 30, 1951, as previously stated, was after deduction of rental of 75 percent of net profits, but before application of any net operating loss carry-forward due to the losses reported in the fiscal years ended April 30, 1949 and April 30, 1950. The corporation's income tax returns filed for its fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955 reflected the following: FiscalGross ReceiptsYearand TotalTotal De-Net In-EndedIncomeductionscome4-30-53$1,835,557.51$1,835,557.51None4-30-542,066,518.842,066,518.84None4-30-551,823,571.851,823,571.85NoneIncluded as a part of the total deductions claimed by the corporation on its income tax returns as set forth above were the following318 specific deductions: Fiscal YearSalaries andEndedWagesRentPursesTotalizator4-30-53$242,308.31$656,618.40$629,172$73,374.644-30-54266,505.75762,009.28688,84090,400.834-30-55275,550.92534,108.28666,80081,383.40The partnership kept its books and filed its information tax returns on a calendar basis and on the cash receipts and disbursements method of accounting. The partnership, in its tax returns filed for the calendar years 1952, 1953, and 1954, claimed the following deductions: Deduction195219531954Salaries and wages$ 31,345.08$ 26,385.63$ 40,285.06Rent67,500.0068,500.0049,786.94Taxes15,503.9917,262.1432,847.60Losses (casualty)12,527.48589.71Depreciation47,610.7816,543.4499,484.51Repairs40,729.1728,160.5042,349.33Other24,044.3426,744.5716,939.21Totals$226,733.36$196,123.76$282,282.36The amounts claimed as deductions on the partnership returns for the calendar years 1952, 1953, and 1954, except for depreciation and losses, were expended, but such amounts were expended by the corporation. The partnership did not maintain319 any bank account. In determining the amounts of expenditures to be deducted by the corporation and by the partnership on their respective tax returns, an allocation of expenses was made between the two: the expenses incurred during the actual 60-day race meeting were attributed to the corporation and the remaining expenses, incurred while no race meeting was being conducted, were attributed to the partnership. The types and amounts of capital improvements to the racetrack properties and the years in which made are set forth below: 194819501951Lighting Equipment$142,290.66Odds Board12,496.66$ 2,072.18Furniture and Fixtures7,082.68$1,167.006,031.53Track Equipment9,445.27 5,185.005,705.84Improvements and Alterations69,803.08Totals$241,118.35$6,352.00$13,809.55195219531954Lighting EquipmentOdds BoardFurniture and Fixtures$ 3,166.59$ 3,648.63$ 2,862.11Track Equipment12,381.548,099.003,798.14Improvements and Alterations40,871.3923,290.6573,149.95Totals$56,419.52$35,038.28$79,810.20320 There has been allowed for depreciation on the capital improvements made by the partnership to the racetrack properties the following amounts for the following periods: Calendar Year1948 to 1951, inclusive$208,701.69195247,610.78195316,500.34195437,088.62Total$309,901.43Applications for race meetings were filed with the Illinois Racing Commission by the corporation in its own name, and such applications were signed by the president and secretary of the corporation. Included as a part of each application was a list of the names and addresses of all shareholders, together with their businesses. Furnished to the Illinois Racing Commission along with each application was a financial statement of the corporation. The corporation, while maintaining its books and filing its corporation income tax returns on a fiscal year basis ended April 30, concluded its racing business by the end of the preceding calendar year and paid its profits for that year to the partnership before the end of such calendar year. Consequently, the corporation's fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955, in effect coincide with the partnership's321 calendar years 1952, 1953, and 1954, respectively. Each of the thoroughbred racing operations conducted by the corporation during the years 1950 to 1954, inclusive (corporation's fiscal years ended April 30, 1951 to April 30, 1955, inclusive), comprised 60 days of racing and consisted of two 30-day race meetings - an early 30-day meeting usually held in May and June and a later 30-day meeting usually held in September and October. During the racing seasons in the years 1952, 1953, and 1954 (the corporation's fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955, respectively), the total "track take" was 15 percent of the mutuel handle, the share of the State of Illinois being 6 percent, and the corporation retaining 9 percent. In addition, the State of Illinois and the corporation each received one-half of the breakage to the nearest dime, which means that for each dollar bet, any winning ticket received its share of the pool only in multiples of ten cents and that any odd cents over the particular multiple of ten was shared by the State and the corporation. Expenses of the racing operation, including purses, were paid by the corporation out of such racing receipts. 322 The total pari-mutuel handle of the corporation from the operation of the racetrack, i.e., the gross amount wagered at the track in each of its fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955, amounted to $15,491,416, $17,482,489 and $15,638,238, respectively. In 1955 Illinois increased the percentage going to the track from 9 percent to 11 percent on any day in which the mutuel handle was $300,000 or less. The partnership reported in its information returns the following amounts as rents received from the corporation during the calendar years 1952, 1953, and 1954: CalendarYearAmount1952$656,618.401953762,009.281954534,108.28 These identical amounts were deducted as rentals by the corporation on its appropriate income tax returns. The partnership paid to Costello as lessor under the leases dated November 3, 1950 and September 11, 1953, the following amounts of rental for the racetrack in each of the calendar years 1952, 1953, and 1954: CalendarYearAmount1952$67,500195367,500195449,786The partnership also paid as rental in the calendar year 1953 the amount of $1,000 for another parcel of323 real estate to increase the parking space at the racetrack. In the calendar year 1954, the difference between the amount paid as rental to Costello and the minimum amount of rental and/or maximum rental based upon percentage of mutuel handle as called for in the lease dated September 11, 1953 was never paid. The reasonable rental value for the racetrack leased by the corporation from the partnership in the former's fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955 are the amounts of $309,828.32, $349,649.78, and $312,765.16, respectively. The amounts of deductions claimed for rental by the corporation in its income tax returns filed for its fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955 in excess of the above amounts are not rent in the amounts of $346,790.08, $412,359.50, and $221,343.12, respectively. At the end of a racing meet and at the "wind-up" of the racing season, the corporation paid over its entire net income, before taxes, to the partnership and had only about $17,500 left. The corporation's financial position at the end of each of its fiscal years ended April 30, 1953, April 30, 1954, and April 30, 1955, as shown by its324 balance sheets for those years, was as follows: Fiscal Year EndedApril 30, 1953April 30, 1954April 30, 1955ASSETSCash$27,783.69$26,493.49$ 1,024.29Notes and accounts receivable14,278.9225,097.5017,147.39Other assets26,684.3142,836.24547.20Total Assets$68,746.74$94,427.23$18,718.88LIABILITIESAccounts payable$ 468.24$ 1,571.49Accrued expenses51,300.11$ 2,448.84Accrued liabilities75,000.00Capital stock (common)17,500.0017,500.0017,500.00Earned surplus and undivided(521.61)(521.61)(352.61)profitsTotal Liabilities$68,746.74$94,427.23$18,718.88A schedule in the stipulation of facts reflects the actual amounts received from the corporation by the individuals named in each of the calendar years 1952, 1953, and 1954 out of the total amounts determined by the Commissioner in each year to constitute excessive rental. The corporation was completely liquidated and dissolved as of May 23, 1955. Upon the liquidation, each shareholder received the sum of $2,449.63 for his 25 shares of stock of the corporation. On September 17, 1954, the corporation entered into an agreement, 325 designated "Cancellation and Assignment of Certain Leases and Agreements", with Fairmount Park Jockey Club, Inc., an Illinois corporation, which agreement provided, in part, as follows: AND NOW, this 17th day of September 1954, the undersigned, for value received, hereby: 1. Agrees that a lease made the 6th day of October, 1953, by and between Daniel C. Parish, William C. O'Mara, Claire Parish O'Mara, Adaline Parish Winsor, Lucille Parish McBeth, William J. Parish, Jr., Willibald Schaefer, Willibald Schaefer, Trustee, Edwin C. Moon, John C. Moon, Isabel M. Vance, Sherry M. Young, Michael H. Parish, June V. King, Ruth V. Peterson, Vera J. Newman, Russell R. Casteel, E. R. Casteel, Maude L. Casteel, Melville Bitner, Trustee, and Ray C. Bennigsen AND Fairmount Park Raceway, Inc., authorizing it to operate a race meet for the years 1954, 1955, 1956 and 1957 be cancelled and declared null and void for the expiration of its term. 2. Assigns to the Fairmount Park Jockey Club, Inc., all its right, title and interest in and to: A. An agreement dated the 8th day of September 1953 with the Berlo Vending Company, 333 South Broad Street, Philadelphia, Pennsylvania, for the operation of326 the concessions at the track for the period of approximately four (4) years beginning on the 15th day of December, 1953 and ending on the 1st day of November, 1957. B. An agreement dated the 17th day of November, 1947 with the Illinois Power Company, for the supplying of electric energy. C. Agreements dated the 1st day of September, 1952 with the American Totalizator Company, Inc., for the furnishing of totalizator service. Also on September 17, 1954, the individual partners as "owners and lessees" of the Fairmount Park lease, as parties of the first part, entered into an agreement, designated "Assignment", with Fairmount Park Jockey Club, Inc., as party of the second part, which agreement provided, in part, as follows: WHEREFORE, FOR VALUE RECEIVED: 1. We, the undersigned, Parties of the First Part, hereby transfer, assign and set over unto the Party of the Second Part, all our right, title and interest in and to the lease above mentioned, subject to and in accordance with the provisions of an agreement made this date and made a part hereof by and between the Party of the Second Part, and we, the undersigned. 2. We, the undersigned, Parties of the First Part, hereby agree327 that an agreement made the 6th day of October, 1953 by and between ourselves with Fairmount Park Raceway, Inc., authorizing it to operate a race meet for the years 1954, 1955, 1956 and 1957 be cancelled and declared null and void for the expiration of its term. 3. The Party of the Second Part hereby accepts said assignment and assumes all the rights and liabilities under the terms and conditions of said lease and agreement herein referred to and relieves the Parties of the First Part of all liability under said lease dated September 11, 1953. On the same date, September 17, 1954, the partnership, as "Sellers" also entered into an agreement with Fairmount Park Jockey Club, Inc., as "Buyer," which provided, in part, as follows: WHEREAS, Sellers are the owners of the leasehold estate created by that certain lease called an "Indenture", dated September 11, 1953, between R. E. Costello, Trustee, as party of the first part, and Festus Stacy, Russell R. Casteel, Edwin C. Moon, Willibald Schaefer, Daniel C. Parish, Michael H. Parish, and Ray C. Bennigsen, as parties of the second part, and Sellers are also the owners of all other rights and interests of the lessees under said lease, 328 and a true copy of said lease is attached hereto; and WHEREAS, by said lease of September 11, 1953, said R. E. Costello, Trustee, leased to the parties of the second part named in said lease and hereinabove mentioned, for a term of four (4) years, beginning November 6, 1953, and ending November 5, 1957, certain real estate located on the north side of U.S. Route 40 in Madison County, Illinois, containing approximately 151 acres, [being the raceway properties] * * * WHEREAS, Sellers have heretofore caused a corporation by the name of Fairmount Park Raceway, Inc., to be organized under the laws of Illinois, and by an agreement dated October 6, 1953, have subleased to said corporation said race track property, and Sellers, or said corporation, have for some years used and operated all of the property covered by said lease of September 11, 1953, and other property located on the leased real estate as a race track or race course, and Sellers and said corporation have lately canceled and surrendered said sublease of October 6, 1953, so that said lease of September 11, 1953, and all of said property now belong absolutely to Sellers, and Sellers have agreed to sell said lease (subject329 to the reservations hereinafter mentioned in article II hereof) and all other property used in or about the operation of such race track, either by Sellers or by their said corporation, to Buyer, for the consideration and upon the terms and conditions hereinafter set forth, and Buyer has agreed to purchase said properties for such consideration and upon such terms and conditions: NOW, THEREFORE, THIS AGREEMENT WITNESSETH that, in considertion of the premises and of the payments made and to be made by Buyer to Sellers, as hereinafter provided, and of the mutual covenants and agreements hereinafter set forth, Sellers do hereby sell, assign, and transfer unto Buyer said lease of September 11, 1953, and the leasehold estate thereby created and all other rights and interests of the lessees therein whatsoever (subject to the reservations hereinafter set forth in article II hereof), and also all other [raceway property] * * and Buyer hereby purchases said leasehold estate and all rights and interests of the lessees under said lease of September 11, 1953, and all other property as aforesaid from Sellers for the considerations and upon the covenants and agreements, terms and conditions330 hereinafter set forth, that is to say: I. Buyer covenants and agrees to pay to Sellers, and Sellers agree to accept from Buyer, as full consideration for the leasehold estate and all other rights and interests of the lessees under said lease of September 11, 1953, One Million Thirty-Five Thousand Dollars ($1,035,000.00), and for all such other property Eighty-five Thousand Dollars ($85,000.00), making a total consideration paid and to be paid by Buyer to Sellers of One Million One Hundred Twenty Thousand Dollars ($1,120,000.00), of which total consideration Buyer has this day paid to Sellers the sum of Three Hundred Thirty Thousand Dollars ($330,000.00) in cash, receipt of which is hereby acknowledged, and Buyer convenants and agrees to pay the remainder of such consideration as follows: Ninety Thousand Dollars ($90,000.00) on or before January 15, 1955; Two Hundred Thirty-three Thousand One Hundred Dollars ($233,100.00) on or before November 1, 1955; Two Hundred Thirty-three Thousand One Hundred Dollars ($233,100.00) on or before November 1, 1956; Two Hundred Thirty-three Thousand Eight Hundred Dollars ($233,800.00) on or before November 1, 1957. Said deferred payment of Ninety331 Thousand Dollars ($90,000.00) shall not bear interest prior to its due date, but the remaining deferred payments shall bear interest from November 1, 1954, at the rate of four (4) percentum per annum, payable annually. Said deferred payment of Ninety Thousand Dollars ($90,000.00) shall be evidenced only by this present agreement, but the three remaining deferred payments shall be evidenced by three non-negotiable promissory notes of Buyer, payable to Sellers, and such notes have this day been made and executed and delivered to Ray C. Bennigsen, who has been and is hereby designated by Sellers for the purpose of holding such notes, subject to the terms of this agreement. Buyer hereby agrees, within a reasonable time hereafter, to cause to be printed its senior debentures or notes, payable to bearer, and in such denominations as may be requested by said Ray C. Bennigsen (but none shall be for less than $100.00) for convenient distribution among Sellers in accordance with their respective interests in such deferred purchase money, and to execute and deliver the same to said Ray C. Bennigsen for proper distribution among Sellers. Buyer shall have no responsibility with respect to such332 distribution. Such senior debentures or notes shall have attached thereto interest coupons, which may be detached, and such interest coupons shall be paid by Buyer to the lawful holder or holders thereof regardless of whether or not Buyer shall anticipate the payment of such deferred purchase money. Such senior debentures or notes shall be in such form, not inconsistent herewith, as may be agreed upon by said Ray C. Bennigsen, acting for Sellers, and Buyer. They shall be subject to the terms of this agreement and therefore non-negotiable. Upon the issuance of such senior debentures or notes, the three non-negotiable promissory notes first hereinabove mentioned evidencing such deferred purchase money shall be canceled and surrendered to Buyer. The three temporary notes first above mentioned, as well as the senior debentures or notes which are to be substituted therefor as aforesaid, shall be payable at the First National Bank of St. Louis, Missouri. II. By said lease of September 11, 1953, the lessor therein granted to the lessees therein and their assigns the right and option to renew the lease for an additional term of five (5) years, upon certain terms and conditions therein set333 forth, and, if such option should be exercised, the lessor in said lease granted to the lessees in said lease and their assigns the further right and option of renewing the lease for a second additional term of five (5) years, all of which will more fully appear from said lease, copy of which is attached hereto as aforesaid. The parties hereto fully understand that Sellers, by this present agreement, have hereby sold and assigned to Buyer only the remainder of the original four (4) year term of said lease, and not the right to exercise said options, or either of them, such right being expressly hereby reserved by Sellers. Sellers, however, do hereby grant to Buyer the exclusive right and option to purchase from Sellers all of the remaining interests in said lease which are reserved by Sellers in this article II. Buyer shall have the right to exercise this option at any time prior to one hundred (100) days before the end of the original term of said lease by giving written notice thereof to said Ray C. Bennigsen, 601 Spruce Street, Winnetka, Illinois, as representative of all of Sellers. If, however, at the time Buyer may wish to exercise the option hereby granted to it said Ray C. 334 Bennigsen shall not be living, such written notice may be given either to said Russell R. Casteel or said Edwin C. Moon. If the option hereby granted Buyer shall be exercised as aforesaid, it shall pay to Sellers therefor the sum of Six Hundred Thousand Dollars ($600,000.00) in cash or in two (2) installments of Three Hundred Thousand Dollars ($300,000.00) each, the first installment being due November 1, 1958, and the second installment being due November 1, 1959. Sellers further agree, however, that at Buyer's option, Buyer shall have five (5) years in which to pay such purchase money, but in this event the amount thereof shall be increased to Seven Hundred Thousand Dollars ($700,000.00), and said sum shall be payable to Sellers in five (5) equal annual installments of One Hundred Forty Thousand Dollars ($140,000.00) each, the first of such installments being due November 1, 1958, and a like installment being due on the first day of November in each of the four succeeding years. If said option shall be exercised as herein provided, and unless the payment therefor be made in cash, all deferred purchase money shall bear interest at the rate of four (4) percentum per annum from November 1, 1957, and335 shall be evidenced by the non-negotiable promissory notes of Buyer, payable at the First National Bank of St. Louis, Missouri. Buyer shall have the right to anticipate the payment of any or all of such deferred purchase money. III. Sellers hereby further grant to Buyer the right to purchase said lease of September 11, 1953, and the leasehold estate thereby created and all other rights and interests of the lessees therein whatsoever, including the right and option to renew the lease for two additional terms of five (5) years each, and also all other property of every kind and character whatsoever now located on said leased real estate, and also all other property of Sellers and of said Fairmount Park Raceway, Inc., which has been used in or about the operation of said race track, whether such property is now located on said leased real estate or not, for the sum of One Million Four Hundred Seventy Thousand Dollars ($1,470,000.00), payable on or before December 31, 1955. In the event this option shall be exercised, Buyer shall be credited with the cash payment of $330,000.00 this day made by it to Sellers, as hereinabove mentioned in article I hereof, and also any and all other payments336 of deferred purchase money made by it to Sellers prior to the exercise of such option, and all notes evidencing deferred purchase money shall be canceled and surrendered to Buyer, and Sellers shall forthwith execute and deliver to Buyer a supplement to this present agreement transferring and assigning to Buyer the interests in the lease of September 11, 1953, and the leasehold estate thereby created which are presently reserved to Sellers in article II of this agreement. Notwithstanding the foregoing provisions of this article III, Buyer shall have no right to exercise the option granted to it by this article unless it shall procure and deliver to Sellers at the time of the exercise of such option a formal release executed by the lessor of said lease of September 11, 1953, releasing Sellers from all obligations as lessees with respect to the said lease. IV. Buyer covenants and agrees to pay the rental due and payable on November 6, 1954, as provided in said lease of September 11, 1953, and to pay when due all other rental thereafter due as provided in said lease and keep and perform all other covenants and agreements to be kept or performed by the lessees therein during the remainder337 of the original term of said lease, and of any extension thereof if either of the options hereinabove granted to Buyer in articles II and III hereof shall be exercised, and Buyer shall indemnify and save harmless the lessors from any and all loss or damage by reason of its failure to pay such rental and keep and perform such covenants. If Buyer shall fail to pay such rental or fail to keep and perform such covenants and agreements as hereinabove provided, or shall make default in the payment of any one or more of the installments of deferred purchase money, as provided in article I hereof, or as provided in article II hereof if the option granted Buyer in article II shall be exercised, and if any such default shall continue for a period of sixty (60) days or more, Sellers may, after giving Buyer at least thirty (30) days written notice of their intention so to do, cancel this agreement and retake all of the properties and rights and interests covered by this agreement. To secure the payment of the deferred purchase money, as provided for in this agreement, and the payment by Buyer of the rental, and the keeping and performance by Buyer of the other covenants and agreements to be kept338 or performed by the lessees in said lease of September 11, 1953, to the extent the same are assumed by Buyer as aforesaid, Sellers hereby reserve a vendor's lien upon all of the property and interests which are sold, assigned, or transferred by this present agreement. V. Sellers covenant and agree that they will keep and maintain the race track properties in good repair and condition at their own expense until January 1, 1955; provided, however, that in the event any of such properties, except the barns specifically mentioned in article VI hereof, shall be damaged or destroyed by fire or other casualty at any time prior to January 1, 1955, the liability of Sellers shall be limited to, and discharged by, the insurance required to be kept and maintained by Sellers under the provisions of article VI hereof. Sellers further covenant and agree that they will pay all utilities, the wages of a night watchman, the salary of the track superintendent, and all other expenses in connection with said properties until said date. Sellers further covenant and agree that they will pay all taxes levied upon said properties for the year 1954 and prior years. Buyer covenants and agrees at its expense339 to keep and maintain said properties in good repair and condition and pay all taxes assessed thereon after January 1, 1955, during the remainder of the original term of said lease, and, if either of the options provided for in articles II and III hereof shall be exercised, during any extension of the term of said lease. VI. Sellers covenant and agree that they have procured, and now have in force, insurance insuring the grandstand, the bleachers, club house, and all other improvements on the leased premises against loss or damage by tornado and fire, with extended coverage, in at least the amount of Nine Hundred Fifty-Seven Thousand Dollars ($957,000.00), and that they will keep such insurance in full force and effect at their own expense until January 1, 1955. Buyer covenants and agrees that it will keep such insurance in at least said sum in full force and effect at its expense from January 1, 1955, until the end of the original term of said lease of September 11, 1953, and, if either of the options hereinabove mentioned in articles II and III hereof shall be exercised, then during any extension of the original term of said lease. In the event the improvements on the leased land340 shall be damaged or destroyed by fire or other casualty covered by the aforesaid insurance, all proceeds from such insurance shall be used solely and without delay for the repair and rebuilding of the improvements so damaged or destroyed. To that end the parties hereto agree that all of such insurance policies shall be made payable to R. E. Costello, Trustee, and to Buyer, as their interests may appear, and said Trustee and Buyer shall hold such proceeds and use and apply the same solely for the purpose of repairing or rebuilding the improvements damaged or destroyed as aforesaid, and such repairing or rebuilding shall be done under the supervision and direction of Buyer. All such insurance policies shall be deposited with Buyer and held by it pursuant to the terms of this agreement. Two of the barns, containing an aggregate of ninety-eight (98) stalls, which were located on the real estate comprising the race track property, have recently been destroyed by fire. Sellers covenant and agree that they will forthwith, at their own expense, replace such barns with barns suitable for use by Buyer in operating a race track and containing at least as many stalls as the barns which were341 destroyed. * * IX. It is the intention of the parties hereto that if Buyer shall keep and perform the covenants and agreements to be kept and performed by it as set forth in this agreement, Buyer shall have and enjoy a complete racing meeting in each of the years comprising the remainder of the original term of the lease of September 11, 1953. Therefore, in the event Buyer shall be prevented from conducting a complete racing meeting at the race track properties during any one or more years comprising the remainder of the original term of said lease because of a war or war emergency which occurs through the action of the Government of the United States or any lawful governmental authority of the United States or because of the action of any local or state government or agency thereof declaring pari-mutuel betting illegal, there shall be a just and proportionate rebatement or abatement in the purchase price paid or to be paid under the provisions of article I hereof. X. In the event Buyer shall exercise the option granted to it in article II hereof, and if any of Sellers shall desire to be indemnified or released from all his obligations as a lessee with respect to said lease342 of September 11, 1953, such Seller shall give written notice to Buyer requesting such indemnification or release, and Buyer shall obtain a satisfactory indemnity bond or a release from the lessor of said lease. If such bond or such release is obtained by Buyer and delivered to such Seller, such Seller shall, in consideration thereof, waive and relinquish in writing his proportionate part of the purchase money to be paid by Buyer to Sellers under the provisions of article II. The transaction as finally consummated between the partnership and Fairmount Park Jockey Club, Inc., under the September 17, 1954 agreement did not include the exercise by Fairmount Park Jockey Club, Inc., at that time of either of the options granted to it in Articles II and III of the agreement. At the time the "Agreement" and the "Assignment" both dated September 17, 1954, were executed, the 1954 racing season had been concluded by the corporation and there remained, under the lease dated September 11, 1953 between Costello and the seven individuals who signed it, only three racing years, i.e., 1955, 1956, and 1957. Ray C. Bennigsen, holding a one-seventh interest in both the partnership and the corporation, 343 also owned a ten percent interest in the corporation, Fairmount Park Jockey Club, Inc. The books and records of the partnership during the calendar years 1952 to 1958, inclusive, were under the care of an accountant with forty years' experience who was made aware of, and was acquainted with, the transaction in 1954 between the partnership and Fairmount Park Jockey Club, Inc. The partnership returns in the calendar years 1954 to 1958, inclusive, were signed by a partner and stated that the partnership was engaged in the "rental" business. In 1957, Fairmount Park Jockey Club, Inc., exercised its option under Article II of the "Agreement" of September 17, 1954. Also in 1957, the option to renew the lease of September 11, 1953 between Costello and the seven individuals who signed it for the first five-year period was exercised. On September 19, 1957, the individual partners entered into an agreement, designated "Assignment", with Fairmount Park Jockey Club, Inc. which agreement provided, in part, as follows: WHEREAS, by assignments made the 17th day of September, 1954, hereinafter such assignments collectively being called the Assignment, the Assignors assigned to the Assignee, 344 all right, title and interest of the Assignors in and to that certain lease dated September 11, 1953 executed by and between R. E. Costello, Trustee, and Daniel C. Parish, Willibald Schaefer, Ray C. Bennigsen, Michael H. Parish, Russell R. Casteel, Edwin C. Moon and Festus Stacy for use as a race course the property known as Fairmount Park containing approximately one hundred fifty-one (151) acres located on the north side of U.S. Route 40, including the club house, grandstand, secretary's office, jockey's quarters, feed barns, track kitchens, barns, and all other buildings with the exception of a sales pavilion the property of H. E. Eddy, and WHEREAS, the Assignment provided it was subject to and in accordance with the provisions of an agreement made September 17, 1954 by and between Daniel C. Parish, et al. and Assignee, hereinafter called the Agreement, and WHEREAS, the Assignee has now exercised the options to it granted in the Agreement and has now complied with all of the provisions thereof, and WHEREAS, the Assignee has delivered to Ray C. Bennigsen, as agent of the Assignors, $700,000 principal amount of its 4% Senior Debentures, dated September 10, 1957, payable $140,000345 annually at the First National Bank of Chicago, Chicago, Illinois. NOW, THEREFORE, in consideration of the premises it is agreed: 1. Each of the undersigned Assignors for himself, his heirs, personal representatives, successors, assigns and (except as to Festus Stacy who is not a partner therein) for Fairmount Park Association, a partnership, hereby: (a) Acknowledges receipt of his proportionate share of said Senior Debentures; (b) Transfers, assigns and sets over unto the Assignee, its successors and assigns all his right, title and interest in and to the above-mentioned lease dated September 11, 1953; (c) Appoints the Assignee, its successors and assigns his irrevocable attorney, with power of substitution, to exercise the right and option of renewing said lease dated September 11, 1953 for an additional period of five (5) years after the 5th day of November, 1962; (d) Warrants that he has not granted or transferred any interest in the leasehold created by the said lease dated September 11, 1953 to any person other than one named in the first paragraph of this instrument. 2. The Assignee hereby accepts said Assignment and assumes all the rights and liabilities under346 the terms and conditions of said lease and the Agreement herein referred and relieves the Assignors of all liability under said lease dated September 11, 1953. In furtherance of the transaction made on September 19, 1957, Fairmount Park Jockey Club, Inc., issued $700,000 worth of its debentures to the partners. During the calendar years 1954 to 1957, inclusive, the partnership received from Fairmount Park Jockey Club, Inc., under the document designated "Agreement" dated September 17, 1954, the amounts of $330,000, $323,100, $233,100, and $233,800, respectively, and during the calendar year 1958, the partnership received from Fairmount Park Jockey Club, Inc., under the document designated "Assignment" dated September 10, 1957 (and pursuant to the option contained in Article II of the agreement designated "Agreement" dated September 17, 1954) the amount of $140,000. The partners, for each of the calendar years 1954 to 1958, inclusive, reported the amounts received by or credited to them from the net proceeds of the amounts set forth above as long-term capital gain. Opinion Amount of Deductions for Rent The petitioner-corporation paid and deducted sublease rental payments347 to a partnership comprised only of the corporation's stockholders, and, except in one instance, their close kin. The amounts claimed as deductions for rent, the amounts disallowed, and allowed by the Commissioner in the taxable years indicated are as follows: Fiscal Year Ended April 30,195319541955Amounts Claimed$656,618.40$762,009.28$534,108.28Amounts Disallowed346,790.08412,359.50221,343.12Amounts Allowed309,828.32349,649.78312,765.16The parties are content to have the issue decided within the framework of what constitutes a "reasonable" rental. Although provisions of the Internal Revenue Codes relating to the deduction of rentals do not use the characterization of "reasonable" in circumstances such as we have here, the issue may be postured in the same arm's length test as used to ascertain "reasonableness". Jos. N. Neel Co., 22 T.C. 1083">22 T.C. 1083, 1090. The petitioners urge that the rent provided by the sublease was reasonable because the partnership had the basic lease on the racetrack facilities and was subject to its obligations; that the partnership made capital improvements on the properties of $432,547.87; 348 that they furnished all of the financial backing for the corporation and the "know how" to operate and maintain the track except during the 60-day period of active racing; and that the corporation was the partnership's agent. They also urge that, on the other hand, the corporation had a capital of only $17,500; and that it fulfilled a function during the operation of the racing program but was idle many months of each year. The petitioners also would use as an indication of what a reasonable rental would be, the Commissioner's argument under a different issue, that a transaction entered into in 1954 with relation to the property was a sublease which at that time had three years to run. The price for the three years, $1,035,000, according to the petitioners, thus established a rental of approximately $345,000 per year. The Commissioner's position is that the corporation is a separate tax entity that was created for the particular purpose of operating the track during the racing periods; that in order to do this it entered into the leases with the partnership whereby it obtained the use of the properties and agreed to pay the rent for them; that petitioners' contention that rent payments349 of the entire net profits of the corporation before taxes is reasonable cannot be accepted because such provisions are unusual and scrutiny is required due to the close relationship between the corporate stockholders and the partnership. We believe that the rental provided in the sublease agreement will not stand the scrutiny necessary in such circumstances, particularly in the light of somewhat similar arm's length transactions. In making the determination of the deficiency for the taxable year ended April 30, 1953, the Commissioner indicated that the amount of rent allowed was computed on a basis of 2 percent of the mutuel handle, which is the gross amount wagered at the track. The Commissioner relies upon the testimony of his valuation expert who had made a study of lease arrangements of pari-mutuel race tracks in the United States to establish the going rates of rental based upon percentages of the pari-mutuel handle and of net profits. His testimony was that rentals of pari-mutuel race tracks are generally based upon (1) a percentage of mutuel handle, (2) a percentage of net profits, (3) or a flat dollar amount; that in the case of a rental based upon a percentage of mutuel350 handle where the lessee bears all the expenses of both the active and inactive periods of the track, a reasonable rental would be from one-half to three-fourths of one percent of the mutuel handle; that in the case of a rental based on a percentage of mutuel handle where the lessor bears only the expenses pertinent to the race meeting with the lessee bearing the expenses of the inactive period, reasonable rental was 1 1/2 percent to 2 percent of the mutuel handle; that in cases where the rental is based upon a percentage of net profits, the lessee usually bearing no more than the direct cost of the race meeting or sometimes less, the reasonable rental is from 30 to 50 percent of net profits; that in such instances when the lessor bears a part of the direct cost of the race meeting, 50 percent of the net profits is a reasonable rental or where the situation is otherwise, 30 to 40 percent of the net profits is a reasonable rental; that in the case of a rental based upon a flat dollar figure, the reasonable rental when converted into the percentage of the mutuel handle will approximate 1 1/2 to 2 percent of the mutuel handle. The Commissioner has used the pari-mutuel handle most generous351 in amount in determining the present deficiencies. The rental allowed by the Commissioner is also in excess of 40 percent of net profits of the lessee, which percentage was shown by the expert to have been used in situations where, as here, the lessor did not bear a part of the direct costs of the race meeting. The Commissioner argues that under the lease the partnership had with Costello it paid rental for 1952, 1953, and 1954 in the amounts of $67,500, $67,500, and $49,786. Under the terms of the lease for 1954 it was obligated to pay $117,287, being the rental computed on the basis of the rate of the mutuel handle. It, however, paid the lessor the sum above mentioned. Compared to this, the Commissioner notes the corporation deducted as "reasonable" rental the amounts of $656,618.40, $762,009.28, and $534,108.28 for the fiscal years ended April 30, 1953, 1954, and 1955, respectively. The Commissioner also notes that in the subsequent leasing of the property during the year involved, in an arm's length transaction between strangers, i.e., Costello and the partners, the maximum rental was stated to be 3/4 of the 1 percent of the mutuel handle, which is almost 1/3 of the 2 percent352 of the mutuel handle which the Commissioner in his determination here has allowed in the case at bar. It would seem apparent on its face that the lease provision requiring the corporation to pay 100 percent of its net profits to the partnership for rental of the property calls for a close scrutiny to determine the true character of the payment and whether it is in excess of a reasonable rental. The leases eliminated any income tax at the corporate level, which is obviously what the interrelated parties were seeking to accomplish. It is not without significance that the increase of rental to 100 percent of the net profits followed the year in which the corporation had net profits. The disposal in 1954 of the remaining 3 years of the lease for $1,035,000 is not conclusive of the amount of reasonable rental in the years before us. In appraising this situation it must be borne in mind that the partnership at the same time offered the 3-year plus the two 5-year renewal periods for a net of $1,385,000, which allocated over the 13-year period would result in a rental of about $106,540 per year, a figure substantially less than the rentals allowed by the Commissioner. Moreover, the partnership353 reported the payments on the lease as capital gains, a position which, if well taken, would permit substantial adjustments on the amounts to be paid. The petitioners further argue that the corporation stood as an agent of the partnership, and that the way to arrive at a reasonable rental for the property is to determine the amount of the corporation's earnings the partnership would allow the corporation to retain as compensation and for the expense involved in operating the track. This issue was not raised in any of the pleadings. However, our conclusion from the record is that the corporation's operations of the race meetings were the only real operations of business relating to the racing aspects of the property. The corporation made application for and received annual licenses to conduct the race meetings and did conduct those meetings. The corporation was the true operator of the track in that it employed all personnel, paid the license taxes, advertising, purses, for saliva tests for horses, and for photo-finish and totalizator services. The corporation did borrow its money for the pari-mutuel pool with the guarantees made by the individual parties. In regard to the petitioners' 354 suggestion that the partners were responsible for most of the management and improvements of the track, it can as well be said that the same parties were the officers and directors of the corporation, and stockholders as well, and that it is only through such parties that a corporation can function. We cannot sustain the petitioners' view that the corporation was a mere agent. The petitioners' further suggestion that the corporation's capitalization of $17,500 required the partners to supply all the necessary financing for it is not well taken. Any inadequacies which may have existed with respect to the corporation were of the partners making. Moreover, the corporation in the taxable years was an active, operating and successful business. It had large profits and apparently would have been more than able to maintain and arrange its own financing if it had not had all of its profits drained away by its leases with the partnership calling for payments of rental in an unreasonable amount. Upon full consideration of the entire record, we are convinced that the petitioners have not borne their burden of overcoming the correctness of the Commissioner's determination of the deficiencies355 in regard to this issue. Dividends to Partners Some of the petitioners contend that if we find, as we have, that a portion of the rent for 1954 2 was excessive and was not deductible as rent, the receipt of that portion was not ordinary income to them, as determined by the Commissioner. Their theory is that those of them who were stockholders of the Corporation were receiving distributions of the corporation taxable as dividends and which, as such, were only taxable to the extent of available earnings and profits. The remainder of the receipts, it is urged, should be taxed as a recovery of capital which should first be offset against their respective cost basis for the stock and the difference taxed as capital gains. It is further urged that all of this adjustment can be reflected in the computations under Rule 50. The principal argument of these petitioners is that the income which the partnership and these petitioners reported as rent for 1954 changed its character to dividends by reason of this Court's validating the Commissioner's determination that the amount was not rent356 deductible under the statute. The Commissioner relies upon Ruben Simon, 11 T.C. 227">11 T.C. 227, and Healy v. Commissioner, 345 U.S. 278">345 U.S. 278 to freeze the status of the receipts as rents. These cases, however, were not concerned with our present problem of retroactive change in the Character of the income in question. The crucial questions there were whether the parties could retroactively erase the receipt of the income in the earlier year. The Supreme Court and this Court relying upon the well-founded concept of an annual accounting period denied the right to make a retroactive change which would eliminate the income entirely from the year in which it was received. That is not our case. The petitioner relies upon Rev. Rul. 56-233, 1 C.B. 51">1956-1 C.B. 51, which states as follows: Under the Internal Revenue Code of 1939, the character of any item of income realized by a partnership and included in a partner's distributive share is the same as though the partner had realized such item directly from the source from which it was realized by the partnership and in the same357 manner. See Harry H. Neuberger v. Commissioner, 311 U.S. 83">311 U.S. 83, Ct. D. 1470, C.B. 1940-2, 228; Emil Mosbacher v. United States, 311 U.S. 619">311 U.S. 619; Commissioner v. Jack Jordan Ammann et ux, 228 Fed. (2d) 417; Zelda B. Jennings et al. v. Commissioner, 110 Fed. (2d) 945, certiorari denied, 311 U.S. 704">311 U.S. 704; John Craik v. United States, 31 Fed. Supp. 132; G.C.M. 22491, C.B. 1941-1, 374; and G.C.M. 22461, C.B. 1941-1, 295. Section 702(b) of the Internal Revenue Code of 1954 enacts the same rule for taxable years to which Subchapter K thereof, relating to partners and partnerships, is applicable. See the Senate Finance Committee Report on Section 702 (83d Congress, 2d Session, Senate Report No. 1622, 376). The position expressed in the case of John E. Dockendorff v. United States, 84 Fed. Supp. 372, is not consistent with this rule and will not be accepted by the Internal Revenue Service in the disposition of other cases involving similar factual situations. On brief the Commissioner adheres to the position taken in Rev. Rul. 56-233,358 but states that it is not applicable to the present situation, without advancing any tenable reason to support his position. His difficulty might stem from the fact that in his quotation of the ruling in his brief the Commissioner omits that part of the ruling which establishes that the concern of the ruling is "the character of any item," rather than "any item" itself. The Commissioner's acceptance of his ruling as otherwise applicable to this case makes unnecessary here a possible pursuit of these provisions of the 1954 Code to adjudicate other possible interpretations of section 702. See, e.g., "Character of Partnership Income" by Bernard Wolfman, N.Y.U. 1961 Institute on Federal Taxation, p. 287. Because of this concession by the Commissioner disposition of such problems as section 702 might present in this regard can await a clear framing of the issue, and briefs concisely directed to it. If we hold, as we do, that the payments to some of the individuals were dividends, the Commissioner strongly urges that in determining earnings and profits available for dividends, interest on any contested deficiencies determined against the corporation is not accruable at the end of each359 year, but when the disputed liabilities are finally determined. This position, as he admits, is directly contrary to Sidney Stark, 29 T.C. 122">29 T.C. 122. Despite his urging, bottomed primarily on his administrative difficulties resulting from the decision, we are not disposed to reverse it here. It should be noted that the Commissioner did not appeal Sidney Stark, supra. The distributions in question are to be treated as dividends to the extent of the available earnings and profits, which can be computed under Rule 50, and the remainder of such distributions will be a factor in computing taxable capital gains, if any, to the respective petitioners. Capital Gains v. Ordinary Income on Contracts Relating to Lease The partner-petitioners claim that the several contracts entered into between them and the Fairmount Jockey Club, Inc. effected a sale of their September 11, 1953 lease of the raceway from Costello. Ten percent of the stock of the Jockey Club was owned by Bennigsen, one of the partners. The Commissioner has determined that there was no sale, but that the contracts in question were for a sublease of the property. The Commissioner concedes that the360 papers were couched in terms generally applicable to a sale, but contends that the intention of the parties gathered from the provisions of the lease and all the circumstances surrounding the transaction establish that the real transaction was a sublease. We agree with the Commissioner. There can be no doubt that the intention of the parties is the only criteria in resolving such an issue as the one before us. See Steven Voloudakis, 29 T.C. 1101">29 T.C. 1101, affd. 274 F. 2d 209 (C.A. 9); and Commissioner v. Pope, 239 F. 2d 881 (C.A. 1). State law may be helpful in ascertaining the intent, but it is not conclusive in circumstances where the reality of the transaction is the issue. The partnership first cancelled its agreement with the corporate petitioner. The transaction in question was then evidenced by two instruments. One made the "Assignment" of the original lease of September 17, 1954 from the partners to the Jockey Club. It, by its terms, was subject to an "Agreement" of the same date. Both of these instruments setting forth the transaction, though in361 substantial form evidencing a sale, nevertheless display an intention to the contrary. Calling the transaction a "sale" does not make it one, if in fact it is something different. 3 The partners did not purport to transfer the entire lease, but reserved to the partnership the inherent options to renew the original lease (which had three years to run) for two terms of five years each. 4 The Jockey Club was given an option to "purchase" the renewal options at a later date, at alternative figures of $600,000, or $700,000, depending on whether the payment was made in two equal installments or over a period of five years. The instrument in no manner relieved the partners of their liability to Costello, who was not a party to the transaction, and did not give it his approval. Under Article III of the September 17, 1954 "Agreement" the Jockey Club could make an outright cash purchase but it was then required to deliver a formal release from Costello, the lessor, of all of the petitioners' obligations as lessees under the original lease. The partners were still the lessees of the property and still362 remained liable to Costello, their landlord. 5 The partners also retained effective rights of re-entry with a right to retake all the properties and interest involved on default of the payments to petitioners or to Costello on petitioners' liability under the original lease. The agreement also provided for a "vendor's lien" on such properties and interests, to secure the payments. The "Assignment" on September 19, 1957, pursuant to the exercise by the Jockey Club of its option in the September 17, 1954 agreement, actually could have covered nothing more than the remaining periods under the lease available to the petitioners by reason of their renewal option in their lease with Costello. The September 19, 1957 assignment nonetheless again recites that it is a conveyance of all right, title and interest in the September 11, 1953 lease with Costello. However, in reality, we deem it as nothing more than an anticipated ten-year363 extension of the sublease for which the partnership was paid $700,000. Here again Costello is not shown to have released the partners from their direct liability to him. There is a provision for the Jockey Club to release the partners from liability under the lease but that is but a matter of indemnity and does not vitiate the lessor-lessee arrangement between the partners and Costello. But even as to this, there is no showing that indemnity agreements were ever given. In this second "Assignment" as in the first, the effective re-entry provisions were continued. The transactions though somewhat differently cast, when correctly viewed are both subleasing arrangements. Situations of this sort are often not free from doubt, but considering all the evidence, the transactions as an entirety, the fact that the partnership returns for 1954 through 1958 stated that its principal activity was "Rental", (which returns were signed by partners after being prepared by their experienced accountant who was in control of the partnership's books and records and was also acquainted with the transaction with Jockey Club), and the fact that the 364 petitioners have the burden of proving that the Commissioner's determination is erroneous, we conclude that the transaction in 1957 was a sublease and the payments to the petitioners were rent taxable as ordinary income. Testimony that no consideration was given to subleasing the property in the negotiations between the partnership and the Jockey Club is not convincing. Bennigsen did not appear to be too certain that such was the case when he testified and he and Michael Parish, who also testified, were not without self interest in the resolution of this question. While Bennigsen was also a stockholder of the Jockey Club, it is possible that it was amortizing the payments in question. Such a conclusion makes it unnecessary to consider the petitioners' argument based upon a formalized breakdown of the various steps of the transaction and the character the various property interests might have under such circumstances. Our conclusion that there was a subleasing and the payments made under the transaction between the partnership were rentals is dispositive of the issue present in the petition in Docket No. 81751. The exclusion of these rentals from their longterm capital gains will365 limit their allowable capital losses to $1,000. Section 1211(b), Internal Revenue Code of 1954. These petitioners do not contend otherwise on brief. The petitioners in Docket Nos. 81571, 81714, 81764, 81765, 81766, and 82506 have failed to submit any evidence relating to the issue of additions to tax under section 6654 of the 1954 Code, for underpayment of estimated tax, and this issue is decided for the Commissioner. Similarly, the Commissioner is sustained in Docket No. 81819 in his determination of addition to tax under section 294(d)(1)(A) of the Internal Revenue Code of 1939, for failure to file a declaration of estimated tax. The petitioners against whom transferee liability is claimed concede this liability in their briefs if, as is the case, the excess rental issue is decided for the Commissioner. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Melville Bitner, Trustee, Docket No. 70279; Festus Stacy, Docket No. 70280; William C. O'Mara, Docket No. 70318; Claire O'Mara, Docket No. 70319; Ruth P. Petersen, Docket No. 70320; Adaline P. Winsor, Docket No. 70321; Michael H. Parish, Docket No. 70322; Isabel M. Vance, Docket No. 70323; Sherry Young, Docket No. 70324; Edwin C. Moon, Docket No. 70325; Edwin C. Moon, Trustee, Docket No. 70326; John C. Moon, Docket No. 70327; June P. King, Docket No. 70328; Vera J. Newman, Docket No. 70329; Ray C. Bennigsen, Docket No. 70330; E. R. Casteel and Maud Casteel, Docket No. 70331; Lucille P. McBeth, Docket No. 70332; Russell Casteel, Docket No. 70333; Daniel C. Parish, Docket No. 70352; William J. Parish, Jr., Docket No. 70353; Hubert M. Schaefer Trust, Willibald Schaefer, Trustee, Docket No. 70354; Russell R. Casteel and Katherine Casteel, Docket No. 71924; Richard E. King and June P. King, Docket No. 81571; William C. O'Mara and Nora S. O'Mara, Docket No. 81713; Wayne W. McBeth and Lucille P. McBeth, Docket No. 81714; Charles K. Winsor and Adaline P. Winsor, Docket No. 81715; Roy F. O'Mara and Claire L. O'Mara, Docket No. 81749; John C. Moon and Marion A. Moon, Docket No. 81750; Edwin C. Moon and Martha H. Moon, Docket No. 81751; Sherry M. Young, Docket No. 81762; Ludwig T. Petersen and Ruth P. Petersen, Docket No. 81763; M. H. Parish and Mae Parish, Docket No. 81764; Dan Parish and Gladys M. Parish, Docket No. 81765; Vera J. Newman, Docket No. 81766; Roy S. Newman and Vera J. Newman, Docket No. 81767; William J. Parish, Jr. and Nancy L. Parish, Docket No. 81818; William J. Parish, Jr., Docket No. 81819; M. H. Parish and Mae Parish, Docket No. 82143; Richard E. King and June P. King, Docket No. 82144; Charles K. Winsor and Adaline P. Winsor, Docket No. 82202; Roy F. O'Mara and Claire L. O'Mara, Docket No. 82203; William C. O'Mara and Nora S. O'Mara, Docket No. 82204; Wayne W. McBeth and Lucille P. McBeth, Docket No. 82481; Edmund R. Casteel and Maud L. Casteel, Docket No. 82482; Dan Parish and Gladys M. Parish, Docket No. 82506; Virlee Stacy Trust, Melville Bitner, Trustee, Docket No. 82517; Ray C. Bennigsen and Veronica Bennigsen, Docket No. 82518; John C. Moon and Marion A. Moon, Docket No. 82519; Irene Stacy Trust, Melville Bitner, Trustee, Docket No. 82520; J. Clair Vance and Isabel M. Vance, Docket No. 82570; Ludwig T. Petersen and Ruth P. Petersen, Docket No. 82617; Vera J. Newman, Docket No. 82667; William J. Parish, Jr. and Nancy L. Parish, Docket No. 82923; Willibald Schaefer and Cecile L. Schaefer, Docket No. 85545; J. Clair Vance and Isabel M. Vance, Docket No. 88158.↩. Made during years 1948 and 1949. No other expenditures made in 1949.↩2. The only pertinent year as to this issue covered by the respective notices of deficiency.↩3. See: Commissioner v. P. G. Lake, Inc. 356 U.S. 260">356 U.S. 260; Oesterreich v. Commissioner, 226 F. 2d 798↩. 4. See: Waller v. Commissioner, 40 F. 2d 892↩. 5. See: Steven Voloudakis, 29 T.C. 1101">29 T.C. 1101, 1108↩, supra.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/204944/	UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 10-4179 UNITED STATES OF AMERICA, Plaintiff - Appellee, v. RANDY CECIL PHILLIPS, Defendant - Appellant. Appeal from the United States District Court for the Western District of North Carolina, at Asheville. Martin K. Reidinger, District Judge. (1:09-cr-00011-MR-1) Submitted: February 10, 2011 Decided: February 16, 2011 Before WILKINSON and DAVIS, Circuit Judges, and HAMILTON, Senior Circuit Judge. Affirmed by unpublished per curiam opinion. Claire J. Rauscher, Executive Director, Ann L. Hester, Assistant Federal Defender, Charlotte, North Carolina, for Appellant. Amy Elizabeth Ray, Assistant United States Attorney, Asheville, North Carolina, for Appellee. Unpublished opinions are not binding precedent in this circuit. PER CURIAM: Randy Phillips pleaded guilty pursuant to a written plea agreement to one count of possession with intent to distribute more than five grams of cocaine base, in violation of 21 U.S.C. § 841(a)(1), (b)(1)(B) (2006) and one count of sale of two firearms to a convicted felon, in violation of 18 U.S.C. § 922(g)(1) (2006). The district court imposed the statutory mandatory minimum sentence of 120 months in prison. Counsel for Phillips filed a brief in accordance with Anders v. California, 386 U.S. 738 (1967), certifying that there are no meritorious grounds for appeal, but questioning whether the district court fashioned a reasonable sentence. Phillips did not file a pro se supplemental brief. The Government elected not to file a brief. Finding no reversible error, we affirm. A review of the record reveals no error in sentencing. * When determining a sentence, the district court must calculate the appropriate advisory Sentencing Guidelines range and consider it in conjunction with the factors set forth in 18 * Phillips’ plea agreement included a waiver barring an appeal from the calculation of his sentence. However, the Government has not filed a motion to dismiss asserting the waiver, and we do not sua sponte enforce appellate waivers. See generally United States v. Blick, 408 F.3d 162, 168 (4th Cir. 2005) (citing United States v. Brock, 211 F.3d 88, 90 n.1 (4th Cir. 2000)). Accordingly, we will decide the appeal on the merits. 2 U.S.C. § 3553(a) (2006). Gall v. United States, 552 U.S. 38, 49-50 (2007); United States v. Lynn, 592 F.3d 572 (4th Cir. 2010). Appellate review of a district court’s imposition of a sentence, “whether inside, just outside, or significantly outside the [g]uidelines range,” is for abuse of discretion. Gall, 552 U.S. at 41. Sentences within the applicable guidelines range may be presumed by the appellate court to be reasonable. United States v. Pauley, 511 F.3d 468, 473 (4th Cir. 2007). The district court followed the necessary procedural steps in sentencing Phillips, appropriately treating the Sentencing Guidelines as advisory, properly calculating and considering the applicable Guidelines range, and weighing the relevant § 3553(a) factors. Because of the statutory mandatory minimum sentence, Phillips’ Guidelines range became 120 to 125 months. Phillips’ 120-month sentence, which is the statutory minimum sentence the district court was required to impose, may be presumed reasonable by this court. Pauley, 511 F.3d at 473. We conclude that the district court did not abuse its discretion in imposing the chosen sentence. In accordance with Anders, we have reviewed the record in this case and have found no meritorious issues for appeal. We therefore affirm the district court’s judgment. This court requires that counsel inform Phillips, in writing, of the right 3 to petition the Supreme Court of the United States for further review. If Phillips requests that a petition be filed, but counsel believes that such a petition would be frivolous, then counsel may move in this court for leave to withdraw from representation. Counsel’s motion must state that a copy thereof was served on Phillips. We dispense with oral argument because the facts and legal contentions are adequately presented in the materials before the court and argument would not aid the decisional process. AFFIRMED 4	01-04-2023	02-16-2011
https://www.courtlistener.com/api/rest/v3/opinions/4619056/	Kurt H. deCousser, Petitioner, v. Commissioner of Internal Revenue, RespondentDe Cousser v. CommissionerDocket No. 21385United States Tax Court16 T.C. 65; 1951 U.S. Tax Ct. LEXIS 311; January 17, 1951, Promulgated 311 Decision will be entered under Rule 50. In 1938 petitioner entered into a partnership with B for the purpose of operating a gas field. The agreement was that they were equal partners in any profits. The details of how to finance drilling and concerning some small items of expense were not worked out as of the time of the signing of the agreement in 1938. A dispute developed between petitioner and his partner concerning financing the drilling, depletion expenses and management and other expenses. In 1943 petitioner filed a lawsuit against his partner for the purpose of getting his share of the profits. The bill of complaint also requested an accounting and dissolution of the partnership. This lawsuit was settled on April 16, 1944. The partnership had net income of $ 35,165.30, $ 31,479.61, and $ 4,328.97, in the years 1942, 1943, and 1944. Held, petitioner is taxable on his distributive share of the partnership profits in the amounts of $ 12,582.65, $ 15,739.80, and $ 2,164.48 in 1942, 1943, and 1944, respectively. M. B. Decker, Esq., for the petitioner.Thomas V. Lefevre, Esq., for the respondent. Hill, Judge. HILL 66 Respondent determined deficiencies in petitioner's income and victory tax for the year ended December 31, 1943, in the amount of $ 2,864.50, and in his income tax for the year ended December 31, 1944, in the amount of $ 654.43. The petitioner claims "overassessments" of $ 3,229.91 and $ 66.95 for 1943 and 1944, respectively. The year 1942 is also involved because of the forgiveness feature of the Current Tax Payment Act of 1943. The questions presented are:(a) Was petitioner's distributive share of the income of the partnership of which he was a member, $ 12,582.65, $ 15,739.80, and $ 2,164.48 in 1942, 1943, and 1944, respectively, as respondent contends? 1313 (b) In the event that petitioner's distributive share of the income of the partnership was uncertain and in controversy during 1942 and 1943, was petitioner taxable in 1944 upon the distributive share which he received in that year by virtue of a compromise agreement between him and his partner?FINDINGS OF FACT.During the years 1942, 1943, and 1944 petitioner resided in Lansing, Michigan. He filed his Federal tax returns for those years with the collector of internal revenue for the district of Michigan on April 15, 1943, March 10, 1944, and January 10, 1945, respectively. Petitioner is a mining and petroleum engineer and has been employed for the past 20 years by Socony-Vacuum Oil Co., Inc.In 1937 petitioner secured leases for Socony-Vacuum on approximately 3,500 acres in Home Township, Montcalm County, Michigan, on which, early in 1938, Socony-Vacuum drilled a well known as No. 405-Chris Hansen No. 1. No oil was discovered in that well, but gas was.Shortly after the drilling of that well, one Leslie T. Barber approached petitioner and suggested that they obtain the gas rights to the area from the various companies holding leases and develop them together on a partnership 314 basis. On August 10, 1938, petitioner and Barber entered into a written partnership agreement as follows:This confirms a mutual agreement between Kurt H. deCousser and Leslie T. Barber whereby they are to operate a gas field as equal parteners [sic] in any profits that may be derived therefrom.It is understood by each of the parties that the acreage being operated is farm out acreage and all carries an overriding royalty of 1/5, part of said acreage 67 being owned by the Belvidere Oil Company which is contraled [sic] by Leslie T. Barber and this fact is mentioned that there can be no misunderstanding on the part of either party in this connection. Said gas field being located in Township 12 North, Range 6 West. It is not known at this time how the complete drilling program will be financed but at this time the money is being supplied under a contract whereby Leslie T. Barber is borrowing part of the funds and is using his own tools to drill the wells and is charging each well into a trustee account at $ 7,500.00 and it is also understood by the parties hereto that there are also some small items of expense incurred by said Leslie T. Barber that will have to be agreed315 on when some permanent plan of operation is adopted as accurate records of such expense has not been kept.The purpose of this declaration is that Kurt H. deCousser and his heirs may be fully protected in the event of the death of said Leslie T. Barber.Petitioner and Barber operated under that partnership agreement as partners or joint venturers through April 16, 1944.The understanding between the partners under that agreement was that petitioner would give geological advice and prepare studies of the area as well as an estimate of the reserves. On the basis of such studies petitioner and Barber hoped to obtain a loan to help finance the drilling. It was agreed that Barber would drill the wells, receive $ 7,500 from the partnership for each well drilled, operate those wells, and keep the books of account. All leases were taken and all other matters were handled in Barber's name. They obtained a loan of $ 25,000, purchased No. 405-Chris Hansen No. 1 from Socony-Vacuum and drilled 11 additional wells. These wells were known as:406-Neilsen-Hamilton & Towle407-Mortensen-Sack408-Snyder-Lavender-Roose416-C. J. Mann420-De Je424-Matherson426-Burt-Mann429 Hackett-Sack430-John316 Hansen434-Sack-Peterson438-Belvidere-HackettIn the latter part of 1938 Barber demanded that petitioner raise $ 50,000 additional capital for the partnership. Petitioner informed Barber that he was unable to do so. However, he assisted Barber in an unsuccessful attempt to obtain a loan of $ 50,000. He also loaned Barber $ 200 out of his personal funds which the latter repaid. In the fall of 1938 petitioner got a lease known as the Weber lease located outside Home Township in Salem Township, Allegan County, Michigan. He assigned that lease to the partnership. Shortly before Christmas, 1938, a producing well was brought in nearby greatly enhancing the value of the Weber lease. Barber sold that lease for $ 5,000. Petitioner asked Barber for one-half the proceeds but the latter insisted that the money be left in the partnership to finance future drilling. In the course of the dispute Barber informed petitioner that as to future wells to be drilled, the partnership arrangement would not apply. It was agreed that petitioner would have the option of participating in future wells but in order to do so he 68 must pay his proportionate share of the costs of drilling each. 317 Subsequently petitioner obtained financing and participated in several wells on this basis. Such wells were not considered as a part of the partnership venture. Only the 12 wells listed above were part of the assets of the partnership business.Barber drilled three non-producing wells in 1940. He demanded that a portion of the costs of drilling those wells be charged against the profits of the partnership venture on the ground that they served to outline the limits of the field. Petitioner agreed and this was done. Such expense had been written off prior to 1942.In June 1941 petitioner received from Barber a financial statement prepared by the accountant for the partnership. This statement covered the partnership's operations up to April 30, 1941. The operations of the partnership resulted in a profit for the first time in 1941. After the close of that year Barber sent petitioner a statement showing the partnership income for 1941 to be $ 30,852.24, before depletion, and his distributive share, before depletion, to be one-half, or $ 15,426.12. Petitioner reported that amount as income from the partnership on his Federal tax return for 1941.Early in 1943 petitioner requested318 and sometime shortly before April 15, 1943, received a report from Barber of the profits of the venture for 1942. Because of the lateness of this report petitioner had to request an extension of time for filing his return for 1942. That report showed partnership income for 1942 of $ 35,501.22, after depletion, and showed petitioner's distributive share to be one-half of the partnership profits or $ 17,750.61, less a management fee of $ 5,000, or a net of $ 12,750.61. Petitioner did not agree with the imposition of the management fee nor with certain expenses which Barber had deducted in arriving at the partnership income. However, because of the shortness of time, petitioner reported on his income tax return the net amount credited to him by Barber as his distributive share of the partnership profits for 1942 in the amount of $ 12,750.61.That report from Barber also revised downward petitioner's distributive share of the partnership profits for 1941 by deducting from it a management fee of $ 3,333.33 and depletion of $ 4,793.07, thereby reducing his share from $ 15,426.12 to $ 7,299.72. Petitioner did not agree with those revisions.As a result of the conflict between petitioner319 and Barber with respect to his 1941 and 1942 distributive share of the partnership profits, petitioner on October 18, 1943, filed suit against Barber and the Consumers Power Company, the purchaser of all the gas produced by the partnership wells. In that suit he claimed one-half of the profits of the venture as his distributive share and he prayed for an accounting, dissolution of the partnership, appointment of a receiver, 69 and a temporary injunction against dissipation of partnership assets. He alleged that Barber's accounting for 1942 and his amended accounting for 1941 showed erroneous charges against partnership income of $ 800 and $ 1,200 for office overhead for 1941 and 1942, respectively, as well as erroneous charges for depletion of $ 16,430.31 and well maintenance of $ 2,664.83 for 1942. He also alleged that the management charges of $ 3,333.33 and $ 5,000 for 1941 and 1942, respectively, and depletion of $ 4,793.07 for 1941 were improper charges against his distributive share. Concerning the amount of income from the partnership activities, petitioner alleged as follows in his bill of complaint:That this Plaintiff claims that according to Defendant's own statement320 he is entitled to a total of $ 15,426.12 as profits for the year 1941 and approximately $ 27,913.18 as profits for the year 1942, making a total of $ 43,114.70 of which sum there has only been paid $ 12,201.52, leaving a balance due of $ 30,813.18 together with the profits due this Plaintiff for the period of January 1st to July 31st of 1943 which are unknown.Barber's answer denied the existence of a partnership and that the charges against income and petitioner's distributive share shown on the statement were improper and alleged affirmatively that petitioner had failed to live up to his partnership obligations and that petitioner had elected to dissolve the partnership on January 25, 1939, because of petitioner's refusal to permit his $ 2,500 share of the Weber lease proceeds to be used for future drilling.Petitioner obtained a temporary injunction restricting Consumers Power Company from making payments to Barber for gas purchased from the partnership wells pending decision of the suit. During the course of the litigation the Consumers Power Company impounded the sum of $ 35,674.24 due to the partnership for gas purchased.Petitioner did not report any income from the partnership321 on his return for 1943. In a letter attached to such return petitioner stated as follows:Enclosed income tax report for 1943 is contingent upon the outcome of a lawsuit now in progress, which was started in October 1943. Since no one can forecast the outcome of a lawsuit, I made my 1943 tax report without reference to gas properties in which I own an interest in Home Twp. Montcalm County, Michigan.Should I lose this suit my 1942 income tax report will have to be revised downward and a considerable refund will be due me. My attorneys feel that I have a most excellent case and should win, in which event I will have to revise my 1942 tax report upward somewhat and my 1943 tax report will be revised upward considerable.Firmly believing that I will win the case I am leaving the $ 782.85 which I have overpaid as a credit against this increase. If you have any suggestions or know of a better way to handle this matter I will appreciate hearing from you. I have no report on the earnings of the properties for 1943 and feel indignant about the reported earnings of 1942. That is what the dispute is about.70 On April 26, 1944, petitioner and Barber entered into a settlement agreement322 dissolving the partnership as of April 1, 1944, and dividing its assets. Petitioner received $ 17,026.23 in cash from the impounded funds and seven producing wells as follows:405-Hansen No. 1416-C. J. Mann420-De Je424-Matherson426-Burt-Mann434-Sack-Peterson438-Belvidere-HackettBarber received $ 18,648.01 in cash from the impounded funds, one producing well, No. 407-Mortensen-Sack, and four non-producing wells: 406-Neilsen-Hamilton & Towle; 408-Snyder-Lavender-Roose; 429-Hackett-Sack, and 430-John Hansen.The gas sales and profits of the Barber-deCousser partnership for the years 1942, 1943, and 1944 were as follows:194219431944TotalsGross gas runs$ 61,077.21$ 66,118.04$ 18,169.07$ 145,364.32Less severance tax1,221.541,322.36363.382,907.28Net gas runs59,855.6764,795.6817,805.69142,457.04Operating expenses7,894.1415,133.619,147.7632,175.51Net profit ofventure51,961.5349,662.078,657.93110,281.53Depletion, 27 1/2 per centof gross16,796.2318,182.46Depletion 50 per cent net4,328.97Net taxable income35,165.3031,479.614,328.97The sum of $ 12,000 was received by 323 petitioner from the partnership prior to the settlement agreement of April 26, 1944, in the following installments:1941$ 3,00019426,00019433,000After the settlement agreement petitioner claimed that his taxable income from the partnership, after depletion, was as follows:1942$ 4,376.6419433,882.121944533.86Petitioner arrived at this result by adding $ 12,000 in cash actually distributed to him prior to 1944 to the $ 17,026.23 in cash distributed to him in April 1944 as part of his settlement dissolving the partnership after litigation and by subtracting from this total sum of $ 29,026.23, the sum of $ 15,426.12 reported by him as income from the partnership in 1941, and by calling this previously unreported distributed cash of $ 13,600.11 his total distributive share, before depletion, of the partnership income for 1942 to 1944, inclusive. He then determined that the 71 $ 13,600.11 is 12.3321 per cent of the $ 110,281.53, the total partnership income, before depletion. He termed this his percentage of the partnership income and applied it to the partnership income, after depletion, for each year to ascertain his taxable distributive share324 for that year as set forth above.The respondent determined that petitioner's taxable income from the partnership is one-half of the partnership income, after depletion, less $ 5,000, or $ 12,582.65 in 1942, $ 15,739.80 in 1943, and $ 2,164.48 in 1944.OPINION.The primary question is whether the respondent correctly determined that petitioner's distributive share of the income of the partnership involved for the years 1942, 1943, and 1944 was in the amounts set forth above. The petitioner argues that the existence of a controversy between him and Barber during those years rendered the amount of his distributive share indefinite and impossible of ascertainment and that such amounts were not specifically established until the settlement agreement of April 26, 1944. With respect to his contention, petitioner states on brief as follows: * * They [petitioner and Barber] were to be equal partners in the profits but there was no definite understanding as to the amount Mr. Barber was to receive for management nor was there anything definite in respect to the capital contributions. * * He also states that: * * The agreement of August 10, 1938 was so vague and indefinite in respect325 to management and other fees to be paid to Mr. Barber, capital contributions and in many other respects, that it was impossible to determine the distributive share of the profits of Petitioner from said agreement, * .Petitioner thus maintains that the amounts of the cash paid to him under the settlement agreement, together with cash previously distributed to him, should be related back to the years in question in accordance with the formula set forth in our findings. We do not agree with his contention.With respect to taxation of members of a partnership, section 182 of Internal Revenue Code provides:SEC. 182. TAX OF PARTNERS.In computing the net income of each partner, he shall include, whether or not distribution is made to him -- * * (c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b).Hence, in accordance with the statute, each partner is taxable upon his distributive share of the partnership profits whether received by him or not. See Bourne v. Commissioner, 62 Fed. (2d) 648.72 Final determination of the basic issue, then, turns upon326 the answer to the question -- In what percentage, if any, of the net profits of the partnership in question did petitioner have a right to share during the years in question? There is no dispute as to the amounts of the partnership net income for each of the years before us. They were stipulated by the parties as set forth in our findings. We think, moreover, that there can be little doubt that petitioner had a right in accordance with the partnership agreement of August 10, 1938, to a 50 per cent share of the partnership profits at least in the years 1942 and 1943. It is true that there was certain vagueness concerning financing and "some small items of expense" in the agreement and that during the existence of the partnership petitioner and Barber had several disagreements from which arose certain alterations to the original agreement. So far as the facts show, however, none of these ever resulted in an amendment to the provision of the agreement that petitioner and Barber were to share in partnership profits on a 50-50 basis.Those disputes are outlined in detail in our findings. It will be noted that there were several disagreements prior to 1942 which resulted in some modifications327 of the agreement. One change resulted from a dispute which arose late in 1938 or early 1939 concerning Barber's request of petitioner that the latter loan the partnership $ 50,000 for working capital. Petitioner could not do so. As a result of this it was agreed that petitioner would not participate in future wells unless he contributed to the cost of drilling them. Another modification came about in 1940 as a result of a dispute concerning sharing expenses of drilling three wells which proved to be dry holes. An agreement was reached concerning this and the expense of drilling those wells was completely absorbed prior to 1942.The only dispute concerning partnership income and the partners' share thereof which affected petitioner's income for the years in question resulted from Barber's 1943 accounting to petitioner. In it Barber not only revised downward petitioner's income for 1941, but also made some adjustments for 1942. Barber's statement for 1942 showed a partnership profit of $ 35,501.22, after depletion, and also a deduction of $ 5,000 for management fees from petitioner's share of $ 17,750.61, which reduced his share to $ 12,750.61. Petitioner then brought suit on328 October 18, 1943, asking for his 50 per cent share of the partnership profits, and an accounting and dissolution of the partnership. In his bill of complaint, petitioner alleged that he was entitled to a total of $ 15,426.12 and $ 27,913.18 in profits for the years 1941 and 1942, respectively. Certainly those facts show that there was no agreement between the partners to change the provision that they were to share in partnership profits on an equal basis.73 Moreover, with respect to 1942 respondent has not attempted to tax petitioner on an amount of petitioner's distributive share of profits of the partnership greater than the $ 12,750.61 which Barber, in his accounting, stated was petitioner's share; indeed, the respondent has determined that his income due to partnership activity in 1942 was $ 12,582.65, which is less than the amount Barber originally said that he was entitled to receive. The respondent determined this lower figure after readjusting the allowance for depletion. In short, the respondent in computing petitioner's profits for 1942 has reduced it by all the deductions in controversy. If petitioner's theory in the lawsuit against Barber was proper his distributive329 share was higher than the amount respondent determined. We believe that in the circumstances of this case and in the light of section 182 of the Code that respondent's determination with respect to 1942 is proper and we so hold.As to 1943, there appearing to be no specific items in controversy and since as of the end of that year it appeared from all the facts then known that petitioner had a right to share in 50 per cent of the partnership profits, we hold that respondent's determination that his distributive share for that year was $ 15,739.80 also should be sustained.Our conclusion in this respect is supported by, among others, First Mechanics Bank v. Commissioner, 91 Fed. (2d) 275. In that case the Court found that one Bird entered into a joint venture in 1916 with a Canadian company for the purpose of fulfilling certain contracts. Under the agreement Bird was to receive profits of 15 per cent from some contracts and 5 per cent from others. Deliveries under one of the contracts were completed in 1916. Under another, manufacture was completed in 1917, but while awaiting shipment the products were destroyed by fire or explosions at Kingsland, 330 New Jersey.In 1916 Bird wrote the Canadian company demanding an accounting for his profits and also threatened court action. Bird brought suit in 1919. The issue involved the contract completed and under which delivery had been made in 1916. Bird was entitled to some $ 312,000 as the result of this contract in 1916. However, he compromised with the Canadian company in 1928 after protracted litigation for $ 200,000. The taxpayer claimed he should have reported $ 312,000 in 1916, while the Commissioner argued that he was taxable on $ 200,000 in 1928. The Court said as follows with respect to the question:In the present case the contracts were completed in 1916. The profits were realized by the joint venture at that time and there was nothing conditional or contingent about their receipt. They were earned and paid. Bird, therefore, was legally entitled to his share of the profits which was $ 312,723.46, and was taxable on that share although he did not actually receive it in that year. That he saw fit to compromise the amount due him for $ 200,000 in 1928 did not 74 diminish his liability for taxes for 1916. Appeal of Fred Truempy, supra, [1 B. T. A. 349]; Appeal of Robert A. Faesy, supra, [1 B. T. A. 350].331 See also D. H. Byrd, 32 B. T. A. 568.With respect to the year 1944, however, it may be argued that petitioner's ratio of his distributive share of the partnership profits was changed by virtue of the settlement agreement of April 16, 1944, between him and Barber. If that were true, it would follow that he would not have been entitled to 50 per cent of the partnership profits for 1944. We do not believe, however, that petitioner has shown that that ratio was changed by the settlement agreement. By it petitioner received $ 17,026.33 in cash and seven producing wells. But in his formula for determining his share of partnership profits petitioner considered only the cash distributed to him. He claims that the value of the wells was not includible in his taxable income for any of the years in question because distribution of assets upon dissolution of a partnership is not a taxable event, citing Annie Laurie Crawford, et al., Executors, 39 B. T. A. 521, and Robert W. Wilmot, 44 B. T. A. 1155. We do not agree with his argument. Concerning the cases cited we said in James F. Curtis, 3 T. C. 648, 662:332 * * The Crawford and Wilmot decisions most assuredly do not suggest that partners may postpone the imposition of tax on partnership profits by the simple expedient of distributing such profits in the form of property other than cash. Hence, they do not assist petitioner in avoiding tax on his portion of the gains arising from the joint transactions.Here the primary purpose of petitioner's lawsuit was to claim one-half of the profits of the venture between him and Barber. So far as the facts show the settlement determined that question. 2 At least it has not been shown that the wells distributed to petitioner on the settlement date were anything else than a distribution of part of his share of the profits for the years 1942, 1943, and 1944. It is thus apparent that petitioner should have included not only the amount of the cash in his computation of income for the years in question, but also any value of the wells distributed to him. And since petitioner has not proved the value of such wells, or that it was less than an amount, when added to the cash, equal to 50 per cent of the partnership profits for 1944, we can not say that the respondent's determination with 333 respect to that year is erroneous. We therefore hold that respondent's determination was also proper as to 1944.In view of the above it is not necessary to discuss issue (2).Decision will be entered under Rule 50. Footnotes1. In the deficiency notice, petitioner's income from the partnership is determined as $ 12,750.61 in 1942, $ 15,921.64 in 1943, and $ 2,164.48 in 1944. Depletion was erroneously computed for 1942 and 1943 in this determination and respondent now contends that petitioner's corrected partnership income is $ 12,582.65 for 1942 and $ 15,739.80 for 1943. 1944 remains unchanged.↩2. In the petition, petitioner states as follows concerning the settlement: * * In May of 1944, your petitioner and the said Leslie T. Barber adjusted by agreement between themselves the distributive shares of the profits from said partnership venture * * * whereby petitioner accepted $ 17,026.33 of said impounded funds, and seven of the producing wells, and Leslie T. Barber accepted $ 18,648.01 of the impounded funds and five producing wells. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619057/	Appeal of SARAH BACKER, WILLIAM BACKER, WALDRON P. BELKNAP, AND SAMUEL LEVY, as executors of the estate of George Backer, deceased.Backer v. CommissionerDocket No. 239.United States Board of Tax Appeals1 B.T.A. 214; 1924 BTA LEXIS 220; December 18, 1924, decided Submitted December 1, 1924. 220 The expense of defending an indictment for perjury growing out of the taxpayer's business held, upon the facts, not to be a deductible ordinary and necessary business expense. Samuel Levy, Esq., and Reuben Rodecker, Esq., for the taxpayer. Robert A. Littleton, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. JAMES214 Before JAMES, STERNHAGEN, and TRUSSELL. This appeal involves a proposed assessment of personal income taxes amounting to $12,315.06 against the estate of the decedent because of an alleged improper deduction by him in the year 1920 of business expenses consisting of attorney's fees and other costs of conducting his defense to a charge of perjury. Oral hearing was had and testimony introduced. FINDINGS OF FACT. In the year 1920, George Backer, the decedent taxpayer, was a prominent builder in the city of New York. He had been in the business for a number of years, individually and in association with others, and had established a substantial and creditable reputation. During the years 1919 and 1920, he was engaged in the construction of three large commercial buildings in the heart221 of the city of New York; the Heckscher Building, a 32-story tower building on the southwest corner of Fifty-seventh Street and Fifth Avenue; the Textile Building, a 16-story building on Fifth Avenue covering the block from Thirtieth to Thirty-first Streets; and the Penn Terminal Building, a 16-story building on Seventh Avenue covering the block from Thirtieth to Thirty-first Streets. The cost of construction of these buildings was over $7,000,000. In the years in question the building situation in New York was very serious, and finally resulted in the so-called Lockwood investigation by a committee of the State legislature. It transpired that certain labor leaders were abusing their offices by a system of black-mail. One Brindell was later convicted and sentenced to a term in prison. The practice was to call a strike of the building trades working on a building in the midst of its construction when materials were on the ground and many obligations had been incurred and the greatest harm would result from delay in construction, and then to demand a price from the builder for calling off the strike so that the construction could proceed. A failure to pay the price meant 215 222 the probability of enormous loss and perhaps ruin. Not only would the work in process rapidly and seriously deteriorate and the delay in completion involve the certain loss of expected profits and return of investment, but contractual liability in large sums would also immediately be incurred to those who produced the material, the owners of the building, and numerous subcontractors. The business reputation and good will of the builder and his financial credit would be imperiled. The delay thus caused at the time directly after the war when there was a crying need for additional building was regarded as a matter of important public concern and this and the criminal aspects of the practice referred to gave rise to the investigation. Because of his previous success, his established reputation and the financial magnitude of the building operations in which he was then engaged, Backer was especially vulnerable to the practice referred to and was compelled to make a large payment, not, he said, to Brindell, but to others associated with him in the same nefarious practice. He was subpoenaed to testify before the Lockwood committee in 1920 while the three buildings were still in construction, 223 and was asked whether he had paid the money to Brindell. Although under the New York penal law it was a crime to bribe a labor leader (Penal Law New York, sec. 380), such crime was not punishable if the person committing it testified under subpoena to the giving and accepting of the bribe (sec. 381). Backer testified before the Lockwood committee that he did not pay the money to Brindell and stuck to this statement. He also said, in the first instance, that he had lost the money, but later, before leaving the witness stand, recanted and said that he had paid the money to some persons not identified but not to Brindell. If he changed his testimony before he left the witness stand and told the truth he was, under New York law, not guilty of the crime of perjury (; ). He was, however, indicted for perjury and tried. The jury disagreed, and subsequently the case was dismissed. The defense to the criminal action cost him in attorney's fees and other expense the sum of $40,624.88, which he paid in 1920, and which he deducted on his return for that year as an "ordinary and necessary expense paid or224 incurred during the taxable year in carrying on his trade or business" (Revenue Act of 1918, sec. 214(a)(1)). The Commissioner disallowed the deduction and has determined a deficiency of $12,315.06 as a result of such disallowance. DECISION. The determination by the Commissioner of a deficiency of $12,315.06 is approved. OPINION. JAMES: The question is whether under all the circumstances set forth in our findings of fact the amount actually paid by the decedent taxpayer to defend himself against the criminal prosecution for perjury is an ordinary and necessary business expense or is a personal expense. If it is the former, it is deductible in determining his net income; if the latter, it is not deductible. 216 The Commissioner asserts that it is a personal expense, because, as we understand, the crime charged is necessarily a personal crime and the defense thereto can not in the nature of things be a matter of business. Manifestly the commission of perjury can, under no circumstances, be recognized as part of a taxpayer's business; and so the expense incident to such criminal activity can likewise not be recognized. We must regard this as written into every225 statute, especially as to such common crimes as are prohibited generally throughout the land - those mala in se, which have immemorially been regarded as contrary to public welfare. It would be an anachronism to say that such an act, so inimical to the public interest as to justify punishment for its commission, may at the same time be so recognized that the expense involved in its commission is sanctioned by the revenue law as an ordinary and necessary expense of carrying on a business. But in this case there has been no crime in contemplation of law - a lie was told on the witness stand, and an indictment, trial, disagreement and the discharge of the defendant have followed. Under such circumstances, may the defendant claim as an ordinary and necessary expense of his business a deduction of the cost of defending himself against this charge? We are dealing here with the age-old question of proximate cause. If the charge of perjury proximately resulted from the business carried on by George Backer, it may be conceded that the expense of defense against that charge was an ordinary and necessary expense of carrying on his business. If, on the other hand, the business of226 contracting was not proximately related to the charge of perjury, then the cost of defense was not a business expense and may not be deducted as such in the taxpayer's income-tax return. We have already decided in the , that the cost of operating an automobile between one's place of business and his residence is not an ordinary and necessary expense. Fundamentally, the reason for this is that the proximate cause of the automobile transportation is not the place of location of the business but the place of location of the residence. Nevertheless, if one ignores the element of personal choice in the selection of a place of residence, it is possible to support a claim for a deduction such as that in Sullivan's Appeal with persuasive reasoning. It is a fact that if men are carrying on business in a large city and desire to surround themselves with the comforts of life to which their earning capacity entitles them, they must select a residence far removed from their place of business and must provide themselves in some manner or other with the means of transportation thereto. It is true that Backer, being a prudent person, 227 chose, when called before the Lockwood Investigating Committee, to lie rather than to incur the hostility of a powerful and unscrupulous group of labor leaders and the inevitable jeopardy to his person and to his fortune. It is equally true that a man of courage and a proper sense of civic responsibility would neither have paid the bribe in the first place, nor lied about it in the second. Business expenses of the ordinary and legitimate kind are not matters of choice in the broadest sense of the word. It is true that a business man may choose to buy or not, but if he does not buy, he 217 does not sell; it is true that he may choose to employ or not, but if he does not employ labor and other assistance, he does not produce commercially valuable results. We are not willing to concede that the carrying on of business in the ordinary manner in the city of New York or elsewhere, under the Government of the United States, is necessarily accompanied by the commission of illegal acts or by the accusation of the commission of such acts whereby business men are subjected at least to the charge of the commission of crimes. We doubt if business men generally would concede that*228 bribery and lying are ordinary and necessary business acts. If they are not, then the cost of bribes and lies are not ordinary and necessary business costs. We do not believe that it is in the interest of sound public policy that the commission of illegal acts should be so far protected or recognized that their cost is regarded as a legitimate and proper deduction in the compution of net income under the revenue laws of the United States. But it is said that Backer did not claim this deduction as a guilty man, but as an innocent one. As we view the case, it is wholly immaterial whether he was innocent or guilty. The question is whether the act whereby he laid himself open to the charge of perjury was one which was ordinarily and necessarily committed in the course of his business. We are unable to see any proximate connection between the two. All members of the Board concur, except STERNHAGEN and TRUSSELL, who dissent, and SMITH, who took no part in the consideration and determination of the appeal.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619058/	EDWARD KAYE AND JOHNNIE KAYE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKaye v. CommissionerDocket No. 6243-83United States Tax CourtT.C. Memo 1995-345; 1995 Tax Ct. Memo LEXIS 352; 70 T.C.M. (CCH) 206; July 31, 1995, Filed 352 Decision will be entered for respondent. Johnnie Kaye, pro se. For respondent: Steven M. Roth. FAYFAYMEMORANDUM OPINION FAY, Judge: Respondent determined a deficiency in petitioners' 1977 Federal income tax in the amount of $ 51,462.10. 1The sole issue for decision is whether Johnnie Kaye (petitioner) is entitled to innocent spouse status pursuant to section 6013(e) 2 for the tax year 1977. We hold that she is not. Some of the facts have been stipulated and are so found. The stipulation and353 attached exhibits are incorporated herein by this reference. Petitioners were married during the year in issue, but were subsequently divorced on February 28, 1983. A petition for redetermination was filed by petitioners on March 22, 1983. Petitioner Edward resided in Los Angeles, California, when the petition was filed. Petitioner resided in Villa Park, California, when the petition was filed. Petitioners had one minor child during the year at issue. Petitioner Edward conceded in full respondent's determined deficiency and the additional interest rate pursuant to section 6621 in a stipulation of settled issues filed with the Court on October 4, 1993. Petitioner Johnnie also concedes the amount of the deficiency; however, she argues that she qualifies for innocent spouse relief. Sec. 6013(e). Petitioner has her high school equivalency degree (GED), as well as a license to manicure fingernails. She worked as an airline stewardess prior to meeting her ex-husband, Edward. Petitioner worked sporadically at her ex-husband's office during 1977, the year at issue herein. Petitioner went into the office approximately 15 times during the year at issue to help wrap packages. She was paid 354 $ 19,711.57 for this work. Petitioners owned a house in Orange County during the year at issue. Petitioners also bought a condominium at the cost of $ 136,000 on August 23, 1977. Petitioners took out a mortgage on the condominium of $ 108,000. Petitioner testified that she and her husband lived quite well during the year at issue and that her biggest problem was usually whether she could spend enough money when she went to Beverly Hills to shop. Petitioners had a pool man who came once a week to clean their pool, as well as intermittent domestic help. In general, petitioners did not discuss with each other anything about their finances. Petitioner testified that, generally, when it was time to file an income tax return for the year, petitioner Edward would bring the return home, and petitioner would sign it. She did not generally review the returns before signing them. The deficiency arose in the case at bar because of the Commissioner's disallowances of deductions arising from the Federal Securities Investment Group partnership (FSI Group partnership) in which petitioners invested. Petitioner was not involved in the decision to invest in the FSI Group partnership. At trial, petitioner355 was unable to recall any of the details pertaining to the investment in this partnership. Petitioner could not even recall whether the money used to invest in the FSI Group partnership came from a joint account. She did not recall signing any documents relating to the partnership. The Schedule K filed by petitioners for the year at issue reflects a $ 25,000 capital contribution and recourse note of $ 75,000 as petitioners' investment in 1977 for the FSI Group partnership. In the case of a joint return, the liability of the spouses with respect to the tax generally is joint and several. Sec. 6013(d)(3). Section 6013(e), however, creates an exception to that rule, providing a measure of relief where the taxpayer proves herself or himself to be an innocent spouse by satisfying the following four requirements: (1) A joint return has been made for the taxable year at issue; 3 (2) on the return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse; (3) the other spouse establishes that, in signing the return, he or she did not know, and had no reason to know, of the substantial understatement; and (4) it would be inequitable to hold the other356 spouse liable for the deficiency in tax for the taxable year attributable to the substantial understatement. Sec. 6013(e)(1). Failure to meet any one of the statutory requirements will prevent petitioner from qualifying for relief under section 6013(e). Bokum v. Commissioner, 992 F.2d 1132">992 F.2d 1132 (11th Cir. 1993), affg. 94 T.C. 126">94 T.C. 126, 138 (1990); Stevens v. Commissioner, 872 F.2d 1499">872 F.2d 1499, 1504 (11th Cir. 1989), affg. T.C. Memo. 1988-63. Petitioner bears the burden of proving that she is entitled to relief as an innocent spouse under section 6013(e). Rule 142(a). Respondent concedes that petitioner meets the first and the third requirements357 of section 6013(e). Respondent contends, however, that petitioner has failed to demonstrate that the deduction disallowed by respondent was grossly erroneous. Not all disallowed deductions are "grossly erroneous." Douglas v. Commissioner86 T.C. 758">86 T.C. 758, 762 (1986). Grossly erroneous items are those claims of a deduction, credit, or basis for which there is no basis in fact or law. Id. Ordinarily, a deduction has no basis in law or fact if it is "fraudulent," "frivolous," "phony," or "groundless." Bokum v. Commissioner, supra at 1142 (quoting Stevens v. Commissioner, supra at 1504 n.6); see Ness v. Commissioner, 954 F.2d 1495 (9th Cir. 1992), revg. 94 T.C. 784">94 T.C. 784 (1990). Not all deductions which are disallowed are frivolous, fraudulent, or phony. Petitioner has produced no evidence concerning the activities and motives of the partnership involved herein. Petitioner could remember almost nothing about the circumstances surrounding the investment in the FSI Group partnership nor did she present any evidence concerning the partnership's358 activities. Petitioner has the burden of proving the requirements of section 6013(e) have been met, including the burden of proving that the understatement was attributable to a grossly erroneous item. Rule 142(a); Sonnenborn v. Commissioner, 57 T.C. 373 (1971). It does not follow that the deduction was grossly erroneous merely because petitioners failed to substantiate it. Petitioner produced no evidence that the FSI Group partnership deduction was grossly erroneous and thus failed to demonstrate that the substantial understatement present in this case is the result of grossly erroneous items. Moreover, although the parties failed to address this issue, we find that it would not be inequitable to hold petitioner liable. This determination is based on the facts and circumstances of the underlying case. Flynn v. Commissioner, 93 T.C. 355 (1989). Whether the claimed "innocent spouse" received a benefit is taken into account. Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987). We find that petitioners maintained a luxurious lifestyle during359 the year at issue. Petitioners made many purchases during the year at issue, including a condominium. Petitioner significantly benefited from the understatement of tax. We find that petitioner has failed to prove that the deduction is a grossly erroneous item within the meaning of section 6013(e)(2)(B) and furthermore failed to prove that it would be inequitable to hold her jointly liable for the deficiency in tax. She is, therefore, not relieved of joint liability with respect to that deficiency. Decision will be entered for respondent. Footnotes1. The stipulation of settled issues reflects an agreed adjustment of $ 51,462 and increased interest pursuant to sec. 6621(c) of the Internal Revenue Code↩.2. All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩3. At trial there was some issue as to whether petitioners had filed a joint return for 1977 because petitioner did not herself sign the return. Respondent conceded the fact that petitioners filed a joint return, and petitioner testified that it was her intention to file jointly.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619060/	Aaron E. Greenleaf v. Commissioner.Greenleaf v. CommissionerDocket No. 19498.United States Tax Court1950 Tax Ct. Memo LEXIS 45; 9 T.C.M. (CCH) 1024; T.C.M. (RIA) 50275; November 13, 195045 Gross income: Section 22(a): Settlement of lawsuit. - Petitioner received a sum of $18,621.59 in settlement of an action for specific performance and/or damages for breach of contract. Held, that the amount so realized constitutes a gain taxable as ordinary income. Martin M. Lore, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: This case involves a deficiency in income tax for the calendar year 1944 in the amount of $5,795.64, and also petitioner's claimed overpayment in the amount of $1,582.78. The issues presented are whether respondent erred in determining that petitioner derived ordinary income in the sum of $18,621.59 received by him in 1944 in full settlement of a suit for specific performance of a contract and for damages for breach of contract, and in failing to determine that such sum was a reimbursement for a loss of capital. In the alternative, petitioner assigns error in the respondent's failure to determine that such amount constitutes the proceeds from a sale of capital assets held for more than six months, resulting in a capital gain as reported on petitioner's46 income tax return. The case was submitted upon a stipulation of facts, testimony, and documentary evidence. Findings of Fact The stipulated facts are so found. The petitioner is an individual residing in Murdock, Kansas. He filed his income tax return for the calendar year 1944 with the collector of internal revenue for the district of Kansas. On September 16, 1939, petitioner contracted in writing with Safeway Trails, Inc., a Maryland corporation, referred to herein as Safeway, and with Eastern Trails, Inc., referred to herein as Eastern, and with certain other companies to sell the Safeway all of the capital stock of Eastern, after the merger into Eastern of Nevin Transit, Inc., which merger was thereafter accomplished. All of the companies operated bus lines in the eastern or east central portion of the United States. Eastern and Safeway operated competing bus lines between New York City and Washington, D.C., via Baltimore, Maryland. The pertinent portions of the agreement were: "V. "[Safeway Trails, Inc.] agrees to purchase and [Aaron E. Greenleaf] agrees to sell all of the capital stock of [Eastern Trails, Inc.] after merger into [Eastern Trails, Inc.] 47 of the property of [Nevin Transit, Inc.]. * * [Aaron E. Greenleaf] also covenants and warrants that on the date of delivery of the said stock, [Eastern Trails, Inc.] shall have acquired all of the property and rights presently owned by [Nevin Transit, Inc.] in accordance with approval by all public authority having jurisdiction. The consideration to be paid by [Safeway Trails, Inc.] to [Aaron E. Greenleaf] under this section shall consist of seven hundred (700) shares of a total of fifteen hundred (1500) shares of the common capital stock of [Safeway Trails, Inc.] having a par value of Fifty ($50.00) Dollars per share. The said seven hundred (700) shares shall be issued free and clear of all encumbrances whatsoever and pursuant to approval of all public authority having jurisdiction, upon tender of delivery by [Aaron E. Greenleaf] to [Safeway Trails, Inc.] of all of the stock of [Eastern Trails, Inc.] in accordance with the terms of this agreement. * * * "V "The parties are agreed that subsequent to the acquisition of the stock of [Eastern Trails, Inc.] by [Safeway Trails, Inc.], as provided in Section IV hereof, [Safeway Trails, Inc.] shall proceed48 as speedily as may be to procure all consent or approval of the Interstate Commerce Commission, duly constituted State authorities and other interested parties to the merger or consolidation of the properties of [Eastern Trails, Inc.] and of [Nevin Transit, Inc.] (merged into [Eastern Trails, Inc.]), into [Safeway Trails, Inc.]. The said merger shall take place at the earliest practicable date following the procurement of such public and other authority." The Interstate Commerce Commission approved and authorized the proposed merger of Eastern into Safeway provided authority was secured from Maryland and New Jersey regulatory bodies and that the purchase of Eastern's stock by Safeway be part of a concurrent merger of the two companies. At the time the contract referred to above was made, September 16, 1939, petitioner owned 90.7 per cent of the outstanding capital stock of Eastern and owned 392 shares of Safeway's outstanding capital stock of 800 shares. On or about October 22, 1940, petitioner sold substantially all of his stock in Safeway to the other stockholders of that company, and he further granted a proxy in his Eastern stock to C. P. Schnebly, who was the president49 and general manager of Safeway. In addition he granted Schnebly an option to purchase the 700 Safeway shares he was to receive upon consummation of the September 1939 agreement. Eastern was operated under the control of Schnebly, a member of Safeway's board of directors, from October 22, 1940 to May 1942, at which time the stock proxy was returned to petitioner. During that period Eastern's operations, which were under the control of Safeway acting through Schnebly, resulted in Eastern sustaining severe operating and capital losses and a decline in net worth. Subsequent to the merger of Nevin Transit, Inc. into Eastern, on numerous occasions petitioner tendered to Safeway all of his stock in Eastern in accordance with the agreement of September 16, 1939 and demanded Safeway's performance of that agreement, namely, delivery of 700 shares of the common capital stock of Safeway, but the latter company refused at all times to comply with the terms of the contract. On May 15, 1942, petitioner sold or transferred to T. Milen Rhodes one-half of his stockholdings in Eastern and assigned to Rhodes one-half interest in the agreement of September 16, 1939, and Rhodes assumed the obligations50 of petitioner under that agreement to the extent of one-half thereof. On his tax return for 1942 petitioner claimed, and was allowed, a loss of $10,000 on the sale of stock to Rhodes. On or about October 31, 1942, both Rhodes and petitioner made a final joint offer to Safeway to turn over to it all of the stock of Eastern and demanded in return the consideration mentioned in the September 16, 1939 agreement. This offer was refused, whereupon suit was commenced by petitioner, T. Milen Rhodes, and Eastern against Safeway in the United States District Court, Southern District of New York. The complaint in that proceeding read in part: "FIFTH: That after the merger of Nevin Transit, Inc. into Eastern Trails, Inc., and at many times thereafter, plaintiff, Greenleaf, tendered to defendant the one thousand one hundred (1,100) shares of the common capital stock of Eastern Trails, Inc., in accordance with the agreement of September 16, 1939, and demanded the consideration therefor, to wit, seven hundred (700) shares of Safeway Trails, Inc.; but defendant has failed and refused to at all times, and still does fail and refuse to comply with said contract and with the demand of the plaintiff. 51 "SIXTH: That plaintiff, Greenleaf, has sold and transferred to plaintiff, T. Milen Rhodes, one-half of Greenleaf's stockholdings in Eastern Trails, Inc. and has assigned to plaintiff, Rhodes, one-half interest in the agreement of September 16, 1939, and said plaintiff, Rhodes, has assumed the obligations of Greenleaf under said agreement to the extent of one-half thereof, of all of which due notice was given defendant. * * "EIGHTH: That plaintiffs are ready, willing and able to transfer to defendant all of the common capital stock of Eastern Trails, Inc. in exchange for the consideration therefor, to wit, the seven hundred (700) shares of the capital stock of Safeway Trails, Inc. in accordance with the agreement of September 16, 1939. * "Plaintiffs, Aaron E. Greenleaf and T. Milen Rhodes, demand the following judgment: "1. That a decree of specific performance of the agreement of September 16, 1939 be granted plaintiffs, and that defendant be directed to issue and deliver to plaintiffs seven hundred (700) shares of its common capital stock of the par value of Fifty ($50.00) Dollars each free and clear of all encumbrances, in exchange for the consideration tendered52 by plaintiffs of one thousand one hundred (1,100) shares of the common capital stock of Eastern Trails, Inc. * * "3. That in addition to such decree of specific performance requested herein, that plaintiffs have further judgment against the defendant for the amount of Fifty thousand ($50,000.00) Dollars damages resulting from defendant's breach of the contract of September 16, 1939 and resulting from the ensuing delay in securing said seven hundred (700) shares of stock." The district court dismissed the above-mentioned action, stating that the contract was incapable of performance. After appeal of the decision to the Court of Appeals, Second Circuit, the case was settled by an agreement between the parties whereby Safeway paid to Rhodes and petitioner $56,000 in full settlement of their claims, which included the above-mentioned claim for damages and also a separate suit involving indebtedness not relevant in this proceeding. The memorandum of agreement, dated April 27, 1944, reads in part: "MEMORANDUM of settlement agreement between Shereff Brothers, Esqs., on behalf of their clients, Aaron E. Greenleaf, T. Milen Rhodes and Eastern Trails, Inc.; and Olcott, Havens, Wandless53 & Stitt, Esqs., on behalf of their client, Safeway Trails, Inc., as follows: "1. In action No. 1 [the action to collect sums allegedly owed to petitioner], by Aaron E. Greenleaf against Safeway Trails, Inc. will withdraw its petition for writ of certiorari to the United States Supreme Court, and the action is to be discontinued without costs to either party. "2. In action No. 2 [the action for specific performance and/or damages for breach of contract], by Aaron E. Greenleaf, T. Milen Rhodes and Eastern Trails, Inc. against Safeway Trails, Inc., plaintiffs agree to withdraw and discontinue their appeal, defendant agrees to satisfy the judgment for costs against plaintiffs. "3. Safeway Trails, Inc. agrees to pay Rhodes and Greenleaf Fifty-six thousand ($56,000.00) Dollars in cash in full settlement of all claims of any nature and description against it. "4. Greenleaf, Rhodes and Eastern Trails, Inc. are to give general releases to Safeway Trails, Inc. Safeway Trails, Inc. is to give general releases to Greenleaf, Rhodes and Eastern Trails, Inc." The parties stipulated that the net amount received by petitioner as his share of the settlement, after payment of expenses and54 attorney fees, and after excluding the amount of the settlement of the suit to collect sums allegedly owed to petitioner, was $18,621.59 on account of the claim for damages for breach of contract involved in the above-mentioned suit. This amount was received by the petitioner in 1944 and he included it in his return for that year as a long term gain on the sale of capital assets. Opinion The questions for decision are whether an amount of $18,621.59 received by petitioner in settlement of a suit for damages for breach of contract and/or specific performance thereof constituted ordinary income as determined by respondent, or, as contended by petitioner, constituted either a reimbursement for a capital loss or, alternatively, a capital gain resulting from the sale of capital assets. Briefly, the facts in respect to petitioner and Safeway show that on September 16, 1939, those parties entered into an executory contract whereby petitioner agreed to sell his shares of Eastern stock to Safeway and the latter agreed to purchase such stock for a consideration of 700 shares of its own capital stock; that petitioner tendered his Eastern stock in fulfillment of his obligation under the55 contract; that Safeway continuously refused to honor its obligation under the contract; that petitioner brought suit against Safeway in 1942 for specific performance and for damages for breach of contract; and that following dismissal of the suit and appeal thereon by petitioner the parties entered into a settlement agreement in 1944 whereby petitioner received a net amount of $18,621.59 on account of damages for Safeway's breach of contract. The facts further show that in the interim and apparently through mismanagement of Eastern's affairs by Safeway acting through Schnebly, who held petitioner's proxy on his shares of stock in Eastern, the latter sustained severe operating and capital losses and a reduction in its net worth. Petitioner contends that losses suffered by Eastern resulted in a decline in the value of petitioner's shares of stock in Eastern; that such decline in value was understood by the parties to be a major reason for the settlement of the suit; and that the damages received constituted reimbursement for loss of capital and therefore not income. The settlement agreement discloses that it encompassed nothing more than a payment to discontinue two suits, one an action56 to collect sums allegedly owed petitioner, and the other an action for specific performance and/or damages for breach of contract. There is no showing that the decline in Eastern's net worth was considered by Safeway or petitioner in effecting the settlement in question. Furthermore, in connection with the suit for damages, the petitioner did not sell or otherwise dispose of his capital asset represented by shares of Eastern's stock. Accordingly, the settlement did not involve a capital transaction in which petitioner realized either a capital loss, for which reimbursement could have been made, as petitioner contends, or a capital gain. This Court, following the decision in , has heretofore held that an amount realized as liquidated damages for failure of another to complete a contract of sale, such as we have here, constitutes gain taxable as ordinary income. . Cf. ; remanded July 23, 1937 (C.C.A. 7th) without opinion pursuant to stipulation by the parties. Respondent's determination is sustained. Decision will be entered57 for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619061/	MEREEN-JOHNSON MACHINE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mareen-Johnson Machine Co. v. CommissionerDocket No. 3531.United States Board of Tax Appeals5 B.T.A. 400; 1926 BTA LEXIS 2874; November 9, 1926, Decided 2874 VALUATION OF PATENTS FOR EXHAUSTION DEDUCTION. - Evidence respecting the value of petitioner's patents considered and valuation determined. Herman C. J. Peisch, C.P.A., for the petitioner. W. H. Lawder, Esq., for the respondent. TRUSSELL 400 The petitioner complains of a deficiency letter dated March 13, 1925, asserting deficiencies in income and profits taxes for the year 1919 in the amount of $755.38, and for the year 1920 in the amount of $1,062.43. The only issue presented for consideration is the March 1, 1913, value of certain patents owned by the petitioner and upon which value the deduction for exhaustion is claimed. FINDINGS OF FACT. The petitioner, Mereen-Johnson Machine Co., is a Minnesota corporation with its principal office at Minneapolis, and it is hereinafter referred to as the corporation. The corporation was incorporated February 10, 1905. The capital stock was issued to A. M Mereen, 125 shares, and to Charles A. Smith, Chester T. Johnson, Charles Jones, 41 2/3 shares each, and in consideration therefor and as full payment for the par value thereof ( $100 per share), each of such stockholders assigned to the2875 corporation all his patents or applications for patents and contracts of property relating to the affairs of the corporation, and further, as part consideration for the said shares of stock, agreed that any new devices or machines, relating to the affairs of the corporation, invented and patented by any of the four named stockholders and incorporators, should become the property of the corporation. This was the only consideration paid in for the $25,000 capital stock issue. The patents acquired at the time of the incorporation have not been described but were set up on the books at a value of $25,000. However, from the record it is inferred that the patents or applications for patents so acquired were for the three types of machines named - the "Squeezer," the "Box Resaw," and the "Ferris Wheel Trimmer." The corporation has been since its organization, and was during the years here in question, engaged in the business of the operation of a machine shop and the manufacture and sale of machines used principally in the manufacture of box boards, under certain patents 401 owned by it for a number of years prior to 1913 and during the years in question. The two principal machines2876 manufactured and sold under patents were the "Box Resaw" and the "Squeezer." The corporation also manufactured and sold under patent the "Ferris Wheel Trimmer," but only a few of these machines were sold as compared with the number of sales of the "Box Resaw" and "Squeezer" machines. The record does not give a description of the "Ferris Wheel Trimmer," nor does it disclose the date of issuance of patent therefor. Patent number 737,434, issued under date of August 25, 1903, covers the "Box Resaw." Patent number 869,923, issued under date of November 5, 1907, covers the "Squeezer," which is a machine for assembling matched stock and which saves the time and labor of from two to six men, the old method being to pound out matched stock by hand with wooden mallets. The petitioner corporation also sold matchers, cut-off and rip saws, and various other machines which were developed from time to time. Gross sales for the years 1908 to 1912, inclusive, of patented machines and other articles separately stated, and the total sales are as follows: Year ended Dec. 31 - Miscellaneous sales.Sales of patented machines.Total sales.1908$14,499.29$14,193.50$28,692.79190919,991.9721,962.7541,954.72191024,073.4422,144.7546,218.19191119,669.4720,392.5040,061.97191228,860.4720,710.9249,571.39107,094.6499,404.42206,499.062877 Sales of patented machines were 48.1 per cent of the total sales. During the same years, 1908 to 1912, inclusive, the average tangible assets employed by the corporation and the net profits of each year were as follows: Year ended Dec. 31 - Average tangible assets during year.Net income during year.1908$10,082.07$2,574.47190914,355.235,972.03191020,452.715,223.05191123,676.574,724.66191226,983.844,389.8895,550.4222,884.09Average, 5 years19,110.084,576.82The two patents numbered 737,334 and 869,923, respectively, had an average life after March 1, 1913, of ten years, five months and four days. 402 OPINION. TRUSSELL: Although the petitioner did not in its original incometax returns for the years here under consideration claim a deduction for exhaustion of patent values, it is not precluded from now asserting a claim to such deductions. . Respecting the March 1, 1913, value of petitioner's patents, the record is not as clear as might be desired, but the fact that during the five years prior to 1913 the sales of machines made under these2878 patents were maintained at a comparatively steady figure and that the net income of the company during the same years showed a similar steady production of profits convinces us that these patents had a value which must be reflected in the profits realized, and we are of the opinion, and therefore find, that the March 1, 1913, value of the two patents described in the findings of fact is $7,500, and that for the years here under consideration the petitioner is entitled to the deduction from gross income on account of the exhaustion of such values computed on the basis of the average life of the said two patents after March 1, 1913. A redetermination of the deficiencies in accordance with the foregoing findings of fact and opinion will be made on 15 days' notice, under Rule 50, and judgment will be entered accordingly.STERNHAGEN dissents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619062/	Frances McGuire Rassas, Petitioner, v. Commissioner of Internal Revenue, RespondentRassas v. CommissionerDocket No. 27501United States Tax Court17 T.C. 160; 1951 U.S. Tax Ct. LEXIS 111; August 6, 1951, Promulgated 111 Decision will be entered for the respondent. Petitioner on December 29, 1947, made a gift in trust to her infant daughter who at that time was 19 days old. The trustees were petitioner and her husband. The trust contained the following provision: "The Trustees shall pay the income of the Trust Estate unto Denice Rassas in quarterly installments. Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said Denice Rassas during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said Denice Rassas, as and for her own separate property, and shall be paid to her upon her coming of age." During the year 1947 and subsequent years, the petitioner and her husband were financially able to maintain, educate, and support Denice and none of the income of the trust was at any time used for her maintenance, education, and support since the creation of the trust. Held, that the gift was one of future interests in property and no exclusion is allowable to petitioner112 under section 1003 (b) (3) of the Internal Revenue Code. Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18. Samuel T. Lawton, Esq., for the petitioner.David F. Long, Esq., for the respondent. Black, Judge. BLACK 161 The Commissioner has determined a deficiency in petitioner's gift tax of $ 118.88 for the year 1947. This deficiency results from the Commissioner's disallowance of an exclusion of $ 2,750 claimed by petitioner on her gift tax return for the year 1947. The Commissioner explains this adjustment in his deficiency notice as follows:It is held that under the trust created December 29, 1947, the beneficiary did not113 receive an immediate, unrestricted right to the use, possession or enjoyment of all the income of the trust. Therefore, the gift to the trust is considered a future interest in property against which no exclusion is allowable. * * The petitioner contests this action of the Commissioner by an appropriate assignment of error.FINDINGS OF FACT.The facts have been stipulated and we adopt the stipulation as our findings of fact. These facts may be summarized as follows:Frances McGuire Rassas is a resident of Winnetka, Illinois. She is married to George J. Rassas. Frances McGuire Rassas and George J. Rassas are the parents of a child, Denice Rassas, who was born on December 10, 1947.The petitioner and her husband filed separate income tax returns for the year 1947, showing an aggregate net income of $ 49,682.16. Petitioner filed her gift tax return for the period here involved with the collector for the first district of Illinois.On December 29, 1947, the petitioner and her husband created a trust in which they named their daughter, Denice Rassas, as beneficiary and themselves as trustees. The assets conveyed by petitioner and her husband to themselves, as trustees, included114 50 shares of the capital stock of Peoples Gas Light & Coke Co., an Illinois corporation, of the value of $ 4,400, which stock was contributed by petitioner. George J. Rassas, the husband, contributed to the trust a voting trust certificate for 100 shares of the capital stock of Independent Pneumatic Tool Company.The provision of the declaration of trust which was executed by the petitioner and her husband which bears upon the issue here involved is paragraph 3 of the declaration of trust which reads as follows:3. The Trustees shall pay the income of the Trust Estate unto Denice Rassas in quarterly instalments. Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said Denice Rassas during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said Denice Rassas, as and for her own separate property, and shall be paid to her upon her coming of age. After said Denice Rassas shall become of age, the Trustees shall pay unto her the entire income of the said115 Trust Estate until she shall reach the age of twenty-five (25) years. When the said Denice Rassas 162 shall arrive at the age of twenty-five (25) years, the said Trustees shall deliver unto her the principal of the Trust Estate held for her under the terms hereof.After the creation of the trust under date of December 29, 1947, the petitioner and her husband opened a bank account in the name of Denice Rassas "by Frances McGuire Rassas or by George J. Rassas" in the City National Bank and Trust Company of Chicago, in the savings department thereof, and deposited in this account the income from the trust and also made withdrawals therefrom, the withdrawals having been made in the name of Denice Rassas, a minor, by one of the parents. Out of the funds which were deposited in the name of the minor in the City National Bank and Trust Company in this account, petitioner and her husband withdrew therefrom the sum of $ 981.25 which was expended by them for the purchase of 25 shares of the capital stock of Atlantic Coast Line, and upon the acquisition of this stock it was placed in the names of George J. Rassas and Frances McGuire Rassas, as trustees under the trust agreement dated116 December 29, 1947, for Denice Rassas. On June 6, 1950, the petitioner and her husband withdrew from this account, in the name of the minor, the further sum of $ 554.75 which was expended for purchase of a mortgage bond of the Chicago and Northwestern Railway in the sum of $ 1,000, which bond was registered in the names of the petitioner and her husband, as trustees, for Denice Rassas. On June 28, 1950, petitioner and her husband withdrew from the account of the minor the sum of $ 700 which was expended by them for purchase of certain shares of capital stock of the Peoples Gas Light & Coke Co., which stock was likewise placed in the names of George J. Rassas and Frances McGuire Rassas, as trustees, for Denice Rassas. On March 7, 1951, the petitioner and her husband withdrew the respective sums of $ 14 and $ 74 for the purpose of paying the balance due of Federal income tax of the minor for the previous years.During the year 1947 and subsequent thereto, the petitioner and her husband were financially able to maintain, educate, and support Denice Rassas, the beneficiary, and none of the income of the trust estate was at any time used for the maintenance, education, and support of117 the minor since the creation of the trust on December 29, 1947.The trustees still hold the stock which was the original subject of the trust. The balance of the income after the expenditures above set forth remains on deposit in the City National Bank and Trust Company in the name of Denice Rassas, subject to withdrawals by Frances McGuire Rassas or by George J. Rassas on behalf of the minor.No guardian was legally appointed for Denice Rassas with respect to the principal of the trust or the income therefrom. It was stipulated that the Tax Court may take judicial notice of Chapter 68, Paragraph 15 of the 1947 Illinois Revised Statutes which reads as follows:The expenses of the family and of the education of the children shall be chargeable upon the property of both husband and wife, or either of them, in favor of creditors therefor, and in relation thereto they may be sued jointly or separately.163 In the gift tax return which petitioner filed she valued the gift of 50 shares of capital stock of Peoples Gas Light & Coke Co. at $ 4,400 and reduced this valuation to $ 1,650 by an exclusion of $ 2,750 which she explained in her return as follows:The above gift was conveyed118 in trust by donor unto George J. Rassas and Frances M. Rassas, as Trustees for Denice Rassas, the daughter of donor, in accordance with a Trust Agreement dated December 29, 1947, a copy of which is hereto attached and hereby certified to be a true and correct copy. The said child was born December 10, 1947. The said Agreement conveys a present interest of 62.5% of the value thereof, or the sum of $ 2750.00, and a future interest equal to 37.5% of the value thereof, or the sum of $ 1650.00.OPINION.In the determination of a deficiency in petitioner's gift tax for the year 1947, the Commissioner has held that the gift which petitioner made to her infant daughter on December 29, 1947, was a gift of future interest in property and that no exclusion was allowable under the statute.There is no dispute that the value of the donated property was $ 4,400 at the time of gift and there is no contention by the Commissioner that if petitioner is entitled to any exclusion at all that $ 2,750 is the correct amount. The Commissioner does contend, however, that the entire gift was one of future interest in property and that no exclusion is allowable. The petitioner on her part concedes that 119 the gift of principal was one of future interest, but contends that the gift of income from the property was one of present interest and that she is entitled to an exclusion of $ 2,750.The applicable sections of the Internal Revenue Code and of Treasury Regulations 108 are printed in the margin. 1 The pertinent part of the regulations printed in the margin is:164 * * * "Future interests" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. * * This regulation has been construed many times by our own Court and by higher courts. One of the latest cases in the Supreme Court to deal with this regulation was Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18. In that case the Supreme Court held that a gift effective only in event of future need is not the same as a gift to satisfy existing needs, and in the former case the donor is not entitled to a statutory exclusion in computing gift taxes irrespective of whether the gift is to an 120 adult or to an infant.121 In the instant case the petitioner's daughter to whom the gift was made in trust was only 19 days of age at the time the gift was made but that fact would not make any difference if the gift was one of present interest in property. In contending that the entire gift was one of future interests in property the Commissioner strongly relies upon the Supreme Court's decision in the Fondren case, supra. We think that case supports the Commissioner's determination. It has been held that where a donee's enjoyment and use of a gift are subject to the exercise of the discretion of a trustee, the donee's interest is a future interest and the statutory exclusion has been denied. Welch v. Paine, 130 F. 2d 990; Commissioner v. Brandegee, 123 F. 2d 58. See also our recent decision in Willis D. Wood, 16 T.C. 962">16 T. C. 962.Both parties agree that the determinative part of the trust instrument which controls the issue which we have here to decide is paragraph 3 which we have included in our findings of fact. That paragraph starts out by saying: "The Trustees shall pay the income of the Trust Estate122 unto Denice Rassas in quarterly instalments." If the trust instrument had stopped there we think the gift would undoubtedly have been one of present interest in the income of the trust, but it did not stop there. It continues by saying:* * * Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said Denice Rassas during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said Denice Rassas, as and for her own separate property, and shall be paid to her upon her coming of age. * * * [Emphasis added.]In view of the facts which have been stipulated as to the favorable financial condition of Denice's parents, it seems extremely unlikely that the parents, as trustees, will deem it necessary to expend any of the income of the trust for Denice's maintenance, education, and support during her minority. It seems likely that the income, instead of being expended on her behalf for the above purposes, will be accumulated 165 and invested from time to123 time and paid to her upon her coming of age as paragraph 3 provides. This being true, it seems to us that the facts bring this case within Fondren v. Commissioner, supra, and that the decision here must be for respondent.Petitioner strongly relies upon Commissioner v. Sharp, 153 F. 2d 163, affirming 3 T. C. 1062. We think that case is distinguishable. Of the trust indenture there involved the court said:The most pertinent provision of the trust agreement, Article First, directs the trustee "to hold, manage, invest, and reinvest said trust estate, and to collect and receive rents, interest, income and dividends (hereinafter referred to as income) therefrom and after paying the proper charges against the same, to apply and pay over to the use and for the benefit of my son Donald Nichols Sharp the net income therefrom during his minority, and upon reaching majority to pay the net income to my said son Donald Nichols Sharp during his life. The trustee may make any payment of any income thus applicable to the use of my son Donald Nichols Sharp, during his minority, by paying the same to124 his mother, or guardian of his property, or corporation designated by the donor (without obligation to look to the proper application thereof by the person receiving it) or by expending it in such manner as the Trustee, in its discretion, believes will benefit my son. Any balance of income shall be accumulated until the arrival of my son Donald Nichols Sharp at majority, at which time the Trustee shall pay over the said accumulated income to my son Donald Nichols Sharp."The court, construing the above provision of the trust indenture, said: * * Whenever the provision is made for immediate application of the funds for the minor's benefit whether of income or corpus, the exemption applies. The fund became available to the beneficiary here for his maintenance immediately upon consummation of the gift. He had at once the right of enjoyment. * * * [Emphasis added.]As we have already pointed out, the above cannot be said of Denice's right under the trust here involved. Her right to receive income from the trust was clearly limited by the following provision of the trust:* * * Payment of such income to said minor shall be made by the Trustees paying and applying, in their125 sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said Denice Rassas during her minority, * * [Emphasis added.]This limitation upon Denice's right to receive the income of the trust it seems to us makes the gift one of future interest under the Supreme Court's decision in the Fondren case, supra, and makes the gift here distinguishable from the one which was made in Commissioner v. Sharp, supra, where the Fondren case was distinguished.We think the instant case is also distinguishable from the case of Kieckhefer v. Commissioner, 189 F.2d 118">189 F. 2d 118, reversing 15 T. C. 111. Neither party cited the Kieckhefer case in their briefs but we have carefully read it and considered it and think it is distinguishable on its facts. The court in that case in deciding that the gift in trust by 166 the donor to his infant grandson was one of present interest instead of future interest laid much emphasis on the following language in the trust indenture: "unless the trust be prior terminated as hereinafter126 provided." In discussing the provision in the trust indenture to which we have just called attention, the court said:Suppose in the instant situation that the beneficiary had been an adult rather than a minor. Such adult, of course, could immediately have made a demand upon the trustee and have received the trust property. We suppose that such a gift unquestionably would be one of a present interest. But because the beneficiary is a minor, with the disabilities incident thereto, it is reasoned that the gift is of a future interest because the disabled beneficiary is not capable of making demand.The court then went on and disagreed with such reasoning and held that the gift was one of present interest.The trust indenture in the instant case did not give to the beneficiary nor to any one acting for her the right to terminate the trust. Not only did the beneficiary have no right to terminate the trust in the instant case but neither the beneficiary nor any one acting for her has the right to demand payment of the income. Only such income of the trust estate is payable to the beneficiary as the trustees in their sole discretion shall decide. These facts, in our opinion, 127 make the instant case distinguishable from Kieckhefer v. Commissioner, supra, and we think, under the cases which we have cited and discussed, make the gift here one of future interest.Decision will be entered for the respondent. Footnotes1. Internal Revenue Code.SEC. 1003. NET GIFTS. * * (b) Exclusions from Gifts. -- * * (3) [As added by section 454 of the Revenue Act of 1942.] Gifts after 1942. -- In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1943 and subsequent calendar years, the first $ 3,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.Regulations 108.Sec. 86.11. Future Interests in Property. -- No part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the calendar year. "Future interests" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. The term has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payment in the future. But a future interest or interests in such contractual obligations may be created by the limitations contained in a trust or other instrument of transfer employed in effecting a gift. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619064/	Arthur D. Foyer and Estate of Bel Foyer, Deceased, Arthur D. Foyer, Executor v. Commissioner.Foyer v. CommissionerDocket No. 71987.United States Tax CourtT.C. Memo 1960-244; 1960 Tax Ct. Memo LEXIS 44; 19 T.C.M. (CCH) 1370; T.C.M. (RIA) 60244; November 21, 1960Arthur D. Foyer, pro se, 2133 Ridge Ave., Evanston, Ill. Charles B. Wolfe, Jr., Esq., for the respondent. TIETJENSTIETJENS, Judge: The Commissioner determined a deficiency in income tax for the year 1954 in the amount of $349.38. The petitioners claim an overpayment of income tax for the taxable45 year in the amount of $437.44. The questions presented are: (1) What are the allowable medical expense deductions under section 213, I.R.C. 1954; (2) what are the allowable tax deductions under section 164, I.R.C. 1954; and (3) are certain of the automobile expenses claimed under section 162, I.R.C. 1954, nondeductible personal expenses. The stipulated facts are so found and the stipulation is included herein by this reference. For the taxable year involved Arthur D. Foyer and Bel Foyer, hereinafter referred to as petitioners, were husband and wife. Petitioners filed a timely joint income tax return for 1954 with the district director of internal revenue, Chicago, Illinois. Bel Foyer died in 1960. Arthur was a traveling salesman and used his automobile in his business. His sales territory covered Ohio, Michigan, Pennsylvania, and New York. He retired from employment in September 1954. Both Bel and Arthur were 75 at the time. In 1940 Bel was bedridden from the effects of bronchial asthma and pneumonia. These respiratory ailments had greatly weakened her and she had lost vitality. She had been occasionally treated46 by the family physician for an asthmatic condition from 1934 to 1940. In 1940 Arthur took Bel to Tucson, Arizona, to convalesce in a more conducive climate. She regained her strength and from that time she has required no further medical attention for the respiratory condition. Petitioners returned to and lived in Tucson for a portion of each winter and spring from 1940 until Bel's death. In 1953 Arthur and Bel went to Honolulu, Hawaii, for the months of November and December and part of January as he felt that the climate at that time of the year in Tucson was too severe. They were accompanied by their daughter on this trip and on their return route to Chicago they stopped to visit another daughter in Portland, Oregon. In 1954 they returned to Honolulu at approximately the same time and stayed for the same period from November to mid-January. Their daughter who had accompanied them in 1953 had preceded them in 1954 in order to secure a teaching position in Honolulu. They again stopped in Portland, Oregon, on their return trip to Chicago. Arthur did not take Bel to Honolulu at the direction or suggestion of a physician; however, upon his return to Chicago he did advise the family47 physician of these trips to Hawaii. On their 1954 income tax return petitioners claimed among the itemized deductions the following: Taxes - Sales, gas, etc.$ 200.00Medical and dental expense1,100.50Auto depreciation700.00On July 12, 1957, petitioners filed an amended joint income tax return with the district director of internal revenue at Chicago, Illinois, on which some of the itemized deductions claimed were as follows: Taxes - Sales, gas, etc.$ 300.00Medical and dental expense1,448.80Auto depreciation700.00On February 10, 1958, the Commissioner sent a notice of deficiency to petitioners for the taxable year 1954 which determined a deficiency in income tax of $349.38. The deficiency was determined with reference to the original joint income tax return. The Commissioner disallowed deductions in the following amounts: Medical deduction$1,032.50Taxes100.00Auto expense350.00By their original and amended joint income tax returns and a petition to revise medical deductions, the aggregate amount of $3,254.80 is claimed by the petitioners as medical expenses. These expenses are: Transportation costs, hotels and mealsfrom Chicago, Illinois to Honolulu,Hawaii and return$1,032.50Transportation costs, hotels and mealsfrom Chicago, Illinois to Tucson,Arizona and return348.30Hotel costs, Honolulu884.00Hotel costs, Tucson990.00$3,254.8048 The medical expenses claimed on the original joint income tax return of petitioners and allowed by the Commissioner were: Medical care - Honuolulu$17.00X-Ray10.00Medical examination - Arthur16.00Dental work25.00$68.00The trips to Arizona and Hawaii in 1954 were taken primarily for the pleasure of the petitioners and the fact that the climatic conditions may have been beneficial to Bel was a collateral consideration. Taxes (sales, gas, etc.) were paid by the petitioners in the amount of $150 in 1954. Opinion The first issue relates to medical expense deductions claimed under section 213, I.R.C. 1954. 1 The Commissioner on the original return disallowed as medical expenses the traveling expenses claimed by the petitioners to Honolulu, Hawaii. Petitioners filed an amended return on which they also claimed a deduction for the travel expenses of the trip to Tucson. At the time of the trial petitioners amended their petition by also claiming the cost of lodging in Honolulu and Tucson as a medical expense. 49 As was said in L. Keever Stringham, 12 T.C. 580">12 T.C. 580, 584 (1949), affd. 183 F. 2d 579 (C.A. 6), "many expenses are so personal in nature that they may only in rare situations lose their identity as ordinary personal expenses and acquire deductibility as amounts claimed primarily for the prevention or alleviation of disease." Trips such as the ones in question "to resort areas are naturally suspect when the expenses therefor are claimed as a medical deduction, and we must carefully scrutinize the facts to make sure that the alleged medical reasons were not merely a pretext for a vacation trip." Max Carasso, 34 T.C. - (September 30, 1960). Therefore in order to resolve the question of whether the transportation expense is medical or personal, we must apply the template which we set forth in our holding in Edward A. Havey, 12 T.C. 409">12 T.C. 409 (1949) where we said the questions to be asked in order to ascertain the deductibility of the amount expended are: Was it incurred at the direction or suggestion of a physician; did the treatment bear directly on the physical condition in question; did the treatment bear such a direct or proximate therapeutic relation50 to the bodily condition as to justify a reasonable belief the same would be efficacious; was the treatment so proximate in time to the onset or recurrence of the disease or condition as to make one the true occasion of the other, thus eliminating expense incurred for general, as contrasted with some specific, physical improvement? Cf. L. Keever Stringham, supra. There is no evidence that either trip was taken at the direction or suggestion of a physician. Although a serious respiratory condition occurred in 1940 from a combination of asthma and pneumonia, fourteen years elapsed between that illness and the time the expenditures in question were made. During this intervening period Bel required no further medical attention for the respiratory condition. "We do not question the fact that the trips may have been beneficial to [Bel] * * . There can be no question that carefully chosen changes of climate are beneficial to most persons, or that vacations at appropriate resorts are desirable and conducive to better health. The record fails to show, however, that the benefit derived by the wife was in any respect different from that enjoyed by any vacationer at the same51 resorts at the same time." Edward A. Havey, supra, at p. 412. "A line must be drawn somewhere between that which is a personal expense and that which is incurred primarily for the prevention of illness and disease. One may live in such a way during one's whole lifetime so as to prevent the recurrence of illness and disease and so as to maintain the best health which is possible after some vital organ has become impaired, or one's health has become less than the health of a thoroughly normal and well person." Frances Hoffman, 17 T.C. 1380">17 T.C. 1380, 1385 (1952). However, in order to be deductible as a medical expense "there must be some existing or imminent illness or existing physical defect which the trip is supposed to alleviate, cure, or prevent." Samuel Dobkin, 15 T.C. 886">15 T.C. 886, 888 (1950) and not merely to benefit or improve the general health. Arthur testified he took Bel to Tucson and Honolulu because he felt the climates in these places to be beneficial to her respiratory condition. However, the existence of a chronic respiratory condition which can be alleviated by going to a more favorable climate is not a carte balanche authorizing travels throughout52 the world without medical advice of any type in search of climates offering greater relief to the condition. The Court in Bertha M. Rodgers v. Commissioner, 241 F. 2d 552 (C.A. 8, 1957), affirming 25 T.C. 254">25 T.C. 254, commenting on this point said: we think that the Tax Court properly would be entitled to regard general trips taken by taxpayers to a more salubrious climate, in escape from unfavorable weather seasons of their home localities, as not constituting deductible medical care for tax purposes, merely because the trips had been recommended by a physician and were capable of being of general benefit to health. Similarly, it seems to us, would the Tax Court ordinarily be entitled to regard the costs of trips, taken by taxpayers to diminish the discomfort or to stay the operativeness, during a period of temporary sojourn, of some chronic condition, such as arthritis, high blood pressure, respiratory difficulty or sinus trouble, but serving at the same time as an opportunity for vacation pleasure or resort enjoyment, as primarily constituting personal rather than medical expenses. And even with more reason, in our opinion, could the costs of trips taken53 periodically by a taxpayer to a more salubrious climate, because of some seasonal unfavorableness in the climate of his home, be regarded as not involving such extraordinariness of fact and circumstance as would lift these costs from the status of living expenses to medical care, where the trips had become such a regular incident as to amount controllingly to a choice by the taxpayer in his mode of life. * * * The trip to Honolulu was made after Arthur had retired and while in Honolulu petitioners visited a daughter who was teaching there, and on their return route to Chicago they stopped to visit another daughter in Portland, Oregon. "Although we do not feel that the bona fides of a taxpayer's motive in incurring an expense should be determinative of its deductibility, we do believe that we should accord it considerable weight." L. Keever Stringham, supra, at p. 585. Although the trips may have been beneficial to Bel, the other circumstances present indicate that they were at least in some measure in the nature of a vacation and for family visits. There was no proof that the primary purpose of the trips was the cure, prevention or alleviation of a disease or physical54 condition. "While a taxpayer is certainly not required to live in a manner leading to the fewest tax benefits, we do not think, under the circumstances described, that Congress intended to subsidize the cost of the taxpayer's travel * * [to] resort hotels even though it would be detrimental to his health to remain throughout the year in the locality in which he choose to make his home." Bertha M. Rodgers, 25 T.C. 254">25 T.C. 254, 261 (1955), affd., supra. The respondent's disallowance of the deduction for expenses of the trips is sustained. Having held that the trips were vacations it is unnecessary to discuss the question whether additional medical expenses claimed by the petitioners for food and lodging while in Tucson and Honolulu are allowable. They clearly are not. See Max Carasso, supra. The second issue deals with tax deductions under section 164, I.R.C. 1954. 2 The petitioners claimed $200 on their original 1954 income tax return. The Commissioner in his deficiency notice disallowed $100 thereof. The petitioners thereafter in their amended return $300claimed as the tax deduction. 55 Though little evidence on the point was offered at the trial, when we consider the amounts expended by the petitioners for hotel accommodations and meals as well as other purchases corresponding to their standard of living we find under the Cohan rule 3 that the amount of $150 was paid in various taxes by the petitioners. The third issue relates to automobile expenses claimed under section 162, I.R.C. 1954. 4 The petitioners claimed auto expenses in the aggregate amount of $984. The Commissioner allocated this amount between personal and business expenses and determined that $350 should be disallowed as personal expenses. The burden is upon the petitioner to show that the allocation is incorrect. The petitioners call attention to the fact that Arthur retired in September and that during November and December they were in Honolulu. However, it can be deduced from Arthur's testimony that he used the car to some extent for his personal convenience prior to his retirement. He testified that he drove to Arizona in 1954. This use of the car was definitely for his personal convenience as it had no relationship56 to his business as a traveling salesman in his sales area which covered Ohio, Michigan, Pennsylvania, and New York. There is no evidence of the total mileage of the car in 1954 nor the mileage in business use or personal use. In the absence of such evidence we are unable to find error in the respondent's allocation and it is sustained. Decision will be entered under Rule 50. Footnotes1. SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES. (a) Allowance of Deduction. - There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152) - * * (e) Definitions. - For purposes of this section - (1) The term "medical care" means amounts paid - (A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (including amounts paid for accident or health insurance), or (B) for transportation primarily for and essential to medical care referred to in subparagraph (A).↩2. SEC. 164. TAXES. (a) General Rule. - Except as otherwise provided in this section, there shall be allowed as a deduction taxes paid or accrued within the taxable year. * (c) Certain Retail Sales Taxes and Gasoline Taxes. - (1) General Rule. - In the case of any State or local sales tax, if the amount of the tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (otherwise than in connection with the consumer's trade or business) to his seller, such amount shall be allowed as a deduction to the consumer as if it constituted a tax imposed on, and paid by, such consumer.↩3. 39 F. 2d 540↩ (C.A. 2, 1930).4. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including - * *(2) traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619065/	RONNIE R. ABBOTT and WILMA ABBOTT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAbbott v. CommissionerDocket No. 5200-80.United States Tax CourtT.C. Memo 1981-424; 1981 Tax Ct. Memo LEXIS 317; 42 T.C.M. (CCH) 646; T.C.M. (RIA) 81424; August 12, 1981. 317 Held, petitioner was not "away from home" within the meaning of section 162(a)(2), I.R.C. 1954, and, therefore, expenses incurred for mileage, meals, and lodging with respect to his employment are nondeductible. Held further, petitioner is not entitled to a depreciation deduction or an investment tax credit with respect to a travel trailer he used for lodging. John D. Herbert, for the petitioners. Brad S. Ostroff, for the respondent. WILES319 MEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a deficiency of $ 1,755 in petitioners' 1977 Federal income tax. After concessions, the remaining issues for decision are: (1) Whether traveling expenses incurred by petitioner Ronnie R. Abbott with respect to his employment are deductible under section 162(a)(2). 1(2) Whether petitioner Ronnie R. Abbott was entitled to a depreciation deduction and an investment tax credit with respect to a travel trailer he used for lodging. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Ronnie R. Abbott (hereinafter petitioner) and Wilma Abbott, husband and wife, resided in Chandler, Arizona, when they filed their petition in this case. They filed their 1977 Joint Federal income tax return with the Internal Revenue Service Center, Ogden, Utah. Petitioner is an electrician by trade and a member of the International Brotherhood of Electrical Workers, Local Union 460, in Midland, Texas. In 1971, petitioner and his family moved to Arizona because he could obtain employment there320 and his wife wanted to live near her mother who had become ill. From 1971 until 1974, although petitioner did not join a local union, he obtained employment through the Phoenix, Arizona, Local Union 640 (hereinafter Local 640). On January 19, 1977, petitioner obtained employment through the Globe, Arizona, Local Union 518 (hereinafter Local 518), at the Cholla Power Plant project (hereinafter Cholla plant) in Joseph City, Arizona. The Cholla plant is owned by the Arizona Public Service Corporation (hereinafter APS) and was placed in service in 1962 with one generating unit (Unit 1). In 1973, APS planned on building three additional generating units (Units 2, 3, and 4) at the Cholla plant. Construction of Units 2, 3, and 4 commenced in 1973, 1976, and 1978, respectively, and on December 31, 1975, the scheduled completion dates for these units were 1978, 1979, and 1980, respectively. In 1976, APS planned a fifth generating unit (Unit 5) at the Cholla plant which would be operational in 1983. At all relevant times, construction at the Cholla plant was under the direction of the general contractor, Bechtel Power Corporation (hereinafter Bechtel). Since Bechtel needed many electricians321 for the Cholla project, it entered into an agreement in 1973 with Local 518 concerning the construction on Units 2 and 3. In 1976, this agreement was renegotiated to include Unit 4. The agreement was common knowledge to the electricians working out of Local 518. Local 518 referred union members to jobs according to a book system. When petitioner first began work at the Cholla plant, he was placed in Book 2 by Local 518. The workers in Book 2 were second in job priority only to the workers placed in Book 1. Bechtel could not satisfy its increasing demand for electricians at the Cholla plant solely from Book 1 membership. Since Bechtel's agreement with Local 518 permitted Bechtel to dismiss any electricians regardless of their book classification, it was able to keep the most competent workers on the job. Bechtel made every effort not to lay off competent electricians because it desired to maintain continuity at the work site and it was more costly to terminate and rehire workers. Although winter weather conditions sometimes required a reduction in the number of work crews, the crews would be built back up as soon as the weather improved. Any employees who were laid off322 by Bechtel had to get their next job assignment from Local 518. Since jobs might be available elsewhere, there was no assurance that such employees would be reassigned to the Cholla plant. From January 19, 1977 until October 24, 1980, the date petitioner quit his job, he was, with one exception, continuously employed at Cholla. 2 When petitioner began working at the Cholla polant he was aware that Units 2 and 3 were under construction and that there were plans to construct Units 4 and 5. From 1973 through the present time, construction on one or more units at Cholla has been continuous, and only a small number of electricians working there have been fired. In July 1977, it was probable that an able electrician beginning work at Cholla would remain employed for a few years. Throughout his employment at the Cholla plant, petitioner owned a residence in Chandler, Arizona, where his wife and two sons lived. From January until July 1977, petitioner lived in a motel in Holbrook, 323 Arizona, during the work week. Holbrook was 10 miles from the jobsite and 186 miles from Chandler. During the remaining part of 1977, petitioner lived in the Holbrook area in a travel trailer which he purchased for $ 4,800. On weekends, petitioner traveled to his Chandler residence to be with his family. Petitioner's wife lived in Chandler in order to be near her ill mother, and his two sons, who were 20 and 21 years of age in 1977, lived there for financial reasons. Consequently, petitioner concluded that it would be unreasonable to relocate and move his family into one of the towns within the vicinity of his jobsite at the Cholla plant. On his 1977 Federal income tax return petitioner claimed a depreciation deduction with regard to his travel trailer of $ 450 and an investment tax credit on the trailer in the same amount, and a travel deduction (including meals and lodging) of $ 4,311. In the notice of deficiency, respondent disallowed the deductions and the investment tax credit. OPINION Issue 1: Travel Expense DeductionThe first issue for decision is whether expenses for lodging, meals, and mileage were incurred by petitioner while he was "away from home" within324 the meaning of section 162(a)(2). Petitioner argues that his home for tax purposes was his Chandler residence and therefore he was "away from home" during his employment in Joseph City at the Cholla plant. Respondent contends that petitioner's tax home was Joseph City and disallowed the deductions petitioner claimed with respect to such employment. As a general rule, deductions for personal living expenses are disallowed under section 262. Section 62(a)(2), however, allows a taxpayer to deduct traveling expenses if he can establish that they were: (1) ordinary and necessary; (2) incurred while "away from home"; (3) incurred in the pursuit of a trade or business. Commissioner v. Flowers, 326 U.S. 465 (1946); Verner v. Commissioner, 39 T.C. 749">39 T.C. 749, 753 (1963). This Court has held that a taxpayer's "home" for purposes of section 162 is the vicinity of his principal place of business whenever his personal residence is not located in the same vicinity. Mitchell v. Commissioner, 74 T.C. 578">74 T.C. 578, 581 (1980); Kroll v. Commissioner, 49 T.C. 557">49 T.C. 557, 561-562 (1968). There is, however, an exception to this rule when a taxpayer325 with a well established tax home accepts temporary employment elsewhere. In this context, temporary employment means "the sort of employment in which termination within a short period could be foreseen." Albert v. Commissioner, 13 T.C. 129">13 T.C. 129, 131 (1949). See also Norwood v. Commissioner, 66 T.C. 467">66 T.C. 467, 470 (1976); McCallister v. Commissioner, 70 T.C. 505">70 T.C. 505, 509 (1978); Kroll v. Commissioner, supra at 562. The reason for not shifting the taxpayer's "tax home" to his temporary place of employment is "to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses." Kroll v. Commissioner, supra at 562. On the other hand, whenever termination of employment cannot be foreseen within a fixed or reasonably short period of time, the taxpayer's tax home shifts to such place of employment and he does not satisfy the "away from home" requirement. Stricker v. Commissioner, 54 T.C. 355">54 T.C. 355, 361 (1970), affd. 438 F. 2d 1216 (6th Cir. 1971). Furthermore, if326 employment which was temporary in contemplation at the date of its commencement becomes indeterminate in duration, "the situs of such employment for purposes of the statute becomes the taxpayer's home." Kroll v. Commissioner, supra at 562. See also McCallister v. Commissioner, supra at 509. Bark v. Commissioner, 6 T.C. 851">6 T.C. 851, 854 (1946). Employment may change from temporary to indefinite "due to changed circumstances, or simply by the passage of time." Norwood v. Commissioner, supra at 470. Each case in this heavily litigated area turns on its own facts. Commissioner v. Peurifoy, 254 F. 2d 483 (4th Cir. 1957), affd. per curiam 358 U.S. 59">358 U.S. 59, 61 (1958); Norwood v. Commissioner, supra at 469-470. The Court of Appeals for the Ninth Circuit, to which an appeal of this case would lie, has applied a somewhat different test than this Court to determine whether a taxpayer's tax home has shifted to his present place of employment. In Harvey v. Commissioner, 283 F. 2d 491, 495 (9th Cir. 1960), revg. 32 T.C. 1368">32 T.C. 1368 (1959), the Ninth Circuit327 stated its test as follows: An employee might be said to change his tax home if there is a reasonable probability known to him that he may be employed for a long period of time at his new station. What constitutes "a long period of time" varies with circumstances surrounding each case. * * * See also Wright v. Hartsell, 305 F.2d 221">305 F. 2d 221, 224 n. 1 (9th Cir. 1962). On this record, applying either the test of this court or the Ninth Circuit, we hold that petitioner was not "away from home" within the meaning of section 162(a)(2). We are convinced that petitioner had a reasonable probability known to him that he would be employed for a long period of time at the Cholla plant. When petitioner began working there he knew that APS planned on constructing Units 2, 3, 4, and 5. Although petitioner testified that he never considered how long it would take to build these new units, he did state that he believed work would be available if sufficient supplies were furnished to the workers. Given the fact that since 1973, construction on one or more new units has been continuous, the petitioner had no reason to expect, nor did he present any evidence of, material328 or other supply shortages which might cause significant breaks in the construction schedule. In addition, there was no evidence presented that information regarding the scheduled completion dates of 1978, 1979, and 1980 for Units 2, 3, and 4, respectively, was withheld from the employees. Compare with Harvey v. Commissioner, supra.Furthermore, the petitioner was never laid off in 1977, and had no reason to expect to be laid off in 1977. Nevertheless, petitioner argues that his employment should be considered to be temporary because of his ownership of a residence in Chandler, his family's need to live in such residence, his inability to find suitable living facilities in the Joseph City area, his risk of being laid off from work, and the unknown duration of the shortage of work in the Chandler area.We must reject petitioner's argument for the following reasons. First, the fact that petitioner owns a residence in Chandler and that his wife and two sons had personal reasons for living there has no relevance in this case. The focus of both this Court's and the Ninth Circuit's test is on the petitioner's view, in light of all the objective facts, as to the329 duration of his employment. Even though the petitioner had a family and a residence in Chandler, his employment at the Cholla plant from January 19, 1977 3 through October 24, 1980, shows that he was able to accept lengthy employment outside of the Chandler area. Second, although petitioner argues that he was unable to find "suitable living facilities in the Joseph City area," he testified that he only looked for housing in Holbrook. Petitioner gave no testimony as to what, if any, efforts he made to obtain housing in Joseph City or any other cities that might offer suitable housing near the Cholla jobsite. Third, the fact that a taxpayer is employed in an industry where workers are occasionally laid off does not automatically mean all such employment may be labeled temporary. Petitioner has not come forward with sufficient evidence that there was a real likelihood he would be laid off by management. Finally, petitioner's claimed lack of knowledge regarding the duration of work in the Chandler area does not establish that petitioner expected employment opportunities to become available there shortly; if anything it shows his employment at the Cholla plant would be for an indefinite330 period of time. For the foregoing reasons, we conclude that petitioner's tax home during 1977 was in the vicinity of Joseph City, Arizona, and that his expenses for lodging, meals, and mileage while working at the Cholla plant are not deductible as "away from home" travel expenses. Issue 2: Depreciation Deduction and Investment Tax CreditOn his 1977 return, petitioner claimed a depreciation deduction of $ 450, as well as an investment tax credit in the same amount, both in regard to the travel trailer he purchased for living purposes while working at the Cholla plant. Since we have held petitioner was not "away from home" during such employment, section 262 operates to disallow the depreciation deduction as the travel trailer purchase was a personal living expense and was not property described in section 167(a). In addition, the investment tax credit must be disallowed because it is not "property with respect to which depreciation * * is allowable." Section 48(a)(1). Furthermore, even if the travel trailer was depreciable property no investment tax credit may be taken because*331 it was "used predominately to furnish lodging or in connection with the furnishing of lodging." Section 48(a)(3). See generally, sec. 1.48-1(h)(1), Income Tax Regs., and Moore v. Commissioner, 58 T.C. 1045">58 T.C. 1045 (1972), affd. 489 F. 2d 285 (5th Cir. 1973). To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩2. The one exception was for two days during the week of March 19, 1979. At the time, petitioner and some other employees were discharged. The following week, however, they were all reinstated.↩3. Petitioner presented no evidence as to where he was employed during 1974, 1975, and 1976.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619066/	PETER G. ZAMARELLO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentZamarello v. CommissionerDocket No. 7749-90United States Tax CourtT.C. Memo 1991-494; 1991 Tax Ct. Memo LEXIS 543; 62 T.C.M. (CCH) 913; T.C.M. (RIA) 91494; October 1, 1991, Filed 543 R issued a statutory notice of deficiency to P while P was in chapter 11 bankruptcy. After P filed his petition with the Court, R moved to dismiss for lack of jurisdiction. R argues that the automatic stay imposed by 11 U.S.C. sec. 362(a)(8) was lifted at the time the bankruptcy court entered an order confirming P's plan of reorganization and that P did not file his petition within the time prescribed by I.R.C. sec. 6213(f). P argues that the "effective date" of the plan of reorganization was the date the automatic stay was lifted. Held, the automatic stay was lifted the date the order confirming the plan of reorganization was entered. Held further, the petition was not timely filed. James K. Wilkens, for the petitioner. Robert P. Crowther, for the respondent. NIMS, Chief Judge. NIMSMEMORANDUM OPINION This case is before the Court on petitioner's motion pursuant to Rule 123(c) to vacate the Court's Order dismissing the case for lack of jurisdiction. (Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, section references are to the Internal Revenue Code as in effect for the year at issue.) The sole issue for544 decision is whether the automatic stay of 11 U.S.C. section 362(a) was lifted on the date the bankruptcy court issued its order confirming petitioner's chapter 11 reorganization plan or on the "effective date" of the plan of reorganization. BackgroundOn May 7, 1987, respondent issued a statutory notice of deficiency to petitioner for the taxable year 1982. At the time the notice of deficiency was issued, petitioner was in chapter 11 bankruptcy. On November 17, 1989, the bankruptcy court entered an order confirming the debtor's third amended joint plan of reorganization. On April 23, 1990, petitioner filed a petition with this Court. On June 14, 1990, respondent filed a motion to dismiss for lack of jurisdiction, wherein he argued that the petition in this case was filed outside the time allowed under section 6213(a). On July 26, 1990, having received no objection from petitioner, the Court granted respondent's motion to dismiss. On August 6, 1990, petitioner filed a motion to vacate the Court's order of dismissal pursuant to Rule 123(c), wherein petitioner asserted that he had not objected to respondent's motion to dismiss because he did not receive notification from 545 the Court that he should object. On September 10, 1990, pursuant to an Order of this Court, petitioner filed a supplement to his motion to vacate. Petitioner argues that his petition was timely filed because the automatic stay was not lifted when the plan of reorganization was confirmed; rather, the stay was lifted when the plan became effective. The plan of reorganization in petitioner's bankruptcy case has an "effective date" of December 1, 1989. As indicated, the issue before the Court is whether the automatic stay of 11 U.S.C. section 362(a) was lifted on the date of the order confirming the plan of reorganization or on the "effective date" of the plan of reorganization. If December 1, 1989, is the date on which the stay was lifted, petitioner's Tax Court petition would be timely. However, if the stay was lifted at the time the bankruptcy court issued its order confirming the plan, the petition was not timely filed, and we lack jurisdiction. DiscussionThe Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985), and case cited therein. In order546 for this Court to have jurisdiction, respondent must have issued a valid notice of deficiency, and the taxpayer must have filed a valid petition with this Court. Secs. 6212 and 6213. A taxpayer has 90 days from the issuance of the notice of deficiency to file a petition in this Court. Sec. 6213(a). The general rule of section 6213(a) is modified by section 6213(f)(1) which provides: In any case under title 11 of the United States Code, the running of the time prescribed by subsection (a) for filing a petition in the Tax Court with respect to any deficiency shall be suspended for the period during which the debtor is prohibited by reason of such case from filing a petition in the Tax Court with respect to such deficiency, and for 60 days thereafter.When the statutory notice of deficiency was issued in the present case, petitioner was in bankruptcy and thus was prevented from filing a petition in this Court until the automatic stay of 11 U.S.C. section 362(a) was lifted. 11 U.S.C. sec. 362(a)(8). Once the stay is lifted, section 6213(f) requires in the instant situation that the Tax Court petition be filed within 150 days of the lifting of the automatic stay (90 days547 under section 6213(a), plus 60 days under section 6213(b)). The automatic stay is lifted upon the earliest of three occurrences: (1) The time the case is closed; (2) the time a case is dismissed; or (3) the time a discharge is granted or denied. 11 U.S.C. sec. 362(c)(2). In order to grant petitioner's motion to vacate, the Court must find that petitioner's bankruptcy case was not closed, dismissed, or discharged until the effective date of the plan of reorganization. In considering a case similar to the instant case, we held in Moody v. Commissioner, 95 T.C. 655">95 T.C. 655 (1990), that when a chapter 11 plan of reorganization is confirmed, the case has been discharged, and the automatic stay is lifted. Petitioner urges the Court to hold that the bankruptcy court's order confirming the plan did not discharge his bankruptcy case. Instead, petitioner asks the Court to find that the stay was lifted pursuant to the "effective date" of the plan of reorganization. The plan of reorganization states in its definitions' section that the "effective date" means December 1, 1989. In support of his position, petitioner argues that the order confirming the plan does nothing more than make the terms548 of the plan effective, and thus it is the plan and not the order which lifts the stay. However, petitioner cites no authority for this argument, and the applicable portions of the bankruptcy code are expressly contrary. 11 U.S.C. section 1141(d) provides in pertinent part: (d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan - (A) discharges the debtor from any debt that arose before the date of such confirmation * * * [Emphasis added.]Thus, unless the plan or the order confirming the plan provides otherwise, 11 U.S.C. section 1141(d)(1) and Moody require us to find that petitioner's bankruptcy case was discharged when the order confirming the plan of reorganization was entered. The order confirming the plan does not "provide otherwise." In fact, it states at page 10 that "Peter G. Zamarello [petitioner] is released from all dischargeable debts." The plan of reorganization also provides that petitioner was discharged upon confirmation of the plan. Article VII of the plan states that "entry of the Confirmation Order acts as a discharge of any and all debts of each of the Debtors549 that arose at any time before entry of the Confirmation Order * ." Petitioner directs us to a different provision of the plan, Article X, which states: "On the Effective Date * * the Debtors shall waive any further protection under Section 362 of the Bankruptcy Code as it may apply to the claims of any Class B or Class D creditor." Petitioner argues that Article X of the plan dictates when the stay is lifted. We disagree. The bankruptcy code provides a bright-line rule as to when the automatic stay is lifted. 11 U.S.C. section 362(c)(2)(C) states that the automatic stay continues until a discharge in the case is granted or denied. 11 U.S.C. section 1141(d) states that unless otherwise provided in the plan or the order confirming the plan, the confirmation of a plan acts as a discharge. Article X of the plan does not contradict this rule, and thus the plan does not "provide otherwise." The language of Article X is insufficient to support petitioner's position that his debts were not discharged when the order confirming the plan was entered. Therefore, because the order confirming the plan and the plan of reorganization do not expressly contradict the general rule of 11 550 U.S.C. section 1141(d)(1), the automatic stay of 11 U.S.C. section 362 was lifted when the order of confirmation was entered. Next, petitioner argues that even if the Court determines that the order of confirmation is the operative document for determining the date the stay was lifted, the IRS filed a motion for new trial requesting the bankruptcy court to set aside the order of confirmation. This, according to petitioner, prevented the confirmation order from becoming final until the motion was withdrawn on November 30, 1989, and the Tax Court petition is therefore timely. In support of this argument, petitioner cites Bankruptcy Rules 8002(b) and 9023. Bankruptcy Rule 8002(b) provides an extension of time for appeal if certain motions are filed with the bankruptcy court, and Bankruptcy Rule 9023 incorporates Rule 59, Fed. R. Civ. P., into the bankruptcy rules. Rule 59, Fed. R. Civ. P., contains the rules for granting a new trial. These rules do not support petitioner's position. Accordingly, we hold that the order confirming petitioner's chapter 11 plan of reorganization granted petitioner a discharge, and the automatic stay of 11 U.S.C. section 362(a) was lifted when the order551 confirming the plan was entered. Therefore, the petition in this case was not filed within the time allowed under section 6213(f). Petitioner's motion to vacate our order of dismissal for lack of jurisdiction will therefore be denied. An appropriate order will be issued.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619067/	Christo P. Napuche v. Commissioner.Napuche v. Comm'rDocket No. 62078.United States Tax CourtT.C. Memo 1959-112; 1959 Tax Ct. Memo LEXIS 136; 18 T.C.M. (CCH) 505; T.C.M. (RIA) 59112; May 28, 1959136 Held, respondent properly reconstructed petitioner's net income for the years 1946-1951, inclusive, by the use of the net worth plus nondeductible expenditures method, and the deficiencies determined thereby are sustained. Held, further, a part of the deficiency for each of the years 1946 through 1951 was due to fraud with intent to evade tax; the returns for the years 1946, 1947, and 1950 were false and fraudulent with intent to evade tax; and the assessment and collection of deficiencies for the years 1946, 1947, and 1950 are not barred by the statute of limitations. Held, further, respondent properly determined addition to tax for 1948 under section 291(a). Christo P. Napuche, 12818 E. Jefferson, Detroit, Mich., pro se. Robert J. Fetterman, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: 137 The respondent determined deficiencies in income tax for the years 1946-1951, inclusive, 50 per cent additions to the deficiencies under section 293(b), 1939 Code, and an addition to tax for 1948 under section 291(a) as follows: YearDeficienciesSec. 293(b)Sec. 291(a)1946$7,594.97$3,259.40None19478,089.704,044.85None19484,482.792,241.40$976.4519491,101.08550.54None19503,703.521,851.76None195182.0041.00NoneThe questions for decision are whether the petitioner understated and failed to report taxable138 income for each of the years 1946-1951, inclusive, in the amounts determined by the respondent or in other amounts; whether a deficiency, if any, for any of the taxable years is due in whole or in part to fraud with intent to evade tax; and whether petitioner's failure to file a return for 1948 was due to reasonable cause and was not due to wilful neglect. Findings of Fact The petitioner is a resident of Detroit, Michigan. He operates a bar for the sale of beer, wine, and liquor on East Jefferson Street, Detroit. He filed Federal income tax returns for the calendar years 1946, 1947, 1949, and 1950 with the collector of internal revenue for the district of Michigan at Detroit. He did not file returns for the taxable years 1948 and 1951. From 1917 to 1925, the petitioner worked in shoe factories in and around Boston, Massachusetts. In 1925, he went to New York City, where he lived until late 1942 or early 1943, except for a 2-year visit to Albania, the country of his birth, between 1934 and 1936. In New York, he worked as a dishwasher and a short-order counterman in restaurants of the so-called coneyisland type. Around October 1942, petitioner left New York City and went to Detroit. 139 He worked in different restaurants until approximately October 1943, at which time he purchased a bar business in Detroit along with two other persons, Thomas Lavaris and Elias Lavaris. The purchase price of the bar business was $10,000; the petitioner's one-third share was $3,300. In October 1944, the taxpayer purchased the interest of his partners in the business for approximately $11,000. Petitioner has operated his bar business as a sole proprietorship since November 1944. He had six or seven employees. He kept a very simple single entry set of books on the cash basis and employed an accountant to prepare his income tax returns. Petitioner made entries in his book listing the receipts and expenditures for each day. There were no cash register tapes or any other substantiating data kept by the petitioner in regard to his receipts. The receipts reported by the petitioner could not be substantiated. The disbursements listed in the account book were usually substantiated by invoices and cancelled checks. Once a month petitioner's accountant looked at the book which petitioner had prepared and made a profit and loss statement therefrom. At the end of the year, the accountant prepared140 the petitioner's return on the basis of the figures in the account book. The accountant accepted as correct the figures for receipts entered in the account book. The petitioner's bar business was located on a main throughfare in Detroit. He drew most of his business from employees of the factories of Continental Motors, Hudson Motors, Kaiser-Frazer, and Chrysler Corporation, which were located nearby. The bar is called Bronx Cafe. In the returns of petitioner filed for the years 1944, 1945, 1946, 1947, 1949, and 1950, the petitioner listed income in the amounts and from the sources shown below: 1944Bronx Cafe - (partnership - 10months)$ 6,065.10Bronx Cafe - (sole proprietor-ship - 2 months)1,166.93Coin Machines18.80Total income$ 7,250.831945Bronx Cafe$14,263.36Coin Machines60.05Total income$14,323.411946Bronx Cafe$11,902.66Coin Machines122.70Total income$12,025.361947Bronx CafeTotal income$ 3,812.051949Bronx Cafe$ 1,962.75Apartment Rental600.00Total income$ 2,562.751950Bronx Cafe$ 691.18Dividends1,200.00Total income$ 1,891.18The petitioner did not file returns141 for 1948 and 1951. However, at the trial of this case, the petitioner's accountant produced copies of income tax forms (Forms 1040) which he stated he had prepared for the petitioner for each of the years 1948 and 1951. Such copies listed income in the amounts and from the sources set forth below: 1948Bronx Cafe (loss)[1,798.14)Apartment Rental1,975.00Total income$ 176.861951Bronx Cafe (loss)[4,104.53)Dividends1,450.00Loss[2,654.53)A revenue agent was assigned to examine the petitioner's 1949 income tax return. Review of the return disclosed that he had invested over $50,000 in his bar business and that the income reported for 1949 and prior years was not sufficient to provide the source of such investment. The receipts of the bar business could not be substantiated by the taxpayer. The examination was broadened to include the years 1946 through 1951. When the agent's preliminary net worth analysis for such years disclosed acquisitions of assets substantially in excess of the amount of income reported by the taxpayer, a special agent was assigned to work with the revenue agent in the examination. A net worth analysis was discussed142 at several conferences of the revenue agent and special agent with the petitioner and his accountant. The petitioner did not object to any items on the net worth statement except opening cash on hand. He claimed that he had accumulated between $60,000 and $80,000 between the years 1917 and 1925; that he still had that amount of cash on hand at the end of 1945; that he kept the money in a suitcase; and that he had purchased his business and property with such cash. He first stated to the agents that he had taken no money with him when he went to Albania in 1934 and had brought back none when he returned in 1936; later he claimed that he had taken $60,000 with him to Albania and had brought back the same amount. The taxpayer never presented any evidence to the agents that he had a substantial amount of cash on hand at the end of 1945, and he did not produce any witnesses, or the names of any witnesses, to verify his story. The revenue agent and special agent attempted to verify the taxpayer's claim that he had accumulated a substantial amount of cash by the end of 1945. They made an analysis of the petitioner's financial history. The special agent also obtained records showing what143 income tax returns had been filed by petitioner since 1930. The petitioner told the agents that he had filed one return while he lived in New York City. The records of the collector for Lower Manhattan disclosed that no returns had been filed by the taxpayer in that district for the years 1930 through 1943. The records from the collector's office for Upper Manhattan disclosed that the taxpayer had not filed a return in that district for the years 1930 through 1940, but that the taxpayer had filed a return for 1941 showing an income tax liability of $51.94, and that the taxpayer had filed a return for the year 1942 showing no income tax liability. Records of the Department of Health, Education and Welfare reflect earnings credited to petitioner's Old Age and Survivors Insurance Account, Social Security Number 112-05-XXXX, between January 1, 1937, and September 1943. Such records show that petitioner's total earnings in any one year never averaged more than $1,800, and in many years were substantially less than $1,800. For the first 9 months of 1943, petitioner's earnings were $567.08. Records of the Bureau of Public Debt for the years 1943 through 1952 show that petitioner purchased144 a bond for the principal amount of $1,000 in February 1944 and a bond in the principal amount of $100 in July 1944, which had a total cost of $825; and that he redeemed both of the bonds in November 1944, which was at about the same time that he purchased the interest of his partners in the bar business. In September 1931, petitioner opened a savings account, number XX6745, at the Franklin Savings Bank in New York City with an initial deposit of $250; he made periodic deposits nearly every month; and there was a balance of $1,687.93 in the account in January 1934, at which time he closed the account and went to Albania. In January 1936, petitioner returned to New York from Albania and at that time he opened another savings account at the Franklin Savings Bank in New York City, account numberXX7514, with an initial deposit of $185. In February 1936, he withdrew $180 from the account, leaving a balance of $5. Thereafter he made periodic deposits and a few withdrawals. There was a balance of $4,826.06 in the account on October 27, 1943, at which time petitioner closed the account. Petitioner did not cooperate with the agents in compiling a net worth statement. The agents obtained145 each item in the net worth analysis from third-party records, such as court records, county records, records of banks, stockbrokers' records, and from the petitioner's own books and records. The agents made a detailed analysis of the petitioner's net worth increase and nondeductible expenditures for the years 1946 through 1951, which analysis formed the basis of the determination of the deficiencies in this case. The opening figures for assets and liabilities are as of December 31, 1945. The net worth statement of the respondent, exhibit A, is set forth hereinafter. The first item appearing in petitioner's assets in the net worth statement for the year ended December 31, 1945, is cash on hand in the amount of $25,000. That figure was based upon a purchase of stock by the petitioner on January 14, 1946, at a stockbrokerage house in Detroit, Bache and Company, in the total amount of $24,774.07, for which petitioner made payment with a cashier's check in the amount of $25,000. At the time of the examination, the agents were unable to discover the source of the $25,000. The petitioner told them that such money came from his hoard of cash on hand. During conferences with the agents, petitioner146 was asked specifically whether he had bank accounts other than those appearing in the net worth statement. He denied that he had any other bank accounts, thereby concealing the fact that he had a savings account at the National Bank of Detroit, number XX7212, from which he had withdrawn cash in the amount of $25,000 to purchase the above-mentioned stock. Since the agents did not then know that such bank account existed, they did not list that bank account in the net worth statement. However, they allowed the petitioner a credit of $25,000 for opening cash. The balance in the bank account at the National Bank of Detroit, number XX7212, on December 31, 1945, was $27,739.50. At the trial of this case, the petitioner admitted that his savings from 1917 to the end of 1945 were deposited in this bank account. The net worth statement of petitioner's assets and liabilities is revised and corrected, herewith, by increasing the figure for cash on hand as of December 31, 1945, from $25,000 to $27,739.50. This correction results in an increase of $2,739.50 in the petitioner's assets and opening net worth on December 31, 1945, and a decease in a like amount in petitioner's income for 1946 from147 $25,561.92 to $22,822.42. After the statutory deficiency notice was issued, the revenue agent learned, in spite of the petitioner's attempt to conceal such asset, of the existence of petitioner's savings account at the main branch of the National Bank of Detroit, number XX7212. The ledger sheets of that account show that there was an initial deposit in the amount of $4,825.81 on October 29, 1943. The deposit ticket shows that such amount was transferred from the petitioner's savings account at the Franklin Savings Bank in New York City. The ledger sheets also show that on November 1, 1943, the petitioner withdrew $3,300, which was at the time that petitioner purchased his one-third interest in the bar business. The records of the account further show that there was another withdrawal in the amount of $7,000 on October 31, 1944, which was at the time that the petitioner purchased the interest of his partners in the bar business for $11,000. There was, at this time, a distribution of $4,000 from the partnership. Account number XX7212 at the main branch of the National Bank of Detroit was closed on October 4, 1946, by transfer to savings account number X9887 at a branch of the National148 Bank of Detroit, which account is listed in the net worth statement, the balance in the account being $10,213.07 on December 31, 1946. Petitioner had cash on hand at the end of 1946 in the separate amounts of $7,276 and $5,206.47. These amounts of cash on hand appear in respondent's net worth statement. There was a deposit at the National Bank of Detroit in savings account number X9887 on January 2, 1947, in the amount of $7,276. There was a deposit in the amount of $5,206.47 with the Industrial National Bank of Detroit on December 31, 1946. The petitioner, as part of his bar business, cashed pay checks for persons who worked in the area. He maintained a separate check cashing fund. When he had cashed a certain amount of checks, sometimes as much as from $10,000 to $15,000, he took the checks to the bank where he had a commercial account, he deposited such checks, and he withdrew a like amount in cash so that he would have money available with which to cash more checks. He made a small charge, usually the pennies, for cashing a check. For example, if a check for $85.37 was cashed, he charged 7 cents. The deposit on December 31, 1946, of $5,206.47 with the Industrial National Bank, 149 referred to above, reflected such transactions. The bank records show that the petitioner deposited checks totaling such amount and had withdrawn cash in that amount. In 1947, the petitioner transferred his commercial account from the Industrial National Bank of Detroit to the Detroit Bank. In the net worth statement, the amount shown as cash on hand at the end of 1947, $15,509.84, reflects a deposit on December 24, 1947, of checks in such amount and a withdrawal of the same amount of cash, which funds were used by petitioner to cash checks for individuals. Petitioner had cash on hand at the end of 1948 in the amount of $12,739.76; at the end of 1949, in the amount of $9,327.22; at the end of 1950, in the amount of $9,400; and at the end of 1951, in the amount of $7,145.05. These amounts represent deposits of checks in petitioner's commercial account and withdrawals of cash in the same amounts on December 31st, or on a date close to December 31st, of each of the years 1948 through 1951. A certified check dated June 5, 1951, in the amount of $7,500, was obtained by petitioner from the Detroit Bank by withdrawal of that amount from petitioner's commercial account in the Detroit Bank. 150 The check was deposited by petitioner with the United States Fidelity and Guaranty Company pending appeal of a judgment rendered against the petitioner for that amount in a personal injury suit. Such amount was still on deposit at the end of 1951. It was properly treated by the revenue agent as an asset of the petitioner at the end of 1951 as cash in court's custody in the net worth statement. The Petitioner deposited funds in escrow with his attorney, Alexander Perry, in connection with improvements being made on property which petitioner purchased in 1948. At the end of 1949, 1950, and 1951, the balances in the escrow account were $2,978.75, $5,392.79, and $5,392.79, respectively. These amounts represented assets of petitioner and they are shown in the respondent's net worth analysis. The balances in petitioner's bank accounts at the end of the years involved were as follows: Detroit Bank, savings account XX6769, $5,134.61, at the end of 1947; $3,995.69, end of 1948; $4,024.41, end of 1949; $1,038.30, end of 1950; and $470.80, end of 1951. Detroit Bank savings account X1835, $6,000, end of 1950; and $1,630.99, end of 1951. Detroit Bank commercial account, $1,172.12, end of 1947; 151 $100.82, end of 1948; 79 cents, end of 1949; $24.83, end of 1950; and $251.87, end of 1951. National Bank of Detroit savings account XX887, $10,213.07, end of 1946; $4,322.74, end of 1947; $5,641.63, end of 1948; $5,252.13, end of 1949; and $52.13, end of both 1950 and 1951. Industrial National Bank commercial account, $4,414.59, end of 1945; and $974.66, end of 1946. The petitioner, by the end of 1945, had acquired complete ownership of the bar business located on East Jefferson Street in Detroit, and as of December 31, 1945, he had invested $6,907.98 in bar fixtures and $9,787.72 in acquiring the business. He rented the premises at 12810 East Jefferson Street until early in 1948, at which time he purchased property at 12818 East Jefferson Street and moved his business to that building. The purchase price of the property was $40,000; he made a down payment of $15,000, and he executed a land contract, which is similar to a mortgage, for the balance of $25,000. His payments under the land contract were $250 per month. At the end of each of the years 1948 through 1951, the real estate represented an asset in the amount of $20,000, and the building represented an asset in the amount152 of $20,000. The balance due at the end of each year under the land contract represented a liability. Such balances at the end of the years 1948-1951, were as follows, respectively: $23,721.48, $22,101.70, $20,379.96, and $18,553.07. In 1948, petitioner spent $8,906.26 for an addition to the building, and $2,221.40 for building fixtures. In 1949, he spent an additional $6,441.45 for building improvements (interior alterations), and $495.70 for a television set. In 1950, petitioner spent an additional $14,875.81 for building improvements, including an air conditioning unit, making a total of $30,223.52 expended for building improvements by the end of 1950. Ledger sheets of Bache and Company show stock purchases by petitioner which reflect his ownership of stocks at the end of the years 1946-1951, respectively, as follows: $24,774.37, end of 1946; and $38,558.77, end of 1947, 1948, 1949, 1950, and 1951. In May 1948, the petitioner borrowed $5,600 from Bache and Company and pledged his stock as security for such loan. The balances due on the loan were $5,131.88, end of 1948; $4,630.59, end of 1949; $3,613.78, end of 1950; and $2,301.90, end of 1951. The petitioner received the153 following amounts of dividends on his stock during the years involved: YearAmounts of Dividends1946$ 675.001947800.0019481,000.001949700.0019501,200.0019511,450.00 The only year in which he reported his dividend income in an income tax return was for 1950. Within 5 years after petitioner's income tax return for the taxable year 1949 was filed, on December 22, 1954, petitioner duly executed and delivered to the respondent under section 275(c) of the Internal Revenue Code of 1939, a consent (Form 872) fixing the period of limitation upon assessment of income tax, whereby it was consented and agreed that the amount of any income tax due under the return filed by petitioner for the taxable year 1949 could be assessed at any time on or before June 30, 1956. The consent was accepted and executed by the respondent on January 4, 1955. The statutory notice of deficiency which constitutes the basis of this proceeding was mailed to petitioner on January 30, 1956. Petitioner's assets, liabilities, net worth, and increase in net worth as of the end of the years 1945-1951, inclusive, were as follows: ASSETS12/31/4512/31/4612/31/4712/31/48Cash on Hand$27,739.50$ 7,276.00$15,509.84$ 12,739.76Cash on Hand5,206.47Detroit Bk. Svgs., 3467695,134.613,995.69Detroit Bk. Com'l1,172.12100.82Natl. Bk. Det. Svgs., 2988710,213.074,322.745,641.63Ind'l Nat. Bk. Com'l4,414.59974.66Land 12818 E. Jeff'son20,000.00Bldg. 12818 E. Jeff'son20,000.00Bldg. Improvts.8,906.26Bldg. Fixtures2,221.40Bar Fixtures6,907.986,907.986,907.986,907.98Invest. Business9,787.729,787.729,787.729,787.72Bache & Co. Stocks24,774.3738,558.7738,558.77Mchdse. Inventory4,711.204,637.448,212.608,411.20Total Assets$53,560.99$69,777.71$89,606.38$137,271.23Less Res. Dep.778.421,464.532,150.643,948.39Net Assets$52,782.57$68,313.18$87,455.74$133,322.84LIABILITIESTaxes due$ 738.13$ 525.03$ 751.16$ 622.40Land Contract23,721.48Loan, Bache & Co.5,131.88Total$ 738.13$ 525.03$ 751.16$ 29,475.76Net Worth52,044.4467,788.1586,704.58103,847.08Less Net Worth Prior Year52,044.4467,788.1586,704.58Increase Net Worth$15,743.71$18,916.43$ 17,142.50154 ASSETS12/31/4912/31/5012/31/51Cash on Hand$ 9,327.22$ 9,400.00$ 7,145.05Cash on HandCash, Court's Custody7,500.00Cash, Escrow2,978.755,392.795,392.79Detroit Bk. Svgs., 346769$ 4,024.41$ 1,038.30$ 470.80Detroit Bk. Svgs., 418356,000.001,630.99Detroit Bk. Com'l.7924.83251.87Natl. Bk. Det. Svgs., 298875,252.1352.1352.13Land 12818 E. Jeff'son20,000.0020,000.0020,000.00Bldg. 12818 E. Jeff'son20,000.0020,000.0020,000.00Bldg. Improvts.15,347.7130,223.5230,223.52Bldg. Fixtures2,221.402,221.402,221.40Bar Fixtures6,907.986,907.986,907.98Invest. Business9,787.729,787.729,787.72Television495.70495.70495.70Bache & Co. Stocks38,558.7738,558.7738,558.77Mchdse. Inventory7,966.807,110.006,070.00Total Assets$142,869.38$157,213.14$156,708.72Less Res. Dep.6,087.259,240.6512,393.99Net Assets$136,782.13$147,972.49$144,314.73LIABILITIESTaxes Due$ 461.29$ 355.14$ 350.11Land Contract22,101.7020,379.9618,553.07Loan, Bache & Co.4,630.593,613.782,301.90Total$ 27,193.58$ 24,348.88$ 21,205.08Net Worth109,588.55123,623.61123,109.65Less Net Worth Prior Year103,847.08109,588.55123,623.61Increase Net Worth$ 5,741.77$ 14,035.06($ 513.96)155 Petitioner realized income in each of the years 1946-1951, inclusive, in the amounts of his annual, net worth increase, plus nondeductible expenditures, which are set forth below. There is set forth below, also, petitioner's total income for each of the taxable years, the amounts of the income reported in income tax returns, and the amounts of unreported, or understated, income: INCOME, REPORTED INCOME, AND UNREPORTED INCOME194619471948Net Worth Income$15,743.71$18,916.43$17,142.50Living Exp.1,500.001,500.001,500.00Inc. Tax Pd.5,578.712,309.72(1,219.50)O. P. A. Fine1,532.90Total Income$22,822.42$24,259.05$17,423.00Reported Income12,025.363,812.05Unreported Income$10,797.06$20,447.00$17,423.00194919501951Net Worth Income$ 5,741.47$14,035.06($ 513.96)Living Exp.1,500.001,500.001,500.00Inc. Tax Pd.964.26144.25117.00O. P. A. FineTotal Income$ 8,205.73$15,679.31$ 1,103.04Reported Income2,562.751,891.18Unreported Income$ 5,642.98$13,788.13$ 1,103.04The petitioner realized and failed to report taxable income for the taxable years as follows: YearIncome1946$10,797.06194720,447.00194817,423.0019495,642.98195013,788.1319511,103.04156 Part of the deficiency for each year 1946-1951, inclusive, is due to fraud with intent to evade tax. False and fraudulent returns were filed for the years 1946, 1947, and 1950 with intent to evade tax. Petitioner wilfully and fraudulently failed to file returns and report income for 1948 and 1951. Petitioner's failure to file a return for 1948 was due to wilful neglect. Opinion The respondent has the burden of proving that false or fraudulent returns with intent to evade tax were filed for 1946 and 1947. Sections 276(a) and 1112. Once fraud is established, the statute of limitations does not apply, and petitioner must show that the determination of the deficiency is incorrect, United States v. Bender, 218 Fed. (2d) 869, certiorari denied 349 U.S. 920">349 U.S. 920; Clark v. United States, 211 Fed. (2d) 100, certiorari denied 348 U.S. 911">348 U.S. 911; Harris v. Commissioner, 174 Fed. (2d) 70; Arlette Coat Co., 14 T.C. 751">14 T.C. 751. With respect to the year 1950, his burden of proof includes establishing that petitioner omitted from gross income an amount properly includible therein which amount was in excess of 25 per cent of the amount157 of the gross income stated in the return, in which event the 5-year period of limitation applies. Section 275(c); Sidney N. LeFiell, 19 T.C. 1162">19 T.C. 1162, 1179. No returns were filed for the years 1948 and 1951; therefore, the statute of limitations does not apply. Section 276(a). The execution of a waiver by the parties extended the period of limitation applicable to the year 1949 to June 30, 1956, before which time determinations were made and the statutory deficiency notice was mailed. Section 276(b). The respondent has the burden of proving that all or part of the deficiency for each of the taxable years 1946 through 1951 was due to fraud with intent to evade tax, section 1112, and it is his burden to prove fraud by clear and convincing evidence. Arlette Co., supra. The petitioner has the burden of proving that the respondent's determinations of the amount of his taxable income for 1948, 1949, and 1951 were incorrect. Respondent was justified in reconstructing petitioner's taxable income for the years 1946 through 1951 by use of the increase in net worth plus nondeductible expenditures method. Petitioner did not retain cash register tapes or any other data158 with which the actual receipts from his business and the entries in his simple accounting records could be checked, verified, and substantiated. The amounts of receipts entered in petitioner's accounting books were computed by himself and there is no evidence that his entries were complete, correct, and accurate. Petitioner's returns for 1947, 1949, and 1950 reported total profits of $6,465.98; and for 1948 and 1951 they reported total losses of $5,902.67. Thus, during the 5-year period 1947 through 1951, petitioner's books showed a total net profit of only $563.31. In contrast to such a poor record of earnings according to petitioner's books and returns, petitioner's expenditures in 1948 (a year of loss in the amount of $1,798.14) were substantial. In 1948, he purchased a building at a purchase price of $40,000 and he spent $8,906.26 for building improvements, and $2,221.40 for fixtures. In 1949, when the reported earnings of his business were only $1,962.75, he spent an additional $6,441.45 for building improvements. In 1950, when the reported earnings of his business were only $691.18, he spent an additional $14,875.81 for building improvements. In these 3 years, petitioner's159 expenditures for building improvements and fixtures totaled $32,442.92, and he made a down payment of $15,000 on the building he purchased, which increased major expenditures to $47,444.92. For 1945 and 1946, petitioner reported income totaling $26,166.02. Adding to that sum his reported net income for the years 1947-1951, inclusive, of $563.31, his total reported net income for the 7 years 1945-1951 amounted to $26,729.33, which is substantially less than the expenditures of $47,444.92 listed above. Moreover, in 1946 and 1947 petitioner invested $38,558.77 in securities, which brought his major expenditures up to $86,003.69. In other words, whereas petitioner's books and returns showed net income of $26,729.33 for the years 1945-1951, his larger expenditures amounted to $86,003.69. Petitioner does not deny or dispute the detailed items of his assets and liabilities in the respondent's net worth analysis for 1945 through 1951. In the course of the agents' examinations, petitioner claimed that he had accumulated savings as of the end of 1945 of between $60,000 to $80,000 which he had kept in a satchel, which was approximately the total amount of his net worth increases. However, 160 investigation by the respondent's agents established that such explanation and claim of the petitioner was not true. In a thorough and careful investigation of petitioner's bank accounts in New York City and Detroit as far back as 1931, the agents succeeded in tracing forward to 1945 and the succeeding years the opening of accounts in various banks, the transfers of funds, and the increases in bank account balances. Also, the agents located petitioner's savings account, number XX7212, in the National Bank of Detroit, about which petitioner withheld information. At the trial of this case, respondent produced proof about this savings account and showed that on December 31, 1945, the balance in this account was $27,739.50. When confronted with this evidence, petitioner admitted at the trial of this case that from 1917 to the end of 1945 his savings had been deposited in various bank accounts. After respondent presented his extensive proof in the trial of this case, petitioner abandoned his earlier claim that he had had at the end of 1945 substantial, undeposited cash accumulations which accounted for the increases in net worth established by the respondent. Consideration has been161 given to the amounts of nondeductible expenditures computed by respondent for the taxable years. They are correct, or, where estimated (as in the case of living expenses), the estimates are reasonable. The O.P.A. fine paid in 1947 was a nondeductible expenditure. Henry Watterson Hotel Company, 15 T.C. 902">15 T.C. 902, affd. 194 Fed. (2d) 539; National Brass Works, Inc. v. Commissioner, 182 Fed. (2d) 526, 531. It was properly included in the net worth statement. Upon consideration of the entire record, it is concluded and held that respondent's net worth analysis for the years 1945 through 1951, as corrected to include cash on hand at the end of 1945 of $27,739.50, is correct, and that it properly reflects and conclusively establishes unreported income for each of the years 1946 through 1951 in the amounts set forth in the Findings of Fact. Petitioner did not cooperate with the agents during their investigation. He knew that he had savings account number XX7212 at the National Bank of Detroit at the end of 1945, and that the $24,774 used to purchase stock in 1946 had come from that bank account. The record shows that petitioner entirely omitted dividends162 from his returns for 1946, 1947, and 1949. He reported dividends in his return for 1950. He failed to report income from rent in 1948. He failed to report income from his check cashing activities, whatever it amounted to, which the record does not show. But petitioner admits that he derived some income from cashing checks for customers. The amounts of unreported income in each of the years involved are of such substantial size that they could not have been unintentionally omitted from petitioner's returns. Petitioner's failure to report dividends and rent could not have been unintentional. Consistent and substantial understatement of income over a period of several years is highly persuasive evidence of fraudulent intent. Rogers v. Commissioner, 111 Fed. (2d) 987; Kurnick v. Commissioner, 232 Fed. (2d) 678; Schwarzkopf v. Commissioner, 246 Fed. (2d) 731; M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518; Lillian Kilpatrick, 22 T.C. 446">22 T.C. 446, 458, affd. 227 Fed. (2d) 240; Richard F. Smith, 31 T.C. 1">31 T.C. 1. It is noted, further that petitioner failed to file returns for 1948 and 1951, in which years he received dividends163 of $1,000 and $1,450, respectively. Petitioner received rental income of $1,975 in 1948, when he failed to file a return. Petitioner has not offered any explanation for his failure to file returns for 1948 and 1951. It is concluded that respondent has established by clear and convincing evidence, Arlette Coat Co., supra, that petitioner wilfully and fraudulently failed to report his correct income for the years 1946, 1947, 1949, and 1950, and that he wilfully and fraudulently failed to report any income for 1948 and 1951. Respondent has established by clear and convincing proof that false and fraudulent returns with intent to evade tax were filed for 1946, 1947, and 1950; that part of the deficiency for each of the years 1946 through 1951 was due to fraud with intent to evade tax; and that for 1950 petitioner omitted from gross income an amount properly includible therein which amount was in excess of 25 per cent of the amount of the gross income stated in the return. No deficiency is barred by the statute of limitations. It is held, further, that petitioner's failure to file a return for 1948 was due to wilful neglect and was not due to reasonable cause. Petitioner, *164 who had the burden of proof under this issue, did not offer any explanation or excuse for his failure to file a return for 1948. Respondent properly determined addition to the tax for 1948 under section 291(a). Although the respondent's determinations are sustained, recomputation under Rule 50 is required because of the correction of one item in the net worth statement relating to an increase in cash on hand at the end of 1945, which reduces the amount of unreported income for 1946 to $10,797.06, as set forth in the Findings of Fact. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619069/	James E. Svalberg and Gary E. Svalberg v. Commissioner.Svalberg v. CommissionerDocket No. 4553-67.United States Tax CourtT.C. Memo 1969-94; 1969 Tax Ct. Memo LEXIS 200; 28 T.C.M. (CCH) 529; T.C.M. (RIA) 69094; May 14, 1969, Filed 200 Gordon G. Hawn, 18th Fl., Milam Bldg., San Antonio, Tex., for petitioners. Robert J. Curphy, for respondent. FEATHERSTONMemorandum Findings of Fact and Opinion FEATHERSTON, Judge: Respondent determined deficiencies in petitioners' income tax for 1962 and 1963 in the amounts of $396 and $660, respectively. Petitioners having conceded certain issues, the only question presented is whether petitioners provided more than one-half of the total support of Melody Ann and Steven Patrick Camp for 1962 and of Melody Ann, Steven Patrick, Terence T., Jr., and Deborah Ellen Camp for 1963. Findings of Fact During 1962 and 1963 James E. Svalberg and Gary E. Svalberg (hereinafter referred to as James and Gary, respectively) were husband and wife. At the time they filed their petition James resided in Houston, Texas, and Gary resided in San Antonio, Texas. They filed joint income tax returns for 1962 and 1963 with the district director of internal revenue at Austin, Texas. Melody Ann, Terence T., Jr., Deborah Ellen, and Steven Patrick Camp (hereinafter sometimes collectively referred to as the Camp children) are the children of Gary and her former husband, Terence T. Camp201 (hereinafter Terence). Gary and Terence were divorced on November 23, 1954. The divorce decree awarded custody of the Camp children to Gary, and directed Terence to make monthly payments for their support to the Office of the Collector of Child Support, Fort Worth, Texas. On December 2, 1955, the divorce decree was amended to direct Terence to provide monthly payments of $140 ($35 per child) for the support of the Camp children. The divorce decree as amended was in effect during 1962 and 1963, except that on May 8, 1962, support payments in arrears as of December 31, 1961, were forgiven. Pursuant to the divorce decree, Terence paid $1,220 and $1,578.30 into the Office of the Collector of Child Support during 1962 and 1963; during 1962 he also paid $115 directly to Gary for child support. Petitioners were married on April 15, 1955. In December 1961, they moved from Lawton, Oklahoma, to San Antonio, Texas, leaving their furniture in storage. At that time, Gary left Melody, Deborah, and Steven with Terence in Fort Worth, Texas, because she did not have sufficient funds to support them; Terence, Jr., remained with her. This was a temporary arrangement, and there was no change in the202 legal custody of the children. In January 1962, Melody, Deborah, and Steven returned to San Antonio to reside with Gary. From January 1962 until June 1962, Gary, James, the Camp children, and Jimmy Sue, petitioners' daughter, lived with Gary's mother in San Antonio. In June 1962, petitioners separated; Gary, the Camp children, and Jimmy Sue moved to Houston, Texas, where they lived in an apartment which Gary rented. In August 1962, petitioners were reconciled. Gary returned to San Antonio, and she and James purchased a residence where they, the Camp children, and Jimmy Sue resided for the remainder of 1962 and 1963, except that Terence, Jr., attended school in Austin, Texas, from September 1 through December 31, 1963. Petitioners paid expenses on behalf of the Camp children for food, clothing, cleaning and laundry, medical expenses, school expenses, haircuts, and similar items during the years 1962 and 1963. In the summers of 1962 and 1963, the Camp children visited Terence in Fort Worth, and he took them on a vacation during each visit. Terence and Gary had agreed that during the period when the Camp children visited Terence, he would not make the child support payments provided203 by the divorce decree. During these visits Terence paid expenses on their behalf for food, recreation, and some clothing. In 1963 Terence purchased a new pair of glasses for Terence, Jr., and paid medical expenses on behalf of Melody Ann. During the summer of 1963, Melody Ann stayed at Terence's house an additional two weeks while recovering from a poison ivy infection. None of the Camp children had attained the age of 19 years as of December 31, 1963. The children had no gross income during 1962 and 1963, and did not contribute to their own support. During 1962 petitioners and Terence respectively provided the following items of support: 531 10 PetitionersItemMelodyStevenLodging$200.00$200.00Food255.00255.00Clothing47.1547.15Cleaning & Laundry53.5753.57Medical expenses53.5753.57School lunches63.0063.00School transportation20.0020.00School supplies25.0025.00Haircuts, etc.16.5033.00Contributions13.0013.00Allowance104.0026.00Gifts 50.0050.00 $900.79$839.29 10 TerenceItemMelodyStevenSupport payments$333.75$333.75Vacation32.5032.50Clothing43.7543.75Food25.0025.00Recreation 11.2511.25 $446.25$446.25204 During 1963 petitioners and Terence respectively provided items of support for the Camp children as follows: 10 PetitionersItemMelodyTerence, Jr.DeborahStevenLodging$ 275.00$ 275.00$ 275.00$275.00Food314.25210.00314.25314.25Clothing47.1547.1547.1547.15Cleaning & Laundry53.5753.5753.5753.57Medical expenses163.5793.5753.5753.57School lunches63.0031.5063.0063.00School transportation45.0071.5022.5022.50School supplies25.0025.0025.0025.00School tuition400.00Haircuts, etc.36.0033.0036.0033.00Contributions13.0013.0013.0013.00Allowances104.00104.0052.0026.00Gifts 75.0050.0050.0050.00 $1,214.54$1,407.29$1,005.04$976.04 10 TerenceItemMelodyTerence, Jr.DeborahStevenSupport payments$ 394.58$ 394.58$ 394.58$ 394.58Vacation50.0050.0050.0050.00Food47.5022.5022.5022.50Recreation6.256.256.256.25Clothing27.5027.5027.5027.50Medical expense 90.5022.00 $ 616.33$ 522.83$ 500.83$500.83 On their returns for 1962 and 1963, petitioners205 claimed dependency exemption deductions for, among others, the Camp children. In the notice of deficiency, respondent disallowed petitioners' claimed deductions for Melody and Steven Camp for 1962, and for all the Camp children for 1963. Ultimate Finding of Fact Petitioners provided more than one-half of the total support of Melody and Steven Camp in 1962, and of Melody, Steven, Terence, Jr., and Deborah Camp for 1963. Opinion The issue presented here is purely factual. On consideration of the whole record, 1 as reflected in our findings, we have concluded that petitioners, James and Gary, furnished more than one-half of the total cost of the support of Melody and Steven Camp in 1962, and of all the Camp children in 1963. Consequently, they are entitled to the claimed dependency exemption deductions for these years. Respondent has conceded the correctness of these conclusions. For a discussion of the contentions of Terence T. Camp and his wife, Alyne V. Camp, with respect to their claims to dependency exemption deductions for Melody and Steven for the years 1962 and 1963, see our opinion in Terence T. Camp, T.C. Memo. 1969-93. *206 Decision will be entered under Rule 50. 532 Footnotes1. The parties stipulated that the trial record in this proceeding would include the evidence presented in Terence T. Camp and Alyne V. Camp, Docket Nos. 2562-66 and 3487-66.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619070/	J. M. RICHARDSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Richardson v. CommissionerDocket No. 10417.United States Board of Tax Appeals11 B.T.A. 532; 1928 BTA LEXIS 3784; April 12, 1928, Promulgated 3784 Upon the evidence, Commissioner's determination that petitioner derived a profit of $45,000 from the sale of an interest in real estate, is approved. Thomas L. Pogue, Esq., for the petitioner. J. Harry Byrne, Esq., for the respondent. LOVE 532 This proceeding is to redetermine a deficiency in income tax of $12,674.17 for the year 1922. The issue is whether or not petitioner received a profit on the sale of an interest in real estate. FINDINGS OF FACT. In February, 1921, petitioner and one W. N. Andrews entered into a lease of and agreed to purchase certain real estate known as 533 the Palace Hotel property, in the City of Cincinnati. Petitioner and Andrews each paid $50,000 and became the owners of an undivided one-half interest in the property. The lease and agreement was negotiated on their behalf by one Lloyd Baker, of Cincinnati, acting as their agent. The lease was made to Baker and immediately assigned by him to Andrews and the petitioner. The property was acquired in the expectation of reselling it. It was agreed between them that Baker was to receive for his services a commission of $50,000 when the property was3785 sold and also one-third of the net profit that might result from the sale. The property was to be managed in the meantime by Baker, and he was to share in the operating profit to the extent of $3,000 a year. The agreement between them was oral. In 1922 the petitioner, desiring to be relieved of further liability, had Baker enter into negotiations with Andrews with the object of selling to him petitioner's interest in the property. As a culmination of such negotiations, the following letter, prepared by Baker, was signed by petitioner and accepted by Andrews: LLOYD BAKER, REAL ESTATE, UNION TRUST BUILDING, Cincinnati, September 21, 1922.W. N. ANDREWS, Esq., Newport, Kentucky.I will assign to you all my right, title and interest in the Northwest corner Sixth and Vine Streets, Cincinnati, Ohio, known as the Palace Hotel property, in consideration of Fifty Thousand ($50,000.00) Dollars in cash, and ten notes for Five Thousand ($5,000.00) each, due and payable at intervals one year apart plus one-third of the operating profit to date of transfer. All notes to be dated October 1, 1922, to bear interest at the rate of six per cent per annum, to become due and3786 payable on September 30, 1923, and on each succeeding September 30, until the last note shall have been paid on September 30, 1932. This offer is open for your acceptance until September 30, 1922. J. M. RICHARDSON. Accepted: W. N. ANDREWS. Thereafter, petitioner assigned all of his interest in the property to Andrews and received $50,000 in cash, and there were delivered by Andrews to Baker ten promissory notes of $5,000 each, which were retained by Baker. The notes were drawn by Andrews, payable to himself, and endorsed in blank. Andrews released petitioner from any further liability with respect to the property. At the same time it was agreed orally between Baker and petitioner that the latter would participate to the extent of 50 per cent in Baker's one-third of the net profits which might be derived from the sale of the property. Both Baker and Andrews have since died. The Commissioner determined that the $50,000 of notes were received by Baker as agent of petitioner and he included them in 534 petitioner's income, at a valuation of $45,000, as profit realized from the sale of petitioner's interest. OPINION. LOVE: The petitioner's contention is3787 that he received only $50,000 for his interest in the Palace Hotel property, and hence derived no profit from its sale. He denies the notes were received by Baker on his (petitioner's) account or that he ever had any interest therein or received any of the proceeds. He explains the receipt of the notes by Baker as being payment of the commission of $50,000 which the latter was to receive upon the sale of the property, and that his permitting Baker to get his commission at that time was the consideration for Baker's agreement to pay petitioner one-half of Baker's share of any net profits. On the other hand, we have in evidence the written offer to sell. Petitioner states this was prepared by Baker, at whose request he signed it without more than glancing at it. However, the paper was signed by petitioner and accepted by Andrews, by his signing it. It states explicitly that the consideration for petitioner's interest shall be $50,000 in cash and ten notes of $5,000 each. It is difficult to comprehend why all three parties should be satisfied to have the consideration thus expressed if it did not correspond with the facts. We do not think petitioner's explanation overcomes the3788 weight of this document as evidence. He would, in any event, nor have been liable for the whole of Baker's commission. We do not question his testimony that the notes were retained by Baker. Their retention by Baker is entirely consistent with the respondent's finding that they were received and were retained in the right of petitioner, since the latter received from Baker a right to participate in Baker's share of any profit. It also appears that petitioner received a substantial amount from Baker's estate on account of claims he asserted against Baker on account of this and another real estate transaction. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619080/	IQBAL QUIDWAI AND RABIA QUIDWAI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentQuidwai v. CommissionerDocket No. 11993-81.United States Tax CourtT.C. Memo 1984-42; 1984 Tax Ct. Memo LEXIS 634; 47 T.C.M. (CCH) 962; T.C.M. (RIA) 84042; January 24, 1984. Iqbal Quidwai, pro se. Margaret Hebert, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in petitioners' Federal income taxes as follows: YearDeficiency1977$2,3791978$1,021The issue to be decided is whether petitioners are entitled to exclude from their taxable income $10,000 in 1977 and $5,000 in 1978 under the provisions of a treaty between the United States and Pakistan. FINDINGS OF FACT Petitioners, Igbal and Rabia Quidwai, were legal residents of Newbury Park, California, when they filed their635 petition. They filed timely Federal income tax returns for 1977 and 1978. Iqbal Quidwai entered the United States on July 13, 1971, on a F-1 student visa. 1636 He enrolled at Cal State University, Fullerton, California, and received a B.A. degree in business management in August 1976. Subsequently, in 1977, he enrolled in the M.B.A. degree program at Pepperdine College and attended some classes at that school until 1979. He did not complete the program. While at Pepperdine during each of the years 1977 and 1978, Mr. Quidwai took 9 hours of graduate courses in each of two trimesters. He did not attend school during the summer months of 1977 and 1978 or in the third trimester. Shortly after entering the United States, Mr. Quidwai obtained a job as a stock boy at K-Mart. In 1973 through part of 1976, he worked for United Courier, Incorporated. From October 1976 until sometime in 1979, he was a full-time employee of Safety-Kleen Corporation. During this period, he began work as a salesman and was promoted to a position as a branch manager. Mr. Quidwai has returned to Pakistan twice since coming to the United States in 1971. Both visits were for a duration of approximately 3 weeks. The first visit was in 1974 when he got married and returned to the United States with his wife. The second trip was in 1978. Mrs. Quidwai came to the United States after her marriage to Mr. Quidwai in 1974. Prior to coming to the United States, she had received a degree in chemistry from the University of Karachi, Pakistan. In 1977, she enrolled in a master's degree program at Cal State in Fullerton. During 1976 and part of 1977, she was employed full-time by Winning Laboratories, 637 Inc. For the remainer of 1977 and 1978, she was employed full-time by Rajar Enterprises, Inc. Neither petitioner has paid taxes to Pakistan since coming to the United States. On their 1977 Federal income tax return, petitioners reported salary income of $28,378 and deducted $5,000 for Mr. Quidwai and $5,000 for mrs. Quidwai, citing the United States-Pakistan treaty. They also claimed dependency exemption deductions for themselves, for one child, and for Quamar Qidwai (sic), mother, and Sohail Qidwai (sic), brother representing that the mother and brother lived in their home 12 months of the year and that they provided more than one-half of the dependants' support. On the same return, petitioners claimed employee business expenses for instruction at Pepperdine university and E. Woods Reading Class. On their 1978 Federal income tax return, petitioners reported salary income of $34,774 and entered a negative figure of $5,000 for "other income" and on an accompanying schedule stated that "TP has F-1 Student Visa. Claims part of his wages are exempt under Article XIII of U.S. Tax Treaty with Pakistan. IRS has allowed in past." Attached to the 1978 return is a Schedule C which638 shows that Mr. and Mrs. Quidwai were proprietors of a business in Santa Barbara, California, named Safety-Kleen Corp. On the return petitioners claimed deductions for real estate taxes and for interest on a home mortgage. In addition, petitioners claimed a deduction for employee educational expenses at Pepperdine University for $1,352 (shown on the schedule as $1,338). In the notice of deficiency respondent disallowed the $10,000 deduction claimed for 1977 and the $5,000 exclusion claimed for 1978 on the ground that: "It has not been established that you meet the provisions of Article XIII of that treaty." OPINION The question to be decided is whether petitioners are entitled to exemption from Federal income taxes on $10,000 of their income in 1977 and $5,000 in 1978 under the following provision of the United States-Pakistan income tax convention: 2Article XIII (1) A resident of one of the contracting States who is temporarily present in the other contracting State solely (a) As a student at a recognized university, college or school in such other State, * * * * * * shall be exempted from tax by such other State * * * (ii) with respect to an amount not in excess639 of 5,000 United States dollars for any taxable year, representing compensation for personal services. 640 We think it quite clear that neither petitioner was a "resident" of Pakistan "temporarily present" in the United States "solely" as a student during 1977 and 1978. The treaty defines "resident of Pakistan" as an individual "resident in Pakistan and not resident in the United States for purposes of the United States tax." Art. II, Par. (1)(i). We are convinced that petitioners were residents of the United States for purposes of the income tax during 1977 and 1978 and were not merely temporarily present in this country solely as students. In two other cases involving Pakistanis claiming the benefits of the treaty, the Court has reached a similar conclusion. Budhwani v. Commissioner,70 T.C. 287">70 T.C. 287, 290-293 (1978); Siddiqi v. Commissioner,70 T.C. 553">70 T.C. 553 (1978). The facts were less favorable for the Government in those cases than in the instant one. The determination of residency for United States income tax purposes is a factual one and must be resolved through a consideration of all the relevant facts and circumstances. Parkv. Commissioner,79 T.C. 252">79 T.C. 252, 286 (1982), on appeal (D.C. Cir., Dec. 2, 1982; Adams v. Commissioner,46 T.C. 352">46 T.C. 352, 358 (1966);641 Jellinek v. Commissioner,36 T.C. 826">36 T.C. 826, 834 (1961). As general guidelines for making the determination of residency, the regulations provide that an alien actually present in the United States "who is not a mere transient or sojourner" is a resident of the United States for income tax purposes. Whether he is a transient is determined by his "intentions with regard to the length and nature of his stay." One who comes to the United States "for a definite purpose which in its nature may be promptly accomplished" is a transient; but if his purpose is of such a nature that "an extended stay may be necessary for its accomplishment" and to that end the alien "makes his home temporarily in the United States," he becomes a resident even though he may at all times intend to return to his domicile. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States "in the absence of exceptional circumstances." Sec. 1.871-2(b), Income Tax Regs.3 In applying these residency guidelines, an alien, by reason of his alienage, is presumed to be a nonresident, but that presumption is a rebuttable one. Sec. 1.871-4(b)642 and (c), Income Tax Regs.4643 These general guidelines for making a residency determination must be read in conjunction with the specific provisions of Article XIII of the treaty, the benefits of which are not only denied to a resident of the United States, but are granted only to a person temporarily in the United States solely as a student at a recognized school. Presence in the United States for a period which is not temporary and in any capacity other than as a student will disqualify the individual for those benefits. In presenting his case, Mr. Quidwai, the only witness, was mainly preoccupied with assertions that, on examination of his Federal income tax returns for 1973, 1974, and 1975, the Internal Revenue Service allowed him the benefits of the treaty 5 and that other Pakistanis who were students had also enjoyed its benefits. As a result, the trial record is skimpy with respect to the crucial facts. Based on the record as it stands, we must conclude that petitioners have failed to carry their burden of proving that they qualify for the claimed exclusions. We think it clear that their objectives in the United States were far broader than academic training. 644 The record contains facts which strongly suggest that, by 1977 and 1978, petitioners had become residents of the United States, as they admit that they did in 1980, and that they were not merely temporarily in this country solely as students. As reflected by our findings, Mr. Quidwai first came to the United States in 1971. In October 1976, he became a full-time employee of Safety-Kleen Corporation and continued to work fulltime for that company through both of the years before the Court. He was present in the United States continuously except for two brief visits to Pakistan, one in 1974 when he married Mrs. Quidwai and one in 1978. Mrs. Quidwai, who already had a college degree in chemistry when she came to the United States in 1974, was employed full time in both 1977 and 1978. Petitioners' salaries were quite substantial. Petitioners offered no evidence to explain why they chose to study in the United States or, in order to show the temporary nature of their stay here, what they planned to do on their departure from the United States on completion of their studies. An examination of their 1977 return, which lists petitioners' respective occupations as "sales representative" 645 and "chemist," shows that petitioners claimed dependency exemption deductions for Mr. Quidwai's mother and brother who lived in petitioners' home 12 months of the year, thus indicating that petitioners had established a family home. They claimed deductions for the cost of their studies at Pepperdine and for other courses of study, thus at least technically admitting that they were engaged in a trade or business in the United States. Their income tax return for 1977 as a whole (substantial salaries and deductions for tags for three automobiles, for credit union and charge card interest, for contributions, and for "miscellaneous business expenses") is inconsistent with a solely-as-a-student status and strongly suggests that petitioners had settled in as United States residents. Petitioners' 1978 income tax return, which lists their respective occupations as "BR manager" and "chemist," contains even stronger evidence that petitioners were residents of the United States and were not present in this country solely as students. Their combined salaries had risen to $34,774. They claimed deductions for home mortgage interest and real estate taxes, thus admitting that they had purchased646 their own home. Again, they claimed educational expense deductions, thus admitting that they were engaged in a trade or business. Indeed, as detailed in our findings, as part of their return they included a schedule C showing that petitioners were proprietors of the Safety-Kleen Corporation. Form W-2 attached to the return shows that Mr. Quidwai received a salary of $35,290.56 in 1978 from a corporation with that name. 6The record thus demonstrates that, in 1977 and 1978, petitioners were not mere transients or sojourners in this country within the meaning of sec. 1.871-2(b), Income Tax Regs, discussed above. That they intended to stay in the United States for an indefinite period is shown by such facts as both petitioners' full-time employment over a period of years, their education course designed to improve their skills in their work, their lack of any well planned course of study which was subject to completion within a definite period, their purchase of a home, and their acquisition of a business as proprietors. They cannot reasonably be said647 to have been in the United States in 1977 and 1978 for a temporary period solely as students. Thus, they do not qualify for the income exclusion provided by Article XIII of the treaty. Mr. Quidwai emphasizes and reiterates, however, that in 1977 and 1978 he had only a student's F-1 visa, that the Immigration and Naturalization Service had granted him permission to work, and that to tax him in these circumstances would be unjust and would violate the treaty. We must, however, decide the case on the facts presented in court. We do not know what representations Mr. Quidwai made to the Immigration and Naturalization Service in order to obtain renewals of his F-1 visa. Nor do we know the level of competence of the official who gave him the renewals. He offered no documentation to support his assertion that he had a work permit. See footnote 1, supra. We see no injustice in a law which requires individuals who have established a family home for themselves, a parent, and a sibling in this country and who have competed with taxpaying residents for full-time jobs and in carrying on a business to bear a fair share of the tax burden. Certainly, the treaty, as we understand it, does648 not grant them the relief they claim. We conclude that petitioners were residents of the United States for purposes of the United States income tax and that they were not temporarily present in this country solely as students during 1977 and 1978. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. As explained in Budhwani v. Commissioner,70 T.C. 287">70 T.C. 287, 287-288 (1978): A person granted admittance to the United States as a nonimmigrant student under an "F-1" visa is admitted solely for the purpose of pursuing a full course of study at an approved school. Accordingly, it is not anticipated that the student will work off-campus either for wages or for board and lodging. Permission for the student to accept part-time employment may be granted, upon proper application, but only where the student can show that such employment is necessary to maintain himself as a student and that the necessity is due to unforeseen circumstances arising after acquisition of student status. Where employment is permitted, it may not be allowed to interfere with the student's ability to pursue a full course of study, and in no event may such employment exceed 20 hours per week while school is in session. See sec. 101(a)(15)(F), Immigration and Nationality Act, 8 U.S.C. sec. 1101(a)(15)(F) (1970); 8 C.F.R. sec. 214.2(f)(6) (rev.ed 1977).1↩2. Convention Between the Government of the United States of America and the Government of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to taxes on Income, July 1, 1957 (1959) 10 U.S.T. 985, T.I.A.S. No. 4632 reprinted in 1 C.B. 755">1960-1 C.B. 755. The definitions in Art. II are relevant: ARTICLE II (1) In the present Convention, unless the context otherwise requires: (h) The term "resident of the United States" means any individual or fiduciary who is resident in the United States for the purposes of the United States tax, and not resident in Pakistan for the purposes of the Pakistan tax * * * (i) The term "resident of Pakistan" means any person (other than a citizen of the United States or a United States corporation) who is a resident in Pakistan for the purposes of Pakistan tax and not resident in the United States for the purposes of the United States tax. * * * (j) The terms "resident of one of the contracting States" and "resident of the other contracting State" mean a person who is a resident of the United States or a person who is a resident of Pakistan, as the context requires * * * [Income Tax Convention with Pakistan, July 1, 1957, arts. XIII, II, 24 Fed. Reg. 10100 (1959), reprinted in part in 1 C.B. 755">1960-1 C.B. 755.] Art. XIII (3) of the convention provides: (3) A resident of one of the contracting States temporarily present in the other contracting State under arrangements with such other State or any agency or instrumentality thereof solely for the purpose of training, study or orientation shall be exempted from tax by such other State with respect to compensation not exceeding 10,000 United States dollars in the rendition of services directly related to such training, study or orientation (including emoluments and remuneration, if any, from the employer abroad of such resident). The trial record contains no information to indicate that petitioner was in the United State under arrangements with the United States or an instrumentality thereof for training, study, or orientation. Therefore, Art, XIII (3) has no applicability. Siddiqi v. Commissioner,70 T.C. 553">70 T.C. 553, 555↩, n. 2 (1978).3. Sec. 1.871-2. Determining residence of alien individuals. (b) Residence defined. An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States within the meaning of his section, in the absence of exceptional circumstances. ↩4. Sec. 1.871-4. Proof of residence of aliens. (a) Rules of evidence. The following rules of evidence shall govern in determining whether or not an alien within the United States has acquired residence therein for purposes of the income tax. (b) Nonresidence presumed. An alien, by reason of his alienage, is presumed to be a nonresident alien. (c) Presumption rebutted. * * * the presumption as to the alien's nonresidence may be overcome by proof-- * * * (iii) Of acts and statements of the alien showing a definite intention to acquire residence in the United States or showing that his stay in the United States has been of such an extended nature as to constitute him a resident.↩5. Petitioners failed to inform the Court that for 1976 the Internal Revenue Service denied petitioners the income exclusion authorized by the treaty, that he filed a petition in this Court under sec. 7463 (docket No. 10472-80S), and that the Court upheld the Internal Revenue Service's deficiency determination.↩6. The record is not clear as to whether the business that they owned and the business for which he worked were the same.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619081/	J. KEARSLEY MITCHELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mitchell v. CommissionerDocket Nos. 25569, 38460.United States Board of Tax Appeals19 B.T.A. 83; 1930 BTA LEXIS 2471; February 27, 1930, Promulgated 2471 A taxpayer described as a "capitalist," who is president of a corporation and owns stock in others, is not so engaged in "the operation of a trade or business regularly carried on" as to be entitled to carry over deductions of net losses under Revenue Act of 1921, section 204, or Revenue Act of 1924, section 206. W. W. Cunningham, Esq., and Fred A. Woodis, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. STERNHAGEN 83 The Commissioner determined deficiencies in income tax of $1,289.38 for 1922 and $4,450.71 for 1925. Petitioner claims deductions in both these years for net losses carried over from the preceding years. For 1922 he claims also specified deductions not originally claimed on his returns for depreciation, loss, and interest. FINDINGS OF FACT. Petitioner is an individual residing at Philadelphia, Pa. From 1920 through 1925 he was a "capitalist engaged in different enterprises." He was president of the Philadelphia Rubber Co. and the principal stockholder of the Commercial Car Unit Co. He had one-third interest in the Mechanical Efficiency Co. and an interest in the Melko Commercial Co. and in the2472 Keystone Motor Truck Co. Petitioner, after 1916, borrowed money on his personal credit to buy stock in these companies and to lend to them on note or open account. 84 Petitioner owned land at Oaks, Pa. It was occupied by Keystone Motor Truck Co., of which petitioner was a stockholder. During 1920, 1921, and 1922 the Keystone Co. at its own cost placed improvements and equipment on the property. The Keystone Co. set up on its accounts depreciation of this property. In 1922 petitioner paid $10,000 pursuant to a contract of 1920 with McGinley and Mackie in settlement of a controversy with them. They were stockholders in the Commercial Car Unit Co., in which petitioner was a stockholder. He had secured a judgment for $500,000, the benefit of which, they claimed, inured in some measure to the corporation. Petitioner agreed with them to buy their stock and take their releases for $25,000 to be paid in five payments of $5,000 each. The corporation was dissolved in 1920. According to a statement of account rendered to petitioner, items of interest totaling $1,507.92 appeared due by him to the Elkins Morris Co. for 1922. It was not paid in 1922. Petitioner's returns2473 were made on the cash receipts and disbursements basis, and it was his usual practice to deduct interest paid by him during the taxable year. OPINION. STERNHAGEN: 1. For 1922 and 1925 petitioner claims deductions of statutory net losses of 1921 and 1924, respectively, under the Revenue Act of 1921, section 204, and the Revenue Act of 1924, section 206. Without setting forth these provisions of the statutes, it suffices to say that they restrict the losses which may be carried over from one year to another to such as result from or are attributable to "the operation of a trade or business regularly carried on by the taxpayer." The petitioner did not testify, the evidence being furnished by his secretary and accountant and by his attorney. Petitioner's business is thus described by his secretary, "He was a capitalist engaged in different enterprises and also president of the Philadelphia Rubber Company." Aside from this characterization, the evidence is only that he owned stock in several corporations, in some of which he exercised his power as controlling stockholder to dictate the personnel employed. To call petitioner a "capitalist" is not to say that he "operates a trade2474 or business regularly carried on." Elliott v. Frankfort, & c.,; ; . Nor can this be said because petitioner is interested through stock ownership in corporations which possibly may be regularly engaged in the operation of a trade or business. ; affd., ; ; affd., ; ; ; J.85 ; . The Revenue Act of 1924, section 206, carries a more elaborate qualification of net losses which would, if necessary, require further consideration, but the scant evidence before us does not call for such discussion. Respondent denied that petitioner had in fact sustained the losses, and petitioner has wholly failed to prove it. He only begs the question by showing that he stated a loss on each return. We sustain respondent's disallowance of the deduction2475 in 1922 and 1925 for net losses. This disposes entirely of Docket No. 38460. 2. The second item is claimed here for the first time and does not grow out of the respondent's disallowance of any deduction taken on the petitioner's return. On his return petitioner made no reference to a deduction for depreciation of the improvements made by the Keystone Co. on the land at Oaks. He now contends that he is entitled to such a deduction. We see no occasion to discuss the theory appearing in petitioner's pleading and suggested at the trial. The evidence is not sufficient to establish any basis for depreciation. Petitioner made no investment himself and he can not deduct depreciation on the basis of another's cost. The tenant itself seems to have set up depreciation on the property. Furthermore, assuming that the basis were proved, the rate or amount of exhaustion, wear and tear for the years in question of the depreciable property is not established. On this point, petitioner has failed. 3. The item of $10,000 deduction in respect of the payment on the McGinley and Mackie contract was not claimed on petitioner's return and does not, therefore, appear as a disallowance in the*2476 respondent's determination. Petitioner now claims it as a loss sustained in 1922. Whether there was a loss, however, does not appear. Petitioner had received the stock in 1920, and prior thereto he had recovered the judgment of $500,000. If these payments in 1922 were simply the final payments for benefits derived in 1920 and the circumstances were such as to tie together the judgment and stock received with the payments made, it could not be said that the payments were a loss. In the doubtful condition of the evidence, we think the deficiency should not be reduced on this account. 4. Petitioner also claims a deduction not taken on his return of interest due from him. He made his return on the basis of actual disbursements and the interest referred to was admittedly not paid. In addition to these issues, petitioner alleges that his income for 1922 should be increased by $4,454.46 expended by the Keystone Co. for improvements at Oaks. Despite respondent's "admission," the evidence does not justify the increase, and we leave the deficiency as stated in the notice. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619083/	CHANNING KING HALL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHall v. CommissionerDocket No. 6379-75.United States Tax CourtT.C. Memo 1978-360; 1978 Tax Ct. Memo LEXIS 158; 37 T.C.M. (CCH) 1500; T.C.M. (RIA) 78360; September 12, 1978, Filed 158 P, a U.S. citizen, was a civilian employee of the U.S. Army from 1953 through Dec. 31, 1971. P's wife was a citizen of France. The couple resided in Morocco from 1953 to 1959, in France from 1959 to 1967, and in Germany from 1967 through 1971. Held, P failed to establish that his domicile for 1970 and 1971 was other than Germany, where he lived and worked; under German law, he is not entitled to exclude from gross income one-half of his earnings as belonging to his nonresident alien wife. Channing King Hall, pro se. Joyce H. Errecart, for the respondent. SIMPSONMEMORANDUM OPINION SIMPSON, Judge: The Commissioner determined deficiencies in the petitioner's Federal income taxes in the amounts of $ 3,507.60 for 1970 and $ 3,889.45 for 1971. The sole issue for decision is whether in 1970 and 1971, the petitioner was domiciled in a community property jurisdiction, so that one-half of his earnings could be attributed to his nonresident alien wife and excluded from his gross income. All of the facts have been stipulated, and those facts are so found. 1The petitioner, Channing King Hall, resided at Sant Julia de Loria, Andorra, at the time he filed his petition in this case. He filed individual Federal income tax returns for the calendar years 1970 and 1971. Mr. Hall was born in Newton, Mass., on April 14, 1921. He resided in Pennsylvania in 1942 when he was drafted into the U.S. Army (the Army). In 1945, he served in the Army in160 France. He went on terminal leave from the Army on February 5, 1946, and obtained his discharge on April 14, 1946. Mr. Hall was married to Georgette Triandafyllidis, a French national, on February 23, 1946, in France, without a contract. From April 15, 1946, to July 5, 1946, he was employed as a civilian employee of the U.S. War Department in France. Mr. Hall remained in France until the end of November 1946. He obtained a French identity card and driver's license. Mr. Hall and his wife came to the United States in 1946 and resided in California at the time he resumed active service in the Army in 1948. He served at duty posts in the United States and subsequently was transferred overseas. He was discharged from the Army in Germany on April 18, 1953. From June 16, 1953, through 1971, Mr. Hall was a civilian employee of the Army. From the beginning of such employment until April 20, 1959, he served in Morocco. He was reassigned from Morocco to France on April 20, 1959. In October of 1964, Mr. Hall and his wife purchased undeveloped real property in France; however, they sold such property in April of 1970. In March of 1967, Mrs. Hall obtained a French identity card.161 In that year, Mr. Hall received a French driver's license and held a French postal savings account with a balance of 140 francs. Mr. Hall remained in France until June 25, 1967, when he was reassigned to civilian employment with the Army in Germany. He and his wife resided in Germany from that time through 1971. Mr. Hall retired from civilian employment with the Army on December 31, 1971. However, on September 29, 1971, he arranged for the movement of some goods from Germany to Andorra. Mr. Hall has remained a U.S. citizen. His wife has never applied for U.S. citizenship. Mr. Hall did not pay French income tax. On October 20, 1964, Mr. Hall claimed that his official residence since January of 1947 was California. On March 4, 1968, he claimed that during the period between December 1966 and December 1967 he was domiciled in France and Germany. On his Federal income tax returns for the calendar years 1970 and 1971, Mr. Hall claimed that his domicile for such years was in Germany. On his returns for 1970 and 1971, Mr. Hall claimed he was entitled to split income with his wife under the community property laws of Germany2 or California. In his notice of deficiency, the162 Commissioner determined that Mr. Hall was not entitled to split income with his wife under the community property laws of any State or other jurisdiction. The sole issue for decision is whether the petitioner is entitled under the community property laws of any jurisdiction to attribute one-half of his earnings to his nonresident alien wife and thereby exclude such amount from his gross income. 3 Resolution of this issue depends upon whether the petitioner was domiciled in a jurisdiction whose community property laws would apply to him. Gates v. Commissioner,199 F. 2d 291 (10th Cir. 1952), affg. a Memorandum Opinion of this Court; Helvering v. Campbell,139 F. 2d 865 (4th Cir. 1944), affg. a Memorandum Opinion of this Court; Commissioner v. Cavanagh,125 F. 2d 366 (9th Cir. 1942), affg. 42 B.T.A. 1037">42 B.T.A. 1037 (1940); Blumenthal v. Commissioner,60 F. 2d 715 (2d Cir. 1932), affg. 15 B.T.A. 1394">15 B.T.A. 1394 (1929), cert. denied 287 U.S. 662">287 U.S. 662 (1932); Santiago v. Commissioner,61 T.C. 53">61 T.C. 53 (1973),163 affd. without opinion 510 F. 2d 223 (D.C. Cir. 1975); Taira v. Commissioner,51 T.C. 662">51 T.C. 662 (1969); see Restatement, Conflict of Laws 2d, sec. 258 (1971). The petitioner now claims that he was domiciled in France during the years at issue, and that French community property law is applicable to him. In the alternative, the petitioner claims domicile in either California or Andorra. The Commissioner argues that the petitioner was domiciled in Germany during the years at issue. He further argues that, even if the Court finds that the petitioner was domiciled in France, French community property law does not apply to him. The essential elements of domicile are residence in fact, coupledwith the intention of making the place of residence one's164 home. Texas v. Florida,306 U.S. 398">306 U.S. 398, 424 (1939); Gates v. Commissioner,supra at 294; Restatement, Conflict of Laws 2d, secs. 14-16, 18 (1971). A domicile, once acquired, is not lost merely by virtue of a change in residence, if such change is accompanied by a persisting intent to return to the previously established domicile. However, the fact that there exists some floating intention of returning to the old domicile does not prevent a new domicile from being acquired in the meantime. District of Columbia v. Murphy,314 U.S. 441">314 U.S. 441, 456 (1941); Texas v. Florida,supra at 425-427; Helvering v. Campbell,supra at 869. The question of domicile is one of fact, to be determined on the basis of all the evidence. Generally, the place where a person lives is taken to be his domicile until facts are adduced to establish otherwise. District of Columbia v. Murphy,supra at 455; Kastel v. Commissioner,136 F.2d 530">136 F. 2d 530, 533 n. 2 (5th Cir. 1943). After reviewing all of the evidence in this case, it is clear that the petitioner's165 residence in 1970 and 1971 was in Germany, and he has failed to establish that he was domiciled in any jurisdiction other than Germany, his place of residence. 4166 In determining a taxpayer's domicile, his declarations of intention may be considered. District of Columbia v. Murphy,314 U.S. at 456; Texas v. Florida,306 U.S. at 425. However, in this case, the petitioner's declarations have been contradictory. He now assets that throughout his marriage, his intention to return to France was manifested. He characterizes all absences from France as "involuntary." Yet, in 1964, he claimed that his domicile was in California, and in 1970 and 1971, he asserted on his tax returns that he was domiciled in Germany. Moreover, his declarations of intent are not dispositive, particularly when they are in conflict with other evidence. District of Columbia v. Murphy,314 U.S. at 456; Texas v. Florida,306 U.S. at 425. On this record, the petitioner has failed to show that he had established substantial ties to any one jurisdiction. Rather, it appears that he changed his domicile whenever his employment dictated such a move. His present claim that he continued to be domiciled in France in 1970 and 1971, despite the fact that he had resided in Germany since 1967, is based primarily167 upon the facts that he obtained a French driver's license in 1967, that he kept open a postal savings account in France, that he owned real property in France, and that his wife remained a French citizen. However, the balance in the petitioner's French postal savings account in 1967, only 140 francs, was not a significant amount, and he has not shown that he continued to hold such account in 1970 and 1971. Moreover, in 1970, he and his wife sold the real property situated in France. 5 Similarly, the petitioner has not shown the conditions under which he obtained the French driver's license or whether he continued to hold such license in 1970 and 1971. Finally, the fact that Mrs. Hall remained a French national is not persuasive evidence in this case, since, during their more than 30 years of marriage, she has continued to live with Mr. Hall wherever he worked and has resided in France relatively little. In summary, the evidence does not establish such substantial ties to France to persuade us that the petitioner remained domiciled there, rather than in Germany, where he lived and worked. The petitioner may have had a sentimental attachment to France, but such a sentimental attachment168 is not sufficient to establish France as his domicile. District of Columbia v. Murphy,314 U.S. at 456. We also are not persuaded by the petitioner's claims of domicile in California or Andorra. 169 The petitioner left California in 1948, and there is absolutely no evidence that he intended to return there. It may be that, during the years at issue, he formed the intent to make Andorra his permanent home upon his retirement. Yet, intention alone is not sufficient to establish domicile.Actual residence is a requisite to establishing domicile; from the record, it does not appear that the petitioner ever resided in Andorra prior to his retirement from civilian employment with the Army on December 31, 1971. Hampton v. Commissioner,38 T.C. 131">38 T.C. 131, 133 (1962). The petitioner also argues that the Commissioner audited his returns for 1963 and 1967, accepted his claim of domicile in France for such years, and approved the exclusion from gross income of one-half of his earnings on the ground that such amount belonged to his wife under French law. However, the facts in those years were substantially different from those during the taxable years at issue, in that the petitioner resided in France during the prior years. In any event, the Commissioner is not bound by a determination made pursuant to an audit of a prior year's return. Fruehauf Trailer Co. v. Commissioner,42 T.C. 83">42 T.C. 83, 99 (1964),170 affd. 356 F. 2d 975 (6th Cir. 1966), cert. denied 385 U.S. 822">385 U.S. 822 (1966). Having determined that the petitioner was domiciled in Germany during the years at issue, we must determine his status under German law. The German Civil Code, Sixth Title, section 1363 provides that a "community of accrued gains" is the prevailing matrimonial regime where the spouses do not provide otherwise by marriage contract. However, the term may be misleading, for the system is not one of community property. Rather, German law provides for a system of separate property during the existence of the marriage, with a claim for equalization of gains upon termination of the matrimonial regime. J. Leyser, "'Equality of the Spouses' under the New German Law," 7 Am. J. Comp. L. 276">7 Am. J. Comp. L. 276, 279-280 (1968); W. Muller-Freienfels, "Family Law and the Law of Succession in Germany," 16 Intl. & Comp. L.Q. 409, 426 (1967); compare Poe v. Seaborn,282 U.S. 101">282 U.S. 101 (1930). Moreover, article 15(2) of the Introductory Act to the German Civil Code provides that if foreign spouses have their residence in Germany, the laws of the State of which the husband was a national*171 at the time of the entry into the marriage determines marital property rights, in the absence of a marriage contract. The petitioner was a U.S. citizen at the time of his marriage. There is no Federal law of community property ( Santiago v. Commissioner,61 T.C. at 59); nor are Massachusetts or Pennsylvania, the only States in which, on the basis of this record, the petitioner had resided prior to his marriage. Willcox v. Penn Mut. Life Ins. Co.,357 Pa. 581">357 Pa. 581, 55 A. 2d 521 (1947). We believe that a German court would not look to the law of France, which was not the State of the petitioner's nationality, or to the law of California, a State to which he did not move until several months after his marriage, to determine that the petitioner's earnings were community property. The petitioner cites no authority to the contrary. The petitioner also claims that certan amounts were assessed and paid prior to the issuance of the notice of deficiency in this case. To give the petitioner credit for any such assessments, Decision will be entered under Rule 155. Footnotes1. There was a hearing at which the Commissioner called an expert witness, but his testimony consisted only of expressing his expert views concerning French law.↩2. Mr. Hall appears to have abandoned any claim that Germany is a community property jurisdiction.↩3. If income earned by the personal services of Mr. Hall while working for the U.S. Government in Germany was attributable to his wife by reason of community property law, such income would be treated as income from sources without the United States and would not be subject to Federal income tax. Hampton v. Commissioner,38 T.C. 131">38 T.C. 131, 135↩ (1962).4. At the time of the trial of this case, the petitioner was in Europe, and he elected not to return to the United States for purposes of the trial and not to engage counsel to represent him. His absence made it difficult for him to carry his burden of proof. To assist the petitioner, the Court arranged for the parties to enter into a stipulation of all the facts with respect to which there was no genuine controversy. To allow the petitioner the greatest opportunity to present his case under such circumstances, the Court admitted many of his letters written to the IRS solely for the purpose of establishing that such letters had in fact been written; the letters were not admitted generally for the truth of the statements contained therein, since such statements were not made under oath and since the Commissioner had no opportunity to cross examine the petitioner with respect to them. Rule 802, Fed. R. Evid. However, at the request of the Commissioner, we have relied upon some of the statements contained in those letters in making our findings of fact, because the statements constituted admissions by a party-opponent. Rule 801(d)(2), Fed. R. Evid.↩5. On schedule D of his Federal income tax return for 1970, the petitioner reported only one-half of the gain from the sale of such property. In support of this treatment, he stated that the land was situated in France, was owned jointly with his wife, and that her share of the gain was not subject to U.S. taxation. His characterization of the transaction was accepted on audit. The petitioner argues that the Commissioner's treatment of this item on audit amounts to a concession that the petitioner is entitled to exclude from gross income one-half of his earnings as belonging to his wife under the community property laws of France. His position is without merit. The Commissioner conceded nothing; he merely chose not to challenge this item on audit. Moreover, different rules apply in determining ownership of real property, as opposed to personal property. See Restatement, Conflict of Laws 2d, sec. 223 comment a↩. (1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619084/	H. Hamburger Company, Inc. v. Commissioner.H. Hamburger Co., Inc. v. CommissionerDocket No. 19840.United States Tax Court1949 Tax Ct. Memo LEXIS 90; 8 T.C.M. (CCH) 780; T.C.M. (RIA) 49213; August 30, 194990 Bernard Weiss, Esq., 136 E. 57th St., New York 22, N. Y., for the petitioner. John J. Madden, Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion The Commissioner determined deficiencies of $717.44 and $14,524.01 in declared value excess-profits tax and excess profits tax of the petitioner for 1943. The only issue for decision is whether the Commissioner erred in disallowing a claimed deduction of $15,311.65 representing payments to unpaid creditors of a predecessor corporation. Findings of Fact The petitioner is a New York corporation which filed its return for 1943 with the collector of internal revenue for the third district of New York. The petitioner was incorporated in 1934 and since then has been engaged in the business of mounting and selling diamonds at wholesale. Herman Hamburger is its president and sole stockholder. He had previously been president and sole stockholder of Kionka and Hamburger, Inc., a corporation engaged in the same kind of business, when that corporation was forced by poor business to cease operations in 1931. It settled with its credtors for 70 per cent of the amounts which it owed. The petitioner was91 having difficulty in obtaining diamonds at the lowest prices in 1942. Its credit rating with the Jewelers Board of Trade, which rates the credit of dealers for the trade, was not first class and many importers who sold at lowest prices would not deal with any except those having a first class rating. Hamburger was told that if he would have the petitioner pay in full those creditors of Kionka and Hamburger, Inc. with which it was dealing or desired to deal, its credit rating would be changed to first class and more diamonds at lower costs would be made available by those dealers and others. The petitioner paid $15,311.65 on July 16, 1943 to 12 former creditors of Kionka and Hamburger, Inc., representing the 30 per cent of their accounts which had not been paid in the 1931 settlement. The petitioner selected those with which it was doing business. There were other creditors of Kionka and Hamburger, Inc. which were not paid anything by the petitioner. The petitioner received a first class credit rating by the Jewelers Board of Trade as a result of the payment and was thereafter able to make more favorable purchases both from old and from new sources. The petitioner deducted the*92 $15,311.65 on its return for 1943. The Commissioner disallowed the deduction with the explanation that the amount was a capital expenditure no portion of which was deductible for 1943. Opinion MURDOCK, Judge: This case is similar to and not distinguishable from (June 22, 1949), in which one corporation, in order to improve its credit rating, paid the remaining 55 per cent of some of the debt of another. This Court there held: "But even if there were no binding commitments, petitioner's standing in the business community, its relationship to the jewelry trade generally, and its credit rating in particular, characterized the payments as calculated to protect and promote petitioner's business and as a natural and reasonable cost of its operation. . As such they are deductible in any event as ordinary and necessary business expense. ; ." Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619087/	EDNA B. ELIAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Elias v. CommissionerDocket No. 90827.United States Board of Tax Appeals41 B.T.A. 1109; 1940 BTA LEXIS 1101; May 10, 1940, Promulgated 1101 On July 1, 1929, petitioner created a separate trust for the benefit of each of her four children, naming her husband as trustee of each trust. The ordinary net income was directed to be used in the discretion of the trustee for the support, education and maintenance of the respective beneficiaries and the remainder accumulated to their respective accounts until each reached the age of twenty-one years. Thereafter such accumulated income was to be paid to the beneficiaries and the current income currently distributed to them. At termination of each trust the corpus was to be distributed in accordance with detailed provisions of the trust instrument, but such corpus was to revert to petitioner only in the event she survived both her husband and the child beneficiary. Capital net gains were to be accumulated as part of the corpus of each trust fund. Petitioner, as grantor, reserved the right at any time to change the trustee and appoint a successor, or to modify or revoke either trust at any time after January 15, 1936, and all four trusts were revoked effective March 4, 1936. Held, (1) no part of the ordinary net income received by the trusts during the taxable years 19341102 and 1935 is taxable to petitioner; and (2) the capital net gains derived by the trusts in the taxable years, which were accumulated as part of the corpus and paid over to petitioner upon revocation of the trusts in 1936, are taxable to petitioner under section 167, Revenue Act of 1934. Edgar B. Bronson, Esq., for the petitioner. Benjamin M. Brodsky, Esq., for the respondent. HILL 1109 Petitioner appeals from a determination by respondent of deficiencies in her income tax liability for the years 1934 and 1935 in the 1110 amounts of $6,664.68 and $6,566.51, respectively. The question for decision is whether capital gains, interest, and dividends received during the taxable years by four certain trusts created by petitioner are taxable to her. FINDING OF FACT. Petitioner is a citizen of the United States, and resides at Armonk, Westchester County, New York. On July 1, 1929, in the city of New York, petitioner, as grantor, and her husband, Henry Hart Elias, as trustee, executed four trust indentures, in which were designated as the respective beneficiaries Albert Jay, Josephine, Robert Henry, and Catherine Elias, children of petitioner1103 and her husband. All of the children named are still living, and, in the order stated, were born on September 28, 1924, December 28, 1917, September 17, 1914, and July 21, 1919. Henry Hart Elias continued as trustee until the trusts were terminated. At the time of the execution of the trust indentures mentioned, petitioner possessed net financial resources of about a million and a half dollars. The principal of each trust fund was $25,000, and petitioner's purpose in creating the four trusts was to provide financial security for her children at a time when conditions generally were in a state of uncertainty. The four trust indentures contained provisions substantially similar in all respects material here. The instrument establishing the turst for the benefit of petitioner's son, Albert Jay Elias, which is fairly representative of the others, empowered the trustee to invest and reinvest the trust fund of $25,000 and any additions thereto; to receive the income and profits therefrom and, after payment of all lawful charges and expenses, to use and expend the net income, or so much thereof as the trustee in his sole discretion might deem advisable, for the support, education, 1104 and maintenance of the beneficiary until he reached the age of twenty-one years, when the trustee was directed to pay over to him all accumulated and unexpended income. Thereafter, the annual net income was payable to such beneficiary until the death of either petitioner or the beneficiary, at which time it was provided the trust should terminate and the principal fund then remaining be paid over to petitioner's husband. In the event petitioner's husband should predecease Albert Jay Elias and petitioner, the net income was payable to such first named beneficiary until his death, with remainder over to petitioner. Additional provisions relate to the disposition of the corpus or principal fund upon the happening of other contingencies not important here. It was further directed that during the lifetime of Henry Hart Elias he should be the sole trustee, with absolute discretion as to the 1111 character of investments for the trust fund; that he should have full power to sell the same and reinvest the proceeds in such manner as he might deem advisable, "and to do everything in the management and investment of the trust fund and property which an individual can do with his1105 own property." The trust instrument provided that the term "net income" should not include profits realized upon any sale or exchange of trust property, and that any profits or losses upon such sales or exchanges, including stock dividends and profits realized from subscription rights, or any appreciation or depreciation in value, should accrue to and be borne by the corpus or principal of the trust fund. Upon termination of the trust, otherwise than by revocation, the funds and property representing such profits and appreciation were to be paid over to Henry Hart Elias, or, if he should then be dead, to the person to whom the principal of the trust was to be paid under other provisions of the trust. It was also provided that if at any time during the minority of the beneficiary the net income of the trust, in the judgment of Henry Hart Elias as trustee, should be insufficient for the proper education, support, and maintenance of the beneficiary, then such trustee was vested with authority to apply and expend for such purposes, in addition to the net income then available, such part of the principal or corpus of the trust as in his judgment should be advisable. It was provided1106 that during the minority of the beneficiary, as long as Henry Hart Elias should be living and competent to administer the trust, the net income should be applied and expended as Henry Hart Elias, in his sole discretion, might determine; but, in the event of the substitution of another trustee during minority of the beneficiary, the net income in its entirety should be paid over by the substituted trustee to the legally constituted guardian of the beneficiary. The trust instrument further provided that the absolute discretion given to Henry Hart Elias as trustee respecting the character of investments of the trust fund should not apply to any substituted trustees; that the powers of the substituted trustees and their successors should be only such as are the usual and customary powers of trustees, with exceptions and detailed instructions not material here. The trust instrument authorized petitioner's husband, as sole trustee, to borrow from the trust fund, for himself and for his own use, in his own discretion, an amount or amounts not exceeding 80 percent of the trust fund, upon such terms as he might deem advisable, upon payment of interest on the sum borrowed at the rate of1107 4 percent per annum. The trust instrument further provided: The party of the first part, the grantor herein of this trust, hereby expressly reserves to herself the right to modify, alter or entirely revoke this instrument 1112 at any time after January 15, 1936, as to all or any part of the trust herein created, without the consent of any Trustee or beneficiary hereunder, upon thirty days' previous notice in writing to the then acting Trustees of the grantor's intention to so modify, alter or revoke this trust indenture. Until said 15th day of January, 1936, this trust is absolutely irrevocable. In the event that the grantor at any time shall revoke this instrument, the corpus or principal of the trust fund, together with all accumulations and profits and appreciations, shall be immediately paid over by the Trustees to the party of the first part, the grantor herein, or to such person or persons as she may designate. In event of the death of Henry Hart Elias before termination of the trust, petitioner, as grantor, appointed a trust company and a certain individual to act as substituted trustees. She also reserved to herself the right to change any or all of the trustees1108 named in the instrument, and to appoint a successor or successors. During the continuance of the four trusts involved herein the trustee kept a separate account in the name of and for each trust, in which account were entered all items and transactions of the trusts, including purchases and sales of securities, and receipts of income consisting of interest on bonds and dividends on stocks. The trustee also kept a separate account in the name of and for the benefit of each beneficiary. All income consisting of interest and dividends received from each trust fund, after first being entered in the trust account where the capital items were kept, was transferred therefrom and credited to the separate account of the beneficiary; and such portion of the income as the trustee deemed advisable was expended from such separate account for the support, education, and maintenance of the beneficiary. During the continuance of the four trusts, capital net gains on sales of securities were added to and treated as a part of the capital or princital of each trust fund; such gains were not segregated or recorded in an account separate from the capital or principal of the trust fund, but such1109 amounts were intermingled and invested with the rest of the trust principal from which gains were derived. For Federal income tax purposes, the trustee included such capital gains in the taxable income reported in returns filed by him as trustee each year, including the taxable years 1934 and 1935, and the taxes shown to be due thereon were paid from the principal of the respective trust funds. Interest and dividends were treated as income of the trusts, and credited to the respective beneficiaries. Such income was reported in Federal income tax returns filed by or in behalf of the beneficiaries each year, including the taxable years 1934 and 1935, and the taxes shown to be due thereon were paid from income held in the separate accounts of the beneficiaries. Respondent included in petitioner's taxable income for the years 1934 and 1935 interest, capital net gain, and dividends received by the four trusts herein as follows: 1934TrustInterestCapital net gainDividendsAlbert J. Elias, 2nd$42.58$3,584.00$5,575.00Josephine Elias3.313,808.006,685.00Robert Henry Elias9.693,359.006,075.00Catherine Elias12.083,711.506,467.50Total67.6614,462.5024,802.501935Albert J. Elias$6,580.00Josephine Elias7,180.00Catherine Elias7,080.00Robert H. Elias$2,014.306,367.50Total2,014.3027,207.501110 1113 Such portion of the credited income as the trustee deemed advisable was applied to the support and maintenance of each beneficiary, and the unexpended balance was held by the trustee in a separate account, credited to the beneficiary as his or her property. All such income from the trust for Robert Henry Elias was paid over to him when he attained his majority on September 17, 1935, and thereafter all income from his trust until revoked was paid over directly to him. None of the income that consisted of interest and dividends received from any of the four trusts in question was ever credited or paid over, directly or indirectly, to petitioner, or applied for her benefit, or used to pay premiums on insurance on her life, or to pay any life insurance premiums. On February 3, 1936, petitioner executed and delivered to the trustee four notices of revocation, revoking each of the four trusts hereinabove mentioned, which revocation became effective thirty days later, on March 4, 1936. On or about the date on which revocation of the trusts became effective, the capital or principal of each trust fund, including net gains on sales made prior thereto, as shown on1111 the balance of the capital account of each trust, was delivered and paid over by the trustee to petitioner. The balance of the income then held in the accounts of the respective beneficiaries, including interest received or accrued and dividends received or declared prior to March 4, 1936, was not paid over or delivered to petitioner, but was transferred to separate accounts of each of the minor beneficiaries, and the unexpended income of the trust for the benefit of Robert Henry Elias, who had theretofore attained his majority, was paid over to him. When Josephine Elias thereafter attained her majority on December 28, 1938, the balance of the income derived from her trust was paid over to her. 1114 The trustee, Henry Hart Elias, never exercised the power conferred on him to borrow money from any of the four trusts. Henry Hart Elias, who was the father of the beneficiaries named in the four trusts created by his wife, was, on July 1, 1929, and during the taxable years 1934 and 1935 and ever since has been, financially able to support, maintain, and educate his children. No guardian has ever been formally appointed by any court for any of the beneficiaries named in1112 the trusts here involved. The reason for the revocation, effective on March 4, 1936, of the four trusts created July 1, 1929, was that petitioner had previously, on August 15, 1935, created irrevocable trusts for the benefit of the same beneficiaries. OPINION. HILL: Respondent included in petitioner's taxable income both the ordinary net income and the capital net gains derived in the taxable years 1934 and 1935 by each of the four trusts established by petitioner in 1929 for the benefit of her children. Respondent contends that his action is in accordance with the provisions of sections 166 and 167 of the Revenue Act of 1934. 11113 If we are to sustain respondent in taxing the income of the trusts to petitioner, obviously our approval must rest on one of two grounds, namely, (1) because the income of the trusts, by the facts appearing in the record, is brought within the purview of section 166 or section 167, supra; or (2) because petitioner retained such dominion and control over the corpus that she did not by creation of the trusts cease to be the owner thereof, and the income therefore, must be regarded for tax purposes as her income within the meaning of section 22(a), which defines gross income as including "gains or profits and income derived from any source whatever." . Cf. . 1115 If either section 166 or section 22(a) is applicable with respect to the ordinary income, it would be taxable to petitioner. If neither section is so applicable, the ordinary income is not taxable to petitioner, but we would still have to consider whether she is taxable on the capital gains under section 167 or section 22(a). A brief consideration of the facts will make it clearly apparent, we think, that the1114 ordinary income here in controversy can not be taxed to petitioner under the doctrine of the cited cases and similar decisions. In the Clifford case, the grantor declared himself trustee of certain securities, for a term of five years, to hold the net income for the benefit of his wife. On termination of the trust, the corpus was to revert to the grantor, while all accrued or undistributed income was to be treated as property of the wife. The grantor retained very broad powers respecting the management of the trust property, including the right to accumulate income or pay it over to his wife within his discretion; to sell, exchange, mortgage, or pledge any of the securities, whether as corpus or investment or proceeds, and any income therefrom; and exercise all voting powers incident to the trusteed shares of stock. The Court said: In this case we can not conclude as a matter of law that respondent [grantor] ceased to be the owner of the corpus after the trust was created. Rather, the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent1115 continued to be the owner for purposes of § 22(a). So far as dominion and control were concerned it seems clear that the trust did not effect any substantial change. In substance his control over the corpus was in all essential respects the same after the trust was created, as before. In the case at bar petitioner retained no powers of control over the corpus of her trusts comparable to those retained by the grantor in the Clifford case. On the contrary, petitioner appointed her husband, not herself, to act as trustee and vested in him all powers of management, including the power to accumulate or expend income for the henefit of the children. And it may be noted in this connection that the husband clearly had a substantial adverse interest in the disposition of both corpus and income. Each trust provided that when the beneficiary reached the age of 21 the accumulated or unexpended income of the trust fund was to be paid over to him, and thereafter he was to receive annually the net income until the death of either the beneficiary or the grantor, at which time the trust would be terminated and the corpus paid over to petitioner's husband, the trustee. In the1116 event the husband predeceased both the beneficiary and petitioner, the trust was to continue until the death of the beneficiary, when it was to terminate and the corpus revert to petitioner, if she survived the beneficiary; otherwise the corpus would go in remainder to others named in the trust instrument. 1116 Thus, it seems plain that petitioner retained no power of control over any part of the corpus of either trust during the period ending January 15, 1936, nor did she retain any like power exercisable thereafter unless the retention of such a power may be said to have been effected by reservation of the right to modify, alter or revoke the trusts at any time after January 15, 1936, upon the giving of 30 days previous notice in writing to the trustee. Section 166 provides for taxing the income of a trust to the grantor where "at any time" the power to revest in the grantor title to any part of the corpus is vested in the grantor. The application of the statute depends wholly upon the vesting of the described power. The provision that the trust should terminate and the corpus be paid over to petitioner if she survived both her husband and the beneficiary1117 did not constitute a vested power to recall the corpus, and hence does not make applicable section 166. Such result would follow because of a retained reversion and not because of the retention of a vested power to revest the corpus in petitioner. , affirming , which affirmed . In that case, the Supreme Court pointed out that at least in the law of estate a power to revest or revoke is not synonymous with reversion; that "a reversion is the residue left in the grantor on determination of a particular estate." The provision in each of the trust instruments involved here reserving to petitioner the right to revoke and thus to recapture the corpus at any time after January 15, 1936, did not constitute the retention of a presently vested power. Such right depended upon the subsequent existence of certain conditions, which were beyond the power of petitioner to control. If either the beneficiary or petitioner had died prior to the date mentioned, the trust would have been thereby terminated and the corpus paid over to petitioner's husband. Hence petitioner's power to revoke1118 the trust was contingent upon its not having terminated by its terms prior to January 15, 1936, and whether the trust would terminate by its terms prior to such date was contingent upon the happening or nonhappening of certain events beyond the control of petitioner. Such power did not exist in the taxable years. Prior to January 15, 1936, the power not only did not exist, but in the taxable years it was not known, and could not then have been known, whether the power would ever come into existence. The power to direct revestment of a trust corpus, which is dependent upon a contingency that may never happen or that is beyond the power of the grantor to control, is not a presently existing power, or, as the principle may be otherwise stated, there is no presently existing power in the grantor to revest "at any time" where the reservation of the power is conditioned upon a contingency that may never occur. "A 1117 power which is not presently exercisable and may never be capable of being exercised, does not exist." , reversing 1119 ; ; . See also ; . Nor is a possibility of a reverter a "power to revest" within the meaning of section 166, . As above indicated, there is a plain and material distinction between reversion and a power to revest. Respondent's action in including in petitioner's income for the taxable years the ordinary income of the trusts in question, consisting of interest and dividends, is disapproved. A different situation is presented in respect of capital net gains. The trust instruments provided that capital net gains should be accumulated and treated as part of the principal fund of each trust and ultimately go to the one entitled to receive the trust corpus. And such gains were in fact accumulated and paid over to petitioner upon revocation of the trusts in 1936. We can not agree with petitioner's construction of the trust instruments, which specifically provided that the term "net1120 income" payable to the beneficiaries, as used therein, "does not and shall not include any profits that may be realized upon a sale or exchange of securities or of any other property that the trust fund at any time may be invested in." Other references to this point in the trust instruments included the provision that such "profits and appreciations realized shall be added to and become part of the corpus or principal of the trust, to be invested and reinvested by the Trustee as a part thereof." Petitioner reserved the right, upon certain conditions heretofore mentioned, to revoke the trust instruments at any time after January 15, 1936, and it was provided that in the event of the exercise of such right "the corpus or principal of the trust fund, together with all accumulations and profits and appreciations", should be paid over by the trustee to her, or to such person or persons as she might designate. The fact that upon the happening of certain specified contingencies the accumulated capital gains, along with the corpus then remaining, would be payable to others, does not prevent the taxation of such gains to petitioner. The circumstances here disclosed bring the capital gains1121 clearly within the purview of section 167. Paraphrasing the statute, such gains during the taxable years were being held or accumulated for possible future distribution to the grantor; and during the taxable years it was known that such accumulated gains might, in the discretion of the grantor, ultimately be distributed to her. They were in fact so distributed. Where a grantor may and does become a beneficiary of 1118 the trust, and may and does utilize the trust to manipulate as he sees fit his receipt of a portion of the income, such income is within section 167. ; affd., . See also , affirming Respondent did not err in taxing the capital gains in controversy to petitioner pursuant to section 167, and this conclusion renders it unnecessary for us to consider whether such income is also taxable to petitioner under section 22(a). Reviewed by the Board. Decision will be entered under Rule 50.KERN and OPPER dissent. BLACK BLACK, dissenting: I respectfully dissent from the1122 conclusion reached in the majority opinion. Petitioner, the settlor of the trusts, reserved to herself in each of the trust indentures, "the right to modify, alter, or entirely revoke this instrument at any time after January 15, 1936, as to all or any part of the trust herein created, etc." It seems to me this reserved power in the grantor brings the trusts squarely within the provisions of section 166 of the Revenue Act of 1934, relating to revocable trusts. It may be true, as the majority opinion points out, that subsequent events might happen, such as the settlor's death prior to January 15, 1936, which would completely divest her of the power to revoke these trusts. Such a condition subsequent had not, however, happened during the taxable years here in question. During the taxable years 1934 and 1935 the settlor of the trusts was living and, in my judgment, was completely vested with a power to revoke the trusts, although such power was not exercisable until after January 15, 1936, and this, I think, brings the trusts within the provisions of section 166, even though such power could not be exercised until then. Such cases as 1123 , and , in my judgment, are not in point and do not support the conclusions reached in the majority opinion. In those cases the power to revoke the trusts was not vested in the grantor of the trusts during the taxable year, but was to vest only upon the happening of some future contingency, which might never happen. That fact I think makes the Corning case and the Rovensky case easily distinguishable from the instant case. As I have already stated, I think the facts of the instant case bring it squarely within the provisions of section 166 of the Revenue Act of 1934, and, unless that section is unconstitutional when applied to such a situation as we have here, it seems to me that we must give it 1119 effect and tax the income of such trusts to the grantor thereof. Considering the nature of the trusts and that the beneficiaries were petitioner's four children, and that petitioner retained the unqualified right to revoke the trusts and revest in herself the corpus after the lapse of only a few years, I see nothing to indicate that section 166, when applied1124 to such a situation, is unconstitutional. Cf. . MURDOCK, TURNER, and DISNEY agree with this dissent. Footnotes1. SEC. 166. REVOCABLE TRUSTS. Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) * * then the income of such part of the trust shall be included in computing the net income of the grantor. SEC. 167. INCOME FOR BENEFIT OF GRANTOR. (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) * * * then such part of the income of the trust shall be included in computing the net income of the grantor. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619088/	LEO F. AND JOAN E. HAFER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHafer v. CommissionerDocket No. 1960-76.United States Tax CourtT.C. Memo 1980-177; 1980 Tax Ct. Memo LEXIS 407; 40 T.C.M. (CCH) 377; T.C.M. (RIA) 80177; May 20, 1980, Filed Robert M. Tyle, for the petitioners. Timothy M. Cotter, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Murray H. Falk pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE FALK, Special Trial Judge: Respondent determined deficiencies of $1,029.41, $822.91, and $1,840.84, respectively, in petitioners' 1969, 1970, and 1971 federal410 income taxes. We must decide whether petitioners are entitled to a net operating loss deduction under section 172 for any of those years and, if so, in what amount. Resolution of the issues depends upon the amount of a casualty loss deduction under section 165(a) to which petitioners are entitled for 1972. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. Petitioners filed amended joint federal income tax returns for 1969, 1970, 3 and 1971 and their joint federal income tax return for 1972 with the Internal Revenue Service Center at Andover, Massachusetts. At the time the petition herein was filed, they resided at Big Flats, New York. In June of 1972, three parcels of improved real estate owned by one or the other or both petitioners, and contents, were damaged by a flood, with respect to which damages petitioners claimed a casualty loss deduction under section 165(a) on their 1972411 federal income tax return. There is no dispute here as to the amount of the loss suffered upon the damage to one of those properties; the Keuka Lake cottage. The others, a residence at 175 Onondaga Street, Corning, New York (hereinafter referred to as the residence) and rental property at 180-182 Bridge Street, Corning, New York (hereinafter referred to as the rental property), are involved in this controversy. The residence, a two-story Cape Cod style house with four rooms on the first floor, three rooms upstairs, and a full basement, was purchased by petitioner Leo F. Hafer, either alone or with his second wife (who died in 1970), for $14,000 in 1970. Closing costs were paid upon its purchase and, prior to the flood, improvements which cost approximately $5,000 were made to the property. The residence was listed for sale at $18,500 at the time of the flood. Its fair market value immediately before the flood did not exceed $18,000. The flood waters rose to a height of five or six feet on the first floor of the residence. The property was littered with debris, the furnace was damaged, windows, cupboards, and walls on the first floor were broken, and insulation in the walls412 and everything on the first floor was soaked. Leo replaced the broken glass in the windows, repaired the furnace, and generally cleaned up the property himself, with the help of a friend, at a cost of $500 for materials, but made no major repairs. He sold the residence for $15,000 in about November of 1972. Its fair market value immediately after the flood was not less than $14,000. On their 1972 federal income tax return, petitioners claimed a loss of $18,490.75 due to the flood with regard to this property. Respondent determined that the loss was $4,000. Petitioner Leo F. Hafer and his first wife (who died in about 1962) purchased the rental property, a two-story, wood frame house, in about 1947 for $10,000. It has a full basement and two nearly identical two-bedroom apartments, one on each floor. The second floor apartment has been held ever since for the production of income. Until 1970, Leo and his family used the first floor of the property as their residence. The first floor apartment has been held for the production of income continuously since 1970. Closing costs were paid upon the purchase of the property and, over the years, repairs and improvements which cost413 approximately $7,000 were made to it.The flood waters rose to within two inches of the ceiling of the first story of the rental property. The property was covered with mud and debris and someone else's garage was washed onto the property. Porch posts were knocked out. The furnace was damaged. The cellar floor was cracked. the hardwood flooring on the first floor buckled and walls cracked. The first floor had to be gutted to repair it. The hallway up to the second floor had to be redone. Petitioners did most of the work cleaning up and repairing the property, at a cost of approximately $8,000. Except for some unusual settling of the house which continues to cause cracks to appear in the walls, some water leaking into the cellar, and a continuing problem with paint peeling from the exterior walls, the house was restored to its pre-flood condition. The upstairs apartment was vacant from the date of the flood until October or November of 1972. The downstairs apartment was vacant nearly a year. When they were reoccupied after the flood, both apartments were rented for about the same amount as before the flood. On their 1972 federal income tax return, petitioners claimed a414 loss of $17,979 to the rental property due to the flood. Respondent determined the loss to be $8,019.10. Petitioners received a loan from the Small Business Administration (hereinafter referred to as the SBA) with respect to the flood damage, repayment of $5,000 of which indebtedness was subsequently forgiven. In computing their claimed casualty loss deduction, petitioners did not account for that loss forgiveness, but now concede that it should be applied to reduce the allowable casualty loss deduction.OPINION The issues here are purely factual. The parties agree as to the amount of the loss due to the flood to petitioners' personalty and the Keuka Lake cottage. Petitioners now concede that the amount of the loss should be reduced by the amount ($5,000) of the SBA loan forgiveness. The only disputes, then, are the amounts of the losses to petitioners' residential and rental realty, respondent contending that petitioners have failed to show the decreases in fair market values of the properties and to establish their bases, while petitioners assert that they have met their burden of proof. Section 165(c)(3) permits individuals to deduct losses suffered on the damage to415 and destruction of nonbusiness property by reason of fire, storm, or other casualty to the extent that each such loss exceeds $100 and is not compensated for by insurance or otherwise. The loss to property held for the production of income may be taken without regard to the $100 limitation. Sec. 165(c)(2). The measure of the loss is the difference between the fair market value of the property immediately before the casualty and its fair market value immediately thereafter, but not exceeding its adjusted basis. Helvering v. Owens, 305 U.S. 468">305 U.S. 468 (1939); Lamphere v. Commissioner, 70 T.C. 391">70 T.C. 391 (1978); sec. 1.165-7(b)(1), Income Tax Regs. The burden of proving these amounts rests with petitioners. Pfalzgraf v. Commissioner, 67 T.C. 784">67 T.C. 784, 787 (1977); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 256 (1971). To establish the amount of the loss, the relevant fair market values "shall generally be ascertained by competent appraisal." Sec. 1.165-7(a)(2)(i), Income Tax Regs.After the flood, petitioners obtained appraisals of the fair market values of the properties before and after the flood from two local real estate agents. The416 testimony of neither is before the Court and their appraisal reports do not state on what method or methods they were based. The circumstances are such here that we draw no inference from the absence of their testimony that the testimony of these persons would be unfavorable to petitioners, 4 but neither can we give their appraisals any weight. The opinion of a landowner as to the value of his or her property is admissible in evidence without further qualification because of the owner's special relationship to that property. District of Columbia Redevelopment Land Agency v. 13 Parcels of Land, 534 F.2d 337">534 F.2d 337, 339-340 (D.C. Cir. 1976); United States v. Sowards, 370 F.2d 87">370 F.2d 87, 92 (10th Cir. 1966); Kinter v. United States, 156 F.2d 5">156 F.2d 5 (3d Cir. 1946); Harmon v. Commissioner, 13 T.C. 373 (1949);417 see also Fed. R. Evid. 701; 2 Jones, Evidence, sec. 14:6, p. 599 (6th ed. 1972); 3 Wigmore, Evidence, sec. 714, p. 50 (1970 rev.). But, we are not bound to accept that testimony at face value, even though it is uncontradicted, if it appears to be improbable, unreasonable, or offered solely to serve the self-interests of the taxpayer. See Fixel v. Commissioner, T.C. Memo. 1974-197, affd. without opinion 511 F.2d 1400">511 F.2d 1400 (5th Cir. 1975); cf. United States v. 3,698.63 Acres of Land, Etc., 416 F.2d 65 (8th Cir. 1969). While the owners of property are competent to testify as to its value, the weight to be given their testimony will depend upon their knowledge, experience, method of valuation, and other relevant considerations. Biddle v. United States, 175 F. Supp. 203">175 F. Supp. 203, 204 (E.D. Pa. 1959); see Jenny v. Commissioner, T.C. Memo 1977-142">T.C. Memo. 1977-142. The matter is not susceptible of precise determination on the record before us, but, doing the best we can with the materials before us, see Heyn v. Commissioner, 46 T.C. 302">46 T.C. 302, 310 (1966), we have found that petitioners sustained418 a loss to the residence of $4,000, as determined by respondent. The only evidence of the property's pre-casualty and postcasualty values was offered through the testimony of petitioner Leo F. Hafer. He testified that he believed the residence had a fair market value of $19,000 to $20,000 immediately before the flood. His estimate, although not based upon any recognized method of valuation, seems somewhat reasonable in light of his description of the property, the fact that he paid $14,000 for it about two years previous, and his description of the improvements he made to it before the flood. Taking into account his self-interest and the weaknesses of his kwowledge, experience, and method of valuation, and the fact that he had listed the property for sale at $18,500 before the flood and had not sold it at that price, we have found as a fact that the fair market value of the residence was $18,000 immediately before the casualty.Leo also testified that he believes that the residence had no value after the flood. He offered no basis for this opinion other than that it just looked atrocious. He believed that it would have to be torn down. To the extent that he was in error or that419 his estimate of post-casualty value, or lack thereof, reflects a temporary fluctuation due to his own -- or prospective purchasers' -- fear or discouragement with respect to low-lying property in an area which has recently been flooded, the loss is not shown to be sustained in the year in question. Squirt Co. v. Commissioner, 51 T.C. 543">51 T.C. 543 (1969), affd. per curiam 423 F.2d 710">423 F.2d 710 (9th Cir. 1970); Peterson v. Commissioner, 30 T.C. 660">30 T.C. 660 (1958). Giving no weight to petitioner Leo F. Hafer's egregiously self-serving testimony and with little to go on but a thumb-nail description of the damage and the fact that the residence was sold for $15,000 about six months after the flood and after the expenditure of only $500 for repairs, we have found as a fact that it had a post-casualty value of $14,000; i.e., a decrease in value equal to $4,000, as determined by respondent. With regard to the rental property, the record before us does not permit us to find that its adjusted basis in petitioner Leo F. Hafer's hands at the time of the casualty exceeded the amount of the loss allowed by respondent. Petitioner and his first wife acquired the property420 in 1947 for $10,000 and closing costs. See sec. 1012. There is no evidence that the wife contributed to the purchase of the property so that some portion of its value at the time of her death in about 1962 would have been includable in her gross estate, thus giving rise to a step-up in basis. See sec. 1014. In any event, there is no evidence that the property's fair market value at the time of the wife's death exceeded its adjusted basis then. After 25 years of ownership (and 10 years since the co-owner's death), during all of which time the upstairs apartment was held for the production of income, a considerable amount of the acquistion costs and capital improvements allocable to that apartment was allowed or allowable as a deduction for depreciation under section 167, reducing its adjusted basis under section 1011. See sec. 1016(a)(2). In addition, more than a year's depreciation with regard to the cost allocable to the first floor apartment was allowed or allowable prior to the flood. 5421 Petitioners testified as to many repairs and improvements made to the rental property over the years at an aggregate cost of approximately $7,000. Except as to a heater for an carpeting on the hallway stairs to the upstairs apartment at a total cost of about $370, which were installed after petitioners were married in 1971, most of the repairs and improvements appear to have been made in the period 10 to 25 years before the flood. The record does not show that such expenditures which related to the upstairs apartment were not fully deducted as repair expenses or allowed or allowable as deductions for depreciation prior to the flood. In other words, the record simply does not permit us to conclude that the initial cost basis as adjusted as of 1972 for capital expenditures and allowances for depreciation exceeds the amount of the loss allowed by respondent with respect to this property. See Millsap v. Commissioner, 46 T.C. 751">46 T.C. 751, 758-761 (1966), affd. on another issue 387 F.2d 420">387 F.2d 420 (8th Cir. 1968). * * *In accordance with the foregoing, Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, Tax Court Rules of Practice and Procedure↩, the post-trial procedures set forth in that rule are not applicable to this case.3. Petitioners were married in 1971 and could not have filed joint returns together for 1969 and 1970. No issue is raised in respondent's notice of deficiencies or by the pleadings regarding this fact and, accordingly, we do not deal with it herein.↩4. Petitioners unsuccessfully attempted to obtain the testimony of both persons.Their failure to appear as witnesses, therefore, is not unexplained and the "absent witness" rule (see Kean v. Commissioner, 51 T.C. 337">51 T.C. 337, 343-344 (1968), affd. on this issue 469 F.2d 1183">469 F.2d 1183, 1187-1188↩ (9th Cir. 1972)) is not applicable here.5. The basis for depreciation of property converted from personal to rental or other business use is the lesser of its fair market value at the time of conversion of its original cost. Sec. 1.167(g)-1, Income Tax Regs.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619089/	Walter Simister, Jr., and Bertha E. Simister, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentSimister v. CommissionerDocket No. 3970United States Tax Court4 T.C. 470; 1944 U.S. Tax Ct. LEXIS 9; December 12, 1944, Promulgated 9 Decision will be entered under Rule 50. The petitioners sustained a loss upon the sale of a farm to their daughter and son-in-law. In payment for the farm the daughter and son-in-law gave their joint promissory note. Held, that the vendees acquired the property in equal shares as tenants in common and that the prohibition contained in section 24 (b) of the Internal Revenue Code against the deduction of losses sustained upon the sale of property between members of a family is applicable to one-half the loss sustained which resulted from the sale of property to the daughter, but does not apply to the remainder of the loss, which resulted from the sale to the son-in-law. J. Alex Neely, Jr., Esq., for the petitioners.Bernard D. Hathcock, Esq., for the respondent. Turner, Judge. TURNER 470 The respondent has determined a deficiency in income tax against the petitioners for the year 1941 in the amount of $ 3,325.68. The respondent's determination resulted from his disallowance of certain deductions and the making of certain additions to income. The petitioners contest only the disallowance of a deduction of $ 2,429.52, claimed as a loss sustained upon the 10 sale of a farm.FINDINGS OF FACT.The petitioners are husband and wife, and residents of Greenville County, South Carolina. They filed a joint income tax return for the calendar year 1941.In 1939 petitioner Walter Simister, Jr., purchased a 36.2-acre farm in Greenville County, paying $ 5,500 therefor. Title to the property was taken in the name of petitioner Bertha E. Simister. The improvements on the property at the time of purchase consisted of a small dwelling, a two-room tenant house, and an old cow barn.In October of 1938 the petitioners' daughter Elsie married Clay Jones, Jr., who was then working in the city of Greenville. Shortly thereafter Jones and his wife moved to the above farm, Jones agreeing with Simister to devote some of his after-work time to seeing that the tenant farmer "did what was right."In the spring of 1939 Jones expressed the desire to go into the dairy business. Since he had no money, it was agreed that Simister should finance the operation and that Jones should run the dairy. Jones was to have $ 25 per week from the venture to cover his living expenses, and if there were any profits he was to have the said $ 25 per week or half of the profits, whichever11 was greater. If the venture resulted in a loss, Simister was to stand the loss.471 At some time, the date not being shown, Simister, or Simister and Jones, entered into the chicken business on the said farm. The location proved to be bad for such an enterprise, and the chicken business was abandoned or moved by Simister to a more suitable location on another farm which he had purchased.During 1939 and 1940 a new cow barn was built and the old dairy barn was repaired. Three chicken houses and one brooder house were also built. The total cost of these improvements, all of which was paid by Simister, was $ 3,175. After abandonment or removal of the chicken business, the houses built for that operation were used only for storage purposes.In 1941 Simister decided to sell the above farm, and discussed the matter with Jones. Jones, desiring to continue in the dairy business, agreed to purchase the farm and to pay $ 6,000 therefor. In payment for the farm, Jones delivered his and his wife's joint promissory note for $ 6,000, the said note being payable at the rate of $ 300 per year, on the first of December, beginning December 1, 1942, until paid in full. It was to bear interest12 at the rate of 3 percent per annum. Title to the farm was conveyed in fee by Bertha E. Simister to "Clay Jones, Jr., and Elsie S. Jones." The deed recited that the conveyance was made in consideration of the payment of the sum of $ 6,000 by the grantees. The date of both the note and the deed was December 30, 1941.Simister and Jones continued the operation of the dairy business as before, except that it was agreed between them that the business should pay Jones $ 400 per year for the use of the farm. The $ 400 was paid for 1942, but was not paid for 1943 because the business did not have the money with which to make the payments. The $ 400 due for 1943 is still owing and is carried as a liability on the accounts of the dairy. The dairy business has not been profitable and, as a result, Jones' withdrawals have been limited to the $ 25 per week, as provided in the agreement between him and Simister.Payments of $ 28 per month have been made regularly on the note, principal and interest, given by Jones and his wife in payment for the farm.In their return for 1941 the petitioners deducted $ 2,429.52 as a loss sustained on the sale of the above farm in December of 1941. In determining13 the deficiency, the respondent has disallowed the deduction so claimed.OPINION.It is the claim of the respondent, first, that the petitioners have failed to prove that a loss was sustained on the disposition of the above farm, and, second, that if it be held that a loss was sustained, the deduction thereof is prohibited by section 24 (b) of 472 the Internal Revenue Code. 1 That the first claim is without merit, is shown by the facts. In December of the taxable year, the petitioners, or petitioner Walter Simister, Jr., sold, for $ 6,000, a farm which with the improvements thereon had a total cost of $ 8,675, and for the purpose of computing the amount of the loss there appears to be no dispute, or basis for dispute, between the parties as to the amount by which the cost basis of the property should be adjusted by depreciation sustained on the improvements prior to the sale.14 The respondent's alternative claim is that Clay Jones, Jr., and Elsie Jones, his wife, acquired the farm as joint tenants; that under joint tenancy each of the tenants is vested with the property in its entirety, and, since Elsie Jones is a lineal descendant of the petitioners, the sale of the property to her brings the transaction within the provisions of section 24 (b), supra, and bars the deduction of the loss sustained. He makes no claim that Jones was a member of petitioners' family within the meaning of the said section. The petitioners, on the other hand, contend that Jones, alone, was the purchaser, and Jones not being a member of petitioners' family under section 24 (b), the deduction claimed is not barred. In the alternative, they claim that under South Carolina law Jones and his wife acquired the farm as tenants in common and, such being the case, one-half of the loss should be considered as having resulted from the sale to Jones and not within the prohibition of the above section.It is the law of South Carolina that, where a grant is made to husband and wife and there is no expressed intention of conveying the whole to the survivor, they become tenants in common. 15 Green v. Cannady, 77 S.C. 193">77 S.C. 193; 57 S.E. 832">57 S.E. 832. In the instant case, the grant was to "Clay Jones, Jr., and Elsie S. Jones" and there was no expressed intention of conveying the property to the survivor. We accordingly conclude that they acquired the property as tenants in common. We also conclude that Jones and his wife acquired the property in equal shares. The presumption is that tenants in common hold an equal share or interest in the common property, where the instrument creating the estate does not make their shares or interests unequal. Thompson on Real Property, vol. 2, sec. 1768. The instrument in question here does not make their interests unequal and the facts show that the parties were equally obligated on the purchase note. On the law and the facts, 473 it is our opinion and we hold that one-half of the loss sustained upon the sale of the farm was attributable to the sale to petitioners' daughter, and to that extent the deduction claimed is barred by the provisions of section 24 (b), supra. The remainder of the loss, however, was attributable to the sale to Jones, and the section in question16 does not contain any prohibition against its deduction. To that extent the petitioners are sustained.Decision will be entered under Rule 50. Footnotes1. SEC. 24. ITEMS NOT DEDUCTIBLE.* * * (b) Losses From Sales or Exchanges of Property. --(1) Losses Disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly --(A) Between members of a family, as defined in paragraph (a)(D);(2) * ** * * (D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619090/	Kenneth Reiner and Alice Reiner v. Commissioner. Frank A. Klaus and Margaret Klaus v. CommissionerReiner v. CommissionerDocket Nos. 94943, 94962.United States Tax CourtT.C. Memo 1965-197; 1965 Tax Ct. Memo LEXIS 134; 24 T.C.M. (CCH) 1005; T.C.M. (RIA) 65197; July 20, 1965134 Construction activities on a personal residence held, on the facts, to constitute, in part, research and experimental expenditures within the meaning of section 174, I.R.C. 1954. Arthur Groman, Hilbert P. Zarky, and Myron E. Harpole, 6399 Wilshire Blvd., Los Angeles, Calif., for the petitioners. Thomas F. Greaves, for the respondent. TRAINMemorandum Findings of Fact and Opinion TRAIN, Judge: In these consolidated proceedings, respondent determined deficiencies in income tax for 1958 and 1959 of $21,377.51 and $29,502.84 against petitioners Reiner and $20,982.14 and $34,950.67 against petitioners Klaus, respectively. These deficiencies arise mainly from respondent's disallowance of certain deductions, claimed as research and development136 expenses and depreciation allowances with regard to an experimental project, which increased the petitioners' distributive share of partnership taxable income for the years in question. By amended petitions filed in both dockets, petitioners raise an alternative contention of an abandonment loss. Since several other issues have been settled by stipulation of the parties, conceded or abandoned, decisions in these cases will be entered under Rule 50. The issues remaining for our decision are: 1. Whether respondent properly disallowed certain research and experimental expense and depreciation deductions claimed by petitioners' partnership, The Kaynar Company, in its fiscal years ending March 31, 1958 and 1959, and properly increased petitioners' distributive shares of partnership income in the calendar years 1958 and 1959 as a result of such disallowance; and 2. Alternatively, whether petitioners' partnership, The Kaynar Company, suffered a deductible loss in the amount of $47,000, due to the abandonment of a pre-stressed concrete business, during its fiscal year ending March 31, 1959. Findings of Fact Some of the facts have been stipulated and the stipulation of facts, together137 with the exhibits attached thereto, are incorporated herein by this reference. During the calendar years here in issue, petitioner Kenneth Reiner (hereinafter sometimes referred to as Reiner) and Alice Reiner were husband and wife, and petitioner Frank A. Klaus (hereinafter sometimes referred to as Klaus) and Margaret Klaus were husband and wife, all residing in Los Angeles, California. They filed joint individual income tax returns for the calendar years 1958 and 1959, on the cash basis method of accounting, with the district director of internal revenue, Los Angeles, California. Alice Reiner and Margaret Klaus are petitioners herein only by virtue of having filed joint returns with their husbands. Reiner and Klaus, collectively, will sometimes hereinafter also be referred to as petitioners. Reiner and Klaus first met while they were students at Purdue University during the mid-1930's. Reiner graduated from Purdue University in 1937 with a bachelor of science degree in engineering and thereafter he and Klaus came to California. During 1937-1938 they attempted unsuccessfully to go into the candy business. Reiner sold typewriters for L. C. Smith and Company in 1939, and worked138 for the Holophane Company in New York City in 1940. In 1941 he returned to California and for a year and one-half thereafter worked as an engineer-trainee for Lockheed Aircraft Company. Reiner subsequently worked for a few months for Hughes Aircraft Company. Beginning in 1943, he and Klaus formed a partnership, which became known as The Kaynar Company (hereinafter sometimes referred to as Kaynar), for the purpose of engaging in the manufacture of nut and bolt retainers for use in aircraft as blind fasteners. Reiner and Klaus commenced the conduct of their business in 1943 as the sole and equal partners of Kaynar under an oral agreement of partnership expressed in general terms. They continued the operations of Kaynar without modification of the oral agreement until they liquidated and dissolved Kaynar on or about August 6, 1961, except that on February 28, 1958, Reiner and Klaus executed a written agreement which was subsequently modified in certain respects by further written agreements dated May 31, 1960, and January 20, 1961. In order "to facilitate the expansion of the manufacturing activities of the company," on August 16, 1948, Reiner and Klaus caused the articles of incorporation139 of Kaynar Manufacturing Company, Inc. (hereinafter sometimes referred to as Kaynar, Inc.) to be filled with the secretary of state of the State of California. Thereafter, on August 26, 1948, they filed an application with the commissioner of corporations for the State of California for a permit to sell and issue shares of capital stock of Kaynar, Inc.Pursuant to the above-said application, on or about September 1, 1948, Kaynar, Inc., issued 400 shares of no par capital stock to Kaynar in exchange for the manufacturing business assets of Kaynar, viz., land, building, machinery, equipment, furniture, fixtures, cash, accounts receivable and inventory, with no sum being allocated to goodwill. Subsequently, Kaynar engaged in the business of selling the products manufactured by Kaynar, Inc. On or about March 25, 1957, Kaynar transferred the 400 shares of Kaynar, Inc., stock to petitioners in equal amounts of 200 shares. Sometime prior to November 21, 1944, Klaus developed "Nut and bolt socket fastenings" which were the subject of a United States patent issued on the aforesaid date to Klaus as inventor. After the partnership had been in business for about a year and one-half, its business140 of manufacturing nut and bolt retainers were adversely affected by the cessation of World War II. Searching for new sources of business for the partnership, sometime between April of 1945 and January 18, 1949, Reiner and one Armand Braga (hereinafter sometimes referred to as Braga), under Reiner's direction, developed a novel type of woman's pin curl clip made out of spring steel. On January 18, 1949, a United States patent was issued to Reiner and Braga as co-inventors of a pin curl clip. The clip became known as the "Lady Ellen Pin Curl Clip." Reiner continued to develop this device and, commencing on July 9, 1957, through October 8, 1963, four United States patents and three United States design patents relative to pin curl clips were issued to Reiner as inventor. Kaynar achieved great financial success with these pin curl clips and similar devices. It and, subsequently, Kaynar, Inc., became the largest producer in the world of pin curl clips, with sales of such clips numbering in the billions. On May 9, 1957, Kaynar sold the Lady Ellen clip patent to Kaynar, Inc., for a consideration of $950,000, payable in installments. The Commissioner of Internal Revenue issued a letter ruling141 to the effect that the gain on the sale qualified as capital gain. When the Korean hostilities commenced in July 1950, with an accompanying increase in production of military and aircraft equipment, Reiner and Klaus decided to reactivate the nut and bolt retainer business of Kaynar. In connection therewith, and concerned about obtaining an adequate supply of self-locking nuts as an insert for Kaynar's nut channels and retainers, Reiner conceived and designed a lightweight, self-locking nut, on which a United States patent was issued to him as inventor. The device, which became known as the "Kaylock," was unique and made an important contribution to the aircraft industry, particularly with respect to achieving weight reduction in air frames. The Federal Government, thereafter, drew specifications of such a nature that only the Kaylock type of nut could be used to fulfill these requirements, and other companies were eventually compelled to take licenses. Reiner continued to improve the locknut and various domestic and foreign patents relating to the locknut business were obtained by him. Reiner also worked on devising machinery for manufacturing these products. The locknut became a142 commercial success and at the end of 1956, Kaynar's gross sales of locknuts were approximately $4,500,000 per year. Generally, Reiner was in charge of manufacturing operations and the technical side of the business and Klaus was in charge of administrative and sales functions. By the close of 1956, the combined sales of Kaynar and Kaynar, Inc., were approximately $6,000,000 per year with profits of about $500,000 to $600,000 per year after taxes. The success of the business resulted from the joint efforts of Reiner and Klaus. In 1956, Kaynar, Inc., was engaged in having a new factory building constructed. Construction was begun by a building contractor, but several months later his services were terminated and Kaynar, Inc., assumed the task of completing the building. Reiner personally took charge of the project. Reiner had become interested in the use of pre-stressed concrete (i.e., concrete in which the reinforcing steel is under tension at all times, and in which the concrete is under compression at all times), a technique of using concrete which permits the use of longer, unsupported spans. Reiner hired and took over supervision of the pre-stressed concrete crew and foreman143 of the contractor who had started the job, and he successfully made pre-stressed concrete beams for the factory building. The design of the building was under the supervision of T. Y. Lin & Associates, authorities on pre-stressing. John Lautner (hereinafter sometimes referred to as Lautner), an architect, had charge of the design of the offices and later, the factory as well. It was unusual in the Los Angeles area, in 1957, to find a pre-stressed concrete roof on a commercial type of building, and Kaynar, Inc., was one of the first to use such a roof in the area. The construction was unusual in that the pre-stressing was done in two directions, and it attracted the attention of contractors and builders in the city of Los Angeles. Reiner spent a substantial amount of time at the building site learning about pre-stressed concrete. The construction of the Kaynar, Inc., factory building was completed either late in 1957 or early in 1958 and the construction costs were paid by Kaynar, Inc.Kaynar performed no work in connection with the construction of Kaynar, Inc.'s factory building. The only construction work Kaynar, Inc., ever engaged in was in connection with the construction of its144 own factory building. From the time of their marriage, the Reiners had been living in a home in the Silverlake area of Los Angeles. The house became inadequate due to the needs of their small children, and they looked for a new location. In September and October of 1954, Reiner purchased five contiguous lots in the Silverlake area, close to his then residence. He subsequently purchased two more lots contiguous with the first five, one of these in August of 1956 and the other in February of 1959. The first six lots acquired were purchased at a total cost of $26,000. In the early part of 1956 Reiner consulted with Lautner relative to commissioning Lautner to design a personal residence on the originally acquired five lots. Lautner received his training as an architect under Frank Lloyd Wright during the period 1933 through part of 1939 and subsequently designed a number of "one-of-a-kind" homes. On March 30, 1956, Reiner and Lautner entered into a written contract relative to the architectural services to be performed by Lautner on Reiner's new home. In April of 1956, Lautner estimated the cost of constructing the residence to be $55,089. In August of 1956 Reiner purchased his145 sixth lot and Lautner's plans were enlarged to include a guest house (the "roundhouse") which would serve as a residence for his parents and would contain an elevator. Lautner's estimate of the total cost of construction subsequent to this change was $80,000, upon which he was to receive an architect's fee of 10 percent of cost. Subsequently, and while still planning a personal residence, the plans were changed to include a curved driveway from the street in front of the house, up the sharp rise on which the house was to be built, which was to be supported partially by the roundhouse and exiting onto the street behind the proposed residence. The improved real property which these consolidated cases concern is located at 2138 Micheltorena Street, Los Angeles, California. The property is commonly known as "Silvertop" and will hereinafter sometimes be referred to as such. The construction of the footings, foundations and ground layout of Silvertop commenced sometime in August or September of 1956 and followed the modified design drawn by Lautner after Reiner had purchased his sixth lot. The floor plan of Silvertop as it presently exists, except for the roundhouse, driveway ramp, swimming146 pool, outside showers and tennis court, was that first reflected in Lautner's preliminary sketches drawn between February and March 30, 1956. These sketches served as the basis for the written agreement between Reiner and Lautner dated March 30, 1956, and are followed in Lautner's architectural design drawing dated May 11, 1956. Construction was started on Silvertop under an "Application to Construct New Building" filed with the Department of Building and Safety of the City of Los Angeles on September 14, 1956. The building application was filed by Lautner on behalf of Reiner and with Reiner's authorization. Among other information, the building application discloses that the building zone is "R-1" (for personal residences only), the purpose of the residence is "Dwelling & Carport & Accessory Living Quarters," the owner is Reiner and the certified architect is Lautner. Thereafter, and through February 2, 1959, 16 more building applications, of various nature, were filed with regard to Silvertop, all of which set forth Reiner as owner. Because of their interest in pre-stressed concrete and its commercial possibilities, and because they believed that the development of new products147 for the building industry offered business opportunities for them, petitioners entered into an oral agreement, in December of 1956, to convert Silvertop into an experimental project of Kaynar. That agreement contemplated that the experimental project would have a duration of some two years and that within that period Kaynar would be able to diversify its business activities (which to that date were promotion, sales, and distribution of its pin curl clips and self-locking nuts and supervision of the activities of Kaynar, Inc.) by developing products for the building construction business. On the advice of petitioners' certified public accountant, Joseph H. Cohen (hereinafter sometimes referred to as Cohen), who believed that the accounting department should have certain written guidelines and directives, petitioners reduced their oral agreement relative to Silvertop to a written agreement dated February 28, 1958. Cohen was first engaged by Kaynar and Kaynar, Inc., in 1951. From that time to the date of trial Cohen has prepared the income tax returns of Kaynar and Kaynar, Inc., as well as the personal income tax returns of petitioners. The written agreement 1 was made with reference148 to the "experimental residence" then under construction and states that Reiner has agreed to lease the real property, on which the experimental residence was being erected, to the partnership for an annual rental equal to the real estate taxes thereon. Upon the completion of the structure, Reiner agreed to purchase the residence "at a fair price which will be established by him," in which there would be evaluated such factors as square footage of living area, average construction costs of similar dwellings, resale value, prices of homes in the general area and any other pertinent factors. Under no circumstances was the price to be less than $15 a square foot of inside living area. Reiner personally agreed to bear any sums paid in connection with the residence in excess of $400,000. It provided, further, that: It is anticipated that during the course of this program, certain patentable ideas may be developed by Reiner or others working on the experimental residence project. At the time of the purchase of the experimental residence by Reiner, he will designate which of his patentable ideas, if any, are to be deemed the property of The Kaynar Company. All such ideas not so designated149 shall remain Mr. Reiner's separate and exclusive property; all patentable ideas developed by others working on the experimental residence project shall belong to The Kaynar Company. Reiner shall reimburse The Kaynar Company in such amounts as he shall determine to be proper in accordance with the costs applying thereto for any of his patentable ideas retained by him. * When Reiner announces the price at which he will purchase the experimental residence, Klaus shall have a period of thirty (30) days thereafter of accepting, on behalf of The Kaynar Company, the price announced by Reiner to be paid to The Kaynar Company for the experimental residence. If Klaus shall reject the price offered by Reiner, Reiner shall become indebted to The Kaynar Company in the amount of 80% of the total amount expended by The Kaynar Company in connection with the said experimental residence (which sum as provided herein shall not exceed $400,000.00) and Reiner shall thereupon become the owner of all patentable ideas, materials and products developed in connection with the said experimental residence and, as150 against The Kaynar Company, shall be entitled to the exclusive use of the corps of personnel developed in connection with the said experimental residence and shall be the owner of all tools, dies, models and materials theretofore involved. In addition, Reiner shall be entitled to purchase from Klaus all of Klaus' stock in John Lautner Architect at Klaus' cost. In the event that prior to the statement by Reiner of the price at which he will acquire the experimental residence, Reiner and Klaus shall sell their interests in The Kaynar Company or Kaynar Mfg. Co., Inc. to some third party or parties, Reiner shall have the option of acquiring from The Kaynar Company the experimental residence and all matters connected therewith, as defined above, at the total cost incurred therefor by The Kaynar Company to the date of Reiner's exercise of such option. Reiner's option to elect to purchase the experimental residence in the event of a sale to a third party or parties as aforesaid shall remain open for a period of thirty (30) days commencing with the completion of the sale. On May 31, 1960, the written agreement was amended to provide that Kaynar would expend up to $600,000 on the experimental151 residence, rather than $400,000 as set forth in the original written agreement. In the interim, petitioners, in order to secure the steady services of Lautner, caused to be formed on June 14, 1957, John Lautner Architect, a California corporation. All of the issued and outstanding stock of the corporation was owned equally by petitioners during the years in question. On or about April 8, 1957, a building application was filed with the Department of Building and Safety of the City of Los Angeles relative to the use of pre-stressed concrete block in the construction of the roundhouse at Silvertop. Thereafter, the Department of Building and Safety informed Reiner that it would not grant a permit for the proposed pre-stressed concrete block construction and advised him that if he wanted to press the matter further, appeal would have to be made to the Board of Building and Safety Commissioners of the City of Los Angeles. Reiner's appeal and a request for a rehearing were turned down by this board. However, he eventually succeeded after application to the Superior Court of the State of California in and for the County of Los Angeles. Subsequent to petitioners' decision to turn Silvertop152 into an experimental project of Kaynar, two underground walk-through utility tunnels were constructed to provide access for the installation, maintenance and operation of the various fixtures which were contemplated. Two 400 ampere services were installed to supply electrical power to Silvertop (as compared with the 100 to 150 amperes in power utilized in the normal household installation). Changes in the original plans were also made to provide for the use of pre-stressed concrete in the roof over the living area, in the cantilevered ramp of the driveway (supported by the roundhouse), in the roundhouse (where pre-stressed concrete block was to be used) and in a tennis court (which was not in the original plans). The pre-stressed concrete roof over the living room area (which took the place of the wooden roof in Lautner's original design) posed problems relative to the character, decor and acoustics of the house which Reiner undertook to solve. The roof turned out to be thicker than anticipated, weighed approximately 167-176 tons, and gave rise to certain construction problems. The crew that had been working at the factory building of Kaynar, Inc., was used for the initial phases153 of the pre-stressed concrete work at Silvertop. One of the first operations was the pouring of the slab for the tennis court. Shortly after, about July 20, 1957, a strike developed at the Kaynar, Inc., plant. A picket appeared at Silvertop, the men were ordered off the job by the union, and it became necessary to engage non-union help to work on the factory building as well as on Silvertop. The prestressed concrete work at Silvertop was finished only with great difficulty and cost and the use of outside contractors. The completion of the pre-stressed concrete work at Silvertop was the last effort made by Reiner and Kaynar in the pre-stressed concrete field. T. L. Stam (hereinafter sometimes referred to as Stam) joined Kaynar in the latter part of 1956 as its full-time house patent counsel. He had, among his functions, the responsibility for keeping records of all "patentable" inventions developed at Silvertop, conducting preliminary patent searches, and preparing preliminary and final patent applications for such inventions. Stam testified that because it became increasingly difficult for him to keep up with the developments at Silvertop, he hired an assistant in November of 1959154 whose duty was to visit Silvertop at least once a week to ascertain any developments, make drawings, and keep Stam informed of them. The assistant was employed until sometime early in 1961. Files were regularly kept for Silvertop items by Stam. There were 63 separate files from which 20 to 30 preliminary patent applications had been prepared. In addition, at the time of trial, ten applications for United States patents had been filed with respect to items not included in the above 63 files which were developed at Silvertop; two patents had been issued on these applications and the rest were still pending at the time of trial (October 29 through November 6, 1963). Some of these items are also the subject of foreign patents and patent applications. Kaynar also used patent counsel in Washington, D.C., to conduct pre-examination patent searches on Silvertop developments. Sometime in 1959, Reiner employed one Melvin Berkman to study and make an evaluation of the market potential of several items being developed at Silvertop. During this period, Reiner's wife complained about the length of time involved to complete the new residence. To relieve the pressure from his wife relative to the155 completion of the residence, and to permit the continuation of the various projects at Silvertop, Reiner purchased, and occupied, another residence in the Silverlake area in July of 1958 for approximately $55,000. In the early part of 1959, Kaynar acquired from Braga (who had previously worked with Reiner in the development of the Lady Ellen hair clip) the Inox Company (hereinafter sometimes referred to as Inox) whose physical assets consisted principally of machine shop equipment that could be used in connection with the work at Silvertop. Inox then became a division of Kaynar, Braga resumed work for Kaynar, and the Inox facilities were moved to the vicinity of Silvertop. There were some five or six employees at Inox and a substantial amount of the work done there was in connection with the Silvertop project. Among the projects which were the subject of investigation at Silvertop were: 1. Wall panel clips, for which a United States patent application was filed on September 11, 1963. These panel clips were developed as a means of installing wood siding without the use of nails. 2. A motorized swing-out baseboard panel which permits clusters of electrical outlets to be concealed156 but readily accessible. Kaynar's files showed that a preliminary patent application had been drawn and a preliminary patent search had been made. 3. Removable ceiling panels which involved an effort to develop a modular ceiling panel, which would be held in place by springs on rails in the ceiling so that the panels would be easily demountable to provide ready access, acoustical qualities, and an area for sound entrapment above the ceiling area. 4. A planetary door, which involved the development of a door that does not swing in the conventional manner, could be used in locations that are too small or narrow for doors hinged in the normal manner, and would constantly present a surface to the viewer that would match or fit in with the decor of adjacent rooms and would not slam. Work was done on several different versions of the planetary door in an effort to keep the door in a particular position, permit it to move automatically from one position to another, and produce less noise upon closing. 5. The use of glass as a building material. Efforts were made to utilize thin sheets of glass where thicker sheets of glass are conventionally used. Reiner believed that joining thin sheets157 of glass in an inconspicuous manner, rather than using conventional framing materials, would constitute a significant advance in building techniques. The work included various aspects of a sliding glass door or window consisting of five ceiling-to-floor panels of thin glass, hung from the top and joined at the sides to one another by flexible connecting joints, the entire window being mechanically driven and traveling on a helical curve. 6. Windows which included such devices as a means of shading between two panes of glass which would permit varying intensities of shading; a mechanism for operating vertical louvered windows; windows with provisions for internal storage of louvers and a self-cleaning device; collapsible windows; louver actuating mechanisms; and a window actuator. 7. Lighting problems which included study of means of regulating light through skylights, such as folding ceiling panels and rotatable skylights. Also investigated were structural, rotating louvered beams, concealed lighting arrangements (which would also include the achievement of variations in light intensity, both by mechanical and by electrical means), and pivotable and retractable tennis court lights. 158 8. A tempered water system (which would maintain water at a constant temperature) and a temperature responsive regulator for such purposes; silent drains; toilet bowl-filling means from below; selfcleaning toilet bowls; remotely-controlled and self-shut-off water devices; bathtub temperature maintenance; solonoid-operated valves; nonfogging mirrors; childsafe medicine cabinets; self-draining soap dishes; and quiet toilet exhausts. 10. Helical-driven drapery rods (similar in concept to the drive for the sliding glass living room windows); a floating water drain designed to perform skimming functions in swimming pools; spirally-wrapped, collapsible tube structures; and a cycling silent motor. 11. A low-voltage switching and security system permitting remotely-controlled switching functions for electric lights, electrical appliances and electrical outlets under the trade name "Swepe." The system is arranged so that it also indicates whether or not a particular light or appliance is on. Some of the components of the Swepe system are the subject of patents and patent applications, both domestic and foreign. Swepe was the first development coming out of Silvertop to be exploited159 commercially. Since 1961, a substantial amount of money has been invested in the further development of Swepe, and it is currently being manufactured and sold in southern California. The system can be installed for a cost of $100 to $125 in addition to the cost of a conventional electric system in a tract house and has been contracted for in hundreds of homes in southern California. Silvertop was used to demonstrate Swepe to the press, contractors and other interested persons. The construction of Silvertop had not been completed as of the time of the trial (October 29 through November 6, 1963). Invoices were kept for all materials purchased for Silvertop and records were kept of all wages paid for labor, the cost of other services performed at the project and of bills of contractors and subcontractors. At the beginning, all expenditures were paid by Kaynar and charged to Reiner's drawing account. This practice continued even after Silvertop became a project of Kaynar and continued until the close of the partnership fiscal year in 1958 (after the agreement of Reiner and Klaus was reduced to writing). At that time, Reiner's personal drawing account was credited with the entire amounts160 previously expended and these expenditures were charged to the Silvertop project of Kaynar, which was kept as a separate account on the partnership's books. All subsequent expenditures for Silvertop were also entered on the partnership's books. The amount credited to Reiner's account as of February 28, 1958, was $211,467.94. Prior to March 31, 1957, the amount charged to Reiner's account was $37,266.89, consisting of labor, $15,806.70; material, $5,975.24; subcontractors and rentals, $6,660.21; professional services, $8,774.32; miscellaneous expenses, $50.42. The first payments made by the partnership and charged to Reiner's account took place in October of 1956. During the time the charges were being made to Reiner's account prior to February 28, 1958, a complete set of double entry books was kept, as was true subsequent to February 28, 1958, when Silvertop was being shown on the partnership books directly. Records were not kept, however, on the cost of the individual projects at Silvertop and no attempt at allocation was made, the books being kept on the basis of total annual expenditures. In Kaynar's partnership income tax return for the fiscal year ended March 31, 1958, there161 was deducted as development expense, on account of the Silvertop project, the amount of $31,980.32. This amount represented 80 percent of the amounts expended for architectural and engineering fees. Petitioners considered that 20 percent of the expenditures at Silvertop were allocable to its residual value as a residence and thus were the nondeductible, nonamortizable, capital costs of the structure, while the remaining 80 percent was attributable to the research and development aspects of the project. A further $49,424.17 deduction was claimed for depreciation with respect to Silvertop. In determining the amount of the depreciation deduction, the accountant who prepared the return determined that the portion of the structure which had then been completed as of March 31, 1958, had a residual value as an eventual residence of $84,000 (this amount was subtracted from the amounts capitalized for the fiscal year which would become Kaynar's depreciable basis for Silvertop); that expenditures prior to June 30, 1957, had substantially gone into the residual value of the structure; that the depreciable benefits to Kaynar began approximately June 30, 1957; and consequently Silvertop was considered162 to have a useful life as a research project beginning on June 30, 1957. Since Reiner expected the experimental and development aspects of the project to be completed by June 30, 1959, Silvertop was assigned a useful life of 24 months. Amortization or depreciation of the structure was claimed for 9/24th (there were nine months left in Kaynar's fiscal year which ended on March 31 of each year) of the estimated useful life of the structure. Deductions claimed in the partnership return of income for the period ended March 31, 1959, were determined in essentially the same manner in which deductions had been determined for the preceding year. In the latter year, in addition to the deduction as development expense of 80 percent of the architectural and engineering fees in the amount of $20,937.52, there was also deducted, as development expenses, the costs incurred at Inox, to the extent attributable to Silvertop, in the amount of $4,142.50. The $85,064.40 deduction for depreciation with respect to the structure was determined after increasing the residual value to $120,000 (which was subtracted from the amounts capitalized for the fiscal year which would be added to Kaynar's depreciable163 basis for Silvertop) and extending the estimated useful life of the structure by one full year because Reiner expected that the research and development work would continue until June 30, 1960. Each year total deductions were subtracted from the other partnership income, and the remainder of the partnership taxable income or loss after such deduction was allocated equally between Klaus and Reiner. For the taxable years ended March 31, 1958, and March 31, 1959, Kaynar made the following expenditures on its Silvertop project: 4-1-57 to 3-31-584-1-58 to 3-31-59Labor$ 92,408.37$ 55,416.64Materials43,535.6837,574.48Subcontractors and Rentals63,570.2039,663.77Professional ServicesT. Y. Lin$ 7,921.50John Lautner Architect32,053.90$26,171.90Other - Engineering, etc.6,599.154,620.1946,574.5530,792.09Miscellaneous ExpensesUtilities, water, telephone1,689.301,388.87Real Estate Taxes1,122.761,689.302,511.63Inox4,142.50TOTAL$247,778.10$170,101.11The deductions relative to the Silvertop project taken on Kaynar's partnership returns of income for164 its years ended March 31, 1958, and March 31, 1959, resulted from the above expenditures being treated as follows: 3-31-583-31-59EXPENDITURES$247,778.10$170,101.11DEVELOPMENT EXPENSE80% architectural and engineering fees$31,980.32$20,937.52INOX04,142.5031,980.3225,080.02CAPITALIZED: current year$215,797.78$145,021.09prior years0215,797.78$360,818.87Residual Value84,000.00120,000.00Balance subject to amortization$131,797.78$240,818.87Amortization claimed in previous years049,424.17Total amount subject to amortization$131,797.78$191,394.70ESTIMATED REMAINING LIFE: End6-30-596-30-60Beginning6-30-574- 1-58Remaining Life24 months27 monthsFraction of Remaining Life in Taxable Year9-2412-27Amortization claimed$ 49,424.17$ 85,064.40Development expense31,980.3225,080.02Total Deductions Claimed$ 81,404.49$110,144.42Deductions for development expense in years subsequent to tax years here in issue followed the same pattern, except that the estimated useful life of the structure was increased165 as it became apparent that the research and development work would continue longer than originally expected, and the residual value as a residence was increased to $150,000. On January 20, 1961, Reiner and Klaus entered into a written agreement under which Klaus sold his entire interest in the "Silvertop inventions" The $240,000 price was determined in accordance with their prior amended written agreement which contemplated that the partnership would expend a maximum of $600,000 at Silvertop; i.e., 80 percent of Klaus' ($300,000) partnership cost thereof. It was also agreed, inter alia, that Reiner would purchase the equipment of Inox at its book value; that Kaynar would sell to Kaynar, Inc., the dies and equipment pertaining to the hair clip purchase from Braga at its value on the books of Kaynar; that Reiner would purchase from Klaus all of Klaus' stock in the John Lautner Architect corporation at its cost to Klaus; and that Reiner would give to Kaynar his note in the amount he was overdrawn from Kaynar as of March 31, 1961, the note to bear interest at 6 percent with principal payments of a minimum of $5,000 a month, plus interest. Thereafter, on August 6, 1961, all the joint166 activities between petitioners ceased and they divided the business of Kaynar and Kaynar, Inc., between themselves. The following are some of the features contained in Silvertop, which had not yet been furnished, at the time of the trial of this matter: 1. The main house contained three bedrooms, two full bathrooms and three half-bathrooms, a kitchen, a music room, and a 20- to 22-foot long dressing room off the master bedroom. 2. Approximately 6,000 square feet of enclosed floor space; approximately 4,000 in the main house which has a living roomdining room area of approximately 2,000 square feet. 3. A curved pre-stressed concrete roof that had the same design as the wooden roof which the original Lautner plans called for. 4. A large fireplace in the living room and another in the master bedroom. 5. A terrace off the master bedroom with a small patio beyond that. 6. The entire east wall of the living roomdining room area of the main house is glass from floor to ceiling, a portion of which is a motorized sliding glass door. 7. A part of the brick wall between the dining room and kitchen is motorized so that it can be raised by pushing a button. 8. A motorized, plexiglass167 wall and ceiling in the bathroom off the master bedroom that can be opened or closed by pushing a button. 9. An area set aside in the basement of the main house for a room. 10. Two long tunnels under the main house so that new features can be incorporated into Silvertop without destroying the architecture. 11. A "central vacuum system." 12. A swimming pool, with one edge constituting a waterfall, windows in one side, and two outside showers in partial enclosures. 13. A tennis court. 14. A guest house (the roundhouse) which contains a living room, a kitchen, a bedroom, one and three-quarters bathrooms and a storage room. 15. Three separate water systems - tempered water, drinking water, and regular tap water. 16. An oversized sewer connection to help prevent possible stopping. 17. An oversized gas line. 18. Sink traps in the wall rather than under the sink. 19. Swepe, a push button control and security system that activates lights, gas torches in the patio area and motors to open and close doors and shutters. Opinion The basic issue for our decision is whether petitioners are entitled to deduct a portion of the cost of a personal residence as research and development168 expenses and depreciation allowances under section 174 of the Internal Revenue Code of 1954. 2 The issue, as presented, is basically a factual one and turns on our evaluation of the voluminous record compiled during an eight-day trial. 169 Respondent, in his statutory notice, disallowed "development expenses" deductions claimed by Kaynar in its fiscal years ending March 31, 1958 and 1959, "because it has not been established that such expenses were incurred in the partnership trade or business or that they were ordinary, necessary or reasonable in amount." Petitioners strongly urge that the expenditures in question were not personal in nature; that they did not, nor were they ever intended to, redound to the personal advantage of any of the petitioners; and that they were bona fide business expenses. Petitioners contend that the construction of Silvertop, which concededly was intended to be Reiner's eventual home, served as a convenient means by which the partnership was able to carry on research and experimental activities in order to expand and diversify its business. Respondent's principal contention is that petitioners Reiner and Klaus caused an extremely expensive residence (Silvertop) to be constructed, which was designed to suit Reiner's personal taste in every respect, and which was intended for Reiner's personal use as a residence; that petitioners expended partnership funds for this purpose and, under170 the pretense that these expenditures were connected with the partnership's (Kaynar's) business, they, as partners, attempted to obtain income tax deductions for what were purely personal expenses. Prior to the Revenue Act of 1954 there was no specific provision for the deduction of research and development expenses. Such expenses had to qualify under section 23(a)(1)(A) of the Internal Revenue Code of 1939, which was substantially the same as section 162(a), in order to be deductible. Section 162(a) provides that: There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * The provisions of section 174 were first enacted into the revenue laws as part of the Internal Revenue Code of 1954. See S. Rept. 1622, 83d Cong., 2d Sess., 33, 214 (1954), where, at page 33, the purpose of the legislation is stated as "To eliminate uncertainty and to encourage taxpayers to carry on research and experimentation * * ." Section 174(a) authorizes the deduction of research or experimental expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade171 or business. 3Section 174(c) excepts from this treatment any amounts expended for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation which is subject to the allowance for depreciation under section 167 (relating to depreciation deductions for property used in a trade or business or held for the production of income). Section 174(c) does provide that depreciation allowances under section 167 shall be considered as expenditures under section 174. It is clear that Congress' intent in enacting this legislation was to provide taxpayers with the option of treating research and experimentation expenditures in much the same manner as ordinary and necessary business expenses deductible under section 162. 172 Congress did not define the phrase "trade or business" as it is used in section 174. However, it is made clear in committee reports relating to other Code sections which utilize the phrase, e.g., section 162, that the concept was not intended to include all activities engaged in for profit, but was used in the realistic and practical sense of a going trade or business. John F. Koons, 35 T.C. 1092">35 T.C. 1092, at page 1100 (1961). Whether a taxpayer's activities constitute the carrying on of a trade or business so that expenditures related to such activities may be currently deducted is basically a question of fact requiring an examination of the particular facts and circumstances in each case. See Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212 (1941). Two of the most recent cases that we have considered in this area are John F. Koons, supra, and Martin Mayrath, 41 T.C. 582">41 T.C. 582 (1964), on appeal (C.A. 5, July 1, 1964). Koons purchased an undeveloped invention in the taxable year 1955 for $5,000 and paid a research laboratory $45,000 to perfect the invention into a patentable and commercial product. In 1958, letters patent on the invention were issued173 to Koons. During the taxable year 1955 Koons' primary source of income was derived from an advertising agency in which he was an active partner. For a number of years preceding 1955, Koons had devoted a part of his time and efforts to investigating, promoting, and financing various enterprises which came to his attention through his advertising business. In holding that the $45,000 was not paid or incurred by Koons in connection with an existing trade or business and that he had not established that he was entitled to the benefits of section 174(a)(1), we stated at pages 1100-1101: It is our view that section 174(a)(1) applies to expenditures for research and experimentation in connection with an existing business to which such research and development is proximately related, such as the development or improvement of its existing products or services, or the development of new products and services in connection with such trade or business. We do not suggest that these generalities are all-inclusive. In the instant case, however, there was no such existing trade or business. The research and experimentation was no doubt in anticipation of the organizing of a business to make business174 use of an end product when it reached the point of commercial acceptability. At the time the invention was bought by petitioners, however, it was in a preliminary laboratory state, and petitioner entered into the so-called Development Contract in part, at least, to get the benefit of research specialists. He went no further than this in 1955, however. It is our view that this activity was preliminary to the coming into existence of a business, and did not reach the stage of an existing business in the year in question within the meaning of section 174(a)(1). The research and development expenditures could not be "in connection with" a business which did not exist. It is clear that the statutory phrase "trade or business" presupposes an existing business with which the taxpayer is directly connected. Expenditures made in investigating a potential new trade or business, or preparatory to entering into such business, do not, in our opinion, qualify for the application of section 174(a)(1). The principle is recognized in our repeated disallowance of such expenditures. See Dwight A. Ward, 20 T.C. 332">20 T.C. 332, 343 (1953), affirmed on another issue, 224 F. 2d 547 (C. 175 A. 9, 1955); George C. Westervelt, 8 T.C. 1248">8 T.C. 1248, 1254 (1947); Henry G. Owen, 23 T.C. 377">23 T.C. 377, 381 (1954); Morton Frank, 20 T.C. 511">20 T.C. 511, 513-514 (1953); Eugene H. Walet, Jr., 31 T.C. 461">31 T.C. 461, 471 (1958), affd. 272 F. 2d 694 (C.A. 5, 1959). See also McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57 (1944). In Martin Mayrath, supra, petitioner Mayrath invented and patented several items relating directly or indirectly to farming. He then organized six corporations which engaged either in manufacturing, selling, or distributing those items. In 1956, Mayrath commenced the construction of a personal residence for himself. His primary concern was to assure that his personal design and ideas be carried out, and he worked closely with the contractor and made most of the decisions. The finished structure was a six-bedroom, five-bathroom house containing 5,826 square feet with a large carport attached. It had a tennis court, swimming pool and bath house. The home contained many innovations, some of which were not ordinarily found in residences and others which were normally found only in luxury residences. A few of the unusual176 or luxury features contained in the house were: the use of glass, plastics, and aluminum instead of wood; two thermostatically-controlled, circulating hot water systems; hanging, heloidshaped, concrete stairway with aluminum and glass bannister; indirect lighting; three- and four-way light switches with dimmers; three-way switches on motor-operated drapes; kitchen cabinets suspended on vertical aluminum pipes; palm tree with an automatic warming coil in the planter; and a filtering system for the swimming pool. Mayrath encountered and solved several problems in the construction of the residence. He took no action while constructing the house, or immediately thereafter, to exploit any of his ideas. Three years after the house was completed, Mayrath mailed letters to seven metal and steel manufacturing companies trying to interest them in some of the "experimental features" of the house, but nothing came of the correspondence. In holding that Mayrath had failed to connect the construction of his residence with a trade or business, we stated, at pages 589-590, that: To a degree he is unquestionably an inventor, as evidenced by the various patents which he has obtained and for which177 he has applied. With very few exceptions, however, these patents are directly or indirectly related to farming implements of one kind or another; and it is from these particular patents that petitioner has realized income either directly or through his corporations. Whether or not petitioner's work in connection with the invention and development of farming implements places him in the trade or business of inventing, we are completely unwilling to consider as a part of such trade or business his activities in building an "experimental" house for his own family's occupancy and in building factories, warehouses, and offices for the use of his wholly-owned corporations. Moreover, petitioner's actions during the construction of the house and following its completion do not bear out any intention to use the house or any of its features in the furtherance of a trade or business. Although we assume that in building a house containing no wood the petitioner mastered some of the construction problems involved, he has not shown that he intends to use such knowledge in the business of constructing residential homes or how he would do so if that were his intention. The only effort he made in178 that direction was to send letters describing the house and some of its features to several metal manufacturers some 3 years after the house was completed and at about the same time petitioners' income tax returns for the years before us were being audited by the Internal Revenue Service. In John F. Koons, 35 T.C. 1092">35 T.C. 1092 (1961), we stated that the statutory phrase "trade or business" presupposes an existing business with which the taxpayer is directly connected and that expenditures for research and experimentation that are preliminary to the establishment of a business do not qualify as deductions under section 174. We think the statute was intended to be used in the realistic and practical sense of a going trade or business - a condition which does not exist here. Certainly the petitioner is not in the trade or business of constructing residences, and his attempt to relate such construction activities to other alleged trades or business is totally insufficient. and, at page 591, that: Even if we were to assume that it is petitioner's business merely to "invent," there is a point beyond which his propensity to experiment must be viewed as taking on the characteristics179 of a hobby. At any rate, in the light of all these evidentiary facts and circumstances, we are not convinced that the cost of constructing petitioners' residence, unusual as it may be, is other than a personal living expense prohibited from deduction by section 262 of the 1954 Code. The instant case is easily distinguishable from John F. Koons, supra. Unlike Koons, Reiner and Klaus had engineering and inventing experience, in connection with their trade or business, for a number of years prior to the taxable years before us. Koons' expenditures in the development of a product and the acquisition of a patent were in no way connected with a trade or business. Respondent contends at great length that Kaynar was solely a sales organization and consequently that the research and development done at Silvertop was in no way proximately related to Kaynar's trade or business. We cannot agree with this position. Subsequent to their formation of the Kaynar partnership in 1943, petitioners invented and patented several items, in connection with the partnership's business, which they proceeded to manufacture and market through Kaynar with great commercial success. Although the180 manufacturing operations were eventually transferred to Kaynar, Inc., a corporation formed by petitioners for this purpose, Kaynar retained responsibility for the sales and promotion activities relating to the manufactured products. In essence the partnership was, and remained, the parent organization while the corporation became the manufacturing division. Inox and John Lautner Architect, corporations formed by petitioners, also became divisions of Kaynar. It is petitioners' testimony that, with an eye to diversification, up to and during the taxable years before us, they never ceased in their efforts to find new products for Kaynar, Inc., to manufacture and Kaynar to exploit. It seems natural to us for a business organization to seek new products to manufacture and exploit; such was the stated intent of Congress in enacting section 174. See S. Rept. 1622, supra. It seems no less natural for a parent organization to seek new products for its manufacturing subsidiary. If Kaynar had paid an outside firm to do the research, there is no question that the amounts expended would be deductible under section 174. See section 1.174-2(a)(2), Income Tax Regs. We find181 no basis for penalizing petitioners for undertaking their own research and development work. John F. Koons, supra, sets forth, and Martin Mayrath, supra, adopts the position that research and experimentation must be done in connection with and be proximately related to an existing business, such as the development or improvement of existing products or the development of new products and services in connection with such trade or business. Certainly we have before us an "existing business." Petitioners maintain, and we believe, that the research and development was done in connection with such business in order to develop new products. The facts of Mayrath are much closer to the factual evidence now before us than those in Koons. There, we held that the petitioner's activities in building an "experimental house" for his own family's occupancy, and in building factories, warehouses, and offices for the use of his wholly-owned corporations, were in no way related to his trade or business. Particularly convincing were the facts that Mayrath moved in immediately after the completion of construction and made no effort to exploit any of his ideas until the Internal182 Revenue Service began to audit his income tax returns some three years later. At the time of trial, Silvertop had not yet been furnished or occupied and had been utilized, on several occasions, to show the developments that were being experimented with to interested members of the public. We do not feel it necessary to repeat our lengthy findings of fact at this juncture. Suffice it to say that our analysis of the facts convinces us that the nature and continuous pattern of petitioners' activities at Silvertop were in connection with and proximately related to their and Kaynar's trade or business. In Mayrath we found that petitioners' expenditures were not of a research and experimental nature within the intendment of section 174. We also expressed our doubt as to the "experimental" nature of the house and the items it contained. Here we have no doubt that some of the projects at Silvertop were of a research and experimental nature within the intendment of section 174. However, we are equally convinced that much of the efforts at Silvertop resulted in merely customization to suit Reiner's particular tastes. 4 In particular, we refer to the mechanization of many of the structural183 components of the house. Motorized windows, curtain rods, walls and ceilings (which were the subject of much work and expense at Silvertop) are not unusual and were not unusual during the years before us. Indirect and mechanically and electrically adjustable lighting have been with us for many years. Separate water systems, over-sized sewage drains, unusually large supplies of electric power, and pools with waterfalls are distinguished only by their costliness, not by any research and developmental nature. Features such as we have just mentioned highlight the incongruity of petitioners' contention that all of the activities at Silvertop were of a research and developmental nature. As we stated in Mayrath, at pages 590-591: It may be true that, in petitioner's mind, some of the ideas were new, unique, or involved special problems. But the record as a whole reveals that many of the so-called "experimental" features were either catalog or luxury items and that the special problems encountered were often the result of unusual combinations of materials, modifications of standard construction principles, or the utilization in residential construction of certain features commonly used in184 commercial construction. Respondent attributes great pertinence to the fact that, prior to Kaynar's sale of the pin curl clip patent to Kaynar, Inc., for $950,000, Reiner transferred the same patent to Kaynar for the consideration of one dollar. However, since we have found that Reiner did his investigating and inventing under the auspices of Kaynar, and since patents can only be issued to an individual, we do not find it strange that Reiner obtained the patents in his own name and then transferred them to Kaynar. Respondent also makes much of the close interrelationship between petitioners and their wholly-owned business entities. He stresses the difficulty of determining who did and owned what, and when, as between petitioners and their wholly-owned business organizations. It is true that petitioners operated almost entirely under an oral partnership agreement for many years because of the trust and confidence they had in each other. It is also true that it has been difficult185 to delineate clear lines of activity and responsibility between petitioners, Kaynar, Kaynar, Inc., John Lautner Architect, and Inox. However, we have not found this difficulty to be insurmountable or determinative of any of the parties' contentions. Respondent's argument consists mainly of peripheral arguments such as this and we do not find it convincing. We have found no reason to disbelieve the essential elements of the testimony by petitioners and their witnesses. The manner in which Kaynar's books represented the expenditures at Silvertop presents a serious problem in this case. We have no information before us that would allow us to allocate costs among the numberless projects that petitioners claim were going on at Silvertop. Petitioners' contention that 80 percent of the non-capital expenditures at Silvertop were allocable to research and experimentation and that, since 100 percent of the capital expenditures at Silvertop, in excess of the assigned residual value as a personal residence, were for property used in connection with research and experimentation and subject to depreciation under section 167, all depreciation allowances claimed were allocable to research and experimentation, 186 lacks the identification of specifics. We are convinced that Silvertop's ultimate value as a personal residence will be (if it has not already been occupied) substantially in excess of the $150,000 ultimately contended for by petitioners. 5 As we have already set forth, we are convinced that some of the activities at Silvertop were of a research and experimental nature within the intendment of section 174 and some were not. Substantially assisted by the very able presentation of the evidence by counsel for petitioners, and after a long and careful examination of the voluminous record and briefs before us, and with full consideration of the arguments of law presented, we hold that 35 percent of the expenditures at Silvertop and 35 percent of the depreciation allowances claimed187 as research and development expenditures, with respect to Silvertop, over and above the claimed residual value of $150,000 as a residence, are allowable as deductions under section 174. Cohan v. Commissioner, 39 F. 2d 540, 544 (C.A. 2, 1930). Since we have held for petitioners on the law, we do not find it necessary to consider their alternative contention. Several other issues were raised by respondent and petitioner Klaus subsequent to the notice of deficiency and all the pleadings thereunder and are not properly before us. While not deciding any of these issues, we note in passing that none of them appear to have real substance. Decisions will be entered under Rule 50. Footnotes1. The entire written agreement (Exhibit 5) is included herein by this reference.↩2. All references herein are to the Internal Revenue Code of 1954 unless otherwise indicated. SEC. 174. RESEARCH AND EXPERIMENTAL EXPENDITURES. (a) Treatment as Expenses. - (1) In general. - A taxpayer may treat research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. * * (c) Land and Other Property. - This section shall not apply to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as expenditures.↩3. Section 1.174, Income Tax Regs., provides, in so far as applicable hereto, as follows: § 1.174-2 Definition of research and experimental expenditures. (a) In general. (1) The term "research or experimental expenditures", as used in section 174↩, means expenditures incurred in connection with the taxpayer's trade or business which represent research and development costs in the experimental or laboratory sense. The term includes generally all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property, and the improvement of already existing property of the type mentioned. The term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions. However, the term includes the costs of obtaining a patent, such as attorneys' fees expended in making and perfecting a patent application. * *4. At the suggestion of counsel for the parties, the Court visited Silvertop on Saturday, October 26, 1963, in the company of counsel for the parties and spent some two hours viewing the property.↩5. This should not be construed, however, as an acceptance by us of petitioners' theory that the proper method of determining research and experimental expenditures is to subtract from total expenditures those items which are clearly nondeductible and/or personal in nature, or are allocable to residual residential value rather than affirmatively proving what expenditures, if any, qualify under section 174↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619092/	John A. Decker and Gladys I. Decker, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentDecker v. CommissionerDocket Nos. 69496, 69497, 69498, 69499United States Tax Court32 T.C. 326; 1959 U.S. Tax Ct. LEXIS 171; May 12, 1959, Filed 171 Decisions will be entered under Rule 50. Five individuals who owned all the stock of a corporation entered into agreement whereby it was agreed that upon death of a stockholder, the surviving stockholders would buy decedent's stock at book value. Upon the death of one stockholder in 1953 and another in 1954, the surviving stockholders purchased decedents' stock and immediately transferred it to the corporation, which paid them the same amount for the stock they had paid decedents' estates. Corporation held stock in treasury and sold some of it each year thereafter to key employees. Held, the payments made by the corporation to the surviving stockholders for deceased stockholders' stock were not essentially equivalent to dividends under section 115(g), I.R.C. 1939, and sections 301 and 302, I.R.C. 1954. K. V. Nicola, Esq., for the petitioners.Maurice B. Townsend, Jr., Esq., for the respondent. Drennen, Judge. DRENNEN326 In these consolidated proceedings respondent determined deficiencies in income tax for the above petitioners for the taxable years and in the amounts shown below.Docket No.Petitioners1953195469496John A. Decker and Gladys I. Decker$ 18,780.14$ 24,888.9769497Estate of William E. Decker, deceased,Mary J. Decker, executrix, and Mary J.Decker15,049.4469498James W. Reichert and Barbara P.Reichert18,784.3024,857.2069499John F. Reichert III and Alice R.Reichert18,209.0223,923.63172 The issue is whether certain payments made by the Decker-Reichert Steel Company to each of the petitioners in the year 1953, and to each of the petitioners, except the petitioners in Docket No. 69497, in the year 1954, were distributions essentially equivalent to a dividend within the purview of section 115(g), I.R.C. 1939, and sections 301 and 302, I.R.C. 1954, respectively.327 FINDINGS OF FACT.Some of the facts were stipulated and are found as stipulated.Petitioners in each of the Docket Nos. except 69497 are husband and wife and filed joint income tax returns for the years 1953 and 1954 with the district director of internal revenue at Cleveland, Ohio.William E. Decker died in November 1954. Mary J. Decker was his wife and is the executrix of his estate. William E. Decker and Mary J. Decker filed a joint income tax return for the year 1953 with the district director of internal revenue at Cleveland, Ohio. Petitioners in Docket No. 69497 are involved only in the year 1953.The Decker-Reichert Steel Company, hereinafter referred to as Steel Company, was incorporated under the laws of Ohio in 1929, with its principal place of business in Cleveland, Ohio. Its authorized stock was 500 173 shares which was issued to and held 100 shares each by Arthur J. Decker, William E. Decker, John A. Decker, James W. Reichert, and John F. Reichert III, prior to and at the time of the death of Arthur J. Decker in July of 1953.On January 14, 1939, the above five stockholders, being all the stockholders of Steel Company, entered into a stock purchase agreement wherein it was agreed that upon the death of one of the five stockholders, the surviving stockholders would purchase from his estate all of the deceased stockholder's stock in the company at book value within 90 days after his death. This agreement was amended from time to time in particulars not here pertinent and was in effect at the death of Arthur J. Decker in 1953. The agreement was also ratified and confirmed by the four surviving stockholders after the death of Arthur J. Decker and was in effect at the death of William E. Decker in November of 1954.Following the death of Arthur J. Decker, a special meeting of the board of directors of Steel Company was held at which it was pointed out that under the terms of the stock purchase agreement the four surviving stockholders were required to purchase the 100 shares of stock 174 of the company owned by Arthur J. Decker during his lifetime. The minutes of the meeting also contained the following:Mr. Decker reported that the surviving shareholders were desirous of living up to the terms of their contract with the decedent, but that none of the shareholders were in a position to purchase said shares at the present time. He stated that in his opinion the matter was of importance to the corporation because the company's best interest required the continuity of the present management.A discussion was had in which it was pointed out that the company had discussed for some time the possibility of including some of the company's key employees as shareholders and that it would appear that the death of Mr. Decker and the inability of the surviving shareholders to purchase and hold his shares, had placed the company in a position where it could obtain treasury shares which later could be sold to the key employees.328 Whereupon, the following motion was made, seconded and unanimously adopted:Moved: That The Decker-Reichert Steel Company purchase the 100 shares of stock owned by Arthur J. Decker during his lifetime at the price of $ 1198.56 per share, and that said shares 175 be held by the corporation as Treasury Shares until further action of the Board of Directors.Each of the four surviving stockholders, being William E. Decker, John A. Decker, John F. Reichert III, and James W. Reichert, purchased 25 shares of stock of Steel Company from the estate of Arthur J. Decker for its book value as of January 1, 1953, being $ 1,198.56 per share, and immediately resold these shares to Steel Company for the same price, all during the year 1953. The total amount paid by the company was $ 119,856, or $ 29,964 to each of the four stockholders.Following the death of William E. Decker on November 22, 1954, a meeting of the board of directors of Steel Company was held on December 22, 1954, the minutes of which meeting contained the following:John A. Decker, who had just returned from the hospital from an operation, and was not yet working full time, explained that the meeting had been called because of the death of William E. Decker in November, and the desire of the remaining stockholders to fulfill their obligations to his widow, Mary J. Decker. He reviewed that on December 20th the Company had loaned the three remaining stockholders the money to purchase William 176 E. Decker's stock from his widow: that this money was to be repaid to the Company as soon as possible, as much as possible before December 31, 1954. There was much discussion on the best way to handle this transaction. The stockholders had, on the morning of December 22nd, paid Mary J. Decker in full for the stock, as per an agreement they had entered into in September, 1953, after the death of Arthur J. Decker. After some discussion, James W. Reichert moved that the Company buy the 100 shares of stock involved, and place it in the Treasury of the Company. He stated that he could not conveniently and quickly procure enough cash to buy 33 1/3 shares without personal sacrifice, and he doubted the other stockholders could either. He thought this action would be best: it would positively prevent any of the stock from getting into unfriendly or competitive hands, that borrowing money with the stock as collateral often had unfortunate results. John F. Reichert III said he [did] not think the Company could afford the purchase. James W. Reichert said he thought we would have to afford it, even if it meant the Company would become a borrower to do it. John A. Decker seconded the original 177 motion, which passed unanimously. John F. Reichert III suggested that, since the December 20th checks to loans to stockholders had not yet been posted, and since the company was acquiring the stock and placing it in the Company Treasury, he thought we could post those checks directly to the Surplus Account. Since no objections could be seen to this, it was so agreed.Each of the three surviving stockholders, being John A. Decker, John F. Reichert III, and James W. Reichert, purchased 33 1/3 shares of the stock of the company held by William E. Decker at the time of his death for the book value thereof at January 1, 1954, being $ 1,329.36 per share, and immediately resold these shares to Steel Company for the same price, all during the year 1954. The total amount 329 paid by the company was $ 132,936.03, or $ 44,312.01 to each of the three stockholders.The 200 shares of stock originally held by Arthur J. Decker and William E. Decker and purchased by the company were held by the company as treasury stock. As of January 1955, the only other issued and outstanding stock of the company was the original 100 shares held by each of the three surviving stockholders.Sometime after 1945, the 178 stockholders and officers of the company began giving some consideration to selling stock of the company to some of the key employees. One or more of these employees discussed the matter with several of the officers of the company from time to time. They were told that for the present the management thought five stockholders were enough, but if any of the present stockholders died or if stock became available, further consideration would be given to selling stock to key employees to get some younger blood into the corporation. One of the employees mentioned the stock purchase to the officers of the company sometime after the death of Arthur J. Decker and was told that consideration would be given to the request, and if anything could be worked out, now was the logical time to do it.On November 21, 1955, the articles of incorporation of Steel Company were amended to increase the authorized stock from 500 shares to 50,000 shares. Thereafter the stock was split 100 for 1. Subsequent to the stock split the company sold some of its new treasury stock to key employees of the company. In 1955, 5 employees bought a total of 1,100 shares for $ 12 per share. In 1956, the same 5 and 1 additional 179 employee bought a total of 1,100 shares for $ 15 per share. In 1957, 5 of the same 6 and 1 additional employee bought a total of 1,200 shares at $ 17.50 per share. In 1958, the same 7 and 1 additional employee bought a total of 1,400 shares at $ 19 per share, making a total of 4,800 shares sold by the company to employees during the years 1955 through 1958. The price paid for the stock by the employees was less than book value in each instance.The following table shows the gross sales, taxable income, income tax paid, and dividends paid by the company in each of the years 1948 through 1957:YearSalesTaxable incomeIncome tax paidDividends paid1948$ 2,659,263.30$ 353,329.09$ 134,265.05$ 125,00019492,319,545.35245,914.4293,447.48105,00019502,847,646.61278,557.13117,974.33100,00019512,901,312.32331,179.16183,746.72125,00019522,915,481.63320,807.111 178,614.65100,00019532,775,515.62180,874.8388,554.9140,00019542,695,287.60148,468.3371,666.481,50019553,293,752.64279,421.54139,799.2069,70019563,084,280.33(2) 137,930.2364,00019572,821,080.15(2) 107,219.9657.175330 The income tax returns of Steel 180 Company for the calendar years 1953 and 1954, which were received in evidence as joint exhibits of the parties, indicate that as of January 1 and December 31, 1953, the company had earned surplus and undivided profits in excess of the amounts paid to petitioners for the stock of Arthur J. Decker in the year 1953; and that as of January 1 and December 31, 1954, the company had earned surplus and undivided profits in excess of the amounts paid to petitioners for the stock of William E. Decker in the year 1954.The amounts paid to petitioners for the stock of Arthur J. Decker in the year 1953 and for the stock of William E. Decker in the year 1954 were not distributions essentially equivalent to a taxable dividend within the meaning of section 115(g), I.R.C. 1939, and section 302(b)(1), I.R.C. 1954.OPINION.These cases present the question, which has been before the courts many times, whether payments made by a corporation to its stockholders in cancellation or redemption of its stock are essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g)(1), I.R.C. 1939, 2181 and sections 301 and 302, I.R.C. 1954. 3182 While the pertinent provisions of the 1939 Code and the 1954 Code are in somewhat different form, for our purpose the question is the same -- whether the payments made in each year were essentially 331 equivalent to a dividend. In view of our ultimate finding of fact in this case, we do not have to decide whether stock acquired by a corporation from its stockholders and held as treasury stock is a redemption of the stock under the 1939 Code, upon which question there 183 are differences in the two Codes.It would serve no useful purpose to discuss the numerous cases that have considered this issue. It is recognized in the case law and in the regulations 4 that the question whether a distribution in redemption of stock is essentially equivalent to a dividend depends on the facts and circumstances of each case. The cases on this point, some of which are cited below in the footnote, 5184 have established certain factual criteria or guideposts that should be considered, but it is clear that there is no magic formula or combination of these criteria that will give the conclusive answer in each case. Some of these factors are given more weight in some cases while others are considered more important in other cases. We have given consideration to these criteria and have made an effort to accord proper weight to each under the facts in this case. In doing so we have attempted to determine the net effect of the distribution, which is the fundamental question in administering this provision. Flanagan v. Helvering, 116 F. 2d 937 (C.A.D.C.), affirming a Memorandum Opinion of this Court dated December 27, 1938. In applying these criteria to the facts in this case, we find that tax avoidance does not appear to have been a major consideration in having the corporation purchase this stock. The corporation had a good dividend record, having for a number of years paid out in dividends a large part of its earnings after taxes. 185 The object of both the stockholders and the corporation was to prevent the stock of the company from falling into the hands of widows, minors, or outsiders and this was of benefit to the corporation as well as the stockholders. The corporation was also desirous of acquiring treasury stock that could be sold to key employees from time to time as the board of directors deemed it advisable. This objective was carried out as evidenced by the fact that the stock acquired by the corporation was not canceled and about 25 per cent of the original 200 332 shares acquired (increased to 20,000 as a result of the stock split) had been sold to employees within 3 or 4 years following the deaths of two of the older officers and stockholders. While it may be that the stockholders could have personally sold some of their stock to key employees to accomplish this objective, as suggested by respondent, this would have been awkward and difficult to handle without disrupting the balance of interest of the individual stockholders.Both of the stock acquisitions here involved were accomplished by two steps -- the surviving stockholders first buying the stock from the estate of the deceased stockholder and 186 then immediately selling it to the company at the same price. So technically, the purchase of stock from the surviving stockholders did not result in any change in the percentage of ownership of the corporation. But it is evident that in each instance the plan was to have the company acquire the stock. So the net effect of the transactions when completed was that the company had bought the stock of the deceased stockholder, and the percentage of ownership of the surviving stockholders was increased from 20 to 25 per cent in one instance and from 25 to 33 1/3 per cent in the second instance -- if the shares held by the corporation in its treasury are ignored, which would be necessary if these payments were to be treated as dividends.From the standpoint of the company, by adjusting its book entries this could be made to appear the same as the distribution of a dividend. This would require reducing the accumulated earnings and undivided profits by the amounts paid out for the stock and not entering the treasury stock as an asset. However, this would be somewhat unrealistic in view of the fact that the company has since realized over $ 75,000 from the sale of this stock to key employees. 187 And, furthermore, the cash paid out by the corporation did not wind up in the hands of the stockholders to whom a dividend is sought to be charged, but in the estate of a deceased stockholder which simply sold the stock for that amount.Petitioners did not receive any true economic benefit from the transactions when considered as a whole. They had the same amount of cash and the same number of shares of stock after the transactions were completed as they had before the death of the deceased stockholder. Their stock represented a higher percentage of equity in the basic assets of the company, but those basic assets were reduced proportionately so the stock actually represented the same values, assuming that the book value for which the stock was bought and sold represented the value of the underlying assets. So petitioners gained nothing from the distribution unless it is that the use of company funds to meet their obligations under the stock purchase agreement produced an economic benefit for them.333 Respondent relies principally on this argument that corporate funds were used to satisfy the personal obligations of petitioners under the stock purchase agreements and, therefore, the 188 payments were essentially equivalent to dividends, citing Wall v. United States, 164 F. 2d 462 (C.A. 4), and Ferro v. Commissioner, 242 F. 2d 838 (C.A. 3), affirming T.C. Memo 1956-94">T.C. Memo 1956-94. In both of these cases, the taxpayer was the sole stockholder and had become so by previously incurring the obligation which corporate funds were used to satisfy. There was no corporate business purpose for the corporation to pay these obligations and the only ones benefiting therefrom were the stockholders, and the decision for the corporation to pay the obligation was made several years after the obligations were incurred by the taxpayers.In our case, none of the petitioners ever had complete ownership or control of the corporation, and we believe there was a sound business reason for the corporation to acquire the stock. While petitioners may have been obligated to purchase the stock of a deceased stockholder, this is a different sort of obligation from those in the Wall, Ferro, and other cases wherein this point has been raised. Petitioners' obligation here was to purchase stock for its book value. Presumably, the stock was worth what was paid for it. Had petitioners bought and retained the stock, 189 their net worths would have remained the same. The corporation did not pay a preexisting debt of the petitioners, the satisfaction of which would increase their net worths. They realized no economic benefit from the transaction. And here the resale to the corporation was obviously a part of a plan to buy the stock of the deceased stockholder in a manner that was best for all concerned.If this payment is treated as a distribution essentially equivalent to a dividend, it would follow that petitioners paid out of their own funds $ 1,198.56 and $ 1,329.36 per share for stock which they then contributed to the corporation without consideration. This is not in accord with the realities of the situation. We think the facts in this case are more analogous to those in Commissioner v. Snite, 177 F. 2d 819 (C.A. 7), affirming 10 T.C. 523">10 T.C. 523, than to those in any of the other cases cited. In the Snite case, as here, employees of the corporation took the initiative in seeking to obtain some of the stock of the company. While in Snite the employees may have applied more pressure with threats to resign etc., here there was a closer relationship between the stockholders and the employees which 190 may have had something to do with it. The witness Radabaugh testified that the stockholders were friends of his and, while he spoke to them several times about acquiring stock, he did not want to be a pest about it. But in Snite, as in this case, the more satisfactory method of meeting these employee requests was for the corporation to sell them the stock.334 Considering all the factors applicable to this case, and particularly those mentioned above which seem to us to be entitled to more weight than some others in this case, we do not think either transaction occurred at such time and in such manner as to be essentially equivalent to the distribution of a taxable dividend, and we so hold.Because petitioners in Docket No. 69498 have conceded certain minor adjustments,Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Estate of William E. Decker, Deceased, Mary J. Decker, Executrix, and Mary J. Decker, Docket No. 69497; James W. Reichert and Barbara P. Reichert, Docket No. 69498; John F. Reichert III and Alice R. Reichert, Docket No. 69499.↩1. Includes tax rebate credit, actual cash paid $ 161,319.70.↩2. Not shown on joint exhibit.↩2. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(g) Redemption of Stock. -- (1) In general. -- If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.↩3. SEC. 301. DISTRIBUTIONS OF PROPERTY.(a) In General. -- Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). * * (c) Amount Taxable. -- In the case of a distribution to which subsection (a) applies -- (1) Amount constituting dividend. -- That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.(a) General Rule. -- If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.(b) Redemptions Treated as Exchanges. -- (1) Redemptions not equivalent to dividends. -- Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend. * * *(d) Redemptions Treated as Distributions of Property. -- Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301↩ applies.4. Sec. 1.302-2(b), Income Tax Regs.↩5. Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737; Commissioner v. Estate of Bedford, 325 U.S. 283">325 U.S. 283; Flanagan v. Helvering, 116 F. 2d 937 (C.A.D.C.), affirming a Memorandum Opinion of this Court dated December 27, 1938; Commissioner v. Snite, 177 F. 2d 819 (C.A. 7), affirming 10 T.C. 523">10 T.C. 523; Kirschenbaum v. Commissioner, 155 F. 2d 23 (C.A. 2), affirming a Memorandum Opinion of this Court dated March 27, 1945, certiorari denied 329 U.S. 726">329 U.S. 726; Wall v. United States, 164 F. 2d 462 (C.A. 4); Boyle v. Commissioner, 187 F. 2d 557 (C.A. 3), affirming 14 T.C. 1382">14 T.C. 1382, certiorari denied 342 U.S. 817">342 U.S. 817: Ferro v. Commissioner, 242 F. 2d 838 (C.A. 3), affirming T.C. Memo 1956-94">T.C. Memo. 1956-94; Holsey v. Commissioner, 258 F. 2d 865 (C.A. 3), reversing 28 T.C. 962">28 T.C. 962; Zipp v. Commissioner, 259 F. 2d 119 (C.A. 6), affirming per curiam 28 T.C. 314">28 T.C. 314, certiorari denied 359 U.S. 934">359 U.S. 934; Bona Allen, Jr., 41 B.T.A. 206">41 B.T.A. 206; Samuel A. Upham, 4 T.C. 1120">4 T.C. 1120; Pullman, Inc., 8 T.C. 292↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619093/	DANIEL BURK and YVONNE T. PETERSEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPetersen v. CommissionerDocket No. 187-76.United States Tax CourtT.C. Memo 1977-4; 1977 Tax Ct. Memo LEXIS 439; 36 T.C.M. (CCH) 11; T.C.M. (RIA) 770004; January 11, 1977, Filed 439 Held, there is no merit to the petitioners' contention that they were not required to file an income tax return because Federal Reserve Notes are not "dollars"; nor in their contention that their constitutional privileges relieve them of the responsibility of proving their right to income tax deductions. Held,further, under the circumstances, the Commissioner's motion for a summary adjudication will be granted. Daniel Burk Petersen, pro se. Walter T. Thompson, for the respondent. SIMPSONMEMORANDUM OPINION SIMPSON, Judge: This matter comes before the Court on the440 Commissioner's oral motion after the trial of this case for a summary adjudication on the legal contentions of the petitioners and to decide the case without any further proceedings. This issues for decision are: Whether Federal Reserve Notes are "dollars" for purposes of section 6012, Internal Revenue Code of 1954 (relating to the requirement for filing an income tax return), and whether the petitioners are entitled to determine how much of their income is taxable without proving their right to deductions because of their claim that to supply such proof would violate their constitutional privileges. On the petitioners' 1974 Federal income tax return, they reported the receipt of 10,308 Federal Reserve Notes. Such amount was also stated to equal 2,062 constitutional dollars of silver and/or gold. The tax due was not computed; instead, they sought a refund of 203.59 Federal Reserve Notes, the amount of tax they reported as having been withheld. On the return, the petitioners specifically stated their objection to answering any questions relating to the computation of their taxes on the grounds of the 1st, 4th, 7th through 10th, 13th, 14th, and 16th amendments441 to the Constitution. In his notice of deficiency, the Commissioner computed the amount of tax owed by the petitioners and determined a deficiency of $812.24 in their Federal income taxes. The parties agree that in computing such tax, the Commissioner allowed the petitioners deductions for the personal exemptions which they claimed and the standard deduction under section 141 of the Internal Revenue Code of 1954. A timely petition was filed by the petitioners, and at that time, they resided in Arizona. In due course, the case was set down for trial pursuant to notice, and Mr. Petersen took the stand as the only witness on behalf of the petitioners. Although Mr. Petersen was given the opportunity to furnish any evidence that he desired, he declined to do so for two reasons: First, he argued that the petitioners' income was in the form of Federal Reserve Notes and not constitutional dollars, and that the amount of Federal Reserve Notes they received, when converted by some unspecified formula into "constitutional dollars," was less than the amount of income which would require them to file a joint Federal income tax return. Consequently, they filed a document442 purporting to revoke their 1974 Federal income tax return. In addition, the petitioners contended that they did not have to set forth the deductions to which they were entitled and furnish any information regarding them because to do so would violate various constitutional guarantees, including the fifth amendment. At the conclusion of the trial, the Commissioner orally moved for a summary adjudication of the legal contentions made by the petitioners and, in addition, for a dismissal of the case under Rule 149, Tax Court Rules of Practice and Procedure, on the ground that the petitioners had failed to adduce any evidence in support of an issue for which they had the burden of proof. For the reasons stated below, we decided to grant the Commissioner's motion. There is absolutely no merit to the petitioners' claim that Federal Reserve Notes are not dollars for purposes of section 6012.E.g. United States v. Gardiner,531 F. 2d 953 (9th Cir. 1976); United States v. Daly,481 F. 2d 28, 30 (8th Cir. 1973), cert. denied 414 U.S. 1064">414 U.S. 1064 (1973); Loren R. Gajewski, 67 T.C. (Nov. 10, 1976); Edward A. Cupp,65 T.C. 68">65 T.C. 68, 81 (1975),443 on appeal (3d Cir. July 26, 1976). During the year in issue, such provision, in general, required a married couple to file an income tax return if they received gross income of $2,800 or more. Thus, the petitioners, who received $10,308, must report such amount and pay the tax due thereon. Nor is there any merit to their claim that their constitutional rights will be violated if they must specify the deductions to which they claim to be entitled and produce evidence to support them. Although the petitioners claim they are afraid to produce any information, they do not contend that they are under investigation for any criminal wrong-doing with respect to their taxes for 1974, and there is no evidence of record which would warrant such a conclusion. The fifth amendment privilege is unavailable in a civil proceeding where the danger of any criminal investigation is remote. See Rogers v. United States,340 U.S. 367">340 U.S. 367, 374 (1951); Brown v. Walker,161 U.S. 591">161 U.S. 591, 599-600 (1896); Boren v. Tucker,239 F. 2d 767, 772 (9th Cir. 1956); E. Jan Roberts,62 T.C. 834">62 T.C. 834, 838 (1974). Nor does any other constitutional provision cited444 by the petitioners relieve them of their burden of proof. See Porth v. Brodrick,214 F. 2d 925 (10th Cir. 1954); Raymond M. Hartman,65 T.C. 542">65 T.C. 542, 547 (1975); Edward A. Cupp,supra at 81-84; E. Jan Roberts,supra at 838-839. In light of the fact that the petitioners have no legal excuse for their failure to adduce evidence to support alleged deductions, we will grant the Commissioner's motion to decide the case without any further proceedings. This Court was established to provide taxpayers with an opportunity to secure a judicial review of their tax liability before payment thereof, and the Court has consistently and zealously guarded a taxpayer's right to his day in court, whenever there was a bona fide dispute between him and the Commissioner of Internal Revenue. See, e.g., Samuel J. King,51 T.C. 851">51 T.C. 851, 854-855 (1969). It is important, not only to the individual, but also to the public's confidence in the tax collection system that the opportunity for judicial review of bona fide disputes be protected. However, in this case, the petitioners asked the Court to pass on legal contentions*445 which have been repeatedly and thoroughly considered and rejected by the courts. They presented no legal issue with respect to which there is any serious controversy, and they presented no evidence for the Court to consider and weigh. Under these circumstances, a summary disposition of the petitioners' baseless claims will assist us in providing prompt trials for taxpayers who do have bona fide disputes with the Commissioner and thereby facilitate carrying out our judicial responsibilities. An appropriate order and decision will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619094/	Glenn H. Strother v. Commissioner.Strother v. CommissionerDocket No. 59705.United States Tax CourtT.C. Memo 1957-102; 1957 Tax Ct. Memo LEXIS 150; 16 T.C.M. (CCH) 425; T.C.M. (RIA) 57102; June 25, 1957150 Exemptions allowed petitioner under section 25(b), I.R.C. 1939, for support of two minor daughters. The amounts of deductions, if any, for interest, sales tax, gasoline tax, and automobile depreciation have been determined from the evidence. Glenn H. Strother, 3287 Saint Patrick Street, S. E., Atlanta, Ga., pro se. Miller Bowen, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion ARUNDELL, Judge: Respondent determined a deficiency in income tax for the year ended December 31, 1953, in the amount of $454.38. The issues are: (1) Whether petitioner is entitled to claim an exemption of $600 for each of his two minor daughters for the taxable year 1953 under section 25(b)1; (2) whether petitioner is entitled to deductions of certain finance charges as "interest" in the taxable year 1953 under section 23(b); (3) whether petitioner is entitled to certain additional deductions in 1953 for state sales tax and state gasoline tax under section 23(c); and (4) whether petitioner is entitled under section 23(1) to a deduction for depreciation of an automobile used in his law practice. Findings152 of Fact Petitioner is an individual, residing in Atlanta, Georgia. He and his present wife, Jacqueline H. Strother, filed a joint income tax return for the taxable year ended December 31, 1953, with the director of internal revenue for the district of Georgia. Petitioner obtained a divorce a vinculo matrimonii from Eloise R. Strother in DeKalb County, Georgia, April 25, 1951. The divorce decree, among other things, provided that pursuant to the finding of the jury, the defendant, Eloise R. Strother, "is awarded full and complete title" to the property known as Number 183 Clifton Street, which had been deeded to petitioner in 1935; that title to all the furniture and household equipment owned by the parties and located in the home place "be, and the same is, awarded to the defendant, as found by the jury;" that the plaintiff (petitioner herein) pay to the defendant $80 per month in semimonthly installments "as permanent alimony, until she may remarry;" that the plaintiff pay to the defendant $40 per month in semimonthly installments "for each of the minor children of the parties;" that "Said payments of alimony for use of a child to cease upon death or marriage or attainment of153 the age of twenty-one years, whichever shall first occur;" and that - "It is further ordered and decreed that custody of said minor children be, and the same is, hereby awarded to the mother, the defendant, Mrs. Eloise Reed Strother, with the right and privilege of having said children visit with their father at his place of residence at such times and for such length of time as the parties may be able to agree upon. In the event the parties are unable to agree upon said matters, the court will pass such orders in respect thereto as shall seem appropriate and in the best interest of all parties concerned." Petitioner married Jacqueline H. Strother on March 15, 1952. Petitioner was a member of the U.S. Air Force, holding the rank of Major through January 18, 1953, when he received his discharge. During this period, he was stationed at MacDill Air Force Base, Florida. Petitioner was employed by the Veterans Administration in Atlanta and resided in Atlanta from January 19, 1953, to December 31, 1953. During 1953, he and another person maintained a law office in the Forsyth Building in Atlanta. Petitioner conducted his outside law practice at night and on Saturdays and Sundays. 154 During 1953, petitioner's present wife was employed for a portion of the year by the American Red Cross in Atlanta and for a portion of the year by the Reconstruction Finance Corporation in Atlanta. On the joint return filed for 1953, petitioner claimed an exemption of $600 for each of his daughters Diane and Suzanne, who were 13-year-old twins. The respondent, in a statement attached to the deficiency notice, disallowed the exemptions "for the reason that evidence has not been presented to substantiate that you furnished their chief support for the taxable year." Diane and Suzanne lived with their mother, Eloise R. Strother, during the year 1953 except that Suzanne spent approximately every other week end with her father, and Diane, in addition to some week ends, resided with her father during June, July, and August. In 1954, petitioner, through court action, gained custody of his daughters, and Suzanne is now living with petitioner. Diane was married on November 7, 1956. Petitioner paid his divorced wife $960 as alimony during 1953. He also paid her $828 toward the support of Diane and Suzanne pursuant to the court decree. He did not pay her the $40 per month during the 3155 months that Diane resided with him. In addition to the $828 paid to his divorced wife for the support of Diane and Suzanne, petitioner paid for such items as department-store bills, camp expenses, and insurance for his two minor daughters, in the amount of $365.16. He also paid to Diane and Suzanne each approximately $4 per week for lunch and spending money. All the spending money Suzanne received was given to her by her father. Petitioner also paid his mother, Mrs. G. W. Strother, a total of $377.25 for clothes for Diane and Suzanne. Petitioner's mother paid out at least $100 of her own money toward the support of Diane and Suzanne during 1953. During that year. petitioner's automobile was used to take Suzanne and Diane to various places. Petitioner and his first wife also had an older daughter, Glenda Eloise Strother. Petitioner claimed no exemption for Glenda during 1953. Glenda was employed during that year and lived with her mother, Eloise R. Strother, to whom she paid $30 per month for her board. Eloise was also employed for a part of the time during 1953. Either during 1953 or 1954, Eloise borrowed money on the house, received under the divorce decree, for the purpose of painting156 the house but did not use all of the money that was borrowed at that time. 2. On March 25, 1952, petitioner purchased an automobile on the installment plan and agreed to pay General Motors Acceptance Corporation 18 installments of $74.87 each, or a total of $1,347.66. Of this total, $152.91 was listed as finance charges, $79.15 of which was paid for the calendar year 1953. The amount of interest included in the finance charge for 1953 was $16.85. At some unknown date, petitioner purchased some household goods from Sears, Roebuck and Company and paid finance charges of $16.20 in connection with the purchase. 3. On the joint return for 1953, petitioner deducted as a part of total taxes paid $162.44 as sales tax and $177.10 as state gasoline tax. In the statement attached to the deficiency notice, the respondent, with respect to these items, said: "It is held that a reasonable estimate of sales taxes paid by you during 1953 is $89.34. The difference of $73.10 between this amount and the $162.44 claimed on your 1953 return has been disallowed. "It is held that a reasonable estimate of gasoline taxes paid by you during 1953 is $62.40. The difference of $114.70 between this amount157 and the $177.10 claimed on your 1953 return has been disallowed." Petitioner arrived at the deduction of $162.44 for sales tax by taking an arbitrary 2 per cent of the adjusted gross income of $8,122.06 reported on the joint return of petitioner and his present wife. 4. On the joint return for 1953, petitioner deducted an amount of $550 as depreciation on an automobile for traveling, which the respondent disallowed. About 30 per cent of the use of petitioner's automobile was in connection with his law practice performed at night and on Saturdays and Sundays. The cost of the automobile was $1,800, and its useful life was approximately 3 1/2 years. At the time petitioner went into the armed services, he had a number of subrogation cases for insurance companies which he turned over to an associate. Upon his discharge from the service, he started working on these cases again, a considerable number of which were outside of Atlanta, and it was necessary for petitioner to use his automobile in connection with the prosecution of such cases. The amount of automobile depreciation attributable to petitioner's law business during 1953 was $125. Opinion The principal issue here is whether158 petitioner is entitled to the two claimed exemptions for his minor daughters. In view of the respondent's disallowance of the claimed exemptions, the burden is on the petitioner to show that under section 25(b)2 he furnished "over half" of the support of the two children during the taxable year. Allancunningham, 22 T.C. 906">22 T.C. 906; E. R. Cobb, Sr., 28 T.C. - (May 31, 1957). 159 We have an unsatisfactory record from which to determine whether petitioner is entitled to the exemptions for contributing more than half of the support of his two minor daughters in 1953. The mother and father of the children are divorced and the children lived with their mother. In connection with the divorce proceedings, the family home, which was in the name of petitioner, was transferred to the wife, together with the household furnishings. Alimony was awarded to the wife in the sum of $80 per month and the petitioner was required to pay for the support of each daughter the sum of $40 per month. He not only paid the amount decreed by the court for the support of his two minor daughters during the year 1953 but he also contributed more than an additional $1,000, which sums were used to clothe the children, give them spending money, and pay for miscellaneous expenses such as equipment for camping trips, etc. It was petitioner's automobile which was used to take the children from place to place when necessary, and they spent many weekends with their father as well as long periods during the summer and particularly during the summer of 1953. An older daughter, who was working, 160 continued to live in the family home with her mother and paid $30 per month board. We do not know just what the income of the mother was but it appears she worked part time in 1953 and, when the time came to paint the family home, it was necessary to mortgage the property for the needed funds. In all fairness, either the father or the mother should be allowed the exemption granted by the statute. We do not understand that the Commissioner has yet made any definitive allowance to either parent. After a careful study of the entire record we have concluded that the petitioner has established that he furnished more than 50 per cent of the support of his two minor children during the year 1953 and is, therefore, entitled to the exemptions. Petitioner testified that his wife refused to come and testify, and the respondent did not call her as a witness. We think petitioner has at least made a prima facie case, and the burden of going forward rests on the respondent. Nellie Kenefick, Executrix, 3 B.T.A. 659">3 B.T.A. 659; Sharaf v. Commissioner (C.A. 1, 1955), 224 Fed. (2d) 570, 572; Avco Manufacturing Corporation, 25 T.C. 975">25 T.C. 975, 987-988. The local court placed the161 duty of supporting the children on the father, and he not only paid the full amount fixed in the divorce decree but, during 1953, he contributed an additional sum of over $1,000 which was used for the children's support. The record in no place suggests that the wife had income or the means of providing so much for her children. 2. Section 23(b) provides that in computing net income there shall be allowed as a deduction "All interest paid * * within the taxable year on indebtedness * * ." In our findings we have found that of the total finance charges applicable to the taxable year 1953 paid in connection with the purchase of an automobile on the installment plan, $16.85 thereof represented interest paid on indebtedness. We hold that petitioner is entitled to deduct this amount under section 23(b), supra. Regarding the household goods purchased on the installment plan, we are not advised as to the cost thereof or the period over which such cost was financed. We hold, therefore, that petitioner has failed to prove that any part of the finance charges of $16.20 is deductible as interest. 3. On the joint return, petitioner claimed deductions for sales tax of $162.44 and gasoline162 tax of $177.10. The respondent allowed deductions for sales tax of $89.34 and gasoline tax of $62.40 and disallowed the remainder. We hold that petitioner has not proven that he is entitled to any greater deductions for these items than have been allowed by the respondent. 4. Section 23(1) provides that in computing net income there shall be allowed as a deduction "A reasonable allowance for the exhaustion, wear and tear * * * of property used in the trade or business * * ." Petitioner has shown that it was necessary for him to use his automobile in connection with his law practice to the extent of about 30 per cent of its total use; that the automobile cost $1,800; and that it had a useful life of about 3 1/2 years. We find and hold that petitioner is entitled to a deduction for the depreciation of his automobile in the amount $125of. Decision will be entered under Rule 50. Footnotes1. Unless otherwise indicated herein, all references to section numbers are of the Internal Revenue Code of 1939.↩2. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME. * (b) Credits for Both Normal Tax and Surtax. - (1) Credits. - There shall be allowed for the purposes of both the normal tax and the surtax, the following credits against net income: * (D) An exemption of $600 for each dependent whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $600, except * (3) Definition of dependent. - As used in this chapter the term "dependent" means any of the following persons over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer: (A) a son or daughter of the taxpayer, or a descendant of either * *. A payment to a wife which is includible under section 22(k) or section 171 in the gross income of such wife shall not be considered a payment by her husband for the support of any dependent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619096/	David Courtney, Petitioner, v. Commissioner of Internal Revenue, RespondentCourtney v. CommissionerDocket No. 58164United States Tax Court28 T.C. 658; 1957 U.S. Tax Ct. LEXIS 158; June 14, 1957, Filed 158 Decision will be entered under Rule 50. 1. The petitioner operated a country grocery store for a part of the period involved and a farm for the other part. He and his wife, both of whom were not well acquainted with accounting or bookkeeping methods, maintained records of receipts, disbursements, credit sales, and inventories. Petitioner gave certain information from his books and records to an attorney who prepared the returns. Respondent determined petitioner's records were inadequate to determine his net income and determined petitioner's net income for the years 1949, 1950, 1951, and 1953 by the net worth method. Held, that the respondent did not exceed the authority granted him in section 41 of the Internal Revenue Code of 1939 in disregarding the petitioner's records and accounting method and that the respondent's net worth statement, after giving effect to oral stipulations and certain other adjustments, is approved.2. The notice of deficiency for the years 1949 and 1950 was mailed more than 3 years and less than 5 years after the returns were due. Petitioner had unreported net income determined by the net worth method in excess of 25 per cent of gross income 159 stated on the returns. Held, the 5-year period of limitations under section 275 (c), Internal Revenue Code of 1939, is applicable with respect to 1949 since unreported net income, reduced by all possible excessive deductions, exceeds 25 per cent of gross income stated on the returns. However, for the year 1950, the unreported net income, when reduced by the amount of possible excessive deductions, is not in excess of 25 per cent of the amount of gross income stated on the returns; therefore, the proceedings for that year are not timely under section 275 (c) of the 1939 Code but are barred under section 275 (a) of the 1939 Code. H. A. Hurley, 22 T. C. 1256, 1264-1265 (1954), followed; H. Leslie Leas, 23 T. C. 1058 (1955), distinguished.3. Held, that addition to the tax for the year 1953 under section 293 (a), Internal Revenue Code of 1939, is upheld; additions to the tax for the year 1953 under section 294 (a) (1) (A) and (d) (2), Internal Revenue Code of 1939, are also upheld. Held, further, that additions to the tax under section 293 (b), Internal Revenue Code of 1939, for the years 1949, 1950, and 1951, 160 are improper. Lee S. Jones, Esq., for the petitioner.Charles R. Hembree, Esq., for the respondent. Black, Judge. BLACK 659 The respondent has determined deficiencies in income tax and additions thereto, under the Internal Revenue Code of 1939, 1 as follows:Additions to taxYearDeficiencySec.Sec. 293 (b)Sec. 294Sec. 294293 (a)(d) (1) (A)(d) (2)1949$ 436.24$ 218.121950451.14225.57$ 37.46$ 32.1119511,212.74606.37195392.00$ 4.6032.9823.28Total2,192.124.601,050.0670.4455.39161 By an amended answer, filed to conform the pleadings to the proof, the respondent claims increased deficiencies in income tax for the taxable years 1949 and 1953 in the respective amounts of $ 623.10 and $ 249.99; and additional, or increased, deficiencies in additions to tax under sections 293 (a) and 294 (d) (1) (A) and (d) (2) in the respective amounts of $ 12.50, $ 21.26, and $ 15 for the year 1953.All of the above amounts have been placed in controversy by the pleadings.660 The respondent's determination of additions to the tax under section 293 (b) has been conceded by him to be erroneous and is no longer in issue.The deficiencies in income tax are based upon unreported income determined by the net worth method. The petitioner's primary contention is that his books and records are adequate and correct; that his returns were made in accordance with the books and records; and, therefore, the respondent had no authority to 162 determine his income by the net worth method. After oral stipulations and concessions, there are only three items in the net worth computation made by the respondent in his determination of the deficiencies which are in dispute. Petitioner also has pleaded that the statute of limitations bars the assessment for the years 1949 and 1950. Respondent, in an amended answer, pleads the 5-year statute of limitations provided in section 275 (c) and denies that the statute of limitations has barred the assessment for either 1949 or 1950.FINDINGS OF FACT.Petitioner, David Courtney, is an individual with residence at Ghent, Kentucky. He filed timely income tax returns for the years 1949, 1950, 1951, and 1953 with the collector or the district director of internal revenue, as the case may be, for the district of Kentucky.Issue 1. Net Worth Method.Petitioner was engaged in the grocery business in the years 1949 and 1950 and for part of the year 1951. He sold his grocery business in 1951 and purchased a farm which he operated until March 1953, at which time he sold the farm and re-entered the grocery business. While he was in the grocery business, petitioner had one or two employees163 working for him.The formal education of petitioner and his wife consisted of attending public school until the seventh and eighth grades, respectively. For the taxable years involved herein, the petitioner and his wife maintained records of the grocery business. The records consisted principally of a book which showed daily sales, purchases, expenses, cash receipts and disbursements, and accounts receivable. They also compiled an inventory each year. When they operated the farm they kept a book showing receipts and expenses. A bank account was maintained. The petitioner retained an attorney to prepare his income tax returns. The attorney made no audit of the petitioner's books and records but prepared the returns from information submitted by the petitioner and his wife. The petitioner knew nothing about the various methods of accounting or of determining income.661 The books and records of the petitioner and his method of accounting did not clearly reflect his income.Attached to the deficiency notice was a net worth statement which showed, inter alia, the following:YearTotal taxableReportedUnreportedincome1949$ 5,586.61$ 1,873.08$ 3,713.5319505,417.202,536.162,881.0419518,412.431,170.627,241.8119533,262.702,825.10437.60164 The Commissioner has not determined any deficiency for the year 1952 and that is why no figures are given for 1952.During the course of the hearing the petitioner agreed that the majority of the items included in the net worth statement were correct. The parties orally stipulated other changes in the net worth statement. The respondent made certain concessions in his brief. Effect will be given to these agreements and concessions in a recomputation under Rule 50.Three items remain in controversy. Findings regarding them are as follows:(a) New Furniture and Improvements. The net worth statement shows as an asset "New Furniture & Improvements" in the amount of $ 550 on December 31, 1952, which is agreed to be correct, and in the amount of $ 2,657 on December 31, 1953. The petitioner's 1953 income tax return and the record do not show the sale or disposition of all or part of the $ 550 of "New Furniture & Improvements" on hand at the beginning of the year 1953. During the year 1953, the petitioner purchased "New Furniture & Improvements" in the amounts of $ 395 and $ 1,601.56. The petitioner, therefore, had "New Furniture & Improvements" on December 31, 1953, in the165 amount of $ 2,546.56 ($ 550 plus $ 395 plus $ 1,601.56).(b) Depreciation Reserve. The amounts in the depreciation reserve at the end of all of the years involved are agreed upon except that the petitioner contends that the balance in the reserve on December 31, 1951, should be $ 155 in excess of the $ 1,520.75 shown on the net worth statement.During the year the petitioner sold two cows, which had a basis of $ 500, for $ 345. On his return he deducted $ 155, the difference between the basis and the sales price, as depreciation. The net worth statement on December 31, 1951, does not reflect the two cows in the amount of $ 500 as assets, nor does the depreciation reserve reflect any depreciation taken on the two cows. The amount of $ 1,520.75 is the proper balance in the depreciation reserve on December 31, 1951662 (c) Living Expenses. The respondent's net worth statement shows living expenses of $ 2,000 for each of the years 1949, 1950, and 1951, and $ 2,500 for the year 1953.The petitioner and his wife had two daughters who were 13 and 18 years old in 1949. The oldest daughter finished high school in 1950 and moved away from home. The other daughter166 was attending school until 1953, when she passed away. Petitioner expended $ 1,000 on her funeral. Petitioner paid the funeral expenses, in part, from insurance proceeds of $ 850 which he received. These proceeds are shown on the net worth statement as a reduction of the increase in net worth.Respondent computed petitioner's net income for 1953 by the net worth method, as follows:Net taxable income (this figure is arrived at by computingpetitioner's increase in net worth for 1953)$ 1,612.70 Add: Living expenses2,500.00 Less: Insurance proceeds (life insurance on daughter(850.00)Total taxable income3,262.70 Petitioner expended about $ 150 per year for life, property, and automobile insurance. The petitioner lived in his own home in Ghent, Kentucky, a town of about 450 persons, or on his farm during the years in question. He paid no rent. Petitioner and his family took very few trips.Petitioner's living expenses for himself and family were $ 1,750 for the year 1949, $ 1,650 for the year 1950, and $ 1,500 for the years 1951 and 1953, respectively. In addition to these personal living expenses of $ 1,500 for 1953, petitioner had a nondeductible 167 expense of $ 150 incurred in paying the funeral expenses of his daughter for which he was not reimbursed by insurance or otherwise. See findings above.After giving effect to changes in the respondent's original net worth statement due to the oral stipulations, concessions, and our findings, the corrected net worth statement shows the following:YearTotal taxableReportedUnreportedincome1949$ 8,530.01$ 1,873.08$ 6,656.9319504,631.702,536.162,095.5419512,254.031,170.621,083.4119533,969.612,825.101,144.51Issue 2. Statute of Limitations.Petitioner's 1949 and 1950 income tax returns were filed on January 16, 1950, and January 12, 1951, respectively. The respondent's notice of deficiency was mailed on March 10, 1955. The petitioner's 1949 and 1950 income tax returns showed the following: 663 19491950Schedule C (grocery business):Gross receipts (line 1)$ 63,022.39$ 59,987.97 Cost of goods sold (line 9)1 60,264.472 55,989.68 Gross profit (line 10)2,757.923,998.29 Other business deductions (line 22)3 1,884.844 856.62 Net profit (line 24)5 873.086 3,131.67 Schedule F (farm): 7Gross receipts (item 3)125.00 Expenses (item 6)720.51 Net loss (item 10)(595.51)Net profit from business5 873.086 2,536.16 Net income5 873.086 2,536.16 168 169 The following schedule relates to the omission of gross income from the returns:19491950Gross income per return$ 2,757.921 $ 4,123.2925 per cent thereof689.481,030.82Unreported net income per net worth statement6,656.932,095.54Deductions per return1,884.842 1,577.13Minimum gross income omitted4,772.09518.41For the year 1949, petitioner omitted gross income in excess of 25 per cent of the amount of gross income stated on the return.Issue 3. Additions to the Tax.(a) Section 293 (a). The petitioner, not being well acquainted with accounting methods, kept books and records in the manner described under Issue 1. The Commissioner, in his determination of the deficiencies by use of the net worth method, stated in his deficiency notice, as follows:In the absence of adequate records, your taxable net income has been computed on the basis of increase in net worth during the taxable years, with adjustments for personal and other non-deductible amounts paid.The Commissioner also stated in his deficiency notice:A 5-percent negligency penalty170 is being asserted for the year 1953, in accordance with the provisions of Section 293 (a) of the Internal Revenue Code.664 At the hearing of this proceeding the petitioner made no effort to show from his books and records what his net income was for the year 1953. The deficiency for the year 1953 was due at least in part to negligence or intentional disregard of rules and regulations.(b) Section 294 (d) (1) (A) and (d) (2). No evidence has been adduced regarding the additions to the tax under this section.(c) Section 293 (b). No part of the deficiencies for 1949, 1950, or 1951 is due to fraud with intent to evade the tax. The Commissioner has not determined additions to the tax under section 293 (b) for the year 1953.OPINION.Issue 1. Net Worth Method.The petitioner first contends that his books and records were adequate, that his tax returns were correct, and that the respondent erred in determining his income by the net worth method.The petitioner operated a country grocery store for a part of the period involved and a farm for the other part. Neither he nor his wife, who helped him, was well acquainted with accounting171 or bookkeeping methods. They did, however, keep books and records for the store and the farm, in which they entered their receipts and disbursements. They kept a bank account, recorded credit sales, and compiled inventories. At the end of each year they gave certain information that was recorded on their books and records to their attorney, who would prepare their returns. The petitioner, his wife, and the attorney all testified that they considered the returns to be correct.Although we believe the petitioner tried to keep records which clearly reflected his income, we cannot, on the record, find that they did so and that the returns in question were correct. The record is not clear as to the method used in preparing the returns. The petitioner left it up to the attorney. On direct examination the attorney testified that the returns were prepared on "the cash receipts and disbursements method." The returns show that inventories were used in determining income. On cross-examination the attorney testified that he gave consideration to credit sales in computing the income on the returns. This seemingly conflicting testimony renders it difficult to find which method the petitioner172 used in determining his income and whether the method which he did use clearly reflected that income. 2665 No statement made up from the books showing petitioner's net income for any of the taxable years was introduced in evidence.We have here a situation where the Commissioner has determined that petitioner's books and records were inadequate for the purpose of determining petitioner's net income in the taxable years. Petitioner, on the other hand, contends that respondent had no right to make such a determination because, as a matter of fact, his books and records were adequate. 173 However, if that is true, it was petitioner's burden of proof to show by summaries made from the books and records what his net income was during each of the taxable years. No such showing was made. It is not a sufficient showing to rebut the presumptive correctness of respondent's determination that petitioner should testify that his returns were correct or that his attorney who prepared the returns should give testimony to the same effect. The books and records themselves must be brought before our Court and a satisfactory showing made from them as to what petitioner's net income really was. Petitioner not having made any such showing as to what his net income was for the taxable years, we have no alternative but to turn to the net worth method, which the Commissioner has used in his determination of the deficiencies, for an answer to the problem.Therefore, it naturally follows that under the circumstances of the instant case, we cannot say that in disregarding the petitioner's books and records the respondent exceeded the authority granted him in section 41. 3 Also, the net income determined by the net worth method is substantially in excess of the net income shown on the174 returns. This is cogent evidence of the unreliability of the books and records. Cf. Morris Lipsitz, 21 T. C. 917, 931 (1954).The petitioner argues that the respondent's net worth statement is grossly in error and unreliable and, therefore, it should not be used. We disagree. After the oral stipulations and concessions only three items, one of which was substantial in amount, remain in controversy. The three items remaining in controversy are:(a) New Furniture and Improvements. The net worth statement showed as an asset "New Furniture & Improvements" in the175 amounts of $ 550 on December 31, 1952, and $ 2,657 on December 31, 1953. The petitioner agrees that the $ 550 balance on December 31, 1952, is correct. The petitioner proved that he purchased "New Furniture & Improvements" in the amount of $ 1,996.56 in the year 1953. He, therefore, contends that the December 31, 1953, balance of $ 2,657 is overstated by $ 660.44 ($ 2,657 minus $ 1,996.56). The petitioner has not shown, nor 666 does his 1953 return or the record indicate, that all or part of the "New Furniture & Improvements" on hand at December 31, 1952, was disposed of prior to December 31, 1953. Accordingly, we have found that "New Furniture & Improvements" should be shown on the net worth statement as of December 31, 1953, in the amount of $ 2,546.56 ($ 550 plus $ 1,996.56), rather than $ 2,657, as determined by the respondent.(b) Depreciation Reserve. The net worth statement shows a depreciation reserve on December 31, 1951, in the amount of $ 1,520.75, which amount does not include any accumulated depreciation for two cows sold during the year 1951. The petitioner agrees to various amounts of accumulated depreciation comprising that amount. He contends, 176 however, that during 1951 he sold two cows which had a basis of $ 500, for $ 345; that he deducted the $ 155 difference between the basis and the selling price as depreciation; and that, therefore, the depreciation reserve should also include the $ 155. Regardless of whether the difference between the basis and the sales price was properly characterized as depreciation, see Estate of B. F. Whitaker, 27 T. C. 399, 405-406 (1956), there is no merit to petitioner's contention. The cows were not on hand on December 31, 1951, and were not included in the net worth statement as assets on that date. Therefore, any accumulated depreciation attributable to those assets would not properly be included in the reserve for depreciation account. The balance in the reserve for depreciation account represents the accumulated depreciation taken on property which is included among the assets.(c) Living Expenses. The respondent determined the petitioner's nondeductible living expenses to be $ 2,000 for each of the years 1949, 1950, and 1951, and $ 2,500 for the year 1953. The respondent, in determining living expenses for 1953 as $ 2,500, included therein177 a nondeductible expenditure of $ 1,000 which petitioner incurred and paid as funeral expenses upon the death of his daughter. However, this funeral expense of $ 1,000 was offset by $ 850 which petitioner collected on an insurance policy as reimbursement for funeral expenses. Our Findings of Fact show how this item was treated by respondent in his net worth computation.The petitioner contends that his nondeductible living expenses were about $ 1,300 a year. After examining the record and giving consideration to the petitioner's mode and manner of living, to the number of dependents, to the fact that he owned a house and/or a farm and did not pay rent, and to the specific expenditures to which he testified, we have concluded that petitioner's living expenses for himself and family were not as great as the respondent has determined in his net worth computation. We have made findings of fact, however, that 667 these living expenses were greater than the $ 1,300 which petitioner claimed in his testimony for each of the taxable years.In 1949, both of petitioner's daughters were at home and in school. After taking all the facts into consideration we have made a finding that 178 petitioner's living expenses for 1949 were $ 1,750.In 1950, petitioner's oldest daughter graduated from school and after graduation moved to Louisville, Kentucky, where she was employed for the remainder of the year, earning her own living. We have, therefore, made a finding that petitioner's living expenses for 1950 were $ 1,650.In 1951 and 1953, only one of petitioner's daughters was living at home. The other daughter was employed in both of those years in Louisville and was earning her own support. We have, therefore, made a finding that petitioner's living expenses for 1951 and 1953 were $ 1,500 for each year. However, in the year 1953, petitioner incurred and paid a nondeductible expense of $ 1,000 on account of the death of his daughter. He was reimbursed for $ 850 of this by an insurance company. After giving effect to this reimbursement it will be seen that petitioner had a nondeductible expense of $ 150 on account of the death of his daughter. This, added to the $ 1,500 nondeductible living expense, makes $ 1,650.The living expense figures given above should be used in a computation under Rule 50.Issue 2. Statute of Limitations.Petitioner's returns for the 179 years 1949 and 1950 were filed on January 16, 1950, and January 12, 1951, respectively. However, these returns were not due until March 15, 1950, and March 15, 1951, respectively, section 53 (a); and, for the purpose of applying section 275 (c), the returns are considered as filed on the last day they were due. Sec. 275 (f). Accordingly, the 5-year statute of limitations, if it is applicable to the instant case, extended to March 15, 1955, for the year 1949, and to March 15, 1956, for the year 1950. The notice of deficiency setting forth the deficiencies for the years 1949 and 1950 was mailed to petitioner on March 10, 1955. Consequently, it will be seen that the respondent's notice of deficiency was mailed more than 3 years and less than 5 years after the returns for 1949 and 1950 were due. The petitioner, relying on section 275 (a)4 contends that the Commissioner's action with respect to those years is barred by the statute of limitations.180 668 The respondent contends that the 5-year period of limitations provided for in section 275 (c)5 is applicable. Under section 275 (c) the respondent has the burden of proving that the petitioner omitted from gross income an amount in excess of 25 per cent of the amount of gross income stated in the return. C. A. Reis, 1 T. C. 9 (1942).The record shows that for the years 1949 and 1950, the amounts of unreported net income are in excess of 25 per cent of the gross income stated in the returns. In order to equate the unreported net income to omitted gross income, it is incumbent upon the respondent to show that181 the unreported net income results from omitted gross income rather than from excessive deductions. H. A. Hurley, 22 T. C. 1256, 1264-1265 (1954), affirmed on another point (C. A. 6, 1956) 233 F.2d 177">233 F. 2d 177. The amount of deductions which petitioner took on his returns for the respective years 1949 and 1950 is shown in our Findings of Fact. He does not claim that he should have reported any additional deductions to those claimed on his returns.In the Hurley case, supra, the Commissioner used the net worth method in computing the taxpayer's net income. The taxpayer pleaded the 3-year statute of limitations as a bar to the assessment of the deficiency for the year 1947. The Commissioner, in turn, pleaded that the 5-year statute of limitations provided by section 275 (c) was applicable because the taxpayer had omitted in excess of 25 per cent of his gross income reported on his return. In holding that the Commissioner had not met his burden of proof to show that such was the case, we said:A computation by the net worth method could result in increased net income by reason of deductions having no factual basis. The probability182 that some part of the increased net income here is attributable to that factor is apparent not only from the nature of petitioner's business but the large amounts he claimed for deductions in computing net income. [Our Findings of Fact show that for the year 1947, the taxpayer claimed "Other Business Deductions" totaling $ 65,432.57. He had reported gross income of $ 80,513.50 on his return.] The theory advanced by respondent ignores that probability completely and requires an inference, lacking a reasonable basis, that all of the additional net income resulted from omissions of gross income.Applying the rationale of the Hurley case, supra, to the facts of the instant case, we think the 5-year statute of limitations provided in section 275 (c) is applicable and the assessment of the deficiency determined for 1949 is not barred. Assessment of the deficiency determined for the year 1950 is barred because the Commissioner has not borne his burden of proof to show that section 275 (c) is applicable under the facts.669 We have set forth in our Findings of Fact the unreported net income for 1949, after reducing it by the total amount of deductions taken by petitioner183 on his return. This leaves a figure of $ 4,772.09, which it seems to us is the minimum amount of gross income which petitioner omitted from his 1949 return. This exceeds 25 per cent of the gross income stated in the return. This unreported net income, it seems to us, could only be from an omission of gross income. The same is not true for 1950, since the minimum amount of gross income omitted, using the same formula as for 1949, does not exceed 25 per cent of the amount of gross income shown on the return. See Findings of Fact, supra.Accordingly, we hold that the proceeding for the year 1949 is not barred by the statute of limitations as provided in section 275 (c), and that the proceeding for the year 1950 is barred as provided in section 275 (a).What we have held here, we think, is not in conflict with our decision in H. Leslie Leas, 23 T. C. 1058 (1955), a case relied upon by respondent in his brief. The Leas case was not a case where the Commissioner had used the net worth method in determining the deficiencies. In that case the taxpayer pleaded the statute of limitations as to the years 1947 and 1948, and the Commissioner relied184 upon the 5-year statute of limitations provided by section 275 (c). On the statute of limitations issue we made specific findings that "petitioner omitted from his reported adjusted gross income for each year $ 19,550.97 and $ 9,667.19, respectively," and we held that these amounts were in excess of 25 per centum of the gross income reported in the returns. In so holding, we distinguished the Hurley case, supra, as follows (p. 1064):It should be noted that H. A. Hurley, 22 T. C. 1256 (1954), is not applicable to the instant case. In that case respondent established that there was an understatement of net income by the net worth method. Under that method, an understatement of net income could have resulted from overstatement of deductions, as well as from an omission of gross income in the return. Under the circumstances of that case, we held, in effect, that proof of understated net income did not establish per se an omission from gross income within the meaning of section 275 (c). In the instant case, however, the record clearly establishes an understatement of gross income attributable to unreported receipts in excess of 25 per centum185 of the gross income reported in each return. Thus, the principle of the Hurley case is not here applicable.Issue 3. Additions to the Tax.(a) The respondent has determined an addition to the tax as provided in section 293 (a) for the year 1953. The burden of proving that the imposition of this addition is erroneous rests upon petitioner. J. T. S. Brown's Son Co., 10 T. C. 840, 851 (1948); Gibbs & Hudson, 670 ., 35 B. T. A. 205, 211 (1936). Section 293 (a)provides for the assessing of an addition to tax totaling 5 per cent of a deficiency if any part of the deficiency "is due to negligence, or intentional disregard of rules and regulations but without intent to defraud." In our Findings of Fact under this issue, we made the following finding: "The deficiency for the year 1953 was due at least in part to negligence or intentional disregard of rules and regulations." The above finding disposes of the issue as to the addition to tax under section 293 (a) against petitioner. Cf. Hyman B. Stone, 22 T.C. 893">22 T. C. 893, 906 (1954). The amount of this addition to tax will be recomputed186 under Rule 50.(b) The respondent also determined additions to the tax as provided in section 294 (d) (1) (A) for the year 1953. The burden of proving that the failure to make and file a declaration of estimated tax was due to reasonable cause and not to willful neglect is on the petitioner. Harry Hartley, 23 T. C. 353, 360 (1954). No evidence regarding this matter has been introduced; therefore, the respondent's determination is upheld. The amount of the addition under section 294 (d) (1) (A), along with the amount of the addition under section 294 (d) (2), can be recomputed under Rule 50.(c) Respondent concedes that the additions to the tax which he imposed under section 293 (b) were erroneous. Also, based on the evidence, we have made a finding that no part of the deficiencies for 1949, 1950, and 1951 is due to fraud with intent to evade the tax. Respondent is reversed as to the additions to tax under section 293 (b).Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1939, as amended.↩1. Includes the amount of $ 2,392.92 for items denominated supplies, repairs, and miscellaneous. No question has been raised and no evidence has been introduced regarding the nature of these items and whether they are properly included in cost of goods sold.↩2. Includes the amounts of $ 1,152.98, $ 492.21, and $ 1,998.41 for items denominated labor, materials, and supplies, and utilities, freight, advertising, and delivery, respectively. No question has been raised and no evidence has been introduced regarding the nature of these items and whether they are properly included in cost of goods sold.↩3. Includes items denominated salaries, interest, taxes, and depreciation.↩4. Includes items denominated taxes, depreciation, salaries, telephone, and insurance.↩5. Shown on return, $ 1,873.08. Mistake was apparently unimportant since petitioner had personal exemption plus three dependents (wife plus two children), and paid no tax for that year.↩6. Correct amount is $ 10 more. Uncorrected arithmetical error on return.↩7. Farm was purchased in 1950 but petitioner did not take possession until 1951. Receipts were for baling hay and expenses were for labor, materials, and supplies.↩1. $ 3,998.29 (grocery) plus $ 125 (farm).↩2. $ 856.62 (grocery) plus $ 720.51 (farm).↩2. The discrepancies in this case may partially be the result of fluctuations in accounts receivable. As we stated previously, the record is not clear as to whether accounts receivable were used in determining income. Since the petitioner was in a business in which the use of inventories was necessary for a determination of income, accounts receivable also must be used in order to clearly reflect income. Regs. 118, sec. 39.41-2.↩3. SEC. 41. GENERAL RULE.The net income shall be computed * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *↩4. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.(a) General Rule. -- The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.↩5. (c) Omission From Gross Income. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619097/	Estate of Herbert J. McClanahan, Deceased, Arleen McClanahan, Executrix, and Arleen McClanahan, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of McClanahan v. CommissionerDocket No. 8912-87United States Tax Court95 T.C. 98; 1990 U.S. Tax Ct. LEXIS 72; 95 T.C. No. 8; July 24, 1990, Filed Decision will be entered for the respondent. Petitioners failed to timely file their Federal income tax returns for each of the years 1977 through 1983. Petitioner husband was in poor health but actively operated his accounting and tax practice. After being contacted by an IRS special agent in April 1984, petitioner husband prepared and filed delinquent returns for all years in question on June 1, 1984. Both the taxes due and additions to tax under sec. 6651(a)(1), I.R.C. 1954, were paid by check dated July 23, 1984. Held:1. 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. The rate of the sec. 6661 addition to tax is 25 percent on additions assessed after Oct. 21, 1986. John M. Youngquist, for the petitioners.James W. Clark, for the respondent. Jacobs, Judge. JACOBS98 Respondent determined the following additions to petitioners' Federal income73 taxes: 99 Additions to taxYearSec. 6651(a)(1) 174 Sec. 6653(a)Sec. 6653(a)(1)1977$ 4061978$ 3,83176619791,33726719805,5921,1181981$ 448198212,3722,47419831,424285Additions to taxYearSec. 6653(a)(2)Sec. 6661 2197719781979198019811982$ 12,37219831,424The issues remaining for decision are: (1) Whether petitioners are liable for the section 6653(a) additions to tax for negligence or intentional disregard of rules or regulations; and (2) whether petitioners are liable for the section 6661 additions to tax in 1982 and 1983 for substantial understatements of tax and, if so, whether the additions should be computed using a 25-percent rate.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference.Petitioner Arleen McClanahan (Mrs. McClanahan) resided in Gridley, California, at the time the petition in this case was filed. Her husband, Herbert J. McClanahan (Mr. McClanahan), died prior to the filing of the petition. Mrs. McClanahan is the personal75 representative of her husband's estate.Mr. McClanahan was a certified public accountant. Prior to 1984, he was a sole practitioner, employing several 100 associates and support staff. In 1984, he formed an accounting partnership which included his son-in-law, James Graff, who had worked with him since 1980.In 1977, Mr. McClanahan was diagnosed as having a heart problem. He continued to work in his accounting practice rather than take corrective measures. In May 1979, he had open-heart surgery; he returned to work in September 1979, although on a reduced schedule. His physical condition deteriorated; he experienced constant stomach and chest pains and lost weight. He continued to meet with clients; on occasions, he prepared income tax returns; he reviewed returns prepared by his associates; and he represented clients before the Internal Revenue Service.Prior to 1974, Mrs. McClanahan worked in her husband's accounting practice as an office manager and bookkeeper. She received her training for this position from her husband. In 1974, Mrs. McClanahan's daughter replaced her as bookkeeper; however, she continued to work there full time until 1979, and occasionally from76 1979 until 1984.Mrs. McClanahan first became aware that her husband had not filed their Federal income tax return for 1977 when he failed to give her a return to sign on April 15, 1978. When questioned by her, he told her not to worry and that he would take care of it. During the successive tax years in issue, Mrs. McClanahan would, on or about April 15 of each succeeding year, discuss with her husband the fact that their returns had not been filed. Each year he repeatedly told her not to worry and that he would take care of it.On April 25, 1984, Mr. McClanahan was contacted at his office by one of respondent's special agents regarding his failure to file Federal income tax returns for 1977 through 1983. At that meeting, he agreed to file delinquent returns and to produce his records at a meeting scheduled for June 1, 1984. At Mr. McClanahan's request, the agent agreed to refrain from contacting third parties provided the returns were produced on June 1, 1984.Following the April 25 meeting, Mr. McClanahan assembled the necessary information and prepared the returns for the 7 years in issue. Mrs. McClanahan verified certain computations required by the various tax forms, and77 the 101 completed returns were reviewed by Mr. McClanahan's son-in-law.On June 1, 1984, Mr. McClanahan presented the completed returns to the special agent and discussed various items relating to the tax liabilities set forth therein. The returns reflected liabilities for additions to tax under section 6651(a)(1) and 6651(a)(2) for failure to timely file and failure to timely pay. The amount of tax and additions to tax shown to be due (aggregating $ 207,414) was paid by check dated July 23, 1984.Shortly after Mr. McClanahan submitted the completed returns, he went to his doctor complaining about the pain he had been experiencing. He was diagnosed as having esophagus cancer. Surgery was performed in August 1984. Following surgery, Mr. McClanahan was informed that the prognosis was unfavorable. He died in February 1986.OPINION1. Section 6653(a) AdditionsThe first issue is whether the delinquent filing of the income tax returns for the 7 years involved was the result of negligence or intentional disregard of rules or regulations pursuant to section 6653(a). Petitioners bear the burden of proof. Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781 (1972);78 Rule 142(a).Petitioners argue that Mr. McClanahan's debilitating physical health precludes the imposition of the section 6653(a) additions to tax. We disagree. While the record demonstrates that Mr. McClanahan's health was declining, it is also replete with evidence that he continued to work actively in his accounting and tax practice despite his poor health. He was a dedicated professional who treated his clients' interests paramount to his own health. He was capable of attending to his business affairs, and he did just that.Given Mr. McClanahan's involvement in his accounting practice during the years in issue and his knowledge of Federal taxation, we reject the contention that his failure to file income tax returns on a timely basis for 7 consecutive years was caused by his failing health and open-heart 102 surgery. The fact that he prepared and submitted delinquent returns in about 5 weeks after he was first contacted by the special agent belies the argument that the failure to timely file was due to his ill health. In view of the broad pattern of petitioners' actions, we believe that their failure to timely file their returns was due to negligence in contravention79 of their duty and in disregard of respondent's rules and regulations. Emmons v. Commissioner, 92 T.C. 342">92 T.C. 342 (1989), affd. 898 F.2d 50">898 F.2d 50 (5th Cir. 1990); Pritchett v. Commissioner, 63 T.C. 149">63 T.C. 149, 174 (1974). Thus, respondent was justified in imposing section 6653(a) additions in these circumstances.Petitioners further argue that the additions to tax under sections 6651(a)(1) and 6653(a) are not "conterminous" and that since petitioners self-assessed the section 6651(a)(1) additions to tax, section 6653(a) should not be applied. This argument is untenable.It is well settled that additions to tax based on negligence may be imposed even though additions for failure to file returns have also been imposed. Bagur v. Commissioner, 66 T.C. 817">66 T.C. 817, 824 (1976); Robinson's Dairy, Inc. v. Commissioner, 35 T.C. 601">35 T.C. 601, 608-609 (1961), affd. 302 F.2d 42">302 F.2d 42 (10th Cir. 1962). Negligence is defined as the "lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances." Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967),80 affg. 43 T.C. 168">43 T.C. 168 (1964).Petitioners, who were skilled individuals, showed a lack of due care and acted unreasonably in failing to file timely income tax returns. They knew of their duty to file; they were capable of fulfilling that duty; but they consciously chose to disregard it.The "multiple penalty" argument urged by petitioners is flawed; the language of section 6653 indicates otherwise. Under section 6653(d), the addition for failure to file a return under section 6651(a)(1) does not apply where an addition for civil fraud under section 6653(b) is assessed. Section 6653(d) evinces congressional awareness of the interplay between sections 6651(a)(1) and 6653(a) and supports the conclusion that sections 6651(a)(1) and 6653(a) can 103 overlap. No disharmony exists in assessing additions to tax under both sections.Finally, we do not accept petitioners' assertion that their negligent actions in failing to timely file returns were expunged by their later act of filing returns which contained self-assessing additions to tax under section 6651(a)(1).2. Section 6661(a) AdditionsNext, we must decide whether petitioners are liable for an 81 addition to tax under section 6661. Section 6661(a) provides for the addition to tax if there is a substantial understatement of income tax for the taxable year. Section 6661(b) provides that a "substantial understatement" exists if the amount of the understatement of income tax for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $ 5,000. (Here, the understatements of tax for 1982 and 1983 were $ 49,489 and $ 5,697, respectively.)Petitioners interpret section 1.6661-2(d)(2), Income Tax Regs., in a manner which would not make them liable for the section 6661 addition to tax. In relevant part, section 1.6661-2(d)(2), Income Tax Regs., provides:For purposes of section 6661, the amount of tax shown on the return for the taxable year is determined * * * without regard to any amount of additional tax shown on a return (including an amended return, so-called) filed after the taxpayer is first contacted by the Internal Revenue Service concerning the tax liability of the taxpayer for the taxable year. * * * If no return was filed for the taxable year or if the return (other than a return filed under section 6014) shows no tax due, the amount82 of tax shown on the return is considered to be zero. * Petitioners argue that since they did not file returns until after they were contacted by a special agent, their late returns, being "original returns," did not show any "additional tax."Section 6661 was enacted in 1982 to, inter alia, enhance taxpayer compliance and deter taxpayer participation in the "audit lottery" whereby taxpayers take questionable positions on their tax returns in the hope that they will not be audited. S. Rept. 97-494, at 272 (1982). Petitioners assert that section 6661 was intended to apply to "wrong positions taken on filed returns that create substantial tax deficiencies 104 and not to "late-filed" returns. We do not agree with petitioners' position.The compliance purpose of section 6661 is to provide an incentive against taking highly questionable positions which go undetected through either failure to file or failure to provide adequate disclosure on a filed return. In our opinion, a taxpayer who fails to timely file a return until after he is contacted by the Internal Revenue Service is as much a participant in the audit lottery as a taxpayer who submits a timely return containing83 highly questionable positions.Our reading of section 6661 and its legislative history convinces us that imposing section 6661 additions to tax against petitioners is not beyond the scope of the statute. Prior to being contacted by the special agent, petitioners had not filed tax returns for the years 1977 through 1983. Consequently, prior to contact, the amount of tax shown on the returns is zero. Sec. 1.6661-2(d)(2), Income Tax Regs. The amount of tax shown on the returns filed subsequent to contact by the Internal Revenue Service is therefore "additional" to the zero amount prior to contact and is plainly within the intendment of section 1.6661-2(d)(2), Income Tax Regs. Accordingly, we hold that section 6661 is applicable where a delinquent return is filed after the taxpayer is first contacted by a representative of the Internal Revenue Service.We now consider whether it is appropriate to calculate the section 6661 addition to tax using a 25-percent rate. Petitioners argue that to apply section 6661 at the increased rate of 25 percent (instead of 10 percent) is a denial of due process.In Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498 (1988), we held84 that the applicable rate under section 6661 is 25 percent for additions assessed after October 21, 1986. In so holding, we concluded that section 8002(c) of the Omnibus Budget Reconciliation Act of 1986 (OBRA 1986), Pub. L. 99-509, 100 Stat. 1874, 1951 which was signed into law on October 21, 1986, controlled over section 1504 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2743 which was signed into law on October 22, 1986.105 Petitioners contend that because the October 21, 1986, effective date subjects returns filed prior to that date to the increased rate, the retroactive application of the increased 25-percent rate is unconstitutional. They argue that the effective date provision of the OBRA 1986 amendment to section 6661(a) is a retroactive increase in violation of their due process rights because it punishes conduct which occurred prior to its enactment. We disagree.Petitioners cite Untermyer v. Anderson, 276 U.S. 440">276 U.S. 440 (1928); United States v. Darusmont, 449 U.S. 292">449 U.S. 292 (1981); and Commissioner v. Acker, 361 U.S. 87 (1959). In Untermyer, a newly enacted gift85 tax statute was found to be unconstitutional insofar as it applied to gifts which were made and completely vested before enactment of the taxing statute. Untermyer is of "limited value in assessing the constitutionality of subsequent amendments that bring about certain changes in operation of the tax laws, rather than the creation of a wholly new tax." United States v. Hemme, 476 U.S. 558">476 U.S. 558, 568 (1986). This case does not involve the imposition of a "new tax"; therefore, Untermyer is inapposite.In Darusmont, the Supreme Court addressed the constitutionality of the 1976 amendments to the alternative minimum tax provisions enacted in 1969. It therein held that the retroactive application of the subsequent amendment to the 1969 enactment did not constitute the imposition of a new tax and, hence, was constitutionally permissible. United States v. Darusmont, supra at 299-300.It is clear that the effective date provision of OBRA 1986 was an amendment to an existing addition to tax rather than the creation of a new addition to tax. As such, the application of the 25-percent rate to section 6661 additions to tax86 assessed after October 21, 1986, is not constitutionally impermissible.Petitioners assert that "penal statutes are to be construed strictly," Commissioner v. Acker, 361 U.S. at 91, and that they should not be "subjected to a penalty unless the words of the statute plainly impose it." Section 8002, OBRA 1986, 100 Stat. at 1951, provides, in relevant part, as follows:106 SEC. 8002. INCREASE IN PENALTY FOR SUBSTANTIAL UNDERSTATEMENT OF LIABILITY.(a) In General. -- Subsection (a) of section 6661 of the Internal Revenue Code of 1954 (relating to substantial understatement of liability) is amended to read as follows:"(a) Addition to Tax. -- If there is a substantial understatement of income tax for any taxable year, there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement."(b) Effective Date. -- The amendment made by subsection (a) shall apply to penalties assessed after the date of the enactment of this Act.Here, section 8002 clearly imposes the increased rate to section 6661 additions to tax assessed after October 21, 1986, the date of enactment. Thus, petitioners' 87 reliance on Acker is misplaced.Petitioners' final argument is that the additions to tax under sections 6651, 6653, and 6661 are not cumulative. They cite no authority for this position. This is not surprising because the provisions of section 6661(b)(3) contradict their argument.Section 6661(b)(3) coordinates the application of section 6661 with section 6659. Under its provisions, the section 6661 addition to tax is not imposed on that portion of the substantial understatement on which a section 6659 addition is imposed. Except with respect to section 6659, the statutory language of section 6661 does not preclude the assessment of the additions to tax under sections 6651 and 6653 with the section 6661 addition. Moreover, the legislative history of section 6661 recognizes the potential for additional additions to tax to apply. 388 In sum, we hold that petitioners are liable for the section 6661 additions to tax for 1982 and 1983 in amounts equal to 25 percent of the underpayments of tax for those years.Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.In his notice of deficiency, respondent determined additions to tax under sec. 6651(a)(1). Subsequent to the filing of the petition in this case, respondent concluded that the amounts should not have been determined in his notice of deficiency, but should have been assessed pursuant to the returns delinquently filed by petitioners for all the years in issue. Such amounts were assessed on June 1, 1987. In his answer, respondent conceded that the sec. 6651(a)(1)↩ additions to tax are no longer in dispute as they have been assessed per the returns filed.2. In the notice of deficiency, respondent calculated the sec. 6661↩ addition to tax using a 25-percent rate despite an explanatory paragraph which stated that the rate was 10 percent. We believe that petitioners were on notice that respondent was seeking the higher rate of interest. See sec. 6214(a).*. 50 percent of the interest due on the underpayment of tax attributable to negligence or intentional disregard of rules and regulations.↩3. The conference report relating to sec. 6661 states:Under present law, penalties may be imposed on the failure to pay certain taxes shown on a return or required to be shown on a return, unless such failure is due to reasonable cause and not willful neglect. If the failure is due to negligence or fraud, additional penalties may apply. [H. Rept. 97-760 (Conf.), at 574 (1982), 2 C.B. 600">1982-2 C.B. 600↩, 649.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619100/	Estate of L. B. Mann, R. S. Mann and E. K. Mann, Executors v. Commissioner.Estate of L. B. Mann v. CommissionerDocket No. 21567.United States Tax Court1951 Tax Ct. Memo LEXIS 6; 10 T.C.M. (CCH) 1235; T.C.M. (RIA) 51377; December 28, 19516 The decedent, at three different times after the age of 74 years, pursuant to promises made and long established plan, transferred properties to his children, in two out of three instances at practically the same time as the drafting of wills. Held, under all of the facts, that his controlling motive in making the transfers was associated with life, and was not contemplation of death. He also, when about 82 years of age, made a gift to a granddaughter to equalize previous gifts to her brothers and to take the place of a gift he had expected her father to make, and executed a codicil to his will referring to the gift as an "advancement." Held, on the facts, that the transfer to the granddaughter was in contemplation of death. Alex P. Gaines, Esq., 1015 William-Oliver Bldg., Atlanta 3, Ga., for the petitioner. Newman A. Townsend, Jr., Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: This proceeding involves a deficiency of $63,066.23 in estate tax. The issue remaining for decision is whether certain transfers of property, the value of which is not in dispute, were made in contemplation of death. The facts set forth in7 the stipulations of the parties are found as agreed upon therein. Portions thereof which we consider necessary for consideration of the issue will be incorporated in connection with facts from other evidence. Findings of Fact The petitioners are the duly qualified executors of the estate of L. B. Mann, deceased, who was born on October 2, 1860, and died January 31, 1946, a resident of Newnan, Coweta County, Georgia. The estate tax return was filed with the collector for the district of Georgia. The tax of $3,150.74 shown on the return was paid. The decedent, whose formal schooling did not extend beyond the third grade of grammar school, began to earn his own livelihood as a farmer in Meriwether County, Georgia. He was married and was the father of five children, namely, Leroy, Augusta, Robert S., Emil K., and Mary, born in 1888, 1890, 1894, 1900 and 1902, respectively, all of whom survived the decedent except Leroy who died February 19, 1943. Decedent's wife died November 5, 1940. Decedent moved to Newnan, Georgia, about 1903 and lived there the remainder of his life. Until 1918 the principal interest of the decedent was the operation of his farms. In 1918 the decedent organized8 a business to manufacture hosiery under the name of Newman Hosiery Mills with Leroy as his first assistant. At that time Robert was in the military service in France. After Robert's return to the United States in 1920, the decedent and Leroy, Robert and Emil formed a partnership to operate the business with a capital of $80,000, all of which was furnished by the decedent, and in which their interests were one-half, three-sixteenths, and one-eighth, respectively. The sons gave the decedent notes for the full amount of their respective interests, all of which were subsequently paid. The original interest continued until January 1, 1926, when the decedent sold one-eighth of his interest to Emil. Decedent was known as "president" of the business; Leroy was general supervisor of the mill under the decedent; Robert did office work and supervised the finishing department and Emil had charge of dyeing and performed other duties. The partnership agreement provided that any member of the partnership who desired to sell his interest, or any part thereof, should first offer it for sale to other members at the same price, that the person to whom the sale was proposed should be acceptable to the9 other partners and that the person acquiring the interest should agree to be bound by the partnership agreement. The decedent was the active head of the business and determined its policies. During the early part of 1926 the partnership commenced and in June 1927 completed the construction of a new mill building at a cost of about $100,000. The books of the partnership disclose that the decedent loaned a total of $60,000 to the partnership between February 1926 and July 11, 1927. On July 11, 1927, the business of the partnership was incorporated under the same name, hereinafter referred to as the corporation, with a capital of $220,000, consisting of 1,600 shares of common and 600 shares of 6 per cent cumulative preferred stock, each share of the par value of $100. The decedent subscribed for 700 shares of the corporation's common stock and each of his sons subscribed for 300 shares. On the same day the corporation agreed to issue its common stock to the subscribers for the assets of the partnership and assume its liabilities. The liabilities assumed consisted of the debt of $60,000 to the decedent and $96,077.77 in bank loans. Of the stock issued for the net assets, 650 shares10 were issued to the decedent, 300 to each of the three sons and 50 shares to J. A. Camp, the superintendent of the mill, out of the subscription of the decedent, on his agreement to sell the stock to the decedent in the event he severed his employment with the corporation. All of the preferred stock of the corporation was issued to the decedent for a cancellation of its indebtedness of $60,000 to him. At the request of the decedent, the common stock was issued to him in three certificates of 216 shares each and one certificate for 2 shares, and the preferred stock in two certificates of 300 shares each. The decedent informed Robert at that time that he expected to give the common stock to him, Leroy, and Emil when he was ready to turn the mill over to them, and that he was going to give the preferred stock to his daughters. At some undisclosed time thereafter, decedent placed the preferred stock certificates in his safe deposit box with a memorandum attached thereto reciting that he intended to give the stock to his daughters. The bank loans assumed by the corporation were paid out of a bond issue in the amount of $100,000. The bonds were retired in 1936, in connection with which11 the corporation borrowed $25,000 from a bank and a like amount from decedent, who subordinated his note to the bank obligation. The decedent endorsed the note given by the corporation for the bank loan and as collateral deposited with the bank the note given him by the corporation. The last payment on the bank loan was made about 1938 and decedent's note was repaid by 1941. In the early part of 1939 the bank granted a request of decedent that he be relieved of a blanket guaranty he had given it to pay notes given by the corporation for loans. With the exception of the loan made in 1936, decedent did not act as endorser of obligations of the corporation after 1935. The decedent, Leroy, Robert and Emil were elected president, vice president, secretary and treasurer, respectively, of the corporation. By re-elections from year to year they held the same offices until January 31, 1946, except that on January 5, 1937, Robert was made second vice president, and James Mann, son of Leroy, was made secretary, and upon the death of Leroy in 1943, Robert was elected vice president. The corporation was liquidated in 1950. The corporation was compelled to borrow money from time to time to finance12 its operations. During the years 1930, 1932, 1933 and 1934 it borrowed a total of $38,500 from the decedent, all of which was repaid by July 1935. The corporation purchased additional machinery from 1927 to 1933, inclusive, at a total cost of $117,200. Prior to 1935, while decedent was its principal executive, the financial condition of the corporation improved progressively. Its operation as a whole had been successful, sales increased and mill property improved. Dividends on the preferred stock were paid each year through 1945, except in 1928 when only one-half of the amount was paid. The unpaid dividend in that year was paid in 1931. No dividend was paid on the common stock in the years 1927 to 1935, inclusive, 1937, 1938 and 1940. Dividends were paid in other years as follows: 1936$24,00019398,00019418,000194222,4001943$24,000194424,000194524,000In February 1935 decedent acquired the 50 shares of common stock held by Camp. The shares were reissued to the decedent in four certificates, two of which were for 17 shares each, one for 15 shares and one for one share. Decedent was especially devoted to his daughters and did not want13 them to marry. They were living with decedent in 1925. Augusta was engaged on two occasions but decedent persuaded her to break the engagements. She never married and continued to live with the decedent until his death. At Christmas 1925 decedent gave to each of his daughters a slip of paper upon which he had written the following: "$30,000.00 stocks and bonds, Manufacturers National Bank," and told them that the slip represented securities and that he was making the gifts to make them financially independent so that they would not have to marry for security. At that time he informed his sons and thereafter told his family doctor and a banker that he intended to give his sons his interest in the mill when he believed they were able to manage the business. He wished to have more time to devote to the operation of his farms. No securities were delivered to the daughters at the time the slips were delivered but the decedent was financially able to make a gift of $60,000. Decedent did not actually deliver any stock to his daughters until 1938. About the time of the gifts of slips of paper in 1925 decedent endeavored to frustrate a budding romance Mary was having with Harry M. Boon, 14 a dentistry student, who was in debt for college expenses. Decedent was aware of the debts and considered them to be an additional reason for opposing the marriage of his daughter to Boon. In the fall of 1926, Mary and Boon informed decedent that they expected to be married about Christmas of that year, to which he remarked, "Well, that's Mary's funeral." They were married December 21, 1926, and promptly thereafter established a residence in a rented apartment in Atlanta, Georgia, where Boon was associated with another dentist. Knowledge that Mary was living in an apartment, instead of a house, irritated decedent. Decedent preferred that they live in a house. About 1927 he had a home built for them in Atlanta, in connection with which he obtained a note from Mary for an amount in excess of $13,000 at 6 per cent interest, without the consent or knowledge of her husband, and into which home Mary and her husband moved after it was completed. The interest was paid on the note for two or three months. Upon learning of the giving of the note by his wife, Boon informed decedent by letter that he thought decedent had made a gift of the house to his wife, that he was not financially able to15 and resented being forced to, in effect, borrow money at 6 per cent interest and that, speaking only for himself, "he could have the house on any short notice." Decedent did not reply to the letter. Later when Boon discussed the matter with decedent, the latter acknowledged that Boon was right in objecting to the transaction and refunded the interest with interest. The decedent canceled the note about 1934. Boon established his own dental office in 1930. He financed the purchase of equipment for his office out a bank loan of $6,000 secured by bonds borrowed from his brothers-in-law for that purpose. The last payment on the loan was made by Boon on February 23, 1938, of which Boon advised decedent on the same day. The information pleased decedent very much. About 1935 the decedent informed his doctor that he wanted his daughters to have their own money and that he had provided for them so that they would not be dependent upon anyone at his death and that he intended to do the same things for his sons when they demonstrated to him that they could operate the mill and knew what to do with money. About February 15, 1935, the decedent informed his banker that he had become convinced16 that his sons could operate the mill and desired to fulfill the promise he had made to give his stock to them. On that day the certificates the decedent held for 216 shares each of common stock were transferred by him to his sons, one certificate to each son. None of the decedent's sons was in financial difficulty at that time. On the same day the decedent informed Robert that he intended to give some property to Mary and Augusta. At that time Robert and Leroy had no appreciable income other than from the corporation. Decedent transferred the common, instead of preferred, stock to his sons because they had the ability lacked by his daughters to manage the mill. In February 1935 decedent informed his wife and Augusta that he intended to convey to them his residence in Newnan and an adjoining lot improved by a cottage. On July 26, 1935, he executed and delivered to Augusta a deed in which he conveyed the property to them jointly with right of survivorship. The deed was witnessed by J. H. Hall and Beatrice B. Gentry and was recorded July 13, 1939. Decedent's intention was that Boon should not obtain any of his property. Boon's practice of dentistry was successful after he opened his17 own office. By 1935, when decedent realized that Boon was succeeding as a dentist and was paying his debts and that Mary was being well provided for, decedent began to like him and eventually became very fond of him. On July 27, 1935, decedent executed a deed in which he conveyed the Atlanta property to Mary "for and during her natural life, and at her death to such child or children as she may leave surviving her and to the representative of any deceased child or children." The witnesses to the deed were J. H. Hall, a law partner of R. O. Jones, Newnan, Georgia, and Beatrice B. Gentry, a stenographer in their office. The deed was filed for record on October 11, 1935. On July 26, 1935, R. O. Jones drafted a will for decedent in accordance with his instructions. The instrument, as drafted, bequeathed one-sixth of decedent's estate to his wife for her life or during widowhood and his residuary estate equally among his five children, except that his sons were to receive his stock of the corporation. The shares, in his estate bequeathed to the sons, were to be theirs absolutely. The share bequeathed to each daughter was upon her death to go to her children, if living, and if deceased, 18 to their descendents, and, if none, the share was to revert to decedent's estate, provided, however, that if a husband survived a daughter, living at his death, onehalf of the income of her share was to be paid to him for a period of one year from the time of her death. The decedent removed the draft of will from the attorney's office without signing it. The document was not found among the papers of decedent after his death. A notation reading, "Old will Superseded," was made by Jones on his office copy of the document after he drafted the last will of decedent in 1938. The transfers of real estate and stock to decedent's wife and children were reported in a gift tax return filed for 1935. The property in each transfer was reported at a value of $8,640. The return was prepared by Robert who understood that his father had made all of the transfers on February 15, 1935. The decedent instructed Robert to include each transfer in the return at a value of $8,640. The certificate held by the decedent for one share of common stock was transferred to J. L. Mann, a son of Leroy, in 1937. The decedent continued to hold the remaining 51 shares until his death. On March 7, 1938, the decedent19 transferred and delivered to the transferees 300 shares of preferred stock of the corporation to Augusta and 100 shares each to Mary and her two children and told Augusta and Mary it would not be necessary for them to retain the slips of paper any longer since the preferred stock was being given to them instead of the securities mentioned in the slips. After making the gifts decedent discontinued the monthly allowance he had previously made to Augusta and made no further gifts to her and Mary except when making gifts of small equal amounts to all members of the family. Thereafter annual dividends on the stock were paid to the daughters. The decedent filed a gift tax return for 1938 in which he reported the transfers at a total value of $60,000. Augusta did not have a safe deposit box until some undisclosed time after the gift of preferred stock to her in 1938. She put the deed for the real property and certificates for the preferred stock in an envelope, which she placed in a safe deposit box in the vault at the hosiery mill. The stock certificates remained in that depository until their removal in 1950 for surrender in connection with the liquidation of the corporation. The certificates20 issued to Mary and her children for preferred stock were at some undisclosed time placed in Mary's safe deposit box in Atlanta. The decedent executed his last will and testament on March 7, 1938. The will bequeathed one-sixth of his estate to his wife for life or during widowhood and at her death or remarriage the property was to revert to his estate for distribution in accordance with Item Five of the instrument. The will directed that certain lands be retained and managed by his executors for a period of 20 years, 1 when they were to be sold, and the proceeds of sale, together with any accumulations of profit from operation, distributed per capita among his living descendants. Item Five directed that his residuary estate be divided equally among his five children, in conection with which the sons were to receive his stock of the corporation and the daughters were to receive out of his securities an amount equal to the share each son received out of the stock. Until 1938 decedent paid all of the living expenses of Augusta and gave her an allowance of $50 per month. He continued to pay her household expenses after21 1938 but discontinued the monthly allowance. Decedent gave Mary an allowance of $50 per month until her marriage. Decedent felt that continuation of the allowance to Mary after her marriage might result in discord in his family. Thereafter at irregular times he made small gifts to her, which she considered to be interest on the securities mentioned on the slip of paper handed to her at Christmas 1925. It was a practice of decedent to make small gifts of cash to members of his family and grandchildren. The gifts were always in equal amounts. Leroy died intestate suddenly and unexpectedly. Prior thereto the decedent had given farms to Leroy's two sons and Leroy contemplated, and did not make, an equal gift of money to his daughter Elsie. On February 21, 1943, two days after the death of Leroy, decedent informed Elsie that he would make a gift to her of $5,000, as an amount equal to the value of the farms he had given each of her two brothers. On March 9, 1943, he gave Elsie 100 shares of common stock of the Citizens & Southern National Bank and 50 shares of common stock of the First National Bank of Atlanta. In January 1944 he gave her Series E United States bonds of the face amount22 of $1,987.50 and cash in the amount of $12.50. The gifts were made in separate years to avoid a gift in one year of a value in excess of $3,000. On March 17, 1943, the decedent executed a codicil to his last will, which, after referring to the gift of $5,000 to Elsie, provided that the amount of the gift be charged as an advancement on the share distributable to Leroy and that decedent's children, then living, each receive $5,000 from his residuary estate before it was distributed as provided in Item Five of the will, Elsie, however, to share equally with her brothers in the estate distributable to all of the children of Leroy. Each year decedent and his sons were paid equal salaries by the corporation. The salaries paid each ranged from $6,000, paid in 1934, 1935 and 1940, to $12,000 paid in the years 1942 to 1945, inclusive. After 1935 the decedent visited the offices of the corporation almost every day, during the course of which he would inquire about business matters, including the purchase of yarn and supplies, inventories, whether money should be borrowed for additional equipment and labor problems, which interest continued until his death. The sons sought decedent's23 advice on business affairs of the corporation but he did no detail work and no longer determined business policies. He had a desk at the office and handled some correspondence of the corporation. In 1935 and until 1938 decedent owned from 600 to 800 acres of farm land. At the time of his death, decedent owned 2,170 acres of timber and other land in Coweta County, Georgia. The decedent was interested in farming and took an active interest in his farms. The decedent was a man of personal integrity and strong convictions. He neither smoked nor drank liquor. His wants were simple and he lived on a modest scale. He was a man of few words and seldom discussed his affairs with anyone. After the decedent made up his mind it was difficult to persuade him to change it. He was a good but stern parent and he expected his children to obey him. They seldom did things contrary to his wishes. He showed no favoritism among his children and often expressed an intention to have them share equally in his property. The decedent had always been in remarkably good health for a man of his years. He had prostate gland operations about 1920 and 1941. His physician informed him after the second operation24 that the condition was not malignant. At the times he made the gifts in 1935, 1938, 1943, and 1944 decedent was in excellent health and had not had any serious illness immediately prior thereto. During the last few years of his life he was active and made daily trips to his farms, was extremely found of cards and played checkers with old friends during afternoons. On his 85th birthday decedent had a good appetite, was jolly and told his guests at a party that he would see them the next year. Decedent never discussed with his sons, bankers or doctor his will, estate taxes or the possibility of death. In 1945 he was making plans for the future. In 1944 and 1945 he was considering remarriage and the establishment of a new home and discussed the matter with his children. On one occasion during that period he proposed marriage but was refused. The decedent wished to keep himself in good physical condition, and to do so, consulted his physician occasionally after 1927 for physical examinations. Decedent was not at any time after about 1927 suffering from high or low blood pressure. He was conscious of blood pressure and frequently had his physician examine his blood pressure, during25 the last five years of his life at least every month. He began to develop micardia insufficiency about six months before his death. The decedent became ill with bronchopneumonia in January 1946 and died about fifteen days later of hypostatic pneumonia. In his determination of the deficiency the respondent held that the transfers made by the decedent in 1935, 1938, 1943 and 1944 were made in contemplation of death. The transfers which the decedent made to his children and to the daughters of Mary were not made in contemplation of his death. The transfers to his granddaughter Elsie were made by him in contemplation of his death. Opinion The tests for determining whether the transfers were made in contemplation of death are set forth in . In that case the Court said that the dominant purpose of the statute is to "reach substitutes for testamentary dispositions" and the "motive which induces the transfer must be of the sort that leads to testamentary disposition." "Thought of death" must be the impelling cause or controlling motive. Gifts made from a different motive are not within the statute. ;26 . The motive inducing the transfers is a question of fact to be determined from consideration of all of the pertinent evidence. Respondent's view, particularly as to the transfers made in 1935 and 1938, is that they were part of a general testamentary plan of decedent to dispose of his estate to his natural heirs and, therefore, substitutes for testamentary distributions. Petitioner's broad contention is that decedent's motives for the transfers were associated with life and therefore were not made in contemplation of death. The transfers of common stock to the sons in 1935 and preferred stock to the daughters and grandchildren in 1938 stem from facts having much in common and will first be considered. Respondent concedes that decedent enjoyed very good health for a man of his age, a concession inescapable from the evidence. We find nothing in the facts to warrant a finding that the decedent at any time important was actuated to make the transfers by thoughts of impending death due to physical disabilities. He frequently sought advice of his physician and was conscious of blood pressure, but the medical services were not27 in connection with any chronic illness such as might cause an individual to be unduly concerned about premature death. Nothing suggests that the decedent gave any more consideration to death than knowledge all have that it is inevitable. However, individuals enjoying the best of health, regardless of age, and without any apprehension of immediate death may contemplate death when making transfers and the point is not controlling, being only a factor to be taken into account in arriving at the decedent's motive for the transfers. The dominant motive for the transfers of stock appears free of doubt. The sons had been associated with decedent in the hosiery manufacturing business and a natural desire on his part would be to have them eventually acquire his holdings of common stock to give them complete control of management and operation. His determination in that regard was made known to the sons as early as Christmas 1925 and was never changed. The time to put it into effect was to be gauged by their ability to acquire knowledge, sufficient in his judgment, for successful operation of the business. The time was reached in 1935. In the meantime, others became aware of decedent's intention, 28 and the common stock since the organization of the corporation in 1927 was held in certificates for equal division among the sons. The desire of decedent was that his daughters not marry. In an effort to eliminate security for them as a consideration for marriage, he gave his daughters the slips of paper in 1925 to indicate gifts to each of securities of a value of $30,000. Prior to 1938 the certificates for the preferred stock, 300 shares each, had been in decedent's safe deposit box with memoranda attached to them which, with the remarks he made to members of his family and others about his purpose, disclose intention over a long period to give the stock to his daughters. Preferred stock was selected for the daughters because they would not possess knowledge required to operate the business as owners of common stock. There is a direct connection between the slips of paper delivered in 1925 and the gifts of preferred stock in 1938. The par value of the stock and the value placed upon the securities in decedent's return for the gifts was the same as the amount shown on the slips as a gift and, upon delivery of the stock, decedent informed his daughters that the stock was in lieu29 of the securities mentioned in the slips. Thus, it is apparent that the preferred stock, like the common, was intended by decedent for many years to be made the subject of gifts to his children. The fact that 100 shares of the 300 shares intended for a gift to Mary were transferred to each of two of her children does not materially affect the original intention of the decedent, for it is obvious that it was merely a division on his part of the gift he at all times since 1925 intended to make to their mother. Decedent informed his wife and Augusta about the time in February 1935 when he transferred the stock to his sons, of his intention to give them a deed to the family residence and an adjoining improved lot. The deed was executed on July 26, 1935 and the next day he executed a deed in which he conveyed the Atlanta property to Mary for life, with remainders over to her children. At that time decedent had counsel draft a will for him but no proof was made that he signed it. His last will was executed the day he transferred the preferred stock. Respondent refers to the preparation and execution of wills about the time of, or concurrently with, the transfers as strong evidence30 of a motive to sustain his action. The acts of decedent in that regard are significant but not controlling. ; . Decedent was especially opposed to the marriage of Mary to Boon and wished to prevent him from obtaining any of his property. Boon and his family had been living in the Atlanta house with the consent of decedent since its erection about 1927. Such interest as Mary, without her husband's knowledge, paid for a few months on the note she gave decedent was refunded and the note was canceled about 1934. About that time decedent was aware that Boon was successfully practicing his profession in an office of his own and some of his bitterness towards his son-in-law had disappeared. Later, apparently in 1938 when Boon paid the bank loan he made to equip his office, it turned to fondness. Thus, by 1935 and 1938 hatred or dislike for Boon was no longer a serious factor for refraining from making a gift to Mary out of which her husband would derive direct or indirect financial benefit. In February 1935, when making the gifts of stock to his sons, decedent informed Robert of his intention31 to make a gift of property to Mary and Augusta and during the same month he told his wife and Augusta that he intended to convey the homestead and adjoining property to them. A gift to one of the daughters only would not have been in line with decedent's practice of making equal gifts to his children. Equal gifts 2 were necessary to comply with his policy. The gift to Augusta tended to make Augusta feel that she had security without marriage. The attitude of decedent on marriage of his daughters and equal treatment for them was manifested in the document prepared in 1935 as a will and his last will, executed in 1938. Provision was made in the first document for the sons to receive equal shares, which were to include decedent's stock of the corporation, absolutely, while the daughters were to receive only life interests in their shares. Surviving sons-in-law received nothing except as a survivor of a daughter living at his death, in which event he was to receive for one year one-half of the income from her share. Decedent's last will executed in 1938 bequeathed his residuary estate in fee simple equally32 among his children and proceeds to be realized from farm lands after specified period of operation, among all living descendents per capita. Thus, the wills (assuming the document drafted in 1935 was signed by decedent) were capable of being administered without reference to the prior gifts of stock and real property. There is weight in the respondent's argument that testamentary disposition is indicated by the fact of a will being drafted dated July 6, 1935, the day of transfer of the house, also adjoining property, to decedent's wife and to Augusta jointly with right of survivorship, and a deed on July 27 to Mary covering her home, and the will executed March 7, 1938, the day of his transfer of the perferred stock to Augusta, and Mary and her children. The fact that the first will may not have been executed we deem immaterial. Its contents were determined by the decedent and his views thereby indicated. Had the determination to make gifts and wills been at substantially the same time, and particularly if as in some cases the language used was largely the same in both, very strong indication of testamentary intent, in the gifts, would appear. But we think there is in logic a great33 difference if the gifts, though made at the same dates as wills, were merely the activation of previous and long-standing intent, in fact promise so to give. In that case the reasonable view appears to be that the will does not reflect the testamentary intent of the maker therein, into the intention as to the long previously determined and promised gift, but is merely supplemental thereto, indicating testamentary intent only as to property not covered by the earlier promise. Such appears to us to be the situation here. Though we by no means agree with the petitioner that wills and gifts merely happened to be at practically the same time, July 6, 1935 and March 7, 1938, for obviously there was connection, yet we think that the wills were, so to speak, only ancillary to the consummation of the gifts, which had long before been determined upon. In short, we take the view that the wills do not indicate that the primary intent, impelling cause, or controlling motive of decedent in making the transfers was contemplation of death, under the cases on this subject - except as below discussed with reference to the gift to Elsie. Further discussion of the facts is unnecessary. Consideration34 of all of the evidence establishes, in our opinion, and we hold, that the transfers of stock and real property in 1935 and 1938 were not made in contemplation of death. The gifts in 1943 and 1944 to Elsie, a daughter of Leroy, have a different setting. Leroy, who died suddenly on February 19, 1943, during his lifetime contemplated a gift to her to equalize gifts of farms decedent had made at undisclosed times to his two sons. Within a few days after his son's death, decedent informed Elsie of his intention to make a gift to her of $5,000. The gift of stock was made March 9, 1943, and the bonds and cash in January 1944, gifts in different years having been decided upon to avoid gift tax. On March 17, 1943, decedent executed a codicil to his last will, in which he provided that the gifts to Elsie be treated as an advancement on the share distributable to Leroy. Petitioner's contention on these transfers is that decedent's impelling motive was to fulfill a promise of his deceased son and that it was prompted by Leroy's death and, therefore, not thoughts of decedent's death. Respondent regards the transfers as substitutes for testamentary dispositions. As proof of the fact respondent35 refers especially to Leroy's untimely death with the effects it had on decedent's outlook on life at his, decedent's, advanced age at that time and the promptness with which he acted after Leroy's death, including alterations of his will. In our view, the transfers to Elsie were under all circumstances substitutes for testamentary disposition. Though connected in a broad way with the earlier gifts to Leroy and the decedents' general purpose of making gifts to his children with intent which we have found associated with life rather than in contemplation of death, it is obvious that the gifts to Elsie were much more closely associated to testamentary disposition than was true in 1935 and 1938 as to the other gifts. The codicil to decedent's will definitely provided that the gift of $5,000 be charged as an advancement on the share of decedent's estate distributable to Leroy. In short, the situation is not different in essence than if decedent had made a gift to Leroy and by codicil provided that it be charged against his share of the estate as provided under the will. The connection is, not with the earlier gifts to Leroy, which we have above held not to be testamentary in nature, but*36 with his share of decedent's estate as provided under his will, which of course is of testamentary nature. The only other connection is with gifts decedent had made to Leroy's sons. It is clear that the decedent in making the gift of $5,000 to Elsie in effect debited it against the provisions he had set up in his will, for Leroy. We take the fact of the codicil and provision as to "advancement," with all other circumstances, into consideration in determining the controlling motive which actuated decedent in making the gift. Under all the facts we conclude that the decedent was primarily motivated by thoughts of his death in making the gifts to Elsie, and that to the extent thereof estate tax was properly determined. The parties have stipulated that petitioner is entitled to a deduction of $750 for attorneys' fees and an additional amount to be reflected in the recomputation under Rule 50 for attorney's fees incident to this proceeding. Decision will be entered under Rule 50. Footnotes1. Reduced to 10 years by codicil executed January 25, 1943.↩2. His gift tax return shows that he considered them to be of equal value.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619101/	George H. Thornley and Rebecca W. Thornley, Petitioners, v. Commissioner of Internal Revenue, RespondentThornley v. CommissionerDocket No. 105554United States Tax Court2 T.C. 220; 1943 U.S. Tax Ct. LEXIS 118; June 25, 1943, Promulgated 118 Decision will be entered under Rule 50. 1. Petitioner surrendered several endowment policies prior to their maturities and elected to receive the cash surrender values in equal installments over 20 years and 10 years, respectively. Under the facts it is held, that the receipts in the taxable year were not annuity receipts within the intendment of section 22 (b) (2) of the Revenue Act of 1936, and no part of the amounts received in the taxable year are includable in gross income.2. Petitioner was a member of a copartnership. Prior to the taxable year the copartnership ended its business, which was taken over by a newly formed corporation. The accumulated profits of the partnership were received constructively by the individual partners and the rest of the assets of the partnership were conveyed to the corporation in exchange for stock. In the taxable year petitioner sold some of the stock he had received under the exchange. Under the facts, it is held, that petitioner received the stock in exchange for his interest in the partnership assets which were conveyed to the corporation rather than in exchange for an interest in the partnership and respondent correctly computed119 the holding period of the stock under section 117 (c) of the Revenue Act of 1936 for purposes of computing the percentage of the taxable gain on the sale of the stock under section 117 (a). Frederick E. S. Morrison, Esq., and Calvin H. Rankin, Esq., for the petitioners.Bernard D. Daniels, Esq., and Walter D. Perry, Esq., for the respondent. Harron, Judge. Disney, J., concurs only in the result. Hill, J., dissenting. HARRON 221 Respondent determined a deficiency in petitioners' income tax liability for the year 1937 in the amount of $ 11,845.22. There are two questions in issue, (1) whether part of payments received by George H. Thornley in the year 1937 from insurance companies should be included in gross income under section 22 (b) (2) of the Revenue Act of 1936; and (2) whether certain stock which was sold in 1937 was held more than ten years under section 117 of the Revenue Act of 1936.Petitioners filed a joint return for 1937 with the collector for the first district of Pennsylvania. Some of the facts have been stipulated.Petitioners were husband and wife and were residents of Philadelphia, Pennsylvania, during 1937. In 1940 they were 120 divorced. The issues involved relate solely to the income of George H. Thornley. He is referred to as the petitioner, hereinafter.FINDINGS OF FACT.Issue 1. -- On December 29, 1930, petitioner entered into two insurance contracts with the Berkshire Life Insurance Co. of Massachusetts. The contracts were similar in all respects except the face amounts. The contracts were 23-year endowment policies, and were in the face amounts of $ 100,000 and $ 50,000, respectively. The beneficiary under each policy was a trustee under a deed of trust dated December 11, 1930. The principal amount of each policy was payable on December 28, 1953, to the insured, if living, or, at the prior death of the insured to the named beneficiary. Annual premiums were payable for 23 years, or until the prior death of the insured. The policies had cash or loan values under a table set forth therein. The policies provided settlement options under which the proceeds of the policies could be paid in (A) installments for a definite number of years, (B) installments continuous for life, (C) the proceeds could be left with the company at interest, (D) the insured could receive annuity payments. The following121 provision appears in the policies:Settlement OptionsThe insured, with the power of revocation, shall have the right to elect that the whole or any part not less than $ 1000 of the proceeds of this policy, including 222 any dividend additions or accumulations then in force, shall be paid, when due, as provided in any of the following options, rather than in one sum, to the insured or the beneficiary, whichever shall become entitled to such payment. Under Option A or Option B each instalment certain payable on the anniversary of the first payment hereunder will be increased by such share of surplus interest as may be allotted thereto by the Directors. The Company will, on the surrender of this policy when due, give in exchange an agreement to pay in accordance with the method elected by the insured under Option A, Option B, Option C, or Option D hereinafter stated. If the insured shall not have previously elected any of said Options, the beneficiary or beneficiaries, when this policy becomes payable, shall have the right of election.Any such election, revocation or appointment, must be in writing, duly executed in form satisfactory to the Company, and this policy returned122 to the Home Office of the Company for appropriate endorsement.The policies contained a table which showed the amount of the monthly installments which $ 1,000 would provide under option A.On December 28, 1935, petitioner executed documents entitled "Election as to mode of payment, Instalment Option A" for each policy. Also, petitioner executed surrender receipts for each policy which stated the amounts of the cash values of the policies, and on the face of each surrender receipt a typewritten provision was inserted to the effect that the cash values were "to be retained by the Company and paid under the provisions of Settlement Option A in installments for twenty years" in accordance with petitioner's written request. The aggregate of cash values of the policies on December 28, 1935, was $ 22,469.25. Petitioner surrendered the policies in exchange for a settlement agreement under option A.The election as to mode of payment which petitioner executed with respect to one of the policies provided as follows, inter alia:I, George H. Thornley, the insured in policy No. 186833 issued by you, by virtue of the right given to me in said policy, * * elect that the proceeds of 123 the surrender of said policy amounting to $ 14,979.50 shall be payable in accordance with the terms of Option A therein stated in Two hundred forty monthly instalments of $ 82.54 each to George H. Thornley, any instalments remaining unpaid at my death to be paid equally, when due, to my daughter, * With respect to the other policy the election which petitioner executed was the same as the above except for amounts.On December 28, 1935, Berkshire issued "Instalment Certificate, Number 651," which certified that the two policies had been surrendered for their cash value amounting to $ 22,469.25 on December 28, 1935, and that "the amount due on said policies according to the conditions and agreements thereof, thereby became payable to George H. Thornley * * in 240 monthly installments of $ 123.81 each, in accordance with his request of December 28, 1935." The installment certificate was the printed form used by Berkshire. It was modified in writing to the extent that the words "matured by its terms," referring to a policy, were stricken and the words "been surrendered for 223 their cash value amounting to $ 22,469.25," were written in, in lieu of the printed words.Petitioner124 paid the aggregate amount of $ 33,255.33 as the consideration for the two policies from the time they were written up to December 28, 1935.During the taxable year 1937 the aggregate of the monthly installments paid by Berkshire was $ 1,589.86. This amount, together with the total installments received from 1935 through 1936, did not equal or exceed the aggregate premiums which petitioner paid as consideration for the policies.Petitioner did not include any part of the above amount of the monthly installments in the joint income tax return which was filed for the year 1937. In his audit of the return, respondent concluded that part of the total amount paid to petitioner should be included in gross income under the terms of section 22 (b) (2) of the Revenue Act of 1936. Respondent added $ 674.08 to gross income, which represents 3 percent of $ 22,469.25, the cash value of the policies.Between April 7, 1924, and December 28, 1925, petitioner entered into seven insurance contracts with Phoenix Mutual Life Insurance Co. of Connecticut. All of the contracts were endowment policies which could mature when petitioner became 65 years of age. The policies, respectively, were payable125 to the insured, if he should be living, in 1953; otherwise, they were payable on proof of death to a named beneficiary. The aggregate of the face amounts of the policies was $ 67,500. All of the policies were identical in terms, except as to dates and amounts. The policies by their terms gave "Options at Settlement" to "the payee of any sum payable in accordance with the provisions of this policy" who could elect "to have the sum payable applied in any method described in the following Options," to wit, 1, cash; 2, guaranteed income; 3, regular installments; 4, continuous installment; 5, life annuity.On April 1, 1925, petitioner took out with Phoenix policy No. 463,227, insuring his own life. The named beneficiary was a daughter of petitioner. The policy was an annual premium life insurance policy, with premiums payable during life. The insurer agreed to pay the beneficiary, upon proof of death of the insured, a monthly income of $ 100 as an annuity-certain during 20 years until 240 monthly installments had been paid.On November 16, 1936, petitioner notified Phoenix that he elected to have the proceeds of the seven policies, first referred to above, paid to him in accordance126 with the terms of option 3 in the policies, and he returned the policies to the company. At that time, the seven policies had an aggregate cash value of $ 19,558.63. On the same day, Phoenix executed settlement agreements, entitled "Supplementary Contract", Nos. 3194 and 3212, stating that the above aggregate amount 224 was payable on November 16, 1936, under the seven policies and "shall be payable in accordance with Option 3, described in said policies, as hereby amended, in ten annual installments," of $ 2,272.31, each. Also, Phoenix gave petitioner the right to have the cash value of policy No. 463,227, which was $ 3,381.93 on November 16, 1936, paid to him in ten annual installments of $ 384.93, each, and executed a settlement agreement, entitled "Supplementary Contract, No. 3199," on November 16, 1936. The aggregate of the periodical installments to be paid in each year for ten years is $ 2,657.24. The parties have stipulated that, on November 16, 1936, Phoenix gave petitioner the right to have the proceeds of the above policy "paid to him under the same conditions and in the same manner as if Option 3 * * had been a part of said contract," and petitioner elected127 to have the cash value of that policy paid to him in such manner.Petitioner surrendered the eight Phoenix policies in exchange for the settlement agreements which were written in accordance with the terms of seven of the policies.During the taxable year 1937, petitioner received installments from Phoenix aggregating $ 2,692.51. The amounts received during 1937, together with installments received during 1936, did not equal or exceed the aggregate consideration which petitioner had paid for all of the Phoenix policies which was in the amount of $ 29,108.56.Petitioner did not include any part of the installments received from Phoenix in gross income in the joint return filed for 1937. Respondent added to income $ 688.22, which represents 3 percent of $ 22,940.56, the total amount of the cash values of the eight Phoenix policies on November 16, 1936.Issue 2. -- N. W. Ayer & Son, a copartnership, conducted the business of an advertising agency for several years prior to January 1, 1923. Petitioner acquired a 3 percent interest in the partnership by purchase on January 1, 1923. Thereafter, petitioner purchased additional interests in the partnership, 2 percent on January 1, 128 1925; 2 percent on October 1, 1925; and 3 percent on January 1, 1927, so that he owned a 10 percent interest on January 1, 1927. It is stipulated that the 10 percent interest had a cost basis of $ 27,949.15 for purposes of determining gain or loss.The articles of copartnership dated December 29, 1927, were in effect from January 1, 1927, until the partnership was dissolved in 1929.On April 23, 1929, the partners decided to incorporate the advertising business then conducted by them through the partnership under the terms of an agreement executed on April 23, 1929, by all of the partners. The agreement provided that a Delaware corporation should be organized prior to May 1, 1929, to be known as "N. W. Ayer & Son, Incorporated," and to be registered in Pennsylvania for the 225 purpose of conducting business in that state. The agreement provided, inter alia, as follows:4. Partners agree, in respect to the undistributed profits which were standing to their respective credits on the partnership books at the close of business on December 31, 1928, that such balances thereof as remain undistributed at the close of business on April 30, 1929, shall for the time being be loaned129 by Partners to the corporation which shall pay for the use of the same interest at the rate of 6% per annum.* * * 6. On May 1st, 1929, or as soon thereafter as possible but as of May 1st, 1929, the entire assets of N. W. Ayer & Son (of Philadelphia) including all the accounts, contracts, books, claims, causes of action, good will, and all rights of every kind and nature, and all property, real, personal and mixed to which said partnership is then legally or equitably entitled shall be conveyed, assigned, set over, and transferred to said corporation subject, however, to all the partnership liabilities which said corporation shall expressly assume.7. In exchange for the assets so to be transferred and in consideration of the agreements of the Partners as hereinafter set forth, there shall be issued to the respective Partners in full payment for their respective interests in said assets, full paid and non-assessable common capital stock of said corporation as follows:NameNumber of SharesWilfred W. Fry456,637William M. Armistead76,106James M. Mathes76,106Adam Kessler, Jr76,106George H. Thornley76,106Total761,061 * * 11. The partnership N. W. 130 Ayer & Son (of Philadelphia) shall be dissolved and the Articles of Partnership terminated as of April 30th, 1929.The corporation, "N. W. Ayer & Son, Incorporated," was organized on April 24, 1929, with an authorized capital of 1,000,000 shares without nominal or par value, for the purpose of engaging in and carrying on the general advertising business which had been conducted by N. W. Ayer & Son, the partnership. The bylaws of the corporation provide that the corporation may have an office in Philadelphia.Pursuant to a resolution adopted at a meeting of the directors of the corporation held on April 29, 1929, the corporation, through its president, ratified, confirmed, and adopted the agreement of April 23, 1929, and agreed to do all the acts on its part which were called for by the agreement. Such ratification by the corporation was made by an execution of the agreement on April 29, 1929, by the corporation, whereby the corporation became a party to the agreement of April 23, 1929.On May 1, 1929 all the assets and property of every kind and nature whatsoever which were previously owned and held by N. W. Ayer & Son, the partnership, were transferred to N. W. Ayer & Son, Inc., 131 subject, however, to all outstanding liabilities and indebtedness of said 226 partnership, which were assumed by the corporation. On May 1, 1929, a bill of sale was executed by the five individuals who were copartners in the firm of N. W. Ayer & Son. The bill of sale provided as follows, in part:Know All Men by These Presents, that we, Wilfred W. Fry, William M. Armistead, James M. Mathes, Adam Kessler, Jr., and George H. Thornley, co-partners trading as N. W. Ayer & Son, for and in consideration of the sum of One Dollar and other good and valuable considerations moving unto each of us from N. W. Ayer & Son, Incorporated, a corporation organized under the laws of the State of Delaware, all as more fully set forth in a certain Agreement dated April 23rd, 1929, providing for the incorporation of the partnership, N. W. Ayer & Son, the receipt whereof is hereby acknowledged, Do hereby grant, sell, assign, transfer and deliver unto the said N. W. Ayers & Son, Incorporated, the entire plant, property, machinery, equipment, fixtures, business and good will of the N. W. Ayer & Son partnership including all book accounts and accounts receivable outstanding, contracts, copyrights, 132 trade marks, claims, causes of action, and all rights, and all assets and property of any kind or nature whatsoever belonging or appertaining to the said partnership and to the business thereof, subject, however, to all the adjustments to be made as more fully set forth in said Agreement of April 23rd, 1929, and further subject to all outstanding liabilities and indebtedness of said partnership, which the said corporation, N. W. Ayer & Son, Incorporated, hereby assumes, to have and to hold said property to the said N. W. Ayer & Son, Incorporated, and its successors and assigns, to their own use and behoof forever.On May 1, 1929, N. W. Ayer & Son, Inc., issued 761,061 shares of its full paid and nonassessable common capital stock to the respective partners in proportion to their respective partnership interests. Petitioner received 76,106 shares of said stock from the corporation for his interest in the partnership.It has been stipulated by the parties that:Under the provisions of the Revenue Act of 1928, no gain or loss was recognized to the partnership or to the partners as individuals upon the transactions hereinabove set forth, and under that act, the basis to the Petitioner, 133 (George H. Thornley) for determining gain or loss upon the subsequent sale of the stock of N. W. Ayer & Son, Incorporated, which he received, was the same basis as that of his partnership interest, namely, $ 271,949.46.On January 4, 1937, petitioner owned 71,356 shares of N. W. Ayer & Son, Inc., capital stock, which he sold on that date, realizing therefrom a capital gain under section 117 in the amount of $ 261,659.60.In the joint return for 1937, petitioner treated capital stock as an asset held for more than ten years, adding to the period during which he had held the stock itself the period during which he had owned an interest in the partnership, N. W. Ayer & Son, so that the entire period extended from January 1, 1927, to January 4, 1937. Under this theory petitioner believed that only 30 percent of the capital gain should be recognized under section 117 (a) of the Revenue Act of 1936.Respondent added to taxable income the sum of $ 24,060.76, which represented increase in the capital gain on the sale of the stock. In 227 the statement attached to the notice of deficiency the following explanation was given:The gain has been computed on the basis of the percentages134 of capital assets and non-capital assets of the corporation of December 31, 1927, [sic], and the taxable gain has been computed on the basis of the period each class of assets is presumed to have been held.A summary of the computation follows:Total gain asApplicableAssets 12/31/27PercentreportedpercentageAmountCapital$ 1,348,687.278.045573$ 261,659.608.045573$ 21,052.01Non-Capital15,414,409.4991.954427261,659.6091.954427240,607.59Amount ofTaxablePeriod heldgainPercentgainCapitalOver 10 years$ 21,052.0130$ 6,315.60Non-CapitalOver 5 years but notover 10 years.240,607.594096,243.04Total taxable gain$ 102,558.64Taxable gain reported78,497.88Additional taxable gain$ 24,060.76OPINION.Issue 1. -- The question arises under section 22 (b) (2) of the Revenue Act of 1936. 1136 See respondent's regulation construing this section. 2 Petitioner received payments from insurance companies in the taxable year under an arrangement whereby he is to receive periodical payments during a limited number of years. Respondent has determined that the payments received in the 135 taxable 228 year are annuities. The broad question under this issue is whether the payments are annuities within the meaning which the Congress has intended that term to have in section 22 (b) (2).The term annuity is variously defined. For a discussion of the various definitions given to the term see Commonwealth v. Metropolitan Life Ins. Co., 98 Atl. 1072; In re Thornton's Estate, 243 N. W. 389; Bodine v. Commissioner, 103 Fed. (2d) 982. But the problem presented by the issue here is to determine the meaning which Congress intended the term annuity to have for the particular purpose of the statute.Congress was concerned with the increasing tendency to purchase annuities. Under the law as it was prior137 to 1934, income tax upon income realized from investments in annuities was postponed indefinitely. It was believed that the tax on annuity receipts to the extent that they represent income should not be postponed. 3 The rule as adopted in section 22 (b) (2) is to be applied to amounts received on annuities under annuity contracts and also to amounts received as annuities under endowment contracts. But the terms of section 22 (b) (2) as it had appeared in the Revenue Act of 1932, and earlier acts, were not amended in their entirety. Section 22 (b) (2) in the Revenue Act of 1934, in the first sentence, still excludes from gross income "amounts received" under a life insurance or an endowment contract, other than at death and other than annuities, until the amounts received in the taxable year, when added to the amounts received in earlier years, equal the premiums or consideration paid. Thus the statute envisioned some types of periodical installment payments 229 under a life insurance or endowment contract upon which income tax was to be postponed until the taxpayer recovered his capital investment. The statute does not appear to contain any definitions, and yet that is138 not entirely true. The statute speaks of (1) "amounts received" which are to be excluded from gross income, and (2) "amounts received" which are to be included in gross income. Amounts in the second class are described, if not defined, as "amounts received as an annuity." The rule which sometimes aids in the construction of statutes, expressio unius et exclusio alterious, has some application here because if "amounts received" do not fall within the second class, they are not to be included in gross income, and the formula prescribed for determining how much is to be included in gross income has no application to "amounts received" which fall in the first class. Even so, we do not need to resort to a rule of implication in the construction of section 22 (b) (2). The statute refers to two classes of "amounts received," and the second class, being the only one defined, is narrower than the first class in our opinion, and that which does not fall within the second class must fall within the first class.139 Congress deemed it sufficient to use the phrase "as an annuity" to define the class of receipts which is to be included in gross income in part. But the evident variety of meanings given to the term annuity, or the loose use of that term, leaves room for argument. It is necessary to inquire, therefore, what kind of receipts Congress had in mind when it referred to "amounts received as an annuity." The reports of the committees provide much in answer to the question. It is said that "Payments to annuitants are, in fact, based upon mortality tables which purport to reflect a rate of return sufficient to enable the annuitant to recover his cost and in addition thereto a low rate of return on his investment." (See footnote No. 3, supra.) This has received explanation in Taxable Income, Magill (1936), p. 375, where it is said:It is well known that an annuity is calculated to yield a recipient who lives out his expectancy a total amount equal to the consideration paid, plus interest thereon. Hence, each annual payment, from the actuarial point of view, is made up partly of a return of capital and partly of income.We think it is made very clear in the committee reports and 140 in the Congressional hearings (see Seidman's Legislative History of Federal Income Tax Laws (1938), pp. 295-299), that Congress meant the phrase "amounts received as an annuity" to have the meaning which insurance companies and actuaries customarily give to the phrase; or, more particularly, to mean amounts computed with reference to the age and sex of the insured, or payee, and with reference to life or lives. In Life Contingencies by E. F. Spurgeon, published by the Institute of Actuaries, London, 1922, at p. 31, it is said that 230 "A Life Annuity, often called simply an Annuity, is a series of payments depending upon the continuance of a given life or combination of lives." If that is the meaning of "amounts received as annuities" in section 22 (b) (2), then the other class, the first class, of "amounts received" must mean, under the exclusio rule, amounts computed without reference to the life, age, or sex of the payee; amounts which are not based upon mortality tables; amounts in the determination of which there is no calculation which takes into consideration the possibility that the recipient will live out his expectancy.Here we are dealing with endowment141 policies, as will be explained hereinafter. Under the terms of those policies, the insured is given several options under which he may receive the proceeds of the policies. The several options are substantially the same in both the Berkshire and the Phoenix policies, and so we refer to the options in the Berkshire policies for convenience. The payee can elect to receive the proceeds under option A, in installments for a definite number of years, under which option the periodical amounts which $ 1,000 will yield are computed without refeernce to age, sex, or life expectancy; under option B, in installments continuous for life; and under option D, in annuity payments for life, under both of which the amount of the payment is computed with reference to the age of the payee, and under D, in addition, with reference to the sex of the payee. Thus it is seen that in the policies involved one class of payments is called "annuity payments" and others are not; and the amounts of certain payments are computed with reference to the life expectancy of the payee based upon mortality tables, while others are not. According to our understanding, practically all insurance companies offer to the142 payee the same or similar classes of options under which to receive the proceeds of policies. It is a reasonable conclusion, therefore, that Congress used the phrase "amounts received as an annuity" with the knowledge that insurance companies distinguish certain kinds of payments, called annuity payments, from other kinds of payments which are computed without reference to life expectancy and mortality tables.So much for background discussion. Against this background a discussion of the facts takes on added significance and the question may be decided with more regard for the realities of the situation involved. In discussing the facts we shall point out from time to time the conclusions to be made. Some further discussion of the nature of annuity payments will be pertinent, however.In 1930 petitioner took out two insurance contracts with Berkshire which were 23-year payment combination life insurance and endowment contracts. At the end of 5 years petitioner decided to surrender the policies. Petitioner had paid premiums in the total amount of $ 33,255.33 under the two policies. At the date of surrender the cash 231 surrender values aggregated $ 22,469.25. In 1924 143 and 1925 petitioner took out 8 insurance contracts with Phoenix. These policies were similar to the Berkshire policies and were combined life insurance and endowment contracts. In 1936 petitioner decided to surrender these policies. He had paid premiums on all the policies in a total amount of $ 29,108.56. The total cash surrender values aggregated $ 22,940.56. It was provided in the contracts that the insured could elect to have the whole or any part of the proceeds of the policies paid under any one of the stated options instead of in one sum. It was also provided in the contracts that the companies would give an agreement to pay the proceeds of the policies in accordance with the method of settlement elected by the insured in exchange for the policies. These provisions in the contracts contemplated the settlement of a policy when it became due. But the same provisions were applicable to the settlement of cash surrender values of policies surrendered before their due dates. The companies issued the prescribed agreements to petitioner in exchange for the policies. The agreements state that the policies have been surrendered, that the respective amounts of the cash surrender144 values were payable to petitioner on the dates of surrender of the policies, and that said amounts shall be payable to petitioner in accordance with the provisions of option A, in the case of Berkshire, in 240 monthly installments of $ 123.81, each, and in accordance with the provisions of option 3, in the case of Phoenix, in 10 annual installments of $ 2,657.24, each. These periodical installment payments aggregate the amount of the proceeds due under each policy upon surrender, with interest. In other words, petitioner, or certain named individuals after petitioner's death, is to receive the above stated periodical installments for 20 years and 10 years, respectively, at the end of which periods the proceeds of the policies, together with interest, will be exhausted. That is, at the end of 20 years, there will be received from Berkshire the proceeds in the amount of $ 22,469.25 and an increment of $ 7,245.15; and at the end of 10 years there will be received from Phoenix the proceeds in the amount of $ 22,940.56, and an increment of $ 3,631.84.Respondent has treated the transactions between petitioner and the companies as if the proceeds of the policies had been paid to petitioner145 in full at the time he surrendered the policies, and he had thereupon paid the money back to the companies in the purchase of annuities. Respondent contends that when the companies retained the proceeds of the policies instead of paying them to petitioner, he received the money constructively, and the transaction was the same, in substance, as one involving the purchase of annuities. Thus respondent, in applying the formula prescribed in section 22 (b) (2) for taxing annuities, took the amounts of the proceeds of the policies as consideration paid for annuities. He included 232 in gross income 3 percent of the proceeds of the Berkshire policies, $ 22,469.25, or, $ 674.08; and 3 percent of the proceeds of the Phoenix policies, $ 22,940.56, or, $ 688.22.In our opinion, respondent's treatment of the transactions is incorrect. The form of the transactions is of vital importance in determining the intention of the parties to the transactions. In the first place, upon the surrender of the policies, the proceeds thereof became due and payable to petitioner. He was entitled to have the proceeds paid to him then in cash in one sum. He elected to leave the principal sums due to146 him with the companies, and he elected to accept payment thereof in installments. In the event of his death, he designated the persons who are to receive the installments. The principal sums are due petitioner although they are payable only in the manner agreed upon, and petitioner has a property interest in the principal sums, the proceeds of the policies. The situation resembles leaving money on deposit with the companies, at interest, with an agreement to accept payment in installments. The situation is like an account receivable. If petitioner had not named beneficiaries of the settlement agreements, other than himself, in the agreements, and if he died before receiving the payments due him under option A and option 3, then, upon his death, all of the remaining unpaid installments would be commuted and paid in one sum to the executor, administrator, or assignee of petitioner. We point out, also, as an additional but not decisive factor, that in the agreement with Berkshire petitioner reserved the right to revoke his request as to the method of paying the proceeds of the policies and to receive the commuted value of any of the unpaid installments without the assent of any147 beneficiary named in the agreement. This further supports the conclusion that petitioner had a property interest in the proceeds of the Berkshire policies. While no similar reservation appears in the Phoenix agreements, the matter is open to the argument that petitioner can receive the commuted installments because it is provided in the Phoenix policies that the payee under option 3 may commute in one payment any unpaid installments under option 3. However, we do not rest our conclusion solely upon the existence of the right to commute the unpaid installments.Petitioner could have, but did not, elect to receive annuity payments under option D and option 5 of the respective policies. We understand, from reading the terms of all of the settlement options, that upon electing to receive annuity payments petitioner would lose all property interests in the proceeds of the policies, as such. For example, if petitioner died within a short time after making the election to receive annuity payments, the companies would retain the unpaid balance of the original proceeds. Under an election to receive annuity payments, the only right of petitioner would have been 233 a right in the148 annuity payments themselves, and not in any principal fund or source from which the annuity payments might be derived. If petitioner had elected to receive annuity payments in settlement of the policies he would have transferred his interest in and to the proceeds of the policies as consideration for the purchase of annuity payments. In Commonwealth v. Beisel, 13 Atl. (2d) 419, a similar question was considered. The court stated the following:"Annuity" is a term somewhat loosely used in financial and legal nomenclature and is perhaps incapable of exact definition. Generally speaking, it designates a right -- bequeathed, donated or purchased -- to receive fixed, periodical 2 payments, either for life or a number of years. Its determining characteristic is that the annuitant has an interest only in the payments themselves and not in any principal fund or source from which they may be derived. The purchaser of an annuity surrenders all right and title in and to the money he pays for it. On the other hand, where a debtor agrees to pay his creditor in installments at regular intervals, the debt or principal sum itself is due to the creditor although149 payable only in the manner agreed upon; it is an account receivable in which he has a property interest. Therefore, installment payments of a debt, or payments of interest on a debt, do not constitute an annuity. See Barber's Estate, 304 Pa. 235">304 Pa. 235, 241, 242, 155 A. 565">155 A. 565; Keiper v. United Zion Home, 108 Pa. Super. 28, 31, 32, 164 A. 367">164 A. 367.It is concluded that petitioner did not purchase annuities from Berkshire and Phoenix under the agreements executed under the option settlement under which petitioner elected to have the proceeds of the policies paid in equal installments for 20 and 10 years to himself, or to his daughter in the event of his death. Respondent erred in treating the transactions as purchases of annuities, and the installment payments as "amounts received as an annuity." We point out, also, that it is our understanding that petitioner could not have taken the proceeds of the policies and purchased any contracts under which installments would be paid for a fixed term without reference to the continuation150 of a life or lives. It is not the general practice of insurance companies to sell such contracts. The agreements which were executed by the companies and the petitioner are written only upon the surrender of policies of insurance and are not to be confused with annuity contracts which some insurance companies do write. We are of the opinion, further, that the installments under the election (as to mode of payment of the proceeds of the policies) which petitioner made in the settlement of his right to receive the proceeds of the cash surrender values of the policies were not amounts received as an annuity within the meaning which Congress intended that clause to have in section 22 (b) (2). As distinguished from one method of settlement provided under the policies, namely, annuity payments, installment payments under options A and 3 were not computed with reference to mortality tables, the age or sex of the 234 payee. Such installments, therefore, are not amounts received as annuities under endowment contracts. We have previously regarded annuities, within the purview of section 22 (b) (2), to mean payments computed with regard for life expectancy, and we take the151 same view here. F. A. Gillespie, 38 B. T. A. 673; Anna L. Raymond, 40 B. T. A. 244; affd., 114 Fed. (2d) 140; certiorari denied, 311 U.S. 710">311 U.S. 710; Title Guarantee & Trust Co., Executor, 40 B. T. A. 475. This view is supported by the committee reports, as was shown above. Labels are not determinative, but the annuity payments described in the insurance policies in question, which petitioner could have elected to receive, but did not so elect, are in fact annuity payments, and, as stated in the beginning, we believe Congress intended that the phrase, "amounts received as an annuity" under endowment contracts, should be taken to mean the same thing that the insurance companies designate as annuities in the option provisions of endowment policies.The only resemblance we can find to annuities in the installment payments in question is that under the election petitioner made he is to receive interest on the principal sums he left with the companies. It is no doubt true that the periodical installment payments here are made up of a return of capital, 152 in part, and interest, in part. The principal sums left with the companies will earn interest. Also, under the elected options, the installments may be increased by a share of surplus interest if such is allotted by the directors, such additions not being guaranteed. 4 We can readily envisage the adoption by the Congress of some formula like that prescribed in the second sentence of section 22 (b) (2) to treat a portion of the kind of periodical installment payment we have here, as interest, and to require such part to be included in gross income. But, we think Congress has not so legislated, reading section 22 (b) (2) in its entirety. Rather, Congress has continued and permitted, under the first sentence of section 22 (b) (2), the exclusion from gross income of all of periodical payments under endowment contracts until they equal consideration paid, other than annuity payments. We would be extending the scope of the second sentence of section 22 (b) (2) if we ignored the provisions of the first sentence of the section and treated all amounts received under endowment contracts as annuities, under a loose use of that term. It appears that the Commissioner's interpretation153 of section 22 (b) (2) in his regulation, quoted before in the margin, is not consistent with the statutory provisions if his regulation means that all periodical installments which are payable over a period of more than one year constitute "annuities" under section 22 (b) (2). We are not certain that his regulation is to be understood to go so far because, in it, he 235 refers to "amounts received in periodical installments, * * such as for life, or for life and a guaranteed fixed period." In any event, it is a rule that, to be valid, a regulation must be consistent with the statute. Manhattan General Equipment Co. v. Commissioner, 297 U.S. 129">297 U.S. 129.We believe it is abundantly clear that it is not the intention of Congress to tax capital or property under section 22 (b) (2), and 154 that the formula prescribed in the second sentence of section 22 (b) (2) is intended to enable as close an approximation as can be made of the part of an annuity payment which represents interest. Title Guarantee & Trust Co., Executor, supra, p. 481. It serves to demonstrate the inapplicability of the prescribed formula to the installment payments under the settlement agreements here, to point out that under respondent's determination a tax will be levied upon principal, taking into consideration the entire periods. Under the agreements with Berkshire the fixed installments will aggregate $ 29,714.40 over the 20-year period. We have shown above that this amount represents the proceeds of the policies to be repaid to petitioner, $ 22,469.25, plus an increment of $ 7,245.15. Yet under respondent's determination, over 20 years, $ 13,481.55 of the payments will be included in gross income and taxed. Of the amount which will be taxed, $ 13,481.55, the amount of $ 7,245.15 will constitute an increment in the form of interest and $ 6,236.40 will constitute a return of capital upon which tax will have been levied. We think it is conceivable that, if the155 principal amount of the proceeds of the Berkshire policies were left with the company for a sufficiently lengthy period of time, a very much larger portion of the principal would be taxed under the theory that respondent has followed here. For example, petitioner could have elected to have the principal amount of the proceeds of the policies paid to him in 600 monthly installments, under option A. Thus, over a period of 50 years, 3 percent of the amount of the proceeds of the policies would be included in gross income in each year and a correspondingly larger portion of the principal, or capital recovered, would be taxed under respondent's theory.The same is true of the payments to be received from Phoenix, the increment over the amount of the proceeds being $ 3,631.84 and the amount to be included in gross income over 10 years under respondent's determination being $ 6,882.17. Also, under option 3 of the Phoenix policies, petitioner could have elected to have the proceeds paid to him over 50 years instead of 10, and the same result would follow under respondent's theory as is pointed out above.Our conclusion is that the installment payments which petitioner received from the156 insurance companies were "amounts received * * under a * * * endowment contract," and since the amounts received in the taxable year, when added to the amounts 236 received before the taxable year, do not exceed the total amounts of either the premiums paid or the proceeds of the respective policies, no part of the payments should be included in gross income. Further, the payments were not "amounts received as an annuity under an annuity or endowment contract" and no part of the payments should be included in gross income. It is so held, and respondent's determination is reversed.The issue presented does not reach the question of what was the "consideration paid" for the installment payments in question for purposes of the first sentence of section 22 (b) (2). It may or it may not be the aggregate premiums paid for the original policies, in view of the fact that the policies were surrendered prior to their maturity and the settlement agreements related to the method of paying the amounts of the cash surrender values, or the proceeds, due to petitioner upon the surrender of the policies. No determination is made of such possible question.Issue 2. -- The question under157 this issue is whether the stock in N. W. Ayer & Son, Inc., which petitioner sold in 1937 was held for more than 10 years for purposes of computing the holding period which fixes the percentage of the gain to be recognized under section 117 of the Revenue Act of 1936. Petitioner received the stock in question in 1929 in an exchange, and the parties are agreed that no gain or loss was recognized upon the receipt of the stock. Each party agrees that the stock was received in exchange for property, but the parties do not agree upon what the property was. The question turns upon the conclusion to be reached on that point, for it is provided in section 117 (c) (1) 5 that "In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged."158 Petitioner contends that he received the stock in exchange for his 10 percent "interest in the partnership," that such partnership interest was acquired on or before January 1, 1927, and that, since the stock was sold on January 4, 1937, the period he held the stock was more than 10 years. If petitioner's contention is correct, it follows that only 30 percent of the gain is taxable.In the agreement of April 23, 1929, between the partners of N. W. Ayer & Son it was provided that the entire assets of the partnership should be conveyed to the new corporation, subject to the partnership liabilities assumed, and that stock in the new corporation should be 237 issued "In exchange for the assets so to be transferred." The stock was to be issued to the respective partners, "in full payment for their respective interests in said assets." The total number of shares issued was 761,061 shares, and the number of shares received by each partner was in the same proportion as each partner's interest in the partnership. Petitioner's interest in the partnership was 10 percent, and he received 10 percent of the total shares distributed, or 76,106 shares.Respondent determined the percentage159 of capital assets and noncapital assets which were exchanged for the stock, and found that, roughly, 8.05 percent of the assets received by the corporation were capital assets and 91.95 percent were noncapital assets. The stock which petitioner sold on January 4, 1937, was acquired on May 1, 1929, so that it was held for more than 5 years but less than 10 years. Respondent determined that no "tacking" should be permitted with respect to the part of the stock which was received in exchange for the noncapital assets, i. e., no period should be added to the 6 1/2 years petitioner had held some of the stock. He recognized that "tacking" should be allowed for the period during which the capital assets involved in the exchange had been held. He determined that the capital assets had been held for a period back to January 1, 1927, or before, so that something over 3 1/2 years should be added to the period that some of the stock was held. The net effect of respondent's determination was to hold that 8.05 percent of the stock sold in the taxable year had been held for more than 10 years, and that 91.95 percent of the stock had been held for more than 5 years but less than 10 years. The160 total amount of the gain realized from the sale of the stock in the taxable year was $ 261,659.60. Respondent determined that 30 percent of $ 21,052.01 of the gain was taxable, or, $ 6,315.60; and that 40 percent of $ 240,607.59 of the gain was taxable, or $ 96,243.04, total, $ 102,558.64. The amount of the taxable gain which petitioner included in gross income was $ 78,497.88. Respondent added to income $ 24,060.76 as additional taxable gain. (The total gain was broken down as follows: 8.05 percent of the total gain equals $ 21,052.01; and 91.95 percent of the total gain equals $ 240,607.59.) Respondent followed G. C. M. 20251, C. B. 1938-2, p. 169, and G. C. M. 11557, C. B. XII-1, p. 128, in making his determination.Respondent argues that all that petitioner exchanged for the stock he received was his interest in the assets of the partnership. In support of this contention respondent points out that under the April 23, 1929, agreement the undistributed profits of the partnership credited on the partnership books to the respective partners were to be loaned to the corporation at 6 percent. On April 30, 1929, there was161 a net credit of undistributed profits of the partnership in the personal account of petitioner in the amount of $ 139,683.09, and that amount was transferred to the corporation. Respondent argues that 238 petitioner's capital account in the partnership was not exchanged for the stock which he received, and, therefore, all that petitioner exchanged for the stock was his interest in the assets of the partnership which remained after his interest in the undistributed profits was loaned to the corporation.We think the question is controlled by the terms of the agreement of April 23, 1929, hereinafter called the 1929 agreement. We believe, also, that it is extremely important in the determination of the question that the partnership went out of existence, in fact. The latter point is considered first.It was provided in the 1929 agreement that the partnership should be dissolved and the articles of partnership terminated as of April 30, 1929. For all practical purposes the partnership was dissolved, although the attorney who carried out all of the steps neglected to cancel the registration of the partnership under the Fictitious Names Act, a Pennsylvania statute, at the 162 time the corporation took over. Clearly, the intent and the fact is that the corporation succeeded the partnership and the partnership ended. It was intended, also, that there should not be any interval between the business activities of the partnership and the business activities of the corporation. The corporation was to "take over" the business on May 1, 1929. That was done. However, the details of this close transition in the ending of formal business activities by one entity and the beginning of formal business activities by a new entity are not material and petitioner errs in laying so much emphasis on that fact. Also, it is unnecessary to construe the transition as a constructive dissolution of the partnership with a constructive distribution of assets to the individual partners, first, and an immediate transfer by them to the corporation, as respondent argues should be done. The 1929 agreement is clear on the point that certain properties owned by the partnership were to be conveyed to the corporation and other properties were not. There was an employees' trust known as the F. Wayland Ayer Employees' Trust. It was entitled to a share in the net earnings of the partnership163 and, as collateral for that interest, 10 percent of the capital interest of Wilfred W. Fry in the partnership was pledged. Adjustments had to be made so that part of the partnership earnings for the first four months of 1929, up to April 30, 1929, would be paid to the employees' trust, Wilfred Fry's capital interest would be released from pledge and the trust agreement would be terminated as of April 30, 1929. The books of the partnership were to be closed on April 30, 1929, to enable the making of the above adjustments, and others. Briefly, out of the gross earnings of the first four months of 1929, distributions were to be made to branch partnerships in New York and Chicago and, after the above, the partners were to be paid some of the net earnings for the first four months in proportion to 239 their respective capital interests, and certain benefit funds were to be paid part of said net earnings. When all of this was done, whatever undistributed profits and earnings stood to the respective credits of the individual partners at the close of business on April 30, 1929, were to be loaned to the new corporation at 6 percent. It can not be concluded that the corporation164 took over the capital accounts of the partners in exchange for stock. There is no evidence to show any modification of the terms of the agreement relating to the lending to the corporation of the accumulated profits to which each partner was entitled. In every real sense the new corporation received only the assets remaining after the above adjustments and it, then, proceeded to carry on the business which had been conducted formerly by the copartnership. We believe it clear, therefore, that the partnership ended on April 30, 1929, and the new corporation did not acquire any interests in the partnership from anyone. It was impossible for the corporation so to do.The property rights of a partner, under Pennsylvania statute, consists of (1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in management. A partner is a co-owner with his partners of specific partnership property. A partner's interest in the partnership is his share of the profits and surplus, and that is personal property. A partner can convey his interest in the partnership, but such conveyance merely entitles the assignee to receive the profits165 to which the assigning partner would be entitled. See Purdon's Pennsylvania Statutes, Ann. Title 59 -- Partnerships, pars. 71, 72, 73, 74, 91. It needs no argument to show that on April 30, 1929, the partnership was dissolved by agreement of the partners to cease the conduct of the business themselves. On and after May 1, 1929, the business which they had conducted, formerly, themselves was carried on by a corporation and all profits were the profits of the corporation. It is a logical absurdity for petitioner to contend that he conveyed to the new corporation his "interest in the partnership."The whole effect of the 1929 agreement was to work out a dissolution of the partnership under which each partner received, constructively, his share in the accumulated and undivided profits of the partnership, and all of the partners, as tenants in partnership, conveyed the remaining specific partnership property to the corporation under a bill of sale. There is no evidence that the 1929 agreement was not carried out with faithful adherence to its terms. The agreement provided that the stock of the corporation should be given to the partners in exchange for the assets to be transferred, 166 and "in full payment for their respective interests in said assets." It is held that petitioner received the stock in exchange for his interest in the assets conveyed to the corporation.240 Under this holding, the period during which petitioner held the stock which he sold in the taxable year must include the period during which he had an interest in the specific property of the partnership. Sec. 117 (c). See also, City Bank Farmers Trust Co. v. United States (Ct. Cls.), 47 Fed. Supp. 105. Petitioner has not introduced evidence on the matter. The period during which he held an interest in the partnership may not be presumed to have been coterminous with the period during which the partnership held specific property. Obviously, the partnership must have acquired various specific properties at different dates. It held real estate and securities. There is no evidence about the date when the partnership acquired specific properties. Under such circumstance, respondent's determination that some of the properties which were conveyed to the new corporation were noncapital assets can not be set aside.Under this issue respondent is sustained. 167 Decision will be entered under Rule 50. HILL Hill, J., dissenting: I agree with the majority that the contracts under which the payments here involved were received by petitioner are not annuity contracts and that the provisions of section 22 (b) (2) for the taxing of annuities do not apply. It is my opinion, however, that such contracts are not insurance or endowment contracts within the meaning of section 22 (b) (2) and that that part of such payments which represents increment to the cash surrender values of the insurance policies is taxable income in the year received under section 22 (a). Both the insurance and endowment contracts represented by the insurance policies ceased to exist when the insured stopped performance thereof and surrendered them before maturity.The amounts of the surrender values were immediately payable in cash to petitioner. The total of such surrender values measured the money obligation of the insurance companies to petitioner. The total of the amounts of such surrender values represented that part of the premiums paid on the insurance policies in excess of that earned for life insurance. Had the cash values of the policies been paid to petitioner168 at the time of the surrender of the policies there would have been returned to him in full that part of such premiums. Instead of an immediate cash payment of the surrender values at the time of the surrender of the policies, petitioner elected to accept a contract for the payment of such surrender values with an increment thereto tantamount to interest payable in amortized installments over a specified period of years. That was not an insurance or endowment contract. Hence, the provisions of section 22 (b) (2) do not apply.241 The endowment contracts ended upon the surrender and cancellation of the policies before their terms had been performed. The contract for payment of the surrender values of the policies was one merely for the discharge by deferred installment payments of a fixed money obligation together with a stipulated added compensation for use of the money pending such deferments in payment. Each installment payment represented a proportionate part of the total amortization of the principal and the increment thereto. Hence, with each installment payment petitioner received an aliquot part of the total increment provided by the deferred payment contract. It169 is my view that such increment is taxable under section 22 (a) as and when received. The total of the increment amortized and the total amounts of the installment payments received by petitioner in the taxable year are ascertainable from the facts of record. Therefore, the part of the increment which is taxable income to petitioner in the year involved is readily calculable.It is suggested that the views I have here expressed are outside the issue herein presented, namely, whether the installment payments are taxable as annuities, and hence have no place in the consideration of this proceeding. It is my opinion that the question we have to decide is whether on the facts presented the deficiency in tax determined by the respondent should be sustained in whole or in part under any provision of the revenue acts. Footnotes1. SEC. 22. GROSS INCOME. * * (b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this title: * * (2) Annuities, etc. -- Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this title or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. * ↩2. Art. 22 (b) (2)-2. [Regulations 94.] Annuities↩. -- Amounts received as an annuity under an annuity or endowment contract include amounts received in periodical installments, whether annually, semiannually, quarterly, monthly, or otherwise, and whether for a fixed period, such as a term of years, or for an indefinite period, such as for life, or for life and a guaranteed fixed period, and which installments are payable or may be payable over a period longer than one year. * 3. See Report No. 704, p. 21, of the Ways and Means Committee, and Report No. 558, p. 23, of the Finance Committee, accompanying the 1934 bill to provide revenue. In Report No. 704, p. 21, the following appears:"Section 22 (b) (2). Annuities, etc.: The present law does not tax annuities arising under contracts until the annuitant has received an aggregate amount of payments equal to the total amount paid for the annuity. Payments to annuitants are, in fact, based upon mortality tables which purport to reflect a rate of return sufficient to enable the annuitant to recover his cost and in addition thereto a low rate of return on his investment. The change continues the policy of permitting the annuitant to recoup his original cost tax-free but requires him to include in his gross income a portion of the annual payments in an amount equal to 3 percent of the cost of the annuity. While the percent used is arbitrary, it approximates the rate of return in the average annuity."Statistics show that an increasing amount of capital is going into the purchase of annuities, with the result that income taxes are postponed indefinitely. The change merely places the return of this form of investment on the same basis as other forms of investment by taxing that portion of each payment which in fact constitutes income.""Prevention of Tax Avoidance," Preliminary Report of a Subcommittee of the Committee on Ways and Means (73d Cong., 2d sess.), p. 13, part II. Minor Problems, (1) Annuities:"Section 22 (b) (2) of the Revenue Act of 1932 provides for taxing annuities, but not until the total amounts received exceed the total amount paid for the annuity."Your subcommittee is of the opinion that the tax on annuity receipts to the extent that they represent income should not be postponed as permitted by present law. Such receipts are, as a matter of fact, part interest and part return of capital. Therefore, it is recommended that some amount representing the portion of the annuity receipts consisting of interest be made subject to the income tax. In order to facilitate administration, it is recommended that an arbitrary rule be adopted that 3 percent of the amount paid for the annuity shall be deemed to be interest. This rule is applied only to annuity contracts."↩2. To constitute an "annuity" it is not necessary that the payments be annual.↩4. In the taxable year petitioner received "dividends" from Berkshire and Phoenix in the respective amounts of $ 104.14 and $ 35.27, over and above the amounts of the guaranteed installments.↩5. SEC. 117. CAPITAL GAINS AND LOSSES. * * *(c) Determination of Period for Which Held. -- For the purpose of subsection (a) --(1) In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 113, the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619102/	MILES G. SAUNDERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Saunders v. CommissionerDocket No. 55188.United States Board of Tax Appeals26 B.T.A. 519; 1932 BTA LEXIS 1294; June 27, 1932, Promulgated 1294 Debts claimed as worthless in the taxable year were uncollectible in a prior year. Roger Underwood, Esq., and Turner S. Underwood, C.P.A., for the petitioner. P. A. Bayer, Esq., for the respondent. LANSDON 519 OPINION. LANSDON: The respondent asserts a deficiency in income tax for the year 1928 in the amount of $932.64. The petitioner contends that the respondent has improperly disallowed total deductions from his income for the taxable year in the amount of $8,435 representing debts ascertained to be worthless and charged off in that year. The record discloses, however, that this amount has not been disallowed as to such year and that it was claimed and allowed as a deduction in the year 1927. The deficiency determined by the respondent results from the disallowance of an alleged net loss in 1927 in the amount of $6,432.77 as a deduction from petitioner's taxable income in 1928. It is obvious, therefore, that the respondent has not erred as alleged by the petitioner. This discrepancy, however, is not material, since it is the amount of the deficiency that is in controversy and that must be proved to be erroneous. The petitioner1295 is an individual with his office in Pueblo, Colorado, where he is engaged in the practice of law. The record shows that prior to June 1, 1926, he advanced $4,435 and $4,000 to the Twin Lakes Land and Water Company, hereinafter called the company, and the Twin Lakes Investment Company, respectively, and that on such date the latter ceased operations and that its obligations were assumed by the former, which thereafter was indebted to him in the amount of $8,435. On April 12, 1926, he agreed with the company that he would accept its bonds in the par value of $4,000 in discharge of its obligations to pay him that amount on account of his advances to the Twin Lakes Investment Company. This agreement was never accomplished and in December, 1927, the company defaulted in the bond interest and the trustee for the bondholders began receivership proceedings in the District Court of Pueblo County. On April 1, 1926, a statement of the company showed assets of the book value of $1,892,073.38 and an asset balance in the amount 520 of $294,133.73. At that date there were substantial liabilities of the company that were not included in the statement. On December 31, 1927, on or about1296 the date of the institution of the receivership proceedings, the trial balance of the company showed assets of the book value of $1,559,134.24, liabilities in the amount of $1,528,545.91, and net worth as per books of $30,588.33. In such trial balance capital stock was not included as a liability. In his income-tax return for 1927 the petitioner claimed and was allowed a deduction on account of bad debts in the amount of $8,435 representing his advances set out above. He now contends that such claim was made in error and that at December 31, 1927, it was impossible to determine that the debts were worthless. He also contends that the deduction of the amount in question from his income in 1927 was not beneficial to him, since he had no taxable income in that year. In our opinion the evidence is not sufficient to prove the petitioner's allegations. At December 31, 1927, the asset balance of the company, as reflected by its books, was only $30,588.33, with receivership proceedings already in progress. This is a very small margin in a statement of assets of the book value of $1,559,134. Bankruptcy proceedings under a receiver are generally quite expensive. Liabilities are seldom1297 less than shown on the books and the listed value of assets is rarely realized through the processes of liquidation. In all the circumstances we are of the opinion that the debts now claimed to have become uncollectible in 1928 were worthless at December 31, 1927, and that respondent did not err in allowing a deduction of the amount thereof from petitioner's income in that year. Inasmuch as there is a difference between the deficiency asserted and the amount alleged to be in controversy, final decision will be rendered under Rule 50. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619103/	ERWIN STARR AND HELEN STARR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStarr v. CommissionerDocket No. 39314-84United States Tax CourtT.C. Memo 1991-610; 1991 Tax Ct. Memo LEXIS 657; 62 T.C.M. (CCH) 1417; T.C.M. (RIA) 91610; December 10, 1991, Filed 657 Petitioner Erwin Starr, a retired businessman and an active investor, engaged in six series of futures straddles during 1978-80. Those straddles gave rise to short-term and long-term capital losses and gains, which were reported on petitioners' 1978, 1979, and 1980 tax returns. Respondent disallowed those gains and losses. Held: Petitioners have failed to meet their burden of proof in showing that petitioner Erwin Starr entered into the straddles at issue primarily for profit within the meaning of sec. 108(a) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630-631, as amended by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1808(d), 100 Stat. 2085, 2817-2818. Held further: The losses arising from those straddles are not allowed under sec. 108(a). Held further: Petitioners are liable for an increased rate of interest pursuant to sec. 6621(c) (formerly sec. 6621(d)) due to a substantial underpayment attributable to one or more tax-motivated transactions. Richard J. Alan Cahan and Joshua N. Bennett, for the petitioners. W. Robert Abramitis and John F. Hernandez, for the respondent. HALPERN, Judge. HALPERNMEMORANDUM OPINION658 By notice of deficiency dated September 7, 1984, respondent determined deficiencies in petitioners' Federal income tax as follows: Tax Year EndingDeficiencyDecember 31, 1978$ 61,548December 31, 197938,539December 31, 198067,936By amendment to his answer, respondent also determined that petitioners are liable for an increased rate of interest pursuant to section 6621(c)1 (formerly section 6621(d)) due to a substantial underpayment attributable to one or more tax-motivated transactions. While respondent's notice of deficiency raised other issues, the only issues remaining for our decision are, one, whether petitioner Erwin Starr entered into certain futures transactions primarily for profit, permitting him to claim certain capital losses from those futures, and, two, whether659 the increased interest rate provided by section 6621(c) applies. BackgroundPetitioners are respectively husband and wife. At the time the petition in this case was filed, petitioners resided in Key Biscayne, Florida. When used in the singular, the term "petitioner" refers to petitioner Erwin Starr. Some of the facts have been stipulated and are found accordingly. By this reference, the stipulation of facts filed by the parties and attached exhibits are incorporated herein. Petitioner, a retired businessman, is an active investor. During the tax years at issue, his investment activities constituted his sole source of income. He spent as much as 6 hours a day on those activities, consulting with people concerning his investments and reading investment materials. Much of his investing was on a short-term basis and involved trading various corporate and Government securities. In addition to other investments, petitioner traded commodity futures for roughly 10 years ending early in the 1980's. For the tax years at issue, petitioner used Bear, Stearns & Co. in New York City for trading futures, and his primary broker at Bear Stearns was Arthur Lashinsky. His Bear Stearns660 account did not permit Mr. Lashinsky or any other person at Bear Stearns to enter and execute trades on petitioner's behalf without his permission. Petitioner's trades took place during normal commodity exchange hours and were not after-hours trades. For the years at issue, neither one of petitioners nor any of their ancestors, lineal descendants, or trusts in which they were the primary beneficiaries was registered with a domestic board of trade designated by the Commodities Futures Trading Commission as a contract market. During 1978 through 1982, petitioner traded commodity futures involving soybeans, copper, gold, silver, and Ginnie Mae Certificates and specifically traded the futures detailed in appendix A, comprising six series of commodity straddles. At trial, we found that trades in those futures did indeed occur, as petitioners claim. We note that, while petitioner entered all the futures transactions listed in appendix A during 1978, 1979, and 1980, petitioner closed four of those futures during 1981 and 1982 (years not here at issue). The terms "commodity futures," "straddles," "short" and "long" positions, and certain other terms used in this opinion are terms of661 art employed in trading futures. In appendix B, we set forth definitions of such terms and briefly discuss the economic rationale for trading futures. For each series of straddles in appendix A, petitioner opened with a short and a long position in the same commodity. Each position, or leg, was for a different delivery month. After a period of time, petitioner proceeded to switch one leg of the straddle with an identical leg except with a different delivery month. With three of the six series at issue, petitioner engaged in a second switch before closing out both legs in the final transactions. With the other three, petitioner closed out the two legs after only one switch. The net results of petitioner's futures trading described in appendix A are as follows: NetNetNetNetShort-TermShort-TermLong-TermLong-TermCapital GainCapital LossCapital GainCapital LossNet1978$ 2,435$ 142,633($ 140,198)1979$ 132,736$ 270,139$ 137,4031980$ 129,611($ 129,611)1981$ 103,881$ 51,339$ 52,5421982$ 133,129$ 61,871$ 71,258($ 8,606)The economic consequences to petitioner go beyond his net loss of $ 8,606. Petitioner had 662 other gains and losses from securities transactions (mostly short-term gains) during the years in question, and the tax losses claimed by petitioners from futures trading served both to defer taxation of such other gains and, to some degree, to convert short-term gains to preferably taxed long-term gains. In his testimony at trial, petitioner was unable to shed much light on his motivation in entering into these futures. Petitioner's testimony was straightforward and credible; nevertheless, it was unenlightening. When asked to explain his motivation for entering into any one of the futures in question, petitioner responded that he could not remember. In responding to the Court's questions concerning generally the factors that would have been taken into account in any particular trade, petitioner responded: "Judge, I would be -- I just really -- I cannot remember why I -- why these were done. I just can't remember them." Petitioner did not recall whether he reviewed historical price data for particular commodities and was very vague about his strategies for particular trades and his overall trading philosophy. Although petitioner did understand a few terms of art related to commodity663 futures, petitioner was unsure on which market the relevant commodities were traded and failed to recall the unit sizes in which the commodities were traded. Petitioner's recollections of the basic tax effects of straddle trading were strong. In addition, while petitioner testified that he discussed his futures trading with his broker, Arthur Lashinsky, and that he read various materials on the potential hazards of such trading, Lashinsky did not testify concerning the content of the discussions, and those materials were not included in the record. Further, petitioner used several accountants during the period in which he traded futures, none of whom testified. At trial, petitioners attempted to avail themselves of an expert witness who would testify as to petitioner's motivation. That witness, however, was not accepted by the Court as an expert in futures trading and was not allowed to testify as to petitioner's motivation. After petitioners conceded that respondent's expert witness was qualified, respondent's expert witness testified that, absent some theory based on the occurrence of a cataclysmic event, petitioner's trading pattern of taking losses in the current year and664 carrying the position with unrealized gain into the long-term holding period in the next year was inconsistent with a profit-motivated strategy. In his notice of deficiency, respondent refused to recognize certain capital losses and gains from petitioner's futures transactions that petitioners claimed on their 1978, 1979, and 1980 tax returns. Those certain losses and gains are: Tax YearShort-/Long-TermCommodity FuturesGain/(Loss)1978Short-TermSilverDec1979($ 61,095)GoldJune1979(31,148)GoldJune1979(14,465)SoybeansMay1979(30,597)CopperJuly1979(5,328)CopperSept19792,4351979Short-TermSoybeansAug1979(35,847)GoldApril1979(31,603)SilverMarch1980(48,195)CopperJan1980(17,091)Loss Carryover(6,916)Long-TermSoybeansJuly197966,178GoldAug197979,497SilverJan19802 101,829CopperDec197917,5591980Short-TermGoldApril19822 (41,094)GoldOct1981(17,229)GNMAMarch1982(34,346)GNMASept1982(25,703)GNMADec1982(10,234)665 In response to respondent's notice of deficiency, petitioners timely filed the petition in this case. In a memorandum opinion filed in March 1990, this Court denied petitioners' motion for summary judgment on the issue of petitioner's futures transactions. Starr v. Commissioner, T.C. Memo 1990-146">T.C. Memo 1990-146. In November 1990, respondent filed a motion to allow the filing of an amendment to respondent's answer, which motion we granted. Respondent's first amendment to answer was then filed. In that amendment, respondent seeks a determination that petitioners are liable for increased interest pursuant to section 6621(c), for the tax years at issue. A trial was held in April of this year. In sum, the issues for decision are, one, whether petitioner Erwin Starr entered into certain futures transactions primarily for profit, permitting him to claim certain capital losses from those futures, and, two, whether the increased interest rate provided by section 6621(c) applies. DiscussionWe consider here the tax consequences of gains and losses arising from six series of straddles in commodity futures. As a preliminary matter, we note that Congress dealt extensively666 with the tax consequences of straddle transactions in the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, secs. 501-509, 95 Stat. 172, 323-335. ERTA created a new set of rules that were designed to tax straddle transactions on their economic substance. See S. Rept. 97-144, at 147 (1981), 2 C.B. 412">1981-2 C.B. 412, 470. The ERTA rules in question do not effect the transactions here at issue, as they in general apply only to "property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date." ERTA sec. 508, 95 Stat. 333. Respondent's ArgumentsIn his notice of deficiency, respondent makes several arguments. First, he asserts that the gains and losses claimed by petitioners should be not be recognized, because petitioners have not established that the transactions actually occurred. That argument is no longer relevant, because, at trial, we found as a fact that the transactions did occur. Second, respondent asserts that each of the transactions was but one step in a series of transactions that must be integrated for tax purposes and which constitute but a single transaction. We have rejected that argument667 in the past and reject it again here. See Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, 385-390 (1982), affd. without published opinion 820 F.2d 1220">820 F.2d 1220 (4th Cir. 1987). Third, respondent asserts that "such transactions do not represent a sufficient change in economic position to justify recognition for tax purposes of the losses or gains as claimed." We reject that argument, as we do not believe that the facts here support it. See Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087 (1986), affd. sub nom. Friedman v. Commissioner, 869 F.2d 785 (4th Cir. 1989), affd. sub nom. Herrington v. Commissioner, 854 F.2d 755">854 F.2d 755 (5th Cir. 1988), affd. sub nom. Killingsworth v. Commissioner, 864 F.2d 1214">864 F.2d 1214 (5th Cir. 1989), affd. sub nom. Bohrer v. Commissioner, 945 F.2d 344 (10th Cir. 1991). Finally, respondent argues that the losses at issue were not incurred in transactions entered into for profit and that, consequently, such losses are not deductible. 3 We consider below that last argument.668 Section 108Section 108 of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630-631, as amended by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1808(d), 100 Stat. 2085, 2817-2818, allows certain losses from straddles that are not covered by ERTA. Further references to section 108 will be to section 108 of the Deficit Reduction Act of 1984 as amended in 1986. Section 108 governs here in that it covers pre-ERTA straddles of the type involved in this case. Section 108(a) states: (a) GENERAL RULE. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions -- (1) which were entered into before 1982 and form part of a straddle, and (2) to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply,any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business.In Glass v. Commissioner, 87 T.C. at 1167, we discussed the effect of section 108: In summary, 669 then, amended section 108 traces the pattern of the loss provisions of section 165(c)(1) and (2), and makes it clear that losses incurred by commodities dealers trading in commodities are deductible under section 108 since they are losses incurred in a trade or business. Investors, on the other hand, must meet the test of loss incurred in a transaction entered into for profit. In the context of commodity straddle transactions, the investor language parallels the section 165(c)(2) language which we construed in Smith and Fox [v. Commissioner, 82 T.C. 1001">82 T.C. 1001 (1984)], and (except as to commodities dealers) we think the effect of amended section 108 is to revalidate our holdings in those cases. * Petitioners do not argue that the futures at issue were not part of straddles within the meaning of section 108 and have failed to raise timely the issue whether the disallowed losses were incurred in a trade or business. Our inquiry, therefore, narrows to whether, under section 108, petitioner's losses from straddles in the commodity futures at issue were incurred in transactions entered into for profit, though not connected with a trade or business. We have670 found that the profit-motive test of section 108 was intended to be similar to the test found in section 165(c)(2). Boswell v. Commissioner, 91 T.C. 151">91 T.C. 151, 158-159 (1988) (Court reviewed). In Boswell, we found that test to be whether the taxpayer entered the relevant transactions primarily for profit. See Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001, 1021 (1984). We previously have summarized the guidelines for that test as found in Fox v. Commissioner, supra, and Smith v. Commissioner, supra: (1) The ultimate issue is profit motive and not profit potential. However, profit potential is a relevant factor to be considered in determining profit motive. (2) Profit motive refers to economic profit independent of tax savings. (3) The determination of profit motive must be made with reference to the spread positions of the straddle and not merely to the losing legs, since it is the overall scheme which determines the deductibility or nondeductibility of the loss. (4) If there are two or more motives, it must be determined which is primary, or of first importance. The determination is essentially671 factual, and greater weight is to be given to objective facts than to self-serving statements characterizing intent. (5) Because the statute speaks of motive in "entering" a transaction, the main focus must be at the time the transactions were initiated. However, all circumstances surrounding the transactions are material to the question of intent.Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 418 (1988), affd. without published opinion 940 F.2d 1536">940 F.2d 1536 (9th Cir. 1991) (citations omitted). Normally, a taxpayer would have to prove not only that he had a profit motive in entering the relevant transactions, but that such profit motive was primary. However, as in Ewing v. Commissioner, 91 T.C. at 418, and Fox v. Commissioner, 82 T.C. at 1021-1022, we proceed here on the supposition without so finding that petitioner had a sincere belief that there was a possibility of making some profit from his transactions and was attracted to the transactions by that belief as well as by the favorable tax benefits. We must determine, though, whether the profit or the tax-benefit motive was primary, or of first importance. The672 determination is one of fact on which petitioners bear the burden of proof. Ewing v. Commissioner, 91 T.C. at 418; Rule 142(a). Petitioner's Primary MotiveWe hold that petitioners have failed to meet their burden of proof in showing that petitioner entered into the futures transactions at issue primarily for profit. First, petitioner's trading pattern generally followed the pattern of an investor interested in commodity straddles for tax reasons. Although petitioners' tax returns do show that, during the tax years before us, petitioner engaged in other futures transactions that are not at issue here, the transactions before us represent the majority of petitioner's futures transactions during those years, in terms of both number and size of losses and gains. 4 These facts and circumstances distinguish this case from our decisions in Stoller v. Commissioner, T.C. Memo 1990-659">T.C. Memo 1990-659, and Etshokin v. Commissioner, T.C. Memo 1990-271">T.C. Memo 1990-271, which petitioners cite in support of their argument that petitioner had a primary profit motive. We believe that the commodity futures at issue accurately reflect petitioner's overall trading673 pattern and, thus, reveal his tax motive.In a typical tax straddle, the taxpayer attempts to postpone the taxability of short-term capital gains by moving them into future years (deferral) and possibly converting them to longterm capital gains (conversion), all with the minimum economic risk associated with straddles. In Smith v. Commissioner, 78 T.C. at 363-366, we described in detail the pattern of a trader interested in straddles primarily for tax reasons and will not repeat that description here. See Ewing v. Commissioner, 91 T.C. at 400-401. Petitioner's trading pattern reflected the pattern of a typical tax-motivated674 trader. Almost all the disallowed gains and losses reflect the ideal results for a taxpayer with a tax motive. See Ewing v. Commissioner, 91 T.C. at 419. The disallowed losses are all short-term losses, and the disallowed gains are mostly long-term capital gains. Further, the straddle legs giving rise to the long-term capital gains claimed by petitioners for the years at issue generally were held only a few days beyond the period necessary to achieve long-term status. A fundamental legal maxim, of course, provides that the consequences of one's acts are presumed to be intended. See Fox v. Commissioner, 82 T.C. at 1022. Second, although actual profits are not a prerequisite to the deductibility of losses, a record of continued losses over a period of time may be an important factor bearing on the taxpayer's true intentions. Fox v. Commissioner, 82 T.C. at 1023 (citing Bessenyey v. Commissioner, 45 T.C. 261">45 T.C. 261, 273-274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967)). Petitioner was an active and experienced investor who spent an extensive amount of time handling his investments. Despite675 that time and experience, however, petitioner's results from the six series of straddles listed in appendix A show that, on a net basis, petitioner lost money from those straddles. While petitioner's net loss from the series of straddles was less than $ 9,000, and while his largest loss from an individual series of straddles was less than $ 7,000, petitioner used in 1978 and 1980 over $ 250,000 in net capital losses from his futures trading to offset other capital gains. Further, petitioner's losses from those straddles contrast with his success in stock and arbitrage investments as reflected in the extensive capital gains claimed by petitioners for 1978, 1979, and 1980. Third, petitioners presented no evidence that the commodity straddles at issue had the objective potential to earn an economic profit. At trial, we disqualified petitioners' expert witness from testifying regarding the objective profit potential of those straddles, because we found that the witness had insignificant experience and knowledge. In contrast, at trial, respondent's expert witness testified that, absent some theory based on the occurrence of a cataclysmic event, petitioner's trading pattern was inconsistent676 with any profit-motivated strategy. Fourth, although petitioner testified that he had a primary profit motive, his testimony was not corroborated by the testimony of others, and he presented no contemporaneous evidence of his subjective intent. Petitioner presented none of the materials on futures trading that he testified to have read, and Arthur Lashinsky, petitioner's broker at Bear Stearns, did not testify concerning the content of his discussions with petitioner. Testimony from Lashinsky might have revealed whether or not, and the extent to which, petitioner discussed with him the tax consequences or the profit potential of his futures trading. Also, petitioner apparently used several accountants during the period in which he traded commodity futures, but none of them testified. Testimony from his accountants, of course, might have revealed the extent of petitioner's interest, or lack of interest, in the tax consequences of futures. In sum, we cannot assume that the testimony of absent witnesses would have been favorable to the party with the burden of proof; indeed, the normal inference is that the testimony would be unfavorable. Marcus v. Commissioner, T.C. Memo 1988-3">T.C. Memo 1988-3.677 Finally, we have nothing here evidencing petitioner's motivation other than petitioner's own uncorroborated testimony, which testimony we find to be of little or no probative value. See Smith v. Commissioner, 78 T.C. at 394; Marcus v. Commissioner, supra.Although petitioner's motivation in entering into these futures transactions is the key issue in this case, petitioner was unable, at trial, to shed much light on that motivation. While petitioner's testimony revealed that petitioner understood a few terms of art related to commodity futures, petitioner failed to recall many details of his futures trading and was very vague about his strategies for particular trades and his overall trading philosophy. Compare Stoller v. Commissioner, T.C. Memo 1990-659">T.C. Memo 1990-659. His recall of the basic tax effects of straddle trading, however, was good. We, of course, are aware that tax planning is an economic reality in the business world and the effect of tax laws is routinely considered along with other factors. The question here concerns petitioner's primary motive in entering the commodity straddles at issue. Petitioners bear the678 burden of proof. Rule 142(a). We find that petitioner has failed to show that he had the requisite profit motive. Therefore, we uphold respondent's determinations regarding the short-term capital losses disallowed by respondent. We, however, note that section 108(c) applies to the futures transactions detailed in appendix A. 5 See sec. 1.165-13T, Q-3 & A-3, Temporary Income Tax Regs., 49 Fed. Reg. 33445 (Aug. 23, 1984). ("Under section 108(c) of the Act the taxpayer is allowed to offset the gain in the subsequent taxable year by the amount of loss (including expenses) disallowed in year 1."). The parties should take section 108(c) into account in making the computations required by Rule 155. 679 Increased Rate of InterestIn an amended answer, respondent seeks increased interest pursuant to section 6621(c) (formerly 6621(d)). Respondent has the burden of proof with respect to the increased interest. Ewing v. Commissioner, 91 T.C. at 422; Rule 142(a). The increased interest provided by section 6621(c) applies to any substantial underpayment of income taxes attributable to one or more tax-motivated transactions. This increased interest accrues after December 31, 1984, even though the transaction was entered into prior to the date of enactment of section 6621(c). Ewing v. Commissioner, 91 T.C. at 422. Section 6621(c)(3)(A)(iii) defines the term "tax-motivated transaction" to include any straddle. See sec. 301.6621-2T, Q & A-2, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50391 (Dec. 28, 1984). Consequently, any underpayment of income taxes by petitioners derived from the claimed straddle losses is attributable to a tax-motivated transaction and subject to section 6621(c). Sec. 6621(c)(3)(A)(iii); Ewing v. Commissioner, 91 T.C. at 422. Decision will be entered under Rule 155. 680 APPENDIX AERWIN STARR -- TRANSACTIONS IN COMMODITY FUTURESLINETRADEPOSITIONDELIVERYCOMMODITYCONTRACTSDATEDATE(QUANTITY)17/20/78shortJuly1979copper927/20/78longDec1979(25,000 lbs9per contract)38/21/78longJuly1979948/21/78shortSept1979959/6/78longSept1979969/6/78shortJan1980971/23/79longJan1980981/23/79shortDec1979917/20/78shortDec1979silver3027/20/78longJan1980(5,000 ounces30per contract)38/1/78longDec19793048/1/78shortMarch19803051/23/79shortJan19803061/23/79longMarch19803017/20/78shortJune1979gold2227/20/78longAug1979(100 ounces22per contract)38/1/78shortApril19792248/1/78longJune19791558/1/78longJune1979761/23/79longApril19792271/23/79shortAug19792217/21/78shortMay1979soybeans70,000 bu27/21/78longJuly197970,00038/24/78longMay197970,00048/24/78shortAug197970,00051/23/79shortJuly197970,00061/23/79longAug197970,000111/26/80shortDec1981gold6211/26/80longApril1982(100 ounces6per contract)312/10/80longOct19816412/10/80shortApril19826512/12/80shortOct19816612/12/80longFeb1982672/6/81longDec1981682/6/81shortFeb19826111/26/80longMarch1982Ginnie Mae15211/26/80shortSept1982Certificates15(Face Ammount)312/12/80shortMarch1982of $ 100,000)15412/12/80longJune198215512/19/80longSept198215612/19/80shortDec198215712/23/80shortSept198215812/23/80longDec19821595/26/82shortJune198215105/26/82longSept198215681 LINETRADERATEPRICECOMMISSIONGAIN/LOSSCLOSESDATE(LINE)17/20/78$ .6675/lb$ 150,187.5027/20/78.6920155,700.0038/21/78.6910155,475.00$ 40.50($ 5,328)148/21/78.6980157,050.0059/6/78.6870154,575.0040.502,435469/6/78.7000157,500.0071/23/79.7745174,262.50328.50(17,091)681/23/79.7715173,587.50328.5017,5592NET($ 2,425)17/20/78$ 5.9850/oz$ 897,75027/20/786.0300904,50038/1/786.3850957,750$ 1,095($ 61,095)148/1/786.5250978,75051/23/796.75001,012,5001,095106,905261/23/796.83901,025,8501,095(48,195)4NET($ 2,385)17/20/78$ 204.10/oz$ 449,02027/20/78207.40456,28038/1/78221.00486,20048/1/78224.50336,750$ 547.50($ 31,148)158/1/78224.40157,080255.50(14,465)161/23/79235.00517,000803(31,603)371/23/79243.90536,58080379,4972NET$ 2,28117/21/78$ 6.28/bu$ 439,60027/21/786.29 3/4440,82538/24/786.71469,700$ 497($ 30,597)148/24/786.69468,30051/23/797.25507,50049766,178261/23/797.195503,650497(35,847)4NET($ 266)111/26/80$ 736.40/oz$ 441,840211/26/80775465,000312/10/80655.40393,240412/10/80705.10423,060$ 159($ 42,099)2512/12/80627.50376,500489(17,229)3612/12/80661396,60072/6/81563337,800159103,881182/6/81575.70345,420159(51,339)6NET($ 6,786)111/26/8069 10/32$ 1,039,687.50211/26/8069 11/321,040,156.25312/12/8067 3/321,006,406.25$ 1,064.95($ 34,346)1412/12/8067 8/321,008,750.00512/19/8071 1/321,065,468.75390(25,703)2612/19/8070 30/321,064,062.50712/23/8071 22/321,075,312.50812/23/8071 19/321,073,906.25390.05(10,234)695/26/8263 5/32947,343.75464.95(61,871)4105/26/8262 25/32941,718.75465.05133,1297NET$ 975NET GAIN/(LOSS) FROM TRANSACTIONS IN COMMODITY FUTURESNET($ 8,606)682 Explanation of Columns: Trade Date = date position established Position = position established, long or short Gain/Loss = gain or loss when position closed, including any commissions Closes (Line) = line of old position which new position closes APPENDIX BWe describe below some terms of art used in trading futures. See Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 399-402 (1988), affd. without published opinion 940 F.2d 1536">940 F.2d 1536 (9th Cir. 1991); Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, 354-356 (1982), affd. without published opinion 820 F.2d 1220">820 F.2d 1220 (4th Cir. 1987). A commodity futures contract is a firm commitment to deliver or receive a specified quantity of a commodity during a designated future month at a designated price. Each such contract is called a "position." A position is "long" if the contract requires the holder to purchase the designated commodity. A position is "short" if a contract requires the holder to sell a designated commodity. When only one position is held, the holder is described as holding an "open position." A futures contract may be offset or closed out by taking the opposite position683 in the same commodity for the same month. A "straddle" involves simultaneously holding a long position in a commodity for one delivery month and a short position in the same commodity for a different delivery month. Each position in a straddle is known as a "leg," and the difference between the market value of each leg is called the "spread." In a straddle, the holder is concerned primarily with the spread. A "switch" occurs when one leg of a straddle is closed out and is replaced by an identical leg except with a different delivery month, resulting in a new straddle. The economic profit or loss of an open position is directly affected by changes in the direction of the market. In contrast, the economic profit or loss of a straddle is affected only by whether the spread widens or narrows. Acquiring a commodity straddle carries less risk than acquiring an open position, because the spread will be less volatile than the price of either leg. With a straddle, the holder is both a purchaser and seller of the same commodity. Since each leg of a straddle requires delivery of the commodity during different months, any price changes in the two legs will be related, but not always identical. 684 The price of each leg of a straddle will be affected by similar economic conditions, and the loss on one leg generally will be offset largely by the gain on the other leg. If the spread widens or narrows, a gain or loss will be incurred. In turn, if the spread remains constant, no gain or loss would be incurred, because any price changes produces an unrealized gain in one leg and an offsetting unrealized loss in the other leg. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. There appears to be an inconsistency between (a) these capital losses and gains as reflected on petitioners' tax returns and respondent's notice of deficiency and (b) the losses and gains that are reflected in Joint Exhibit 5-E and Appendix A to this opinion. Any such inconsistency can be resolved in the computations required under Rule 155.↩3. Respondent also asserts in the notice of deficiency that, if the transactions were entered into for profit, the claimed losses should be limited to the amount at risk. We do not need to consider that argument and refer respondent to Laureys v. Commissioner, 92 T.C. 101">92 T.C. 101, 129-132↩ (1989).4. For example, on their 1978 tax return, petitioners claimed gains and losses related to four corn futures, none of which was over $ 1,100. For 1979, petitioners claimed gains and losses related to six other copper and gold futures, none of which was over $ 10,000. For 1980, respondent disallowed all claimed gains and losses arising from commodity futures.↩5. Sec. 108(c) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, provides that: If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduction (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer's net gain or loss from all positions in such straddle.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619052/	JOHN LEE CHRISMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentChrisman v. CommissionerDocket No. 12145-88United States Tax CourtT.C. Memo 1990-305; 1990 Tax Ct. Memo LEXIS 323; 59 T.C.M. 922; T.C.M. (RIA) 90305; June 19, 1990, Filed 1990 Tax Ct. Memo LEXIS 323">323 Decision will be entered for the respondent. James B. Lewis, for the petitioner. Tommy Leung and Martin L. Shindler, for the respondent. PETERSON, Chief Special Trial Judge. PETERSONMEMORANDUM FINDINGS OF FACT AND OPINION This case was heard pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182. All section references are to the Internal Revenue Code, as amended and in effect for 1984. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined a deficiency in petitioner's Federal income tax for the year 1984 in the amount of $ 1,116. 1990 Tax Ct. Memo LEXIS 323">324 After a concession by petitioner that certain wage payments are includable in income, the issue remaining for our decision is whether respondent correctly determined the amount of wage income that is includable in petitioner's taxable income for the year 1984. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time petitioner filed the petition herein, his legal residence was in Stamford, Connecticut. During the first few months of 1984, petitioner was employed by Connecticut Temporaries, Inc. Mr. Wallman, an attorney, retained petitioner through Connecticut Temporaries. Mr. Wallman needed someone to fill in for his secretary while she was away. Mr. Wallman paid Connecticut Temporaries $ 13.00 per hour for petitioner's services. Connecticut Temporaries withheld taxes and their own commission from this amount and paid petitioner the remainder. In March 1984, Mr. Wallman hired petitioner directly and petitioner worked approximately 20 hours per week as an office manager/bookkeeper. Petitioner received $ 7,786.50 from Mr. Wallman during 1984 for services rendered. Mr. 1990 Tax Ct. Memo LEXIS 323">325 Wallman treated petitioner as an independent contractor and did not withhold any income tax on the payments made to petitioner. In April 1985, petitioner received Form W-2 from Mr. Wallman reflecting $ 7,786.50 gross income and no withholding. In approximately August 1985, petitioner received a second Form W-2 reflecting $ 7,786.50 gross income, $ 521.70 for Social Security taxes, and no withholding for Federal income tax. Petitioner did not report as income the amount of $ 7,786.50 on his Federal income tax return filed in November 1985; however, petitioner attached a copy of the second Form W-2 to his return. OPINION The dispute lies in whether Federal income tax was withheld on certain unreported wages which the parties agree should be included as a part of petitioner's wage income. Respondent contends no amounts were withheld, and, therefore, determined petitioner's deficiency based upon $ 7,786.50 unreported income as reflected on Form W-2. Petitioner contends an appropriate amount of Federal income tax (based on the "net payment" of $ 15.00 per hour) was withheld from his wages by his employer even though that amount was not reflected on Form W-2. Petitioner further contends1990 Tax Ct. Memo LEXIS 323">326 that his unreported income is actually greater than $ 7,786.50 to reflect the amounts allegedly withheld by his employer. Respondent's determinations are presumed correct and petitioner bears the burden of proving that respondent is incorrect. Rule 142(a). Our decision in this case is purely a factual redetermination of the amount of petitioner's unreported wage income for the taxable year 1984. Petitioner concedes that if we find his employer did not withhold amounts for Federal income tax, respondent's determination is correct as to the amount of his tax liability for the year 1984. Section 31 allows an employee to take a tax credit for the amount withheld by an employer from the employee's wages for Federal income taxes. However, it is well settled that the amount must have actually been withheld. ; , affd. . In , we held that respondent "may assess the tax against the employee upon whom, in the final analysis, the tax burden must fall. The employee of1990 Tax Ct. Memo LEXIS 323">327 an employer failing to properly withhold amounts for tax is not entitled to a credit for amounts which were never withheld from him." . If we find petitioner's employer did not withhold amounts from his wages, petitioner would still bear the ultimate responsibility for his Federal income tax liability on the correct amount of his wages. Petitioner contends that his oral employment agreement with Mr. Wallman provided that he would be paid $ 15.00 per hour "net of withholding." Therefore, petitioner contends his unreported gross income should include the amount of withholding tax that Mr. Wallman was supposed to withhold for Federal income tax. There is no evidence to support such an agreement. We think the record is clear that Mr. Wallman treated petitioner as an independent contractor and consequently did not withhold any amounts for Federal income tax. Petitioner's argument that Mr. Wallman withheld amounts from his wages for purposes of Federal income tax lacks merit. There is no evidence other than petitioner's self-serving statements to substantiate his claims. There are no records indicating that petitioner's wages1990 Tax Ct. Memo LEXIS 323">328 were any amount other than $ 15 per hour. There are no records indicating any withholding for Federal income tax. Self-serving statements, without more, are not enough to satisfy petitioner's burden of proof. Pursuant to the above, we find that petitioner failed to report wage income from Mr. Wallman in the amount of $ 7,786.50 since petitioner's income did not include any amounts withheld for Federal income tax. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619047/	VINCENT ENGINEERING COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentVINCENT ENGG. CO. v. COMMISSIONERDocket No. 15059-92United States Tax CourtT.C. Memo 1993-435; 1993 Tax Ct. Memo LEXIS 448; 66 T.C.M. 791; September 20, 1993, Filed 1993 Tax Ct. Memo LEXIS 448">448 An appropriate order of dismissal for lack of jurisdiction will be entered. For respondent: Michelle K. Loesch. FAYFAYMEMORANDUM OPINION FAY, Judge: This case was heard by Special Trial Judge James M. Gussis pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. All section references are to the Internal Revenue Code, as amended. All Rule references are to the Tax Court Rules of Practice and Procedure. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GUSSIS, Special Trial Judge: This matter is before the Court on respondent's Motion to Dismiss for Lack of Jurisdiction filed September 9, 1992. The motion was taken under consideration by the Court at a hearing in San Francisco, California, on December 1, 1992. Respondent, in a statutory notice of deficiency dated April 15, 1992, determined the following deficiencies in, and additions to, petitioner's Federal income taxes: Additions to TaxYearDeficiencySec. 6653(a)(1) Sec. 6662(a)1988$ 114,897$ 5,745--1989141,991-- $ 28,3981990127,490-- 25,498The petition filed 1993 Tax Ct. Memo LEXIS 448">449 with the Court on July 6, 1992, was signed by one Mary L. Vincent, an individual who is not admitted to practice before the United States Tax Court. On August 4, 1992, respondent, by letter to Vincent Engineering Company, c/o Coopers & Townes, L.C., Trustee, P.O. Box 8043, Clearwater, Florida, 34616, stated that the petition was not filed by the proper party and suggested ratification of the petition by the trustee. There was no response. On September 9, 1992, respondent filed a Motion to Dismiss for Lack of Jurisdiction on the ground that the petition was not filed by the proper party pursuant to the Tax Court Rules of Practice and Procedure. On September 14, 1992, the Court ordered that a Trustee of Vincent Engineering Company might, on or before October 13, 1992, file with the Court an amendment to petition stating, if such be the case, that he or she ratified and affirmed the July 6, 1992, petition. No response to said Order was received by the Court. Vincent Engineering Company, an entity described as a "Common Law Contractual Company" was formed in or about 1987 pursuant to a "Declaration of Contract and Indenture" and authorized to exist and function through its Board 1993 Tax Ct. Memo LEXIS 448">450 of Trustees. The Board of Trustees had all necessary powers to operate and manage Vincent Engineering Company for the benefit of Capital Unit Holders. The Board of Trustees was authorized to appoint a qualified nontrustee as general manager with authority to manage the routine day-to-day operations of the Contractual Company, subject at all times to the approval of the Board. At some time prior to December 2, 1991, Cooper & Townes, L.C. was designated as Trustee for Vincent Engineering Company and Mary L. Vincent was appointed general manager of the company. Pursuant to a resolution adopted December 2, 1991, Cooper & Townes, L.C., as Trustee of Vincent Engineering Company, proceeded to terminate the Contract and Indenture under which Vincent Engineering Company was authorized to operate. On December 2, 1991, Cooper & Townes, L.C., authorized Mary L. Vincent and Rebecca J. Vincent, on behalf of the Board of Transferee and Certificate Holders, to carry out the business of terminating the affairs of Vincent Engineering Company by attending to all outstanding affairs, making final transfers of any remaining funds, closing accounts and finalizing any and all other business at the earliest1993 Tax Ct. Memo LEXIS 448">451 date possible, all in accordance with the terms and conditions of the Declaration of Contract and Indenture. The designated individuals were authorized to prepare and execute all documents necessary to accomplish said termination or to submit the same to the Trustee for signature. On December 31, 1991, Cooper & Townes, L.C., resigned its position as trustee of Vincent Engineering Company without appointing a successor trustee. In the absence of any successor trustee, the resignation of Cooper & Townes, L.C. became effective 30 days after the tender of resignation on December 31, 1991. In moving to dismiss this case for lack of jurisdiction respondent contends that the petition herein was not signed by the proper party pursuant to the Rules of this Court. Petitioner has the burden of proving that this Court has jurisdiction. Patz Trust v. Commissioner, 69 T.C. 497">69 T.C. 497, 69 T.C. 497">503 (1977). Jurisdiction is predicated upon a petition timely filed by the person against whom the deficiency is determined. Secs. 6213 and 6214. Our Rules, promulgated under section 7453, provide that a case may be brought by and in the name of the person against whom the Commissioner1993 Tax Ct. Memo LEXIS 448">452 determined the deficiency, or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person. Rule 60(a). Said Rule further provides that a case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reasonable time has been allowed after objection for ratification by such party of the bringing of the case. Rule 60(c) provides that the capacity of a corporation to engage in litigation in the Tax Court shall be determined by the law under which it was organized. The capacity of a fiduciary or other representative to litigate in the Tax Court shall be determined in accordance with the law of the jurisdiction from which such person's authority is derived. See also Rule 23(a)(3). At the outset, petitioner offers no explanation as to the exact legal status of Vincent Engineering Company which purports to be a "Common Law Contractual Company". Although the company was allegedly formed pursuant to a Declaration of Contract and Indenture purportedly under Delaware law, it does not appear from the record that any such legal entity is recognized by the State of Delaware. Nor does 1993 Tax Ct. Memo LEXIS 448">453 it appear that any record of incorporation exists in the State of California. Finally, there is an obscure suggestion on the record that Vincent Engineering Company may be a "Nassau Trust". In view of the evidentiary shortcomings in the record, we find it impossible to ascertain in any meaningful way the existence of the requisite capacity of Vincent Engineering Company to litigate in the Tax Court. Moreover, we do not believe that the December 2, 1991, resolution of the Trustee, Cooper & Townes, L.C., authorizing Mary L. Vincent, as general manager, to carry out the termination of the company in accordance with the terms of the Declaration of Contract and Indenture satisfies the requirements of our Rules. The Declaration of Contract and Indenture makes it clear that the actions of the general manager were at all times subject to the approval of the Board of Trustees. Here, the record shows that the resignation of the Trustee, Cooper & Townes, L.C., was effective 30 days after December 31, 1991. No successor trustee was ever appointed. It would appear then that any powers granted to Mary L. Vincent by the former trustee, Cooper & Townes, L.C., lapsed when the resignation of 1993 Tax Ct. Memo LEXIS 448">*454 such trustee became effective. In any event, petitioner failed to respond to an Order of this Court ordering that a Trustee of Vincent Engineering Company, on or before October 13, 1992, file with the Court an amendment to the petition stating, if that be the case, that he or she ratified and affirmed the July 6, 1992, petition. We must conclude on this record that petitioner has failed to meet its burden of showing that the Court has jurisdiction over this matter. See Rules 23(a)(3), 60(a)(1) and (c). On this record, respondent's Motion to Dismiss for Lack of Jurisdiction will be granted. An appropriate order of dismissal for lack of jurisdiction will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619155/	Sam J. Vecchio, Petitioner v. Commissioner of Internal Revenue, RespondentVecchio v. CommissionerDocket No. 11928-91United States Tax Court103 T.C. 170; 1994 U.S. Tax Ct. LEXIS 57; 103 T.C. No. 12; August 15, 1994, Filed 57 Decision will be entered under Rule 155. P, E, and B were partners in a partnership. The partnership agreement allocated operating income 47.5 percent to P, 49 percent to E, and 3.5 percent to B. The partnership agreement allocated a disproportionately large share of losses and depreciation to E from 1974 through 1978, so that at the beginning of 1980, E had a negative capital account balance of $ 1,251,898. P and B had positive capital account balances. As a result of a dispute between E and P, E filed suit in State court. On May 8, 1980, the State court ordered P to purchase E's interest in the partnership on or before Sept. 30, 1981, or to transfer one-half of his interest (23.5 percent) to E. The partnership sold its real property on Dec. 10, 1980, pursuant to an installment sale agreement under which the partnership realized gain of $ 4,659,832, of which $ 1,986,913 was taxable in 1980. The partnership agreement provided that, upon the sale of the partnership's real property or the liquidation of the partnership, E was entitled to a return of its capital investment of $ 766,100 before distributions were made to other partners. The partnership allocated the gain recognizable58 in the year of the sale first to E in an amount necessary to bring its capital account to 0. The balance was allocated to P and B. P reported on his 1980 return $ 563,656 in gain from the sale of the property. In the notice of deficiency, respondent determined that P was required to report $ 943,784 or 47.5 percent of the gain recognizable in 1980 from the sale of the partnership's real property and $ 723,566 from P's "sale" of E's partnership interest. In an amended answer respondent asserted that P purchased E's interest on May 8, 1980, and, therefore, was required to include 96.5 percent of the gain as income in 1980.1. Held, the partnership's allocation of the gain recognized in the year of the installment sale did not have substantial economic effect and, therefore, gain from the sale of the property must be allocated in accordance with the partners' interests in the partnership under sec. 704(b), I.R.C.2. Held, further: Because E had a negative capital account, gain must be allocated first to E's interest in an amount necessary to bring its capital account to 0, and because E had a right to the first $ 766,100 of proceeds, gain must be allocated next to E's interest59 in an amount necessary to bring its capital account to that amount. Therefore, the entire gain in the year of the sale must be allocated to E's interest.3. Held, further, P acquired E's interest in the partnership after the sale of the real property on Dec. 10, 1980.4. Held, further, because E had received the benefit of the prior deductions for depreciation and loss and P had the right to the proceeds from the sale of the property as a result of his purchase of E's interest, allocating gain to E in an amount necessary to bring the capital account to 0, and allocating the remaining gain to P is in accordance with the partners' interests in the partnership under sec. 704(c), I.R.C., and is reasonable under sec. 706(c), I.R.C., and sec. 1.706-1(c)(2)(ii), Income Tax Regs.Robert J. Vecchio, for petitioner.Dawn Marie Krause, for respondent. Parker, Judge. PARKER171 Parker, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1980 in the amount of $ 286,693. In an amendment to answer, respondent later asserted an increased deficiency of $ 349,198.25.After concessions, 1 the primary issue to be decided is60 the amount of gain resulting from the sale of real property by Johanna Properties Partnership that properly is allocable to petitioner and includable in his income in the taxable year 1980. In reaching our decision on the primary issue, we must initially determine how the gain should be allocated among the three partners' interests in the partnership. We must then determine whether petitioner's purchase of another partner's interest in the partnership occurred prior to or subsequent to the partnership's sale of the real property. Finally, we must determine how the gain allocable to the 172 purchased interest is to be apportioned between petitioner and the selling partner.61 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.I. General BackgroundPetitioner is an individual who resided in Aurora, Ohio, at the time he filed the petition in this case. Petitioner is a partner in Johanna Properties Partnership, an Ohio general partnership (Johanna Properties or the partnership). The original partners in Johanna Properties were John Takacs (Takacs) and Development Systems, a California general partnership in which petitioner is a general partner. 2 Development Systems is an entity through which petitioner borrows money and holds interests in other partnerships, including at one time Johanna Properties.62 On January 1, 1974, Equity Johanna, an Ohio limited partnership (Equity), became a partner in Johanna Properties. On that date, Johanna Properties, Takacs, Development Systems, and Equity executed a document titled a First Amendment to Partnership Agreement and Agreement to Admit Additional Partner (the partnership agreement). The purpose of the partnership agreement was to admit Equity as a partner in Johanna Properties and to set forth the terms and conditions for conducting the business of the partnership. Development Systems and Takacs are sometimes referred to in the partnership agreement as "Original Partners". Equity is sometimes referred to in the partnership agreement as "Investment Partnership" or "Investor Partnership". Amendments to the partnership agreement required the approval of all of the partners.173 II. Johanna Properties' Partnership AgreementA. Contributions to CapitalThe partnership agreement required Equity to make a capital contribution to the partnership in the amount of $ 766,100. In the event additional funds were needed for financing or operating expenses (including guarantee payments to Equity), Development Systems and Takacs had63 a joint and several obligation to contribute such required funds.B. Allocation of Profits and LossesExcept for the profits or losses arising from the disposition of partnership assets, profits and losses in general were considered to have been earned ratably over the period of the fiscal year of the partnership. Profits or losses arising from the disposition of assets were to be taken into account as of the date of the disposition.The partnership agreement allocated the partnership's profit and loss as follows:Section 4.1 Allocation of Profit and Loss.(a) From January 1, 1974 to December 31, 1974, the net profits and losses including depreciation of the Operating Partnership shall be divided among the Partners as follows:Development Systems18%John Takacs2%Equity80%(b) In the event that the Partnership operates at a loss between January 1, 1975 and December 31, 1975, then and in that event the division of losses including depreciation shall remain the same as above provided in 4.1(a); in the event the Partnership operates at a profit then, such profits (excluding depreciation which shall be divided as above provided) shall be divided in the following64 percentages:Development Systems45.9%John Takacs5.1%Equity59.0% [sic](c) From January 1, 1976 to December 31, 1978, net profits and losses, excluding depreciation, which shall be divided as above provided in 4.1(a), shall be divided in the following percentages: 174 Development Systems45.9%John Takacs5.1%Equity49.0%(d) After January 1, 1979, the net profits and losses including depreciation of the Operating Partnership shall be divided between the Operating Partners and Equity in the following percentages:Development Systems45.9%John Takacs5.1%Equity49.0%(e) Any gain resulting under Section 1245(a) and 1250(a) of the Internal Revenue Code of 1954, as amended, or any comparable provision, shall be allocated to the partners in the exact ratio in which the depreciation deductions giving rise to such gain were themselves allocated.C. Capital AccountsThe partnership agreement required maintenance of a capital account for each partner. The amount of each partner's capital contribution and his share of partnership profits were required to be credited to his capital account. Distributions to each partner and his share of partnership65 loss were required to be charged to his capital account.With regard to any negative capital account balance, section 4.4(b) of the partnership agreement provided:Except to the extent guarantee payments are made, if at any time the Partnership shall suffer a loss as a result of which the capital account of any Partner shall be a negative amount, such loss shall be carried as a charge against his capital account, and his share of subsequent profits of the Partnership shall be applied to restore such deficit in his capital account.D. Nonliquidating DistributionsThe partnership agreement provided for the payment of management fees totaling $ 30,000 annually. 3 Equity was entitled to annual guarantee payments of $ 80,440. Cash-flow was to be distributed pro rata for payment of the management fees and to Equity for its guarantee payment prior to any distributions to Development Systems or Takacs. If the total amount available from cash-flow exceeded the amount required to pay the management fees and guarantee payment, such excess was to be distributed first pro rata to Development Systems and Takacs, up to $ 75,352.50 to Development 175 Systems and $ 8,372.50 to Takacs. 66 Any cash-flow in excess of $ 194,165 ($ 30,000 + $ 80,440 + $ 75,352.50 + $ 8,372.50) was to be distributed 30 percent to Equity, 63 percent to Development Systems, and 7 percent to Takacs.The partnership agreement provided that, in the event of a sale of the partnership's real property, after payment of all mortgage indebtedness, taxes, and closing costs, Equity was to receive all cash up to the amount of $ 766,100 (its capital contribution to the partnership). Thereafter, Equity was to receive 10 percent of all additional funds until it had received 49 percent (counting the $ 766,100), Development Systems had received 45.9 percent, and Takacs had received 5.1 percent of the cash distribution. 4 Thereafter all funds were to be distributed 49 percent to Equity, 45.9 percent to Development Systems, and 5.1 percent to Takacs.67 E. Termination, Liquidation, and AmendmentUnder the partnership agreement, the partnership would terminate upon: (a) The sale of all or substantially all of the partnership's assets; (b) the retirement of a partner if no partner remained; or (c) the transfer of the partnership's assets and liabilities to a successor entity. Upon termination, the assets would be applied first to the payment of the liabilities of the partnership (other than any loans or advances that may have been made by the partners to the partnership) and the expenses of liquidation. 5 Next, remaining assets would be used to repay any loans or advances made by partners to the partnership. Finally, liquidating distributions to the partners would be made as follows:Section 10.4 Distribution. The remaining assets shall be divided pro rata among all of the Partners in accordance with their respective interests in the Partnership as set forth in Section 4.1(a) hereof, provided, however, that Equity shall, if sufficient proceeds remain, receive all cash distributions until its return received is equal to Seven Hundred Sixty-Six Thousand One Hundred Dollars ($ 766,100.00).176 Amendments to the partnership68 agreement required the approval of all of the partners.III. The Transactions and the State Court DecisionDevelopment Systems served as the managing partner of Johanna Properties until August 1, 1977, at which time it transferred all of its interest in Johanna Properties directly to petitioner. Thus, on August 1, 1977, the partners of Johanna Properties were Takacs, Equity, and petitioner. At some point Takacs withdrew from the partnership and a new partner was admitted, so that, on January 12, 1979, the partners of Johanna Properties were Equity, petitioner, and Lawrence Berzon (Berzon). 669 On that date, Equity held a 49-percent interest, petitioner held a 47.5-percent interest, and Berzon held a 3.5-percent interest in Johanna Properties. 7The main asset of Johanna Properties was a commercial building located at 3690 Orange Place, Beachwood, Ohio (the real property). At some point, a dispute arose between petitioner and Equity with regard to the management of the real property. As a result, they entered into an agreement whereby they would jointly manage the real property. The arrangement proved to be unsatisfactory. Petitioner wanted to allocate the income from the real property to the building and retain it in the partnership. Equity wanted to allocate and distribute the income to Equity. Because the partners were unable to resolve their differences, Equity filed an action in State court.On May 8, 1980, the State court entered a final judgment resolving the rights of Equity and of petitioner in Johanna Properties. The judgment required petitioner to purchase all of Equity's interest in Johanna Properties on or before September70 30, 1981. In the event petitioner did not purchase Equity's interest in Johanna Properties on or before that date, the final judgment required petitioner to assign and transfer to Equity on that date one-half of his interest (23.75 percent) in Johanna Properties.177 The final judgment set a purchase price for Equity's interest in Johanna Properties of $ 1,498,000, without interest, reduced by the following amounts: (1) Upon the signing of the final judgment, $ 50,000 payable to Equity by check dated and collectible on May 20, 1980; (2) one-half of the cash distributed by Johanna Properties to Equity on or after May 8, 1980; and (3) in the event the purchase occurred before September 30, 1981, $ 222 for each day prior to that date.Petitioner was to pay Equity the purchase price in installments. On the date of closing, Equity was to receive $ 1,055,000 in cash, less the amounts above previously credited. The balance was to be paid, without interest, in two equal installments. The first installment would be due 1 year after the date of the closing, and the second installment would be due 2 years after the date of closing. The installment payments were to be secured, if available, 71 by (1) an unconditional pledge of bona fide contribution notes of limited partners purchasing an interest in Johanna Properties in an amount equal to the installment payments, (2) an unconditional assignment of a portion of a mortgage of purchasers securing payments for the sale of the real property in an amount equal to the installment payments, or (3) other acceptable security.Petitioner was to continue to manage and operate Johanna Properties and the real property until the consummation of the sale of Equity's interest to petitioner or the transfer of one-half of petitioner's interest to Equity. With certain exceptions, petitioner agreed to indemnify Equity against any and all loss or claims arising out of litigation instituted against Equity or Johanna Properties by reason of Equity's being a partner in Johanna Properties. Prior to his purchase of Equity's interest, petitioner could not sell an interest in Johanna Properties or its realty, unless he first offered to sell the interest or realty to Equity at the same price contained in a bona fide offer from a third party willing to purchase.The State court's final judgment superseded portions of the partnership agreement. 72 Except as otherwise provided in the final judgment, the partnership agreement remained in full force and effect until the consummation of the sale of Equity's interest to petitioner or the transfer of petitioner's interest to Equity.178 On November 17, 1980, Johanna Properties entered into a sale agreement to sell the real property to a third party. On December 10, 1980, Johanna Properties sold the real property for $ 8,512,000, of which $ 3,629,728 was received in the year of the sale.Equity cooperated in the sale and asserted its claim to be paid from the sale proceeds. Petitioner refused, asserting that he was not required to pay Equity until September 30, 1981. Equity filed a motion with the State court demanding a share of the sale proceeds according to the provisions of the partnership agreement rather than the fixed price specified in the final judgment. The issues the State court was called upon to resolve were (1) whether petitioner acted contrary to the final judgment of the State court by not paying Equity from the proceeds of the sale on the date the realty was sold; and (2) if so, whether Equity was thereby entitled to a share of the proceeds as defined in 73 the partnership agreement rather than the agreed fixed price as set forth in the final judgment.On April 6, 1981, the State court, in lieu of a more formal memorandum, issued a letter setting forth its opinion regarding the prior litigation between the parties and clarifying the final judgment. Finding that petitioner had acted contrary to the spirit of the final judgment and that Equity was entitled to be paid on the date of sale, the State court ruled that Equity's tradeoff for accepting a fixed buyout price without interest up to September 30, 1981, was security for its investment. The State court concluded: "The parties were still partners with a continuing interest secured by the realty with all rights, powers and duties attendant thereto." The State court noted that, although petitioner had the right to sell the property (subject to Equity's right to meet the third party's offer) and the resulting opportunity to realize a profit greater than the fixed price (of Equity's partnership interest) stated in the final judgment, petitioner also assumed the risk of diluting his interest in the partnership if he failed to purchase Equity's interest on or before September 30, 1981.In74 addition, the State court clarified the following: (1) The final judgment superseded portions of the partnership agreement and was to be read together with the remaining portions of the partnership agreement; (2) pursuant to the partnership agreement, the sale of the real property caused the 179 termination of the partnership; (3) the sale of the real property triggered the termination of the partnership, and that in turn caused the date of the sale of the real property to become the closing date for petitioner's purchase of Equity's interest in Johanna Properties, i.e., "the date on which Equity's partnership interest is transferred to Vecchio [petitioner]"; (4) prior to the time Equity's interest was transferred to petitioner, income from the real property could not be distributed unless Equity simultaneously received its share, which was to be credited to the purchase price; (5) the final judgment gave petitioner the right to manage the real property so long as it continued as a partnership asset; (6) upon sale of the real property, the judgment did not give petitioner complete right to manage the termination of the partnership in a manner of his own choosing; (7) no provision75 was made in the final judgment as to the conduct of the partnership as between the parties after the sale of the realty for the simple reason that no further relationship between Equity and petitioner after that time was contemplated; and (8) petitioner should have bought out Equity at the time of sale of the realty on December 10, 1980.The State court credited petitioner with $ 70,000 cash previously distributed from Johanna Properties to Equity and $ 222 per day for early payment, which computed to be $ 65,268 (294 days X $ 222 per day), using December 10, 1980, as the proper closing date. The State court ordered petitioner to pay Equity the final purchase price of $ 1,362,732 ($ 1,498,000 - $ 70,000 - $ 65,268). The amount of $ 985,000 ($ 1,055,000 payment due on closing less $ 70,000) due on December 10, 1980, was to be paid with interest from the sale date of December 10, 1980, until actual payment was made to Equity. The balance of $ 377,732 was payable in two equal installments of $ 188,866, payable on December 10, 1981, and December 10, 1982, and secured by $ 430,000 in securities held in escrow.IV. Johanna Properties' 1980 Partnership ReturnDuring all of this 76 time, petitioner maintained the books and records for Johanna Properties and assisted in the preparation of the partnership's tax returns.180 Johanna Properties elected to report its gain from the sale of the real property on the installment method under section 453. As a result, Johanna Properties had a gross profit of $ 4,659,832 and a gross profit ratio of 54.74 percent. The portion of gain from the installment sale taxable in 1980 was $ 1,986,913.The U.S. Partnership Return of Income (Form 1065) of Johanna Properties for the taxable year 1980 indicates that the partnership sold the real property on December 10, 1980. Computation of Installment Sale Income (Form 6252) and Statement 5 attached to the return provide the following information regarding the installment sale of the real property:ItemAmountSale price$ 8,512,000Cost or other basis5,611,703Depreciation allowed or allowable1,898,160Adjusted basis3,713,543Expenses of sale138,625Adjusted basis + expenses of sale3,852,168Gross profit4,659,832Payments received in current year3,629,728Taxable part of installment sale1 2,034,558Ordinary income under recapture rules220,371Sec. 1231 gain1,814,187Deferred gain on installment sale2 2,625,274Gross profit ratio54.74426%77 The Supplemental Schedule of Gains and Losses (Form 4797) attached to the return indicates that $ 1,814,187 of the gain recognized in the year of the sale was taxable as capital gain and $ 220,371 was taxable as ordinary income under section 1250. 8Equity's Schedule K-1 (K-1), attached to the partnership's 1980 return, indicates that Equity had a 78 negative capital account balance at the beginning of the year in the amount 181 of $ 1,251,898, and a capital account balance of zero at the end of the year. It also indicates that Equity made a contribution to capital in the amount of $ 30,953 and received distributions in the amount of $ 70,000 that year.Petitioner's K-1, attached to the partnership's 1980 return, indicates that petitioner had a positive capital account balance at the beginning of the year in the amount of $ 78,544, and a positive capital account balance at the end of the year in the amount of $ 3,039,142. It also indicates that petitioner received distributions in the amount of $ 182,053.Berzon's K-1, attached to the partnership's 1980 return, indicates that he had a positive capital account balance at the beginning of the year in the amount of $ 158,433, and a positive capital account balance at the end of the year in the amount of $ 177,351. It also indicates that he did not receive any distributions during the year.The partnership allocated to the partners ordinary loss from partnership operations and gain from the sale of the real property as follows:ItemPetitionerEquityBerzonTotalNet loss from rents($ 81,237)($ 127,723)($ 13,020)($ 221,980)Interest income5,366 8,436 860 14,662 Total ordinary loss(75,871)(119,287)(12,160)(207,318)Net sec. 1231 gain498,767 1,302,250 13,170 1,814,187 Specially allocated gain112,389 107,982 -0-220,371 Total year of sale gain611,156 1,410,232 13,170 2,034,558 Deferred gain2,607,366 -0-17,908 2,625,274 Total gain on sale3,218,522 1,410,232 31,078 4,659,832 79 All of the partners agreed to the above allocations as reported on Johanna Properties' tax return.Petitioner's K-1 from Johanna Properties indicates that he acquired a partnership interest on December 10, 1980, and that a part of his interest was acquired at some time from another partner. Equity's K-1 from Johanna Properties for the taxable year 1980 indicates that Equity's partnership interest decreased from 49 percent to zero percent and terminated during the year.182 V. Petitioner's 1980 Individual ReturnPetitioner reported the gain from the sale of the real property by Johanna Properties as passing through Development Systems. 9 Petitioner reported net loss from Development Systems in the amount of $ 204,951, which included the $ 75,871 ordinary loss from Johanna Properties. 1081 He reported total long-term capital gain in the amount of $ 500,577, which included gain in the amount of $ 20,585 from the sale of petitioner's residence and gain in the amount of $ 479,992 from Development Systems. The long-term capital gain from Development Systems included $ 28,725 from Kennedy Road Properties, in addition to gain from the sale of the real property by Johanna Properties. 80 11 Thus, petitioner reported longterm capital gain in the amount of $ 451,267 ($ 479,992 - $ 28,725) from the sale of the real property by Johanna Properties. In addition to the long-term capital gain, petitioner reported specially allocated ordinary gain from Development Systems in the amount of $ 112,389. 12Thus, on his 1980 return, petitioner reported $ 75,871 ordinary loss, $ 451,267 long-term capital gain, 13 and $ 112,389 specially allocated ordinary gain attributable to Johanna Properties. Consequently, petitioner reported a total of 183 $ 563,656 total gain from the installment sale of the real property by Johanna Properties, the sum of the long-term capital gain and82 the specially allocated ordinary income.VI. Respondent's Determination of Tax DeficiencyIn a statutory notice of deficiency dated March 20, 1991, respondent determined a deficiency in petitioner's income tax for the year 1980 in the amount of $ 286,693. The notice stated that petitioner realized a long-term capital gain in the amount of $ 943,784 from the installment sale of the real property by Johanna Properties, and long-term capital gain in the amount of $ 723,566 from petitioner's "sale of Equity Johanna's partnership interest in 1980". The notice further stated that petitioner should have reported long-term capital gain in the total amount of $ 1,716,660, based on the following computation:Florida property (residence)$ 20,585Kennedy Road properties28,725Johanna Properties installment sale943,784Equity723,566Total long-term capital gain1,716,66083 As a result, respondent determined that petitioner's taxable income should be increased by $ 486,433 computed as follows:Net long-term capital gain per return$ 500,577Net long-term adjustments1,216,083Net long-term capital gain as adjusted1,716,660Less 60%1,029,996Net capital gain686,664Capital gain per return200,231Schedule D adjustment486,433Respondent failed to credit petitioner with the portion of gain from the sale subject to recapture and reported by petitioner as specially allocated ordinary income in the amount of $ 112,389.Petitioner timely filed a petition in this Court challenging the entire amount of the deficiency. Respondent filed an answer denying any error in the determination of deficiency. More than a year after filing the answer and shortly before trial, respondent filed a motion for leave to amend the 184 answer to assert that when the notice of deficiency was prepared, she believed that, on December 10, 1980, petitioner only owned 47.5-percent of Johanna Properties, but subsequently determined that petitioner owned 96.5 percent. Leave was granted, and respondent filed an amended answer.In the amended answer, respondent84 asserted that when the notice of deficiency was issued, she had determined that petitioner was required to report $ 943,784 in capital gain in 1980 based on a 47.5-percent ownership in Johanna Properties. Respondent asserted that, at that time, however, she believed that petitioner received more than 47.5 percent of the profits from Johanna Properties. Respondent believed the amount of additional profits petitioner received was $ 723,566. Respondent explained that the capital gain of $ 943,784 from the Johanna Properties' installment sale and the capital gain of $ 723,566 from the sale of Equity's partnership interest in 1980 determined in the notice of deficiency are from the same transaction, specifically, Johanna Properties' sale of the real property. Respondent contends that the total amount of capital gain asserted in the notice of deficiency with regard to that transaction was $ 1,667,350.Subsequent to the issuance of the notice of deficiency, respondent concluded that petitioner owned 96.5 percent of Johanna Properties at the time of the sale of the real property, instead of 47.5 percent. Consequently, in the amended answer, respondent asserted that petitioner's share85 of the taxable gain in the year of the sale was $ 1,917,371. Respondent then computed petitioner's total long-term capital gain for 1980 as follows:Florida property$ 20,585Kennedy Road properties28,725Johanna Properties installment sale1 1,917,721Total long-term capital gain1,967,031As a result of this change, respondent asserted in the amended answer that the correct deficiency in income tax due from petitioner for 1980 is $ 349,198.25, representing an increase of $ 62,505 from that claimed in the notice of deficiency. In both the notice of deficiency and the amended 185 answer to petition, respondent failed to credit petitioner with the $ 112,389 of specially allocated ordinary gain that petitioner included in his income in 1980, which was attributable to the installment sale of the real property by Johanna Properties.OPINIONThis case demonstrates not only the complexity of partnership86 taxation, but also the careful consideration and analysis that should be applied in determining the tax consequences of partnership transactions. Partnership income or loss, distributions to partners, and gain on the sale of partnership interests are each taxed separately and are each subject to different provisions of the Internal Revenue Code. Generally, allocation of partnership income and loss is subject to the rules of sections 704 and 761(c), and the taxation of distributions to partners is determined by section 731. When there is a sale or exchange of a partnership interest during a taxable year, allocation of partnership income and loss is subject to the rules of sections 706, 708, and 761(c), in addition to section 704, and the gain on the sale or exchange of a partnership interest is determined by section 741. 1487 I. Allocation of Gain From the Sale of the Real PropertyIn determining his income tax, a partner must take into account his "distributive share" of each item of partnership income, gain, loss, deduction, and credit. Sec. 702(a). Each partner is taxed on his distributive share of the partnership income without regard to whether the amount is actually distributed to him. Sec. 1.702-1(a), Income Tax Regs.; see also United States v. Basye, 410 U.S. 441">410 U.S. 441, 453 (1973). A partner's distributive share of partnership income or loss is to be determined by the partnership agreement, provided the allocation has substantial economic effect. Sec. 704(a). If the partnership agreement does not provide as to the partner's 186 distributive share, or if the partnership agreement provides for an allocation that does not have substantial economic effect, then a partner's distributive share is determined by the partner's "interest in the partnership". Sec. 704(b). A partner's interest in the partnership is determined by taking into account all facts and circumstances. Id.A. The Partnership Agreement AllocationPetitioner argues that the partnership88 agreement required allocating the first $ 1,410,232 of the gain to Equity. He contends that section 4.4(b) of the partnership agreement required Equity to bring its capital account balance to zero upon the sale of its interest to him and, therefore, Equity must be allocated more of the gain on the sale of the real property. Section 4.4(b) of the partnership agreement provides as follows:Except to the extent guarantee payments are made, if at any time the Partnership shall suffer a loss as a result of which the capital account of any Partner shall be a negative amount, such loss shall be carried as a charge against his capital account, and his share of subsequent profits of the Partnership shall be applied to restore such deficit in his capital account.That provision, however, merely permits a partner to continue to receive a share of partnership losses even though the loss creates a negative capital account. The provision requires that "his share of subsequent profits" be applied to restore the deficit; it does not, however, redefine his share of such profits or allocate a greater share of the profits to such partner.For purposes of allocating partnership income or loss, a89 partnership agreement includes any modifications made prior to, or at, the time prescribed for filing the partnership return for the taxable year (not including extensions), provided the modifications were agreed to by all the partners, or adopted as otherwise required by the partnership agreement. Sec. 761(c). Where a modification alters the profit-sharing interests of existing partners and does not result in the retroactive allocation of partnership income or losses to a new partner, the courts generally have given effect to the amended provision, provided the allocation has substantial economic effect. See Smith v. Commissioner, 331 F.2d 298">331 F.2d 298, 301187 (7th Cir. 1964), affg. T.C. Memo. 1962-294; Foxman v. Commissioner, 41 T.C. 535">41 T.C. 535, 554 (1964), affd. 352 F.2d 466">352 F.2d 466 (3d Cir. 1965). 15Johanna Properties' partnership90 agreement specifies that after January 1, 1979, the net profits and losses including depreciation of the partnership were to be divided among the partners in the following percentages:Development Systems45.%John Takacs5.1Equity49.0Prior to January 12, 1979, Takacs withdrew from the partnership, Berzon obtained a 3.5-percent interest in the partnership, and petitioner obtained Development Systems' interest plus an additional 1.6-percent interest. Those events modified the partnership agreement so that in 1980, prior to the sale of the real property and prior to petitioner's purchase of Equity's interest in the partnership, profits and losses were allocated 47.5 percent to petitioner, 49 percent to Equity, and 3.5 percent to Berzon.Johanna Properties' partnership agreement further provides that profits and losses arising from the disposition of assets were to be taken into account as of the date of disposition. Thus, the gain from the sale of the property was to be taken into account as of the sale date, December 10, 1980.The final judgment of the State court further amended Johanna Properties' partnership agreement. The final judgment, however, does not specify91 how the gain on any sale of the property should be allocated between Equity and petitioner. There is nothing in any of the pertinent written documents that would alter the profit-sharing percentages explicitly set forth in the partnership agreement.A modification, however, need not necessarily be written, unless the partnership agreement so requires. Sec. 1.761-1(c), Income Tax Regs. Johanna Properties' partnership agreement does not require a modification to be in writing or prohibit an oral modification. Petitioner testified that Equity agreed that the gain from the sale of the real property would be shared as reported by Johanna Properties on its return.A portion of the gain Johanna Properties realized on the sale of the property was attributable to the recapture of the 188 depreciation previously deducted from the partnership's basis in the property. Petitioner testified that, because Equity had a negative capital account balance resulting from the disproportionate allocation of depreciation deductions to Equity, all the partners agreed that the gain from the sale of the real property would be allocated first to Equity in an amount necessary to restore its negative92 capital account to zero. That amount, $ 1,410,232, was determined as follows:Beginning year balance($ 1,251,898)Capital contributed during year30,953 Share of 1980 ordinary loss(119,287)Distribution during year(70,000)Capital account balance priorto allocation of gain(1,410,232)Johanna Properties realized $ 4,659,832 of gain on the sale of the property, of which $ 1,986,913 was taxable in 1980. The first $ 1,410,232 of the realized gain was allocated to Equity. The balance of the realized gain was allocated $ 3,218,522 to petitioner and $ 31,078 to Berzon. The $ 1,986,913 of gain taxable in 1980 was allocated $ 1,410,232 to Equity, $ 13,170 to Berzon, and the balance to petitioner.We found petitioner to be a credible witness as to the partnership's method of allocating the gain and the partners' agreement to such allocation. The allocation will be recognized provided it has substantial economic effect or otherwise satisfies the requirements of section 704.B. Substantial Economic EffectBefore 1976, section 704(b)(2) provided that a special allocation under a partnership agreement would not be recognized if its principal purpose was to avoid or 93 evade any income tax. Section 1.704-1(b)(2), Income Tax Regs., was promulgated under the prior law and provided several tests to determine tax evasion or avoidance. The regulations' "substantial economic effect" test became the preeminent test for determining whether the principal purpose was tax evasion or avoidance. Harris v. Commissioner, 61 T.C. 770">61 T.C. 770, 785 (1974); Orrisch v. Commissioner, 55 T.C. 395">55 T.C. 395 (1970). In the Tax Reform Act of 1976, Pub. L. 94-455, section 213(d), 90 Stat. 1520, 1548, Congress elevated the "substantial economic effect" test from the regulation to the statute.189 Regulations setting forth the requirements for substantial economic effect were issued on December 31, 1985, and made effective for taxable years beginning after December 31, 1975. 16 The regulations provide that the determination of whether an allocation has substantial economic effect involves a two-part test. Sec. 1.704-1(b)(2)(i), Income Tax Regs. Under the first part of the test, the allocation must have economic effect. Sec. 1.704-1(b)(2)(ii), Income Tax Regs. Under the second part, the economic effect of the allocation94 must be substantial. Sec. 1.704-1(b)(2)(iii), Income Tax Regs. For taxable years beginning after December 31, 1975, but before May 1, 1986, an allocation that does not satisfy the two-part test nonetheless will be respected if the allocation has substantial economic effect as interpreted under the relevant case law and the legislative history of section 213(d) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1548. Sec. 1.704-1(b)(1)(ii), Income Tax Regs.1. Economic EffectIn order to have economic effect, the partnership agreement must satisfy three requirements provided in section 1.704-1(b)(2)(ii)(b), Income Tax Regs. An allocation of income, gain, loss, or deduction (or item thereof) to a partner will have economic effect if, and only if, throughout the full term of the partnership, the partnership agreement provides95 that (1) the partners' capital accounts be kept in accordance with the regulations, (2) liquidating distributions be made in accordance with positive capital account balances, and (3) a partner be required to restore a deficit capital account balance following the liquidation of the partnership or of his interest in the partnership. Sec. 1.704-1(b)(2)(ii)(b), Income Tax Regs. An allocation does not have economic effect if it fails to satisfy any one of the three parts of the test. In this case, special allocation of the gain taxable in the year of the sale fails all three parts of the test.a. Maintenance of Capital AccountsThe regulations require that each partner's capital account be increased by his share of partnership gain as computed for 190 book purposes (book gain). 17Sec. 1.704-1(b)(2)(iv)(b), 1.704-1(b)(2)(iv)(g), Income Tax Regs. Johanna Properties realized $ 4,659,832 of gain on the sale of the property, of which $ 1,986,913 was reportable in 1980. The realized gain was allocated $ 1,410,232 to Equity, $ 3,218,522 to petitioner, and $ 31,078 to Berzon. The partners' capital account balances were properly adjusted to reflect that allocation. 96 The partners' capital account balances, however, cannot be further adjusted to reflect the allocation of the portion of the gain taxable in the year of the sale. Thus, although the partnership properly elected to report the gain from the sale under the installment sale provisions of section 453, the partners' capital accounts must be adjusted to reflect the entire book gain realized in the year of the sale. The partners' shares of corresponding taxable gain for 1980 are not independently reflected by further adjustments to the partners' capital accounts. This result is further demonstrated by the fact that the capital accounts will not be further adjusted in later years as the deferred gain is recognized. Thus, separate allocation of these tax items cannot satisfy the first requirement of the economic effect test. See sec. 1.704-1(b)(4)(i), Income Tax Regs.97 191 b. Liquidating DistributionsThe second requirement of the economic effect test requires that liquidating distributions are required in all cases to be made in accordance with the positive capital account balances of the partners. 18 Johanna Properties' partnership agreement provides that, upon the sale of the real property or liquidation of the partnership, Equity was to receive a return of its investment before distributions could be made to other partners. The partnership agreement does not require that liquidating distributions be in accordance with the partners' positive capital account balances. Therefore, the second requirement of the economic effect test is not satisfied, and the allocations cannot have economic effect.98 c. Obligation To Restore Deficit Capital AccountThe third part of the economic effect test requires that the partnership agreement require a partner with a deficit capital account balance after the liquidation of his interest in the partnership, determined after taking into account all capital account adjustments for the year, to restore the amount of the deficit. Sec. 1.704-1(b)(2)(ii)(b)(3), Income Tax Regs.Petitioner argues that section 4.4(b) of the partnership agreement requires partners to restore deficit capital account balances. As discussed above, that provision merely permits a partner to continue to receive a share of partnership losses even though the loss creates a negative capital account. The provision requires that such partner's share of subsequent profits be applied to restore the deficit; it does not redefine his share of such profits, allocate a greater share of the profits to such partner, or require a partner to contribute additional funds to the partnership to restore the deficit account. To the contrary, the agreement specifically provides that Equity, the only partner with a deficit capital account balance, 192 is not required to provide99 additional funds to the partnership. 192. Economic Effect EquivalenceAllocations made to a partner that do not otherwise satisfy the economic effect test, nevertheless, are deemed to have economic effect, provided that, as of the end of each partnership taxable year, a liquidation of the partnership at the end of such year100 or at the end of any future year would produce the same economic results to the partners as would occur if all the requirements of the economic effect test had been satisfied, regardless of the economic performance of the partnership. Sec. 1.704-1(b)(2)(ii)(i), Income Tax Regs.; see also Elrod v. Commissioner, 87 T.C. 1046">87 T.C. 1046, 1086 n.23 (1986). Petitioner has not argued and has not demonstrated that the allocation satisfies this economic effect equivalence test.3. Prior LawAlthough the allocation does not satisfy the substantial economic effect test of the regulations, it will be permitted if it has substantial economic effect under the applicable paragraph of the regulation in effect for taxable years beginning before May 1, 1986, the relevant case law, and the relevant legislative history of the Tax Reform Act of 1976. Sec. 1.704-1(b)(1)(ii), Income Tax Regs. Guided by those provisions, the courts developed a "capital accounts analysis" to determine whether an allocation had substantial economic effect. Ogden v. Commissioner, 788 F.2d 252">788 F.2d 252, 261 (5th Cir. 1986), affg. 84 T.C. 871">84 T.C. 871 (1985);101 Allison v. United States, 701 F.2d 933">701 F.2d 933, 939 (Fed. Cir. 1983); Goldfine v. Commissioner, 80 T.C. 843">80 T.C. 843, 852-853 (1983). That analysis, however, also requires that capital accounts be properly maintained and that liquidating distributions be made in accordance with positive capital account balances. Thus, under the relevant precedent, petitioner 193 has failed to demonstrate that the allocation satisfies the requirements for substantial economic effect.C. Partners' Interests in the PartnershipIf the partnership agreement provides for an allocation that does not have substantial economic effect, then a partner's distributive share is determined by the partner's interest in the partnership. As stated above, special allocation of the gain taxable in the year of the sale cannot affect the capital accounts and, therefore, cannot have economic effect. The taxable gain must be allocated in accordance with the partners' interests in the partnership. A partner's interest in the partnership is determined by taking into account all facts and circumstances. Sec. 704(b). Among the relevant factors to be taken into account102 in determining the partners' interests in the partnership are (1) the partners' relative contributions to capital, (2) the interests of the respective partners in profits and losses (if different from that in taxable income or loss), (3) their relative interests in cash-flow and other nonliquidating distributions, and (4) their rights to distributions of capital upon liquidation. Sec. 1.704-1(b)(3)(ii), Income Tax Regs.Section 1.704-1(b)(3)(i), Income Tax Regs., generally defines a partner's interest in the partnership as follows:References in section 704(b) and this paragraph to a partner's interest in the partnership, or to the partners' interests in the partnership, signify the manner in which the partners have agreed to share the economic benefit or burden (if any) corresponding to the income, gain, loss, deduction, or credit (or item thereof) that is allocated. Except with respect to partnership items that cannot have economic effect (such as nonrecourse deductions of the partnership), this sharing arrangement may or may not correspond to the overall economic arrangement of the partners. * * Thus, a partner who has a 50 percent overall interest in the partnership may103 have a 90 percent interest in a particular item of income or deduction. (For example, in the case of an unexpected downward adjustment to the capital account of a partner who does not have a deficit makeup obligation that causes such partner to have a negative capital account, it may be necessary to allocate a disproportionate amount of gross income of the partnership to such partner for such year so as to bring that partner's capital account back up to zero.) The determination of a partner's interest in a partnership shall be made by taking into account all facts and circumstances relating to the economic arrangement of the partners. All partners' interests in the partnership are presumed to be equal (determined on a per capita basis). However, this presumption may be rebutted by the taxpayer 194 or the Internal Revenue Service by establishing facts and circumstances that show that the partners' interests in the partnership are otherwise.The regulation anticipates that, in situations where prior deductions have created a negative capital account, 20 gain may be allocated in a manner which produces the same results as an allocation that has substantial economic effect. 104 The fundamental principle for requiring that an allocation have economic effect is that the allocation must be consistent with the underlying economic arrangement of the partners. "This means that in the event there is an economic benefit or economic burden that corresponds to an allocation, the partner to whom the allocation is made must receive such economic benefit or bear such economic burden." Sec. 1.704-1(b)(2)(ii)(a), Income Tax Regs.As of the end of 1979, as a result of the disproportionate allocation of Johanna Properties' operating loss and depreciation deductions, Equity had a negative capital account balance. The remaining partners, petitioner105 and Berzon, had positive capital account balances. Respondent does not dispute that the allocation of partnership losses from those prior years was properly reflected in the partners' capital accounts.The partner to whom the item is specially allocated for tax purposes must bear the economic burdens and benefits of that specially allocated item. Goldfine v. Commissioner, 80 T.C. at 851. Equity's share of partnership depreciation and losses exceeded its contribution to the partnership, which resulted in a deficit in Equity's capital account of $ 1,251,898 at the beginning of the year at issue. Petitioner and Berzon had positive capital account balances at the beginning of the year. Petitioner argues, and we agree, that, because Equity received the benefit of the prior deductions, Equity should bear the economic burden of gain in an amount necessary to bring its capital account to zero. Absent such allocation, the other partnership interests would have to bear part of the economic cost of the special allocation that resulted in the deficit capital account. Elrod v. Commissioner, 87 T.C. at 1084; Ogden v. Commissioner, 84 T.C. 871">84 T.C. 871, 884 (1985),106 affd. 195 788 F.2d 252">788 F.2d 252 (5th Cir. 1986); Goldfine v. Commissioner, supra at 852; Harris v. Commissioner, 61 T.C. at 786; Orrisch v. Commissioner, 55 T.C. at 403-404.Furthermore, under the partnership agreement, Equity was entitled to the first $ 766,100 of proceeds from the sale of the partnership real property. Thereafter, additional funds were to be distributed 10 percent to Equity and 90 percent to petitioner and Berzon until Equity had received 49 percent (counting the $ 766,100), petitioner had received 47.5 percent, and Berzon had received 3.5 percent of the cash distribution. 21 Thereafter all funds were to be distributed 49 percent to Equity, 47.5 percent to petitioner, and 3.5 percent to Berzon. During the operation of the partnership, petitioner and Berzon (or Takacs) bore the risk that a sale of the property would not provide distributable proceeds in excess of Equity's right to the first $ 766,100 of proceeds. In order for the partners' capital accounts to reflect that right, gain in the year of the sale should have been allocated first to Equity's107 interest in an amount necessary to bring its capital account to zero ($ 1,410,232) and then to a positive $ 766,100. Therefore, the first $ 2,176,332 of the gain from the sale should be allocated to Equity's interest. 22 Thus the entire $ 1,986,913 of gain taxable in the year of the sale must be allocated to Equity's interest. This allocation of the gain taxable in the year of the sale of the real property also reflects the risk of economic loss in a later year borne by petitioner and Berzon in the event that the purchaser of the real property should fail to pay an installment due in the later year.108 II. Petitioner's Purchase of Equity's InterestRespondent asserted in the amended answer that petitioner acquired Equity's 49-percent interest in Johanna Properties on May 8, 1980, and, therefore, is required to include 196 96.5 percent of the gain from the sale in his income for 1980. Respondent has the burden of proving issues raised in the amended answer. Rule 142(a). Under the partnership agreement, gain from the sale of the real property was to be taken into account as of the date of the disposition of the property. Therefore, if petitioner acquired Equity's interest prior to December 10, 1980, the date of the sale, he must include in his income the gain from the sale of the real property that is properly allocable to Equity's interest in the partnership.Respondent argues that petitioner purchased Equity's partnership interest in Johanna Properties on May 8, 1980, the date the final judgment was entered by the State court. Citing Yelencsics v. Commissioner, 74 T.C. 1513">74 T.C. 1513, 1527 (1980), respondent argues that, for purposes of Federal income taxation, a sale occurs upon the transfer of the benefits and burdens of ownership rather than109 upon satisfaction of technical requirements for the passage of title under State law. Respondent maintains that the benefits and burdens of Equity's 49-percent partnership interest in Johanna Properties were transferred to petitioner on May 8, 1980. She alleges that the benefits transferred included the right to receive profits and the ability to benefit from appreciation in value of the real property, the only asset owned by Johanna Properties. Respondent contends that, pursuant to the State court's order, Equity was no longer entitled to a share of Johanna Properties' profits, and Equity's share of cash available for distribution was instead to be credited against the purchase price. Further, respondent asserts that Equity was relieved of all burdens of ownership because petitioner was required to indemnify Equity against all liability resulting from a default in the sale of the real property or from Equity's status as a partner in Johanna Properties. Respondent argues that all steps leading to the sale of Equity's partnership interest were negotiated and agreed upon on May 8, 1980, the price was fixed, and petitioner received all rights to manage the partnership's assets. 110 She maintains that Equity retained legal title to the partnership interest only as security for payment and concludes that all ownership burdens and benefits passed to petitioner on May 8, 1980. We disagree.Equity was admitted as a partner in Johanna Properties in January of 1974. Sometime before May of 1980, a dispute 197 arose between Equity and petitioner over the management of Johanna Properties that eventually led to the State court suit. Because they were unable to resolve the dispute, the final judgment of the State court provided a method for ending the deadlock whereby petitioner was given approximately 17 months to purchase Equity's interest. In the event petitioner did not purchase Equity's interest on or before September 30, 1981, petitioner was required to transfer to Equity one-half of his interest in Johanna Properties, which the final judgment specifies is 23.75 percent. Clearly, if Equity's 49-percent interest had transferred to petitioner on May 8, 1980, then on September 30, 1981, he would have held 96.5 percent. In that case, one-half of his interest would have been 48.25 percent and not 23.75 percent as indicated in the final judgment. Equity bore111 the risk that its interest in the partnership might appreciate in the interim period before petitioner purchased that interest at the fixed price set in the State court judgment. Petitioner bore the risk that his interest in the partnership would be diluted in the event he was unable to purchase Equity's interest on or before September 30, 1981. In the latter event, Equity would have received a windfall; i.e., one-half of petitioner's partnership interest for free.The purchase price for Equity's interest was established based on a closing date of September 30, 1981, and provided for reductions for distributions from the partnership to Equity during the 17-month period and $ 222 per day in the event of an earlier closing date. Thus, the purchase price for Equity's interest included an agreed value for Equity's share of income from the partnership during the 17-month period.Finally, the State court's interpretive letter specifically states that the sale of the real property by Johanna Properties caused a dissolution of the partnership. The dissolution of the partnership, in turn, advanced the closing date for the sale of Equity's interest from September 30, 1981, to the date of112 the sale of the real property, December 10, 1980, and triggered petitioner's obligation to purchase Equity's interest. At the time of the sale of the real property by Johanna Properties, petitioner did not own Equity's interest in the partnership. Petitioner acquired Equity's interest in the partnership after the sale of the real property.198 III. Allocation of Gain Between Equity and PetitionerNext we must determine how the gain realized from the sale of the property that properly was allocated to Equity's partnership interest should be allocated between Equity as seller of that interest and petitioner as purchaser of the interest. Section 706(c)(2)(A) provides that the taxable year of a partnership closes with respect to a partner who sells his entire interest in the partnership, and the partner's distributive share of partnership income or loss for such year is determined under the regulations. Section 1.706-1(c)(2)(ii), Income Tax Regs., provides:(ii) Inclusions in taxable income. In the case of a sale, exchange, or liquidation of a partner's entire interest in a partnership, the partner shall include in his taxable income for his taxable year within or113 with which his membership in the partnership ends, his distributive share of items described in section 702(a), and any guaranteed payments under section 707(c), for his partnership taxable year ending with the date of such sale, exchange, or liquidation. In order to avoid an interim closing of the partnership books, such partner's distributive share of items described in section 702(a) may, by agreement among the partners, be estimated by taking his pro rata part of the amount of such items he would have included in his taxable income had he remained a partner until the end of the partnership taxable year. The proration may be based on the portion of the taxable year that has elapsed prior to the sale, exchange, or liquidation, or may be determined under any other method that is reasonable. Any partner who is the transferee of such partner's interest shall include in his taxable income, as his distributive share of items described in section 702(a) with respect to the acquired interest, the pro rata part (determined by the method used by the transferor partner) of the amount of such items he would have included had he been a partner from the beginning of the taxable year of the114 partnership. * Thus, when a partner sells or exchanges his entire interest in the partnership, his distributive share of partnership items is determined by closing the partnership books, unless the partners agree to estimate his share under a reasonable proration. If his share is determined by an interim closing of the partnership books, his taxable year ends with the date of the sale or exchange of his interest. Therefore, in this case, unless the partners agreed to reasonably prorate the items of income, Equity would be required to include in its income for 1980 the entire gain from the sale of the real property allocable to its interest, the entire $ 1,986,913 taxable in 1980.199 The partners agreed to allocate to Equity the amount of gain necessary to bring its negative capital account to zero. Prior to the sale of its interest to petitioner, Equity had received the benefit of substantial depreciation deductions. The State court's final judgment required Equity to sell its interest, and all rights attendant thereto, to petitioner at a fixed purchase price. As a result of petitioner's purchase of Equity's interest, petitioner acquired the right to the first $ 766,100115 of proceeds from the sale of the real property. 23 Allocating gain in an amount necessary to bring Equity's capital account to zero, $ 1,410,232, reflects the prior benefit Equity received from the allocation of deductions up to the time of the sale of its interest to petitioner. Allocating the remainder of the gain in the year of the sale, $ 576,681, to petitioner reflects petitioner's right to the first $ 766,100 of proceeds from the sale of the property, which right he acquired through his purchase of Equity's partnership interest. Such allocation is reasonable and in accordance with the partners' interests in the partnership during the year at issue. We hold, therefore, petitioner's share of gain from Johanna Properties' sale of the real property included as his taxable income in 1980 is $ 576,681.IV. ConclusionOn his 1980 return, petitioner reported total gain in the amount of $ 563,656 from the sale 116 of Johanna Properties' real property. He reported $ 112,389 as specially allocated ordinary gain and $ 451,267 as long-term capital gain. This is $ 13,025 less than the $ 576,681 properly allocated to him. The parties have not disputed the amount of recaptured ordinary gain or the amount properly allocated to petitioner. Therefore, the $ 13,025 additional gain is reportable as longterm capital gain. As a result, petitioner is required to include $ 112,389 as specially allocated ordinary gain and $ 464,292 as long-term capital gain from the sale of the real property. 24200 To reflect the parties' stipulations and concessions, and the above holding,Decision will be entered under Rule 155. Footnotes1. Respondent denied petitioner's deductions for a rental loss in the amount of $ 8,429 and for attorney's fees in the amount of $ 48,500. Petitioner concedes that he is not entitled to a deduction for the rental loss. The parties agree that petitioner is entitled to a deduction for attorney's fees in the amount of $ 24,500. Petitioner concedes that he is not entitled to deduct the remaining $ 24,000 of the attorney's fees. Respondent also determined that petitioner is entitled to a net operating loss carryover deduction of $ 126,241 for the taxable year 1980 from a net operating loss petitioner sustained in 1978. The adjustment for the net operating loss carryover from 1978 is not in dispute. The record does not indicate which of petitioner's activities generated the net operating loss carryover from 1978. Respondent does not allege that it arose from the operations of Johanna Properties Partnership, which is the focus of this case.↩2. In 1980, although Bernard Schneier was also a partner in Development Systems, petitioner was entitled to receive 100 percent of the profits and losses from Development Systems.↩3. The Original Partners had the right to select a company to manage the property.↩4. The partnership agreement does not specify how the 90 percent was to be distributed between Development Systems and Takacs. We assume, however, that it must have been in a ratio of 45.9 to 5.1 in order to bring the three partners to the required percentages.↩5. A reasonable time was permitted for the orderly liquidation of the assets of the partnership and the discharge of liabilities to creditors so as to enable the original partners to minimize the normal losses attendant upon a liquidation.↩6. The record does not indicate how the shift in the partners' interests or the withdrawal of Takacs and admission of Berzon came about.↩7. These holdings represent the partners' shares of operating net profits and losses. These interests do not necessarily represent a partner's "interest in the partnership" for purposes of sec. 704(b)↩.1. The amount of gain to be reported in the year of the sale indicated on Form 6252 is incorrect and exceeds the correct amount by $ 47,645 ($ 2,034,558 - $ 1,986,913). The parties have stipulated, and we have found, that the portion of the gain from the installment sale taxable in 1980 is $ 1,986,913.↩2. The correct amount of deferred gain on the installment sale is $ 2,672,919 ($ 4,659,832 - $ 1,986,913).↩8. The $ 47,645 error noted in the table in the text is also carried over into the Form 4797.↩9. Petitioner did not explain why he reported the gain as passing through Development Systems. We note, however, that when his accountant testified, the accountant was under the erroneous impression that Development Systems, rather than petitioner, was the partner in Johanna Properties.↩10. On its U.S. Partnership Return of Income (Form 1065) for 1980, Development Systems reported ordinary loss from other partnerships in the amount of $ 204,951, which included the ordinary loss of $ 75,871 from Johanna Properties. It reported gain from the sale or exchange of property from other partnerships in the amount of $ 527,492 on a Supplemental Schedule of Gains and Losses (Form 4797).The K-1's attached to Development Systems' return indicate that petitioner's share of partnership profits was 100 percent. Petitioner's K-1 from Development Systems allocates to him ordinary loss in the amount of $ 204,951, other gain under sec. 1231 in the amount of $ 527,492, and specially allocated ordinary gain in the amount of $ 112,389 as his distributive share of partnership items. We note that the specially allocated gain was omitted from the partnership's K-1.↩11. On Schedule D attached to his 1980 U.S. Individual Income Tax Return (Form 1040), petitioner reported total long-term capital gain in the amount of $ 500,577 consisting of gain from the installment sale of the residence (Form 6252) in the amount of $ 20,585, and gain from Form 4797, l. 5(a)(1), in the amount of $ 479,992. Petitioner recognized long-term capital gain in the amount of $ 28,725 from Kennedy Road Properties.↩12. On Supplemental Schedule of Gains and Losses (Form 4797), petitioner reported gain from a partnership sec. 1231 asset in the amount of $ 479,992 and ordinary income from Development Systems in the amount of $ 112,389. Petitioner reported the $ 112,389 ordinary income on l. 16 of his Form 1040.↩13. Petitioner did not explain why he reported $ 47,500 less long-term capital gain on his return than the $ 498,767 allocated to him on the K-1 from Johanna Properties. We note, however, that Johanna Properties' return overstated the gain in the year of the sale by $ 47,645.↩1. There is no explanation as to why this figure is more than the immediately preceding $ 1,917,371.↩14. In the statutory notice of deficiency, respondent determined that petitioner realized longterm capital gain in the amount of $ 723,566 from petitioner's "sale of Equity Johanna's partnership interest in 1980". In 1980, petitioner purchased↩ Equity's interest in Johanna Properties; he did not sell that interest. There is no legal basis for including in petitioner's income longterm capital gain in the amount of $ 723,566 from petitioner's "sale of Equity Johanna's partnership interest in 1980". The partners in Equity are the proper taxpayers for recognition of any gain on the sale of its interest to petitioner. Apparently, respondent, realizing that such a position was untenable, filed the amended answer.15. See also Martin v. Commissioner, T.C. Memo. 1982-226↩.16. The regulations promulgated under sec. 704(b) for the year at issue were published on Dec. 31, 1985, T.D. 8065, 1 C.B. 254">1986-1 C.B. 254↩.17. Sec. 1.704-1(b)(2)(iv)(b), Income Tax Regs., provides that the partners' capital accounts be maintained as follows:(b) Basic rules. Except as otherwise provided in this paragraph (b)(2)(iv), the partners' capital accounts will be considered to be determined and maintained in accordance with the rules of this paragraph (b)(2)(iv) if, and only if, each partner's capital account is increased by (1) the amount of money contributed by him to the partnership, (2) the fair market value of property contributed by him to the partnership (net of liabilities secured by such contributed property that the partnership is considered to assume or take subject to under section 752), and (3) allocations to him of partnership income and gain (or items thereof), including income and gain exempt from tax and income and gain described in paragraph (b)(2)(iv)(g) of this section, but excluding income and gain described in paragraph (b)(4)(i) of this section; and is decreased by (4) the amount of money distributed to him by the partnership, (5) the fair market value of property distributed to him by the partnership (net of liabilities secured by such distributed property that such partner is considered to assume or take subject to under section 752), (6) allocations to him of expenditures of the partnership described in section 705(a)(2)(B), and (7) allocations of partnership loss and deduction (or item thereof), including loss and deduction described in paragraph (b)(2)(iv)(g) of this section, but excluding items described in (6) above and loss or deduction described in paragraphs (b)(4)(i) or (b)(4)(iii) of this section; and is otherwise adjusted in accordance with the additional rules set forth in this paragraph (b)(2)(iv). For purposes of this paragraph, a partner who has more than one interest in a partnership shall have a single capital account that reflects all such interests, regardless of the class of interests owned by such partner (e.g.↩, general or limited) and regardless of the time or manner in which such interests were acquired.18. Sec. 1.704-1(b)(2)(ii)(b)(2), Income Tax Regs., provides:Upon liquidation of the partnership (or any partner's interest in the partnership), liquidating distributions are required in all cases to be made in accordance with the positive capital account balances of the partners, as determined after taking into account all capital account adjustments for the partnership taxable year during which such liquidation occurs (other than those made pursuant to this requirement (2) and requirement (3) of this paragraph (b)(2)(ii)(b↩)), by the end of such taxable year (or, if later, within 90 days after the date of such liquidation) * *19. If the partnership agreement had satisfied the first two parts of the test (proper maintenance of capital accounts and liquidation distributions in accordance with capital accounts), but failed the third requirement (obligation to restore deficit capital account balances), the regulations provide an alternative economic effect test. Sec. 1.704-1(b)(2)(ii)(d↩), Income Tax Regs. Because the partnership agreement did not satisfy the first two parts of the test, the alternative economic effect test is not available. We note, however, that the partnership agreement does not provide for a qualified income offset or otherwise satisfy the requirements of the alternative economic effect test.20. Although the regulations refer to "an unexpected downward adjustment", the economic result is the same if the deduction is planned. We think that a partner's interest in the partnership is the same whether the deduction is unexpected or intentional. See 1 McKee et al., Federal Taxation of Partnerships and Partners, par. 10.02[2], at 10-57 n.153 (1990).↩21. The partnership agreement does not specify how the 90 percent was to be distributed between Development Systems (now petitioner) and Takacs (now Berzon). We assume, however, that it must have been in a ratio of 45.9 (now 47.5) to 5.1 (now 3.5) in order to bring the three partners to the required percentages.↩22. The allocation amount is computed as follows:↩Beginning of year capital account($ 1,251,898)Capital contributed during year30,953 Distributions during year(70,000)Share of 1980 ordinary loss(119,287)Gain on sale of real property2,176,332 Ending capital account balance766,100 23. In the alternative, petitioner could have given half of his interest to Equity as of that date.↩24. In light of the fact that petitioner is entitled in 1980 to a net operating loss carryover deduction of $ 126,241 from 1978, the recomputation under Rule 155 may well result in an overpayment rather than a deficiency.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619105/	ATAO HEALY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHealy v. CommissionerDocket No. 30316-85United States Tax CourtT.C. Memo 1989-375; 1989 Tax Ct. Memo LEXIS 374; 57 T.C.M. (CCH) 1085; T.C.M. (RIA) 89375; July 26, 1989Atao Healy, pro se. Thomas Travers, for the respondent. PARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined a deficiency in petitioner's 1981 income tax of $ 19,250.00 and additions to tax in the amounts of $ 962.50 and 50 percent of the interest due on $ 19,250.00 under sections 6653(a)(1)1 and (a)(2), respectively. After concessions, we must decide (1) whether petitioner is entitled to her claimed dependency exemptions; (2) whether petitioner has unreported community income; (3) whether petitioner is entitled to the itemized deductions respondent disallowed; (4) whether the amount petitioner reported as a dividend is excludable375 from income; and (5) whether petitioner is liable for the additions to tax. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulated facts and exhibits are incorporated by this reference. Petitioner resided in Fountain Valley, Calif., when she filed her petition in this case. Petitioner timely filed her 1981 Federal income tax return under the status married filing separately. During 1981 petitioner was married to Dr. John Healy, a chiropractor, and she worked as a cashier. Petitioner reported W-2 wage income of $ 14,180.00 on her return. All of these wages were earned by Mrs. Healy while working as a cashier. Mrs. Healy did not include any of her husband's income in her return. Petitioner also claimed one personal exemption plus exemptions for her husband, her son and two other relatives. Respondent disallowed all but the personal exemption for lack of substantiation. At trial respondent conceded that petitioner is entitled to deductions as claimed on Schedule A of her return for state and local income taxes, real estate taxes, and sales taxes, as well as union dues. Petitioner conceded she is not entitled to a charitable contribution376 to the Universal Life Church. The following deductions are still in dispute: Interest:Home mortgage$ 4,920.00Accordian203.00Miscellaneous Deductions:Publication400.00Respondent disallowed these deductions because of inadequate substantiation. Petitioner also reported a dividend of $ 2,863.00 from the Capital Preservation Fund. Although respondent originally determined a greater dividend was paid, he has conceded that the amount was correctly reported. At trial petitioner contended, however, that the amount was excludable from income. OPINION Petitioner bears the burden of proof on all issues in this case. Rule 142(a), Tax Court Rules of Practice and Procedure.Dependency ExemptionsPetitioner claimed a personal exemption for herself plus exemptions for her husband, son and Show-Chi Kuo and Sun Yu Kuo listed as petitioner's mother-in-law and father-in-law, respectively. 2 Respondent disallowed all except the personal exemption. At trial petitioner presented no evidence that she was entitled to the dependency exemptions. We hold377 for respondent on this issue. Community IncomeRespondent determined that Dr. Healy had income of $ 60,018.00 in 1981. California is a community property state. Taxpayers in community property states are required under Federal tax law to report one-half of the "community" income. United States v. Malcolm, 282 U.S. 792">282 U.S. 792 (1931); Hunt v. Commissioner, 22 T.C. 228">22 T.C. 228 (1954). Thus, petitioner is required to report not only one-half of her income, but one-half of her husband's income as well. The evidence in this case demonstrates that respondent's determination of Dr. Healy's wage income for 1981 was incorrect. Dr. Healy drew a salary from the chiropractic practice with which he was affiliated. Respondent, however, also determined that Dr. Healy received payments from insurance companies. Dr. Healy testified, and we believe, that378 these insurance payments, although payable to Dr. Healy, were in fact paid to the owner of the chiropractic practice, Dr. Raymond Moser. Therefore, the portion of respondent's determination relating to income from insurance payments is not includable in petitioner's income. According to respondent, Dr. Healy had W-2 income of $ 35,385.00 in 1981. Dr. Healy contends that this may be an incorrect amount. However, Dr. Healy was uncooperative, if not evasive, when the Court questioned him about the correct amount of wage income for 1981. When forced to estimate his earnings he estimated he received $ 25,000 in 1981. We are unable to believe that Dr. Healy's estimate is more reliable than respondent's determination, which is presumed to be correct. Therefore, we find that petitioner must include $ 17,692.50 as income for 1981 ($ 35,385.00 X .5). Petitioner's income must be further adjusted in 1981, however. Mrs. Healy earned $ 14,179.77 as a cashier in 1981. She reported $ 14,180 as wage income of her return. Mrs. Healy is liable for only one-half of the community income. Thus, she need only include one half of her own wage income on her return (the remaining one half would379 be reportable by her husband). Mrs. Healy's wage income must be reduced by $ 7,089.88. Finally, on the matter of community income, respondent determined petitioner failed to include $ 3,088.00 in community income earned from interest. Petitioner did not present any evidence on this matter. Therefore we uphold respondent's determination. Itemized Deductions(a) Interest In 1981 petitioner claimed interest expense deductions of $ 4,920.00 for a home mortgage and $ 203.00 for an accordian. Dr. Healy testified that the first mortgage on their home was at 10-3/4 percent. The payment of interest and principal was approximately $ 700.50 per month, or $ 8,406.00 per year. Petitioner did not submit the mortgage note itself or any evidence as to the breakdown between principal and interest. Dr. Healy testified that the second mortgage payment of $ 119.00 per month was all interest. He stated the second mortgage was taken out for three years and had a balloon payment due in 1982 or 1983. Again, the mortgage note was not submitted in evidence. Since we do not doubt that the Healys in fact incurred interest expense based on the information we have, we may estimate those expenditures,380 bearing against petitioner whose inexactitude is of his own making. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Treating the interest as simple rather than compound interest, we find that, as to the first mortgage, petitioner may deduct $ 407.97 (.5 X .1075 X ($ 8,406.00/1.1075)). Additionally, we believe the monthly payment of $ 119.00 was purely interest. Petitioner's share of this is $ 59.50. Therefore, Mrs. Healy may deduct one half of the total amount of home interest expended, or $ 467.47. Petitioner also deducted $ 203.00 in interest for an accordian. No evidence was presented on this issue. Petitioner is not entitled to this deduction. (b) Miscellaneous Petitioner claimed a $ 400.00 deduction for a subscription to the "Richard May Report" for investments. Petitioner offered no documentary evidence to substantiate the expenditure. Dr. Healy testified that this publication was to assist him in keeping track of the stock market. He testified that he and his wife had approximately $ 20,000.00 invested in the market during 1981. However, petitioner's Form 1040 shows only $ 15.00 of interest income and no dividend income apart from the Capital381 Preservation Fund, which we assumed was managed by others. Moreover, no stock trades are shown on petitioner's return. The Healys do not appear to have been actively trading stock. Therefore, we cannot find that the publication was an ordinary and necessary expense for the management, conservation or maintenance of property held for the production of income. Section 212. Petitioner may not claim this deduction. Dividend IncomePetitioner reported dividend income from the Capital Preservation Fund of $ 2,863.00. At trial, respondent conceded that petitioner had reported the correct amount. Petitioner now claims, however, that the amount was properly excludable from income. The Form 1099 for 1981 issued to petitioner, and received in evidence without objection, states that the entire dividend qualifies for exclusion. We find for petitioner on this issue. Additions to TaxRespondent determined petitioner was subject to additions to tax equal to 50 percent of the interest on the underpayment plus five percent of the underpayment due to negligence. Petitioner bears the burden382 of proving she is not liable for these additions to tax. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757 (1972). Petitioner presented no evidence to suggest the additions were not properly applied. We find for respondent on this issue. To reflect concessions and the foregoing, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during 1981.↩2. We note that Dr. Healy filled out petitioner's tax return. This would explain why petitioner's "in-laws" do not have her last name. In all likelihood these people are petitioner's parents and Dr. Healy's in-laws.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619106/	CYRIL SHILLING and JOAN SHILLING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSHILLING v. COMMISSIONERDocket Nos. 5366-71, 2593-73, 4289-73.United States Tax CourtT.C. Memo 1978-456; 1978 Tax Ct. Memo LEXIS 60; 37 T.C.M. (CCH) 1847-64; November 14, 1978, Filed Cyril Shilling, pro se. Harvey S. Sander, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These cases were assigned to and heard by Special Trial Judge Charles R. Johnston. Pursuant to the order of the Chief Judge dated November 2, 1977, as amended, the provisions of Rule 182, Tax Court Rules of Practice and Procedure are not applicable to these cases. 61 The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below. OPINION OF SPECIAL TRIAL JUDGE JOHNSTON, Special Trial Judge: These cases were heard pursuant to the order of the Chief Judge dated November 2, 1977, as amended. The respondent determined deficiencies in petitioners' Federal income tax in the amounts of $122.94, $460.61 and $335.15 for the taxable years 1968, 1969 and 1970, respectively. Concessions having been made, the issues remaining for decision are: (1) whether petitioners are entitled to deductions under section 162(a) 1 for transportation expenses of $1,617.47 in 1969 and $1,721.00 in 1970 incurred in traveling by personally-owned automobile between petitioners' residence and various job sites at which petitioner, Cyril Shilling, was employed; and (2) whether section 63 is unavailable to respondent for the years 1969 and 1970. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference. 62 Petitioners' legal residence at the time of filing the petitions herein, and during the taxable years at issue, was 114 Holbrook Road, Centereach, New York. Petitioner, Cyril Shilling, is a carpenter by trade and during the taxable years 1969 and 1970 he was employed as such at various job sites on Long Island, New York. He traveled by personal automobile between his residence and his various places of employment carrying with him the tools used in his trade. When Cyril drove to the job sites where he worked, no other person traveled with him. His tools weighed approximately 180 pounds. No alteration was required to petitioner's automobile to facilitate the carrying of his tools. During the year 1969 Cyril drove between his residence and job sites in various localities for the days and distances as follows: DaysDaily RoundTotal Round LocalityWorkedTrip MileageTrip MileageFarmingdale College157507,850Farmingdale, New York1/14/69 - 1/17/693/17/69 - 12/31/69Veterans' Hospital2434816Northport, New York1/20/69 - 3/11/69Total1818,666In 1969 Cyril incurred the following travel expenses which were deducted63 on petitioners' joint Federal income tax return for said year: ItemAmountDepreciation$ 832.00Insurance221.00License30.75Gasoline261.48Oil & Lubrication43.58Repairs150.29Tires & Tubes64.05Washing & Polishing11.32Inspection3.00Total$ 1,617.47He incurred no expense for tolls when he drove to and from his residence and the various job sites at which he worked. During the year 1970, Cyril drove between his residence and job sites in various localities for the days and distances as follows: DaysDaily RoundTotal Round LocalityWorkedTrip MileageTrip MileageFarmingdale College39501,950Farmingdale, New York1/2/70 - 1/23/7011/18/70 - 12/30/70Veterans' Hospital30341,020Northport, New York2/10/70 - 3/23/70Long Island Lighting55372,035Northport, New York3/24/70 - 5/8/706/8/70 - 7/28/70Huntington, New YorkFood Fair Stores18478465/11/70 - 6/3/70A & P Stores23451,0358/10/70 - 9/10/70Waldbaums83528010/7/70 - 10/12/7011/2/70 - 11/5/70A & S54824011/9/70 - 11/13/70Synagogue6432589/23/70 - 9/30/70Suitorama, Route 11075035010/21/70 - 10/28/70Elwood, New YorkBell Telephone6301809/14/70 - 9/21/70Big Apple, Route 25A3288410/29/70, - 11/16/70,11/17/70Total2008,27864 He incurred no expense for tolls when he drove to and from his residence and the various job sites at which he worked. In 1970 Cyril incurred the following travel expenses which were deducted on petitioners' joint Federal income tax return for said year: ItemAmountDepreciation $ 832.00Insurance217.00License31.00Inspection3.00Repairs192.00Tires73.00Gas, Oil & Lubrication373.00Total$ 1,721.00The driving time from petitioners' residence to the Farmingdale job site would be between 45 and 50 minutes; to the Northport job sites it would be between 35 and 40 minutes; and to the Huntington and Elwood job sites the driving time would be slightly longer than the time to Northport. Cyril started work at 8 a.m. and finished work at 3:30 p.m. In the vicinity of petitioners' residence in Centereach, New York bus routes numbered 60, 62, 63, 64 and 72 were in operation. These bus routes could not have been utilized in any manner by Cyril to travel from his residence to any job site at which he worked in 1969 and 1970. During the years 1969 and 1970, the Long Island Railroad (hereinafter referred to as LIRR) operated a bus between Greenport, 65 New York, which is east of Centereach and Huntington, New York, which is west of Centereach. The bus stopped at Pleasant Avenue in Centereach. After Pleasant Avenue, going in a westerly direction, the bus proceeded on Route 25. Between Pleasant Avenue and Huntington, the bus was only authorized to stop at the Smith Haven Mall, the Suffolk County Center, and Huntington. The bus traveled through Commack, New York, passing Larkfield Road, but it was not authorized to stop there. The first bus in the morning leaving Pleasant Avenue in a westerly direction would depart at 7:20 a.m. and would arrive in Huntington at 8:00 a.m. In the afternoon, busses departed from Huntington going in an easterly direction to Centereach at 1:09 p.m., 4:09 p.m., and 6:22 p.m. The 4:09 p.m. bus would arrive at Centereach at 4:44 p.m. The bus stop in Centereach would be a brisk fifteen minute walk for Cyril from his residence. It would take approximately ten minutes to get from the LIRR bus stop in Huntington to the job sites situated in the Plaza, Huntington. The time to get to those situated elsewhere in Huntington does not appear. There were six job sites in Huntington, i.e., Food Fair Stores, A66 & P Stores, Waldbaums, A & S, Synagogue, Suitorama, and the distance of each from Cyril's residence was 23-1/2, 22-1/2, 17-1/2, 24, 21-1/2 and 25 miles, respectively. OPINION The question to be determined is whether petitioner, a carpenter by trade, is entitled to deduct during the taxable years as an ordinary and necessary business expense under section 162(a) the cost of travel between his residence and the various job sites at which he worked. He traveled to and from his places of employment in his personally-owned automobile in which he would carry the tools of his trade as well as other miscellaneous equipment. The tools weighed about 180 pounds. On his income tax returns for 1969 and 1970, petitioner deducted as employee business expense $1,617.47 and $1,721.00, respectively, attributable to the cost of traveling between his place of residence and his places of work. Respondent disallowed the claimed deductions and asserted the deficiencies herein at issue. A taxpayer's costs of commuting to work are personal expenses and ordinarily do not qualify as deductible expenses. Section 1.262-1(b)(5) Income Tax Regs. However, the Supreme Court has held that if a taxpayer67 incurs additional expense in traveling between his residence and his place of employment because of the necessity of carrying his tools to work he may deduct the additional expenses. Fausner v. Commissioner,413 U.S. 838">413 U.S. 838 (1973). Respondent concedes the applicability ofRev. Rul. 63-100, 1 C.B. 34">1963-1 C.B. 34, to the facts in the instant case. But, in order for the petitioner to deduct the costs of his transportation within the rules prescribed inRev. Rul. 63-100, he must show that he would not have traveled to the job sites by private vehicle but for the necessity of having to transport his tools and equipment. If a taxpayer would have driven his automobile to work had he not been required to transport his tools, he has incurred no such additional expense and nothing is deductible. Gilberg v. Commissioner,55 T.C. 611">55 T.C. 611 (1971). Cyril's contention is that if he did not have to carry his tools, he would have used public transportation to travel to and from the various places at which he worked in each of the years. As the parties have stipulated and we have found, bus routes numbered 60, 62, 63, 64 and 72 could not have been68 utilized by Cyril for that purpose.His reliance is mainly upon the LIRR bus route which passed through Centereach along Route 25 to Huntington. The stops on that route were at the intersection of Pleasant Avenue and Route 25, at South Haven Mall, at the County Center (there was no authorized stop at the intersection of Larkfield Road and Route 25 in Commack) and at Huntington. It was Cyril's contention that he would have used the LIRR bus route to reach the job sites at Huntington, Northport (in part to Commack then pick up ride), and Farmingdale (in part to Huntington, then pick up ride). The record does not show how petitioner could have gotten to Elwood which is located about a mile to a mile and a half from the intersection of Larkfield Road and Route 25. The location of Cyril's work site at the Big Apple on Route 25A cannot be precisely located on this record. Nor can its accessibility to Cyril by public transportation be ascertained. It is clear, however, that the LIRR bus route does not approach Route 25A closer than a mile and a half on the portion of the route we are concerned with. Respondent contends that the facts show that Cyril's use of the LIRR bus route would69 at the least be impracticable.He points out that the earliest scheduled arrival time of the bus in Huntington is 8:00 a.m. and the point of arrival is at least 10 minutes from the nearest work site if the bus arrives on time. This assuredly guarantees Cyril would be tardy or late for work every day. Additionally, the earliest bus which would bring Cyril home each day left at 4:09 p.m. and was scheduled to arrive at Centereach at 4:44 p.m. Petitioner then had a 15 minute walk to his residence. The driving time between Cyril's residence and the Huntington work sites was between 45 and 50 minutes. The evening trip home, including the waiting and walking time, would take about an hour and a half. We agree with respondent's contention that no employer would countenance a union worker reporting to work late every day. We also agree that it is difficult to believe petitioner would have traveled by bus with such inconvenient schedules. With respect to travel to Northport, Farmingdale and Elwood, we think petitioner has failed to show that there was a practicable means of transportation to and from work. Not only did it depend on unauthorized bus stops, but also on additional forms70 of transportation based essentially on pick-ups or taxis. In the case of the Farmington job, it is clear that use of the bus arriving in Huntington at 8:00 a.m. insured petitioner's late arrival at work on a daily basis and an even later arrival at home. There does not appear to have been any means of public transportation readily available to petitioner which would have enabled him to arrive at his various places of work at the normal starting time for his trade. Nor does the record show any other practicable means of commuting to and from his jobs other than by his private vehicle. We therefore conclude that petitioner would have driven to work even if he had not been required to carry his tools and equipment in his automobile. While this conclusion requires us to sustain the respondent's disallowance of the claimed business expense, we also note that petitioner has failed to establish the amount of any additional expense incurred because of the necessity of carrying his tools to work. Petitioner testified that he used his car at work to drive to other job sites from time to time. Such use does not make the expense of driving to and from work deductible. Feistman v. Commissioner,63 T.C. 129">63 T.C. 129 (1974).71 It is true that the expense of driving between work sites is a deductible expense but unfortunately the record does not show the number of times such trips were made nor the distance traveled. Petitioner has the burden of proof to show the number and lengths of such trips. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142, Tax Court Rules of Practice and Procedure. He has not sustained that burden. Petitioners contend that they are entitled to refunds of $658.88 and $892.00 in 1969 and 1970, respectively, on the account of the non-availability of section 63 to respondent. This claim is based on the argument that the statutory notice was wrongly issued. That in issuing the statutory notice the Commissioner of Internal Revenue disregarded the statutory formula set out in section 63; that since the formula was disregarded it was not available to the Commissioner by his knowingly wrongful act; and, that as a matter of law, without application of section 63 there cannot be any "taxable income" to the petitioners thus entitling them to the refund claimed. This argument was advanced and rejected in two Memorandum Opinion of this Court 2 on the grounds that it is72 essentially an argument that the motives of the Commissioner were improper so that he should be estopped or precluded from collecting any tax from the petitioners. Cf. Crowther v. Commissioner,28 T.C. 1293">28 T.C. 1293, affd. on this issue 269 F. 2d 292 (9th Cir. 1959). Decision will be entered for petitioners in Docket No. 5366-71.Decision will be entered under Rule 155 in Docket No. 2593-73.Decision will be entered for Respondent in Docket No. 4289-73.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩2. Frey v. Commissioner,T.C. Memo. 1971-208; Coker v. Commissioner,T.C. Memo. 1972-80↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619107/	Percival E. Foerderer v. Commissioner.Foerderer v. CommissionerDocket No. 109076.United States Tax Court1943 Tax Ct. Memo LEXIS 428; 1 T.C.M. (CCH) 677; T.C.M. (RIA) 43102; February 27, 1943428 (1) Petitioner created a trust naming himself as sole trustee with broad powers of management including power to pledge securities of the trust estate for the purpose of borrowing money to make advances to a beneficiary to be charged against future income and providing that the income was to be paid to his wife for life and upon her death to her children for petitioner's life. Large advances, in excess of the income of the trust, were made during various years to petitioner's wife as a beneficiary. Held, that petitioner is taxable with the income of the trust for the taxable year under section 22 (a) of the Revenue Act of 1938. (2) Attorney and accountant fees paid by petitioner during the taxable year to recover overpaid income taxes with interest thereon held deductible under section 23 (a) of the Internal Revenue Code as amended by Section 121 (a) (2) of the Revenue Act of 1942 to the extent such fees were allocable to the recovery of the interest. J. S. Y. Ivins, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent. TYSON Memorandum Findings of Fact and Opinion Respondent determined a deficiency in income tax for the calendar year 1939 against petitioner in 429 the amount of $6,763.92. There are only two issues. The first issue is whether income from a trust of which petitioner was grantor is taxable to petitioner. The second issue concerns the deductibility of certain accountant and attorney fees paid by petitioner in recovering overpaid income taxes. The proceeding has been submitted upon the pleadings, stipulations of facts, and oral and documentary evidence. Findings of Fact Two stipulations of facts, numbered 1 and 2, respectively, have been submitted. In stipulation number 2 the parties reserved the right to object to the consideration of any fact therein stipulated on the ground of irrelevance and immateriality. The petitioner made such objection as to all the facts contained in stipulation number 2. We received stipulation number 2 in evidence with the understanding that irrelevant and immaterial facts therein would be disregarded. Deeming the facts, set out in stipulation number 2 as material and relevant we adopt the facts as set forth in both stipulations as a part of our findings of fact, but incorporate herein only such of these facts as we deem essential to consideration of the issues involved. Petitioner is an individual430 whose office is at 123 South Broad Street, Philadelphia, Pennsylvania. He filed his Federal income tax return for the calendar year 1939 with the collector of internal revenue, First District of Pennsylvania, Philadelphia, Pennsylvania. On July 1, 1924, Petitioner created an irrevocable trust naming himself as sole trustee and transferring certain securities to the trust. The trust instrument provided that the income thereof was to be paid to petitioner's wife, Ethel Brown Foerderer, for her life, and upon her death and until petitioner's death, to the child or children of his wife or the issue of such child or children per stirpes. Upon the death of petitioner and his wife the corpus was to be distributed as petitioner's wife should by will appoint and in default of such appointment to their descendants then living per stirpes. If petitioner's wife died intestate leaving no descendants, the corpus was to be distributed to persons entitled to petitioner's estate under the intestate laws of his domicile. By the trust instrument petitioner gave to himself as trustee power: to hold the securities in trust or sell them or any other property comprising the corpus of the trust431 estate at public or private sale for such prices and on such terms as he deemed fit; to make other investments in real or personal property in addition to legal investments as he deemed advisable without liability for loss if made in good faith; to join in any plan of reorganizations of corporations whose securities were held by the trust; to make exchanges of securities or any other property held by the trust; to borrow money for any purpose incident to the administration of the trust or for making advances to a beneficiary to be charged against future income; and to pledge any securities in the trust estate as collateral for such borrowings. The trust instrument further provided that if the beneficiary for life receiving advances should die before such advances had been recouped from accruing income, the advances were to be charged against corpus. Petitioner reserved the right to appoint and remove an associate or successor trustee. Petitioner and his wife had one child living at the time of the creation of the trust. Two other children have been born since that time, one in 1926 and the other in 1927. Petitioner has been the sole trustee of the trust since its creation. All 432 checks for dividends on stocks and interest on bonds constituting the corpus of the trust and all other funds of the trust are now and at all times since the creation of the trust have been paid to Percival E. Foerderer and deposited in bank accounts entitled "Percival E. Foerderer Special", and all disbursements by the trustee have been made by checks against these accounts. The first of these accounts was opened on July 22, 1924. Brokerage accounts carried in the name of "Percival E. Foerderer Special" were used solely for the purchase or sale of securities for the trust. All disbursements by the trustee have been made by check prepared by a Mr. Elmer Strunk, an employee, and signed "Percival E. Foerderer, Special." Checks of the trustee drawn to the order of Ethel Foerderer were endorsed by her, or by the above-mentioned employee at her direction, and in the latter case were deposited by the employee in one of her several bank accounts. Withdrawals from her bank accounts were made only by her personal check. An office has been maintained by the estate of petitioner's father, Robert H. Foerderer Estate, Inc., at 123 Broad Street, Philadelphia, Pennsylvania. Others having their433 business headquarters in that office were Percival E. Foerderer, Ethel Brown Foerderer, petitioner's mother, his sister and brother-in-law, the Percival E. Foerderer trust in question, a Percival E. Foerderer trust created in 1932, and certain corporations of which Percival E. Foerderer was an officer. A Mr. Platt, and later Elmer Strunk, attended to the business and personal matters of the individuals, trusts, and corporations at that office. On April 25, 1924, Ethel Brown Foerderer, petitioner's wife, made application to five life insurance companies for insurance aggregating $250,000, on the life of petitioner, and policies were issued on these applications to petitioner's wife as primary beneficiary. Petitioner signed the policies in acquiescing in the issuance of the policies on his life. The initial premiums on these policies aggregated $7,678.50. On June 19, 1924, Ethel Brown Foerderer borrowed $7,755.50 from R. H. Foerderer Estate, Inc., and gave her note therefor. She used this sum to pay the initial insurance premiums and interest thereon. At the time this insurance was taken out petitioner was carrying a substantial amount of other insurance on his own life. On December434 1, 1924, petitioner as trustee by a trustee's check paid with interest the note which Ethel Brown Foerderer had given to R. H. Foerderer Estate, Inc. and charged the payment to her account on the books of the trust. In 1927 and 1928 Ethel Brown Foerderer made application with three insurance companies for additional insurance, aggregating $450,000, on the life of petitioner. Such insurance was issued with petitioner's wife as primary beneficiary thereunder. The annual premiums thereon totalled $14,772. In accordance with the insurance applications, premium notices with respect to all insurance taken out by Ethel Brown Foerderer on petitioner's life were sent to 123 South Broad Street, Philadelphia, Pennsylvania. Elmer Strunk notified Ethel Brown Foerderer of the receipt of these notices and, in the instances in which the premiums were paid out of trust income, would prepare checks for the premiums on the account known as "Percival E. Foerderer Special" at the Girard Trust Company, obtain petitioner's signature thereon, endorse the checks on behalf of Ethel Brown Foerderer with a rubber stamp and deposit them in her personal account at the Girard Trust Company. Ethel Brown Foerderer435 would then sign checks drawn on her personal account for the payment of the insurance premiums and Elmer Strunk would see to their proper application. In no instance were insurance premiums paid directly from the trust, but all such payments were made by Ethel Brown Foerderer through personal checks drawn on her bank account. In many instances Ethel Brown Foerderer received checks from the trust in the exact amounts necessary to pay the annual insurance premiums. Until 1936 petitioner as trustee made payments (including advances of $105,571.62) from the trust to Ethel Brown Foerderer largely in excess of all insurance premiums paid by her. The total of such premiums between 1924 and 1936 was $167,675.54. Her total income from the trust, excluding advances but including capital gains, from 1924 to 1936 was $151,398.85. Her total income, including capital gains, other than from the trust from 1924 to 1936 was $97,046.42. No payments of premiums were made in cash to the insurance companies after 1936, the payments being carried under additional loans or by election of options. Between February 1925 and 1936 petitioner, individually, made numerous loans to the trust ranging in amounts436 from $608 to $41,597.43, and aggregating a total of $94,505.43. All of these loans were repaid without interest. On August 7, 1925, petitioner, individually, borrowed $25,000 from the trust and in 1927 repaid such amount without interest. On November 26, 1934, Ethel Brown Foerderer borrowed $2500 from the trust, which loan was repaid with interest in 1935. Elmer Strunk had authority to borrow cash from the account of any of the parties or concerns operating in the office at 123 Broad Street and use it for another of such parties or concerns; and there was continuous intra-office borrowing between the corporate, trust, and individual accounts. Petitioner, in his discretion, shifted funds from the account of one entity to another as he thought was required by the business exigencies of the entity to which the funds were shifted. On each of two occasions when income of the trust in excess of $18,000 was received, it was deposited to the account of Percival E. Foerderer, Inc. and book entries made to reflect a loan from the trust to that corporation. Frequently purchases and sales made by the corporation, trust, and individuals, including the trust in question, would be cleared through437 Percival E. Foerderer, Inc. bank account for the reason that the bank account of that corporation could be drawn upon by checks signed by Elmer Strunk during petitioner's absence. All stocks belonging to the trust and other accounts in the office were in the name of petitioner, individually because he acted as nominee for all such accounts. Entries were made in the books of a particular account at the time of the purchase of the stock so as to identify the stock as belonging to that account. In 1927 Ethel Brown Foerderer purchased a summer residence at Seal Harbor, Maine, known as "Chasellas", for $34,650. She was the grantee in the deeds by which the property and the furnishings therein were acquired. The purchase price was paid by check drawn on the account of "Percival E. Foerderer Special" and was charged on the books of the trustee to "Seal Harbor Property". The cost of improvements upon the property, furnishings, taxes, repairs, a boat for use at the property, and the repair of furnishings and equipment were also paid by checks drawn on the account, "Percival E. Foerderer Special", and charged as advances to Ethel Brown Foerderer and during the period from 1927 through 1940438 the cost of these items amounted to $10,662.23. "Chasellas" was occupied as a summer residence by members of petitioner's family during the summer seasons of 1928 to 1938, inclusive, but not thereafter. It was offered for rent in the summer of 1938 and has continuously since then been offered for rent. Petitioner spent part of the summer season with his family when they were at "Chasellas". For some time prior to September 1934 and at all times after October 1936, petitioner regularly furnished to his wife $3,100 a month for household expenses. In thirteen months of the period from September 1934 to October 1936, petitioner, individually, made monthly payments of $3,100 to his wife for household expenses. In ten months of the period from September 1934 to October 1936 petitioner, as trustee, made similar payments of $3,100. During three months of the latter period part of monthly payments of $3,100 for household expenses was paid by petitioner, individually, and part by petitioner, as trustee. The reason why some of these payments were made by petitioner from the trust was that he, individually, did not have available the money to make the payments. On August 31, 1927, petitioner439 made an entry on his own individual books recording a transfer to the trust of 700 shares of common stock of Aluminum Company of America which had been purchased by him in January 1927 for the sum of $44,688.21. On November 27, 1927, petitioner, as trustee, sold 700 shares of Aluminum Company of America stock for $83,709.50. On November 27, 1927, the trustee paid to Percival E. Foerderer the sum of $44,688.21, designated on the trustee's books as "Amount due for purchase of 700 shares of Aluminum Co. of America". Petitioner, as trustee, reported and paid the Federal income tax on the gain on the sale. Petitioner, in administering the trust as trustee, made advances to his wife in excess of the income thereby causing an impairment of the corpus of the trust. This impairment steadily increased from $5,070.54 at the end of 1928 to $120,761.59 at the end of 1936. By the end of 1939 the impairment was reduced to $108,396.68. In determining the deficiency the respondent included in the income of the petitioner the amount of $8,916.49 as ordinary income of the 1924 trust and the amount of $3,067.48 as short term gain of that trust. In 1939 petitioner paid accountant and attorney fees440 for services in recovering overpaid income taxes. These fees were determined by a percentage of the recovery of tax and interest. The interest recovered was 34.17 percent of the total recovery. This interest was included in petitioner's 1939 taxable income in respondent's determination. The total of the fees was $2,943.85 and 34.17 percent thereof is $1,006.05. Petitioner on his 1939 income tax return deducted as business expense the entire $2,943.85, which was wholly disallowed by respondent in determining the deficiency in controversy. Opinion TYSON, Judge: The first issue is whether the 1939 income from the trust established by petitioner on July 1, 1924 for the benefit of his wife and contingent beneficiaries is taxable to petitioner in 1939. Petitioner contends that the income is not taxable to him under either sections 166, 167, or 22 (a) of the Revenue Act of 1938. Respondent's principal, and only definite, contention is that petitioner remained, in reality, the owner of the trust corpus and therefore is taxable on the income therefrom under section 22 (a) of the Revenue Act of 1938. The test to be applied in determining whether the grantor is taxable under section 22 (a) 441 of the Revenue Act of 1938 is, as was stated by the Supreme Court in , as follows: That issue is whether the grantor after the trust has been established may still be treated, under this statutory scheme as the owner of the corpus. * * * In absence of more precise standards or guides supplied by statute or appropriate regulations, the answer to that question must depend on an analysis of the terms of the trust and all the circumstances attendant on its creation and operation. And where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as section 22 (a) is concerned. In the instant case provisions in the trust instrument itself, when considered in connection with the facts surrounding the creation and operation of the trust, lead us to the inevitable conclusion that petitioner retained such a substantial ownership in the trust corpus as to render him taxable on the income therefrom here442 involved under section 22 (a), supra. The terms of the trust instrument leading to this conclusion are: the income from the trust was reallocated within petitioner's "intimate family group"; petitioner was the sole trustee; petitioner, as trustee, had broad powers of management; and petitioner, as trustee, could pledge the securities of the trust for the purpose of borrowing money to make advances to a beneficiary to be charged against future income. The broad powers of management reposed in petitioner, as trustee, when "coupled" with his further power to pledge corpus of the trust for the purpose of borrowing money to make advances to a beneficiary are, we think, vitally significant. See . The trust instrument does not limit the extent to which corpus could be pledged and, in view of the provision of that instrument that advances to the life beneficiary, petitioner's wife, if not recouped before the death of the life beneficiary, would be a charge against corpus, we think that petitioner could have made advances to his wife in amounts which might approximate, if not equal, the value of the corpus of443 the trust by borrowing and pledging trust securities for the loan. In such a case, if his wife died, the remaindermen would receive a greatly impaired interest, or no interest, in the trust. After the death of his wife, when petitioner's three children, if living, would become entitled to the income from the trust, petitioner, as trustee, could also borrow money for the purpose of making advances to any one or two of his three children, to the exclusion of the other or others, by pledging the trust securities without limit as security for such borrowings and thus impair, and possibly destroy, the interest of the other child or children in the trust. In effect, then, petitioner, under the terms of the trust instrument, had the power to shift beneficial interests in the trust. We consider this power in petitioner, a man of large means, as an important factor in concluding, as we have, that petitioner substantially remained the owner of the trust for the purpose of section 22 (a), supra. That petitioner construed the trust instrument as giving him power, as trustee, to make advances to his wife is established by the fact that at the end of the taxable year the trust corpus had444 been impaired to the extent of $108,396.68 by such advances. Had petitioner's wife died at that time there would have resulted a shift of interests in the trust fund from the contingent beneficiaries to the wife as life beneficiary. The power in the grantor to shift interests in the trust from one beneficiary to another is deemed important by the courts. In , affirming and involving a trust whereby the grantor retained the power to change both the beneficiaries and the proportion of the income payable to any beneficiary, except that such changes could not be for the benefit or use of herself, the Circuit Court of Appeals for the Third Circuit said: We think that a settor who is a person of means and who can control the spending of a fund, which she has set up, in every respect except spending it for herself is sufficiently the "owner" of the fund to make its income taxable to her under section 22 (a). Also, in , the Circuit Court of Appeals for the Second Circuit said the "outstanding fact" in that case was that445 the grantor of a trust had reserved the power to change, in any respect whatsoever, the provisions of the trust relating to "the disposition of the income and principal of the trust estate or the separate shares into which the same may be divided, and to change any beneficial interest" under the trust, although he could not by such changes benefit himself. In so holding the court stated: During his life, he has entire control of the sale and investment of the corpus, in whole or in part, and the voting power of any stock now or later constituting that corpus. When to such control there is coupled the power, until his death, freely to sprinkle the income about among any beneficiaries he may select (as if he were playing a hose), it is impossible to conclude, in the light of the recent decisions of the Supreme Court, that the income is not taxable to him. See . Cf. . Further indicia of petitioner's substantial ownership of the trust fund are found in some of the actual uses to which principal and income thereof were applied and are confirmatory of our conclusion. 446 We are justified in considering such further indicia in the light of the test quoted above from Helvering v. Clifford, with reference to which test the Tenth Circuit Court of Appeals in , said: In the determination of this question all facts and circumstances, which bear upon the creation and operation of this trust become material, as well as the terms and provisions of the trust instrument itself. See also . Until 1936 payments of large amounts derived from the trust by petitioner's wife, as the life beneficiary, were made by her on premiums for insurance, which insurance aggregated $750,000, on petitioner's life. Thereafter, and through the taxable year, the policies carried themselves. Moreover, prior to 1936, income and advances to petitioner's wife were used on occasion to pay household expenses of petitioner and his family and also for the purchase and upkeep of a summer home in Seal Harbor, Maine, occupied by petitioner and family. All of these payments directly, or indirectly, benefited petitioner. We hold petitioner taxable on447 the income of the trust here involved under section 22 (a) of the Revenue Act of 1938. In view of our above holding, we need not decide whether petitioner is taxable under sections 166 or 167 of the Revenue Act of 1938 and, in fact, a contention to that effect does not seem to have been specifically made by the respondent. The second issue presents the question of whether or not accountant and attorney fees paid by petitioner during the taxable year for services rendered in recovering overpaid income taxes and interest thereon are deductible. Section 121 (a) (2) of the Revenue Act of 1942, which is retroactively applicable to taxable years beginning after December 31, 1938, provides that "in the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income" are deductible for income tax purposes.while the accountant and attorney fees in question paid to recover the income taxes themselves are not deductible under this section, the fees allocable to the collection of interest on the income tax recovery*448 are deductible. 34.17 percent of such recovery constituted interest. Therefore, 34.17 percent of the total of the accountant and attorney fees, or $1,006.05, is a deductible expense, and this is the full extent of the deduction claimed by petitioner on brief. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619108/	ERMA CLARKE AND JAMES CLARKE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentClarke v. CommissionerDocket No. 10680-93United States Tax CourtT.C. Memo 1994-390; 1994 Tax Ct. Memo LEXIS 399; 68 T.C.M. (CCH) 398; 94-2 U.S. Tax Cas. (CCH) P47,952; August 17, 1994, Filed 399 Decision will be entered under Rule 155. Erma Clarke and James Clarke, pro se. For respondent: Gary L. Bloom. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent, for petitioners' 1990 taxable year, determined a $ 9,312 Federal income tax deficiency and a $ 1,862 addition to tax under section 6662(a). 1 Respondent has conceded that petitioners are not liable for the addition to tax under section 6662(a). Petitioners have conceded all adjustments except whether they are entitled to tax-deferred treatment in rolling over a distribution from an individual retirement account (IRA) to an investment in their private residence. FINDINGS OF FACT 2400 Petitioners resided in Afton, Oklahoma, at the time their petition was filed. During March 1990, petitioners each withdrew $ 16,361, for a total of $ 32,722, from their respective IRAs. At the time of the withdrawal, each petitioner's age exceeded 59-1/2. Petitioners had telephoned respondent's assistance number and spoken with a representative. Petitioners inquired whether the withdrawal of funds from their IRAs would be taxable if the withdrawn funds were used to purchase a personal residence. Petitioners believe that they were advised that the use of withdrawn IRA funds to purchase a private residence would not result in a taxable transaction. Respondent believes that petitioners were advised that petitioners would not be liable for the 10-percent penalty for premature withdrawal under section 72(t). Relying on their understanding of respondent's advice, petitioners withdrew funds from their IRAs and used them to purchase a residence. Petitioners would not have purchased a residence if they thought the withdrawals were taxable because they would not have been financially able to both purchase the house and pay the tax. OPINION Petitioners' withdrawal of their IRA funds401 would, without further action, result in a taxable event. Sec. 408(d)(1); sec. 1.408-4(a), Income Tax Regs. If, within 60 days, petitioners roll the distributions over into another qualified IRA or a qualified pension plan, the taxable event may continue to be deferred. Sec. 408(d)(3)(A)(i); sec. 1,408-4(b)(1), Income Tax Regs. Petitioners bear the burden of proving that respondent's determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). Petitioners admit that they received $ 32,722 from their IRAs during 1990, but they argue that the taxable event should continue to be deferred because they followed the advice that they had received from respondent's taxpayer assistance program. Petitioners further argue that, even if respondent's advice was wrong, the withdrawal should not be taxable because it was respondent's and not petitioners' error. Petitioners were truthful and credible witnesses, and their position is one that elicits compassion. 3 The relief petitioners seek, however, is not an alternative that is statutorily available, and we have no choice but to find, as we do, that the $ 32,722 withdrawal is fully taxable402 as ordinary income for petitioners' 1990 taxable year. Harris v. Commissioner, T.C. Memo 1994-22">T.C. Memo. 1994-22. Although we cannot be certain whether petitioners misunderstood respondent's representative's advice or whether erroneous advice was rendered, that distinction would not make a difference in the outcome of this case. In situations where the Commissioner's representatives provide erroneous advice based upon a mistaken interpretation of the law, courts and the Commissioner are not bound by the agent's statements and must follow the statutes, regulations, and case law. Dixon v. United States, 381 U.S. 68">381 U.S. 68, 72-73 (1965); Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180, 183 (1957);*403 Neri v. Commissioner, 54 T.C. 767">54 T.C. 767, 771-772 (1970); DiPlacido v. Commissioner, T.C. Memo. 1993-169. Due to agreement of the parties, Decision will be entered under Rule 155.Footnotes1. Section references are to the Internal Revenue Code in effect for the tax year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The parties have stipulated facts and exhibits, all of which are incorporated by this reference.↩3. We note that petitioners were older than 59-1/2 years at the time of the withdrawal and investment in their personal residence. In those circumstances it is difficult to conceive of when or whether petitioners could have expected that the tax-deferred retirement accounts would be subjected to taxation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619109/	Richard H. and Lovella H. Sand v. Commissioner.Sand v. CommissionerDocket No. 132-69 SC.United States Tax CourtT.C. Memo 1969-155; 1969 Tax Ct. Memo LEXIS 142; 28 T.C.M. (CCH) 774; T.C.M. (RIA) 69155; July 22, 1969. Filed Roy E. Crawford, for the petitioners. Nancy L. Simpson and Joel A. Sharon, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: Respondent determined a deficiency of $879.98 in petitioners' Federal income tax for the year 1967. The only issue remaining for decision is whether certain traveling expenses were incurred by petitioner Richard H. Sand "while away from home" within the meaning of section 162(a)(2) 1 so as to entitle him to a deduction. By oral stipulation at trial, petitioners and respondent agreed that, if a deduction is allowable for such expenses, the amount to be deducted is $3,809.47 instead of $4,409.47 claimed on petitioners' 143 income tax return. Findings of Fact Some facts were orally stipulated and are found accordingly. Richard H. Sand and Lovella H. Sand are husband and wife who were legal residents of Yorkville, California, at the time they filed their petition herein. They filed their joint Federal income tax return for the taxable year 1967 with the district director 775 of internal revenue at San Francisco, California. For many years petitioners have lived in the small ranch community of Yorkville, California. About 1965, jobs in the Yorkville area became scarce because of cutbacks in the availability of timber for cutting, so Richard (herein called petitioner) began searching for a more secure means of earning a living. On June 21, 1965, he obtained a temporary 6-month appointment for work as a maintenance man for the California Department of Highways at Hopland, California. Then on December 2, 1965, petitioner obtained a second 6-month appointment at Manchester, California. At the end of this second period, he was discharged pursuant to the terms of his employment. He was then employed144 for several months at a lumber mill near Philo, California, which is about 17 miles from Yorkville. Petitioner continued his search for more permanent employment. Hiring authority with the California Highway Department was vested in district superintendents, so petitioner contacted several district superintendents in the general area of northwestern California seeking an appointment. Once hired by the State, he then understood that he could transfer within a short period of time to an area within commuting distance from his home in Yorkville. In October 1966, petitioner accepted an opening which became available in Orleans, California. Orleans is approximately 280 miles from Yorkville, and is in a remote area referred to as an undesirable place to live "unless [one likes] hunting and fishing and living out in the brush." At the time petitioner was hired by Harry Williams, the district superintendent, it was understood that petitioner would stay at Orleans for a period of 6 months, after which he would be transferred to another location nearer his home when an opening became available. His ultimate goal was to be located in the yard in Booneville, only 10 miles from his home145 town of Yorkville. Although the superintendent would have preferred that petitioner stay a year, the superintendent agreed that petitioner could transfer when an opening became available. The appointment in October 1966 as a highway maintenance man was a "regular permanent" civil service appointment with the State Highway Department. Soon after petitioner went to work at Orleans on October 20, 1966, the Governor of California announced a freeze on hiring of State personnel. The freeze had the effect of inhibiting the opportunity for petitioner to transfer because ordinarily it was necessary to have a replacement prior to a transfer and it was unlikely that anyone would desire a transfer to Orleans. Petitioner had not anticipated the freeze. Petitioner continued to seek a transfer to a point closer to his home in Yorkville, and called upon three or four superintendents when he heard of openings. If it had not been for the freeze, he could have transferred 3 months after going to Orleans. While stationed in Orleans, petitioner traveled 7 hours each way to return to his home in Yorkville every other weekend. He never considered moving his family to Orleans because of the remoteness146 of that area. He lived in a trailer in Orleans during the week. Petitioner was subject to transfer at his own request or at the needs of the State. Petitioner's superintendent at Orleans asked him, apparently sometime in 1967, if he would be willing to transfer to Willow Creek, the main yard in that district, as a "floating" maintenance man. Willow Creek was 30 miles closer to Yorkville than Orleans. Petitioner was agreeable to the change in assignment, but the transfer was not made. On or about December 15, 1967, petitioner was transferred at his request to Fort Bragg, California, which is approximately 59 miles from Yorkville. Petitioners have lived in Yorkville 14 years, and have owned a home there for 12 years. Petitioners' house is next door to Mrs. Sand's parents. Mrs. Sand has lived in Yorkville for the last 23 years, and petitioner lived in an adjoining town 12 miles away for 10 years prior to their marriage. Petitioners were married in Booneville, a nearby town that is the main town of the four small towns in the valley (Navarro, Philo, Booneville, and Yorkville). Petitioners' income tax return shows that they contributed to the Methodist Church in Booneville in 1967. 147 Petitioners have two children, ages 11 and 12, who attend the same school in Yorkville. Petitioner's automobile was registered in Yorkville, and he is registered to vote there. Mrs. Sand has been employed by the Philo Lumber Company in nearby Philo since 1965. In order for petitioner to obtain a job as a highway maintenance man it was 776 necessary for him to accept an employment assignment in the remote area of Orleans for a temporary period of time until he could be transferred to a location near his home in Yorkville. Petitioner incurred traveling expenses (including amounts expended for meals and lodging) of $3,809.47 in 1967 while away from Yorkville in pursuit of his trade as a highway maintenance man. Ultimate Findings 1. Petitioner's employment assignment in Orleans was temporary. 2. Petitioner's "home" during the year 1967 was Yorkville, California. Opinion Section 162(a)(2) allows the deduction as an "ordinary and necessary" expense of "traveling expenses (including amounts expended for meals and lodging * ) while away from home in the pursuit of a trade or business." The narrow factual question presented in this case is whether petitioner's expenditures148 outside of Yorkville were made "while away from home." This depends to a great extent upon whether petitioner's employment assignment in Orleans for most of the year 1967 was "temporary" or "indefinite." Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59 (1958). This we must determine from all the facts and circumstances involved. Petitioner claims that Yorkville was his "home." Respondent argues that Orleans was petitioner's "home" for tax purposes. We agree with petitioner. The phrase "away from home" is not selfdefining. See United States v. Correll, 389 U.S. 299">389 U.S. 299, 304 (1967). The decided cases present varied, and often difficult, questions of fact and we find it unnecessary to review them in detail. We recognize that it is not always easy to draw the line between what is "temporary" and "indefinite." But, exercising our best judgment on this record, we believe the petitioner's employment assignment at Orleans during most of 1967 was temporary. These particular facts, as we view them, bring this case within the ambit of Harry F. Schurer, 3 T.C. 544">3 T.C. 544 (1944); Coburn v. Commissioner, 138 F. 2d 763 (C.A. 2, 1943); and Burns v. Gray, 287 F. 2d 698149 (C.A. 6, 1961).2 Compare Ronald D. Kroll, 49 T.C. 557">49 T.C. 557 (1968), Beatrice H. Albert, 13 T.C. 129">13 T.C. 129 (1949), and Rendell Owens, 50 T.C. 577">50 T.C. 577 (1968), which we regard as distinguishable on their facts. There is present here a coalescence of factors that fortify our conclusion: 1. At all times petitioner considered his assignment to be temporary. He understood that he had to take a temporary assignment to a remote area like Orleans in order to obtain a permanent job with the California Highway Department and that he would be transferred to a place closer to his home in Yorkville within a relatively short period of time. Cf. Harvey v. Commissioner, 283 F.2d 491">283 F. 2d 491, 495 (C.A. 9, 1960), where the Court of Appeals said that the proper test to determine whether petitioner acquired a new tax home is whether - there is a reasonable probability known to him that he may be employed for a long period of time at his new station. What constitutes a "long period of time" varies150 with circumstances surrounding each case. If such be the case, it is reasonable to expect him to move his permanent abode to his new station, and thus avoid the double burden that the Congress intended to mitigate. It is clear that petitioner reasonably expected to be at Orleans for less than a "long period of time" and could not reasonably be expected under such circumstances to move his family from Yorkville to Orleans. Throughout his stay at Orleans petitioner persisted in his efforts to obtain a transfer to a location near Yorkville. He frequently talked with the district superintendents, and finally secured the transfer to Fort Bragg in December 1967. In the interim, he was willing temporarily to incur the additional and duplicitous expense and inconvenience of living away from his "home" in Yorkville. See James v. United States, 176 F. Supp. 270">176 F. Supp. 270, affirmed 308 F. 2d 204 (C.A. 9, 1962). 2. All the surrounding facts are consistent with petitioner's intent that Yorkville remain his "home." He was forced to seek work elsewhere due to a shortage of jobs in the Yorkville area. Petitioner had strong family ties to Yorkville. Both he and his wife went to*151 school in the area and have 777 lived there for all their adult lives. They have lived in their own home for 12 years, which is located next door to Mrs. Sand's parents. Their automobile is registered there. They vote there. Their children go to school there. Mrs. Sand works in nearby Philo. Accordingly, we hold that petitioner's employment assignment at Orleans was temporary, and that his "home" for tax purposes in 1967 was Yorkville. The expenditures incurred were unavoidable; they were reasonable; and, in our view, they were ordinary and necessary expenses while away from his "home" in pursuit of his trade. To reflect the agreement of the parties as to the correct amount of such expenses and to provide for the proper medical deduction, Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩2. Also see Michael Kuris, T.C. Memo 1956-163">T.C. Memo. 1956-163; Howard Greenway, T.C. Memo 1964-13">T.C. Memo. 1964-13; and Rev. Rul. 60-189, 1 C.B. 60">1960-1 C.B. 60↩, 63.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619110/	WALTER C. PRESCOTT AND AMELIA J. PRESCOTT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPrescott v. CommissionerDocket No. 5432-82.United States Tax CourtT.C. Memo 1984-157; 1984 Tax Ct. Memo LEXIS 515; 47 T.C.M. (CCH) 1389; T.C.M. (RIA) 84157; March 29, 1984. 515 Joseph B. Alala, Jr. and J. Robert Wren, Jr., for the petitioners. Mathew E. Bates, for the respondent. KORNERSUPPLEMENTAL MEMORANDUM OPINION KORNER, Judge: The instant case was submitted to the Court on a fully stipulated set of facts pursuant to Rule 122. 1 The sole issue presented by the parties to us for determination was whether petitioners received $21,000 of dividend income during 1978 which they failed to report in their return. In its initial memorandum opinion herein, filed as on November 29, 1983, the Court, while finding relevant facts as stipulated by the parties, held that the respective theories under which each party approached the issue in this case were erroneous. In determining the correct theory upon which the case should be decided, the Court found that certain essential material and relevant facts were not disclosed in the record before it, and accordingly516 remanded the case to the parties in order to give them an opportunity to stipulate such additional necessary facts or, absent such stipulation, to move the Court for a further evidentiary hearing. In compliance with the Court's order, the parties have now filed a supplementary stipulation of facts with the Court covering the necessary omitted facts, and the Court accordingly finds, in accordance with said stipulation, as follows: (a) The fair market value of the unsecured demand note, in the face amount of $50,000, issued by I.E.C. to petitioner Walter C. Prescott on February 28, 1978, and bearing interest at the rate of 7 percent, was $45,000. (b) Petitioner Walter C. Prescott had an adjusted cost basis of $71,978.64 in his stock of I.E.C. (c) The earnings and profits of I.E.C., computed as of the close of the corporation's taxable year on January 31, 1979, were $43,452.59. Since such additional facts now supply the missing links which enable the Court to decide the issue presented, the Court now finds and holds, in accordance with its prior opinion herein, , that petitioner received an ordinary fully taxable dividend in 1978 in the amount*517 of $43,452.59, as the result of the distribution to petitioner by I.E.C. of its promissory note in that year. Decision will be entered under Rule 155.Footnotes1. All references to Rules herein are to the Tax Court Rules of Practice and Procedure, and all statutory references are to the sections of the Internal Revenue Code of 1954, as in effect in the years in issue, unless otherwise noted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619111/	KENNETH L. KNUDTSON AND WADENA F. KNUDTSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKnudtson v. CommissionerDocket No. 1359-79.United States Tax CourtT.C. Memo 1980-455; 1980 Tax Ct. Memo LEXIS 130; 41 T.C.M. (CCH) 166; T.C.M. (RIA) 80455; October 8, 1980, Filed George Constable, for the petitioners. Michael R. McMahon132 , for the respondent. FEATHERSTONMERORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in the amounts of $13,877.90 and $2,581.38 in petitioners' Federal income taxes for 1975 and 1976, respectively. After concessions by petitioners, the issues remaining for decision are (1) Whether the ratio of business to personal use of an airplane during 1976 may be considered in determining the amount of the investment credit for the airplane and the deductions for depreciation and operating expenses of the airplane to which petitioners are entitled for the year 1975; and (2) whether any portion of the hours that the airplane was flown during the instrument flight training of petitioner Kenneth L. Knudtson in 1975 and 1976 may be included in determining the percentage of business use of the airplane during those years. FINDINGS OF FACT Some of the facts in this case have been stipulated. Petitioners Kenneth L. Knudtson (hereinafter petitioner) and Wadena F. Knudtson, husband and wife, filed joint Federal income tax returns for 1975 and 1976 with the Internal Revenue Service Center, Ogden, Utah. At the time the petition herein133 was filed, they resided in Redmond, Washington. During 1975 and 1976, and for a number of years prior and subsequent thereto, petitioner owned and operated Knudtson Auto Electric, a sole proprietorship engaged in the business of rebuilding automobile windshield wiper motors. In this business, maintaining a source of supply of used wiper motors to be rebuilt is more of a problem than selling the rebuilt motors. Therefore, it has been important that petitioner maintain a close association with his suppliers. In this connection, it has been necessary for petitioner to travel to the places of business of his suppliers and to the biannual conventions held by them. It has also been necessary for him to travel in connection with sales of rebuilt wiper motors. Petitioner's suppliers, for the most part consisting of automobile wrecking yards, are located throughout the United States. Most of petitioner's sales of rebuilt wiper motors are made to warehouse distributors on the West Coast of the United States. 1/ On November 18, 1975, petitioner134 purchased a model A-36 Beechcraft Bonanza airplane (the plane or the A-36). The plane had an estimated useful life of 7 years and cost $89,700. The purchase price included some $20,000 for special instruments to be used for flying in inclement weather. At the time that he purchased the A-36, petitioner had a private pilot's license, but he did not have an instrument rating. Between November 18, 1975, and April 13, 1976, he flew a total of 53.6 hours in the A-36 in connection with instrument flight training. On April 13, 1976, petitioner received an instrument rating on his pilot's license. Without this rating, it would have been difficult, if not impossible, for petitioner to maintain any kind of a schedule in using the plane for business purposes. 2/ During 1975, petitioner paid an excise tax on the airplane in the amount of $4,485. In 1976, he paid $10,882.64 in operating expenses for the airplane. The parties agree that the number of hours flown by petitioner in the A-36 during the years in question can be characterized as follows: YearBusinessPersonalMaintenance 1TrainingTotal Hours19751.03.704.79.41976100.225.115.848.9190.0135 On his 1975 and 1976 Federal income tax returns, petitioner claimed deductions for the depreciation and operating expenses of the A-36. In addition, on the 1975 return, he claimed an investment credit and additional first-year depreciation for the airplane. Although it is not entirely clear from the record, it appears that the investment credit and the deductions for depreciation and operating expenses were all computed without any adjustment for personal use of the airplane. 3/ In the notice of deficiency, respondent determined that only 11 percent and 58 percent of the total hours flown in the A-36 during 1975 and 1976, respectively, were for business purposes. the remainder of the hours flown, including all hours for instrument136 flight training, were treated as having been flown for personal purposes. To the extent that he determined that the airplane was used for personal purposes, respondent disallowed the investment credit and the deductions for additional first-year depreciation, annual depreciation, and operating expenses claimed by the petitioner for 1975 and 1976. 4/ OPINION Section 162(a)5/ permits a taxpayer to deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in137 carrying on any trade or business." Section 167(a)(1) provides that "a reasonable allowance for the exhaustion, wear and tear * * * of property used in the trade or business" shall be allowed as a deduction for depreciation. In the case of certain tangible personal property, "the term 'reasonable allowance' as used in section 167(a) may, at the election of the taxpayer, include an allowance" for additional first-year depreciation of 20 percent of the cost of the property. Sec. 179(a). 6138 Section 38 allows a tax credit for investments in certain property specified in section 48(a), including tangible personal property with respect to which a deduction for depreciation is allowable under section 167. If, for the taxable year in which property is placed in service, a deduction for depreciation is allowable to the taxpayer only with respect to a part of such property, then only the proportionate part of the property with respect to which such deduction is allowable qualifies for the purpose of determining the amount of credit allowable under section 38. Thus, for example, if property is used 80 percent of the time in a trade or business and is used 20 percent of the time for personal purposes, only 80 percent of the basis (or cost) of such property qualifies as section 38 property. Sec. 1.48-1(b)(2), Income Tax Regs. See sec. 1.46-3(d)(4)(i), Income Tax Regs. Rules for computing the credit are set forth in sections 46 through 50. It is undisputed that petitioner is entitled to deduct annual depreciation and operating expenses139 of the airplane for each of the years in question, under sections 167 and 162, and that he is also entitled to an investment credit and to a deduction for additional first-year depreciation for 1975, under sections 38 and 179. However, respondent contends that the various deductions and investment credit are allowable only to the extent of the actual business use of the airplane in each of the years 1975 and 1976. In this connection, he argues that use of the plane for instrument flight training constituted personal, rather than business, use. Petitioner concedes that he is not entitled to the deductions and investment credit to the extent that he would have been had the plane been used 100 percent of the time for business purposes. He contends, however, that the ratio of business to personal use of the plane during 1975 does not represent the use that he intended to make of the plane when it was purchased and that, therefore, the percentage of business use for 1976 should be used in determining the amount of deductions and investment credit for 1975. As we understand the law, petitioner's140 original intention with respect to the plane's use does not control the amount of the deductions or investment credit to which petitioner is entitled. Original intentions often change. 7/ Section 162 allows a deduction for business expenses "paid or incurred during the taxable year." It is clear that the percentage of business use of the plane during 1976 has no relation to the amount of the expenses paid or incurred in operating the plane for business purposes during the taxable year 1975. Further, the allowance for depreciation is to be determined in accordance with the facts as they exist in the period for which a tax return is made. See Pasadena City Lines, Inc. v. Commissioner,23 T.C. 34">23 T.C. 34, 39 (1954); cf. Roy H. Park Broadcasting, Inc. v. Commissioner,56 T.C. 784">56 T.C. 784, 805, fn. 10 (1971);141 Philadelphia Quartz Co. v. Commissioner,13 B.T.A. 1146">13 B.T.A. 1146 (1928). We think it clear that a similar rule must be applied with respect to the investment credit and the allowance for additional first-year depreciation, since computation of both of these items depends upon the extent to which a deduction for depreciation is allowable under section 167. See secs. 1.48-1(b)(2) and 1.179-1(a), Income Tax Regs. Accordingly, we hold that the investment credit and the deductions for annual depreciation, additional first-year depreciation, and operating expenses for the year 1975 must be computed with reference to the actual business use of the airplane during that year. Petitioner further contends that respondent erred by failing to include the hours that the plane was used for instrument flight training in computing the percentage of business use for 1975 and 1976. It is his position that operation of the plane for instrument flight training falls squarely within section 1.162-5(a)(1), Income Tax Regs., which permits a deduction for the expense of education142 that maintains or improves skills required by an individual in his trade or business. Accordingly, petitioner asserts that flight training hours should at least be apportioned between the agreed business and personal use of the plane, as respondent did with respect to maintenance hours. 8/ Respondent argues that: Training and proficiency flights are personal in nature, and the operating costs, investment credit, and depreciation attributable to them are not deductible. In support of this proposition, he cites Gibson Products Co., Inc. v. Commissioner,8 T.C. 654">8 T.C. 654 (1947), and several Memorandum Opinions of this Court. 9/ The holding in Gibson, however, was simply that a corporate taxpayer failed to show that the expense of training its president to fly, largely for his personal benefit, was a business expense of the corporation. In the other cases relied on by respondent, training and proficiency143 flights were found to be personal in nature, but the general use of airplanes by the taxpayers in those cases was almost entirely personal and it does not appear that knowledge of flying was among the skills "required" in their respective businesses. 10The record in the instant case makes it clear that the expense of owning and operating the A-36 constitutes an "ordinary and necessary" expense of the petitioner's business, within the meaning of section 162. Petitioner's suppliers, and his customers to a somewhat lesser extent, are located throughout a very large geographic area. 11/ It is particularly important to petitioner's business that he maintain a close working relationship144 with his suppliers. He is, therefore, required to travel extensively in connection with his business. Petitioner aptly describes the plane as a business tool. Obviously, the expense of owning and operating the plane is "necessary" in the sense that it is "appropriate and helpful" to the development of petitioner's business. It is also "ordinary" in the sense that it is a "normal and natural response" to the specific conditions under which petitioner conducts his business. Commissioner v. Tellier,383 U.S. 687">383 U.S. 687, 689 (1966); Welch v. Helvering,290 U.S. 111">290 U.S. 111, 113 (1933); Graham v. Commissioner,35 T.C. 273">35 T.C. 273, 278-279 (1960). Respondent does not argue otherwise. Since the expense of owning and operating the plane is an ordinary and necessary expense of petitioner's business under section 162, it follows that knowledge of flying is one of the skills "required" by petitioner in his business. Clearly, the instrument flight training maintained or improved that skill. During a substantial part of the year, weather conditions make instrument145 flying essential for efficient use of the plane for petitioner's purposes. Of course, petitioner could have hired a pilot with an instrument rating, but there is nothing in the tax law that would require him to do so. On the record before us, we hold that the expense of operating the plane for instrument flight training is deductible as the expense of education that maintained or improved skills required by petitioner in his business and that all hours flown for this purpose must be included in computing the percentage of business use of the plane during each of the years 1975 and 1976. 12/ To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. /↩ Subsequent to the years in issue, petitioner's market expanded to include some distributors in the mid-West and in Canada.2. /↩ A pilot must have an instrument rating if he wishes to fly under certain conditions of poor visibility.1. The figures shown for "personal" and "maintenance" in 1976 reflect a correction to the stipulation of facts that was made by the parties at trial.↩3. /↩ In computing the investment credit and the deductions for annual depreciation and additional first-year depreciation, petitioner used the figure of $80,730 as the cost of the airplane, rather than its actual cost of $89,700. No explanation for this discrepancy appears in the record.4. /↩ Respondent's computation of the percentage of business use of the airplane is based on the figures shown in the table, set forth in the above Findings, which gives a breakdown of the hours and purposes for which the plane was flown in 1975 and 1976. With respect to 1976, he computed that 100.2 hours flown for business purposes is equivalent to 53 percent of the total hours flown for all purposes during that year. He arrived at a final figure of 58 percent business usage by apportioning the hours designated as "maintenance" between the business and personal use of the airplane.5. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted. 6. SEC. 179. ADDITIONAL FIRST-YEAR DEPRECIATION ALLOWANCE FOR SMALL BUSINESS. (a) General Rule.--In the case of section 179 property, the term "reasonable allowance" as used in section 167(a) may, at the election of the taxpayer, include an allowance, for the first taxable year for which a deduction is allowable under section 167 to the taxpayer with respect to such property, of 20 percent of the cost of such property. (b) Dollar Limitation.--If in any one taxable year the cost of section 179 property with respect to which the texpayer may elect an allowance under subsection (a) for such taxable year exceeds $10,000, then subsection (a) shall apply with respect to those items selected by the taxpayer, but only to the extent of an aggregate cost of $10,000. In the case of a husband and wife who file a joint return under section 6013 for the taxable year, the limitation under the preceding sentence shall be $20,000 in lieu of $10,000. (d) Definitions and Special Rules.-- (1) Section 179 property.--For purposes of this section, the term "section 179 property" means tangible personal property-- (A) of a character subject to the allowance for depreciation under section 167, (B) acquired by purchase after December 31, 1957, for use in a trade or business of for holding for production of income, and (C) with a useful life (determined at the time of such acquisition) of 6 years or more.↩7. / See Gross v. Commissioner,T.C. Memo. 1972-221↩, where a taxpayer was denied depreciation, additional first-year depreciation, and the investment credit on an automobile purchased on Dec. 31, 1966, for both personal and business uses but not used for business purposes in the year of purchase.8. / See footnote 4, supra. We note that if education is of the type described in sec. 1.162-5(a), Income Tax Regs.↩, then no allocation between the relative business and personal benefits of the education is necessary.9. /Johnston v. Commisioner,T.C. Memo. 1976-20; Sherry v. Commissioner,T.C. Memo. 1975-337; Beckley v. Commissioner,T.C. Memo. 1975-37↩. 10. Compare Aaronson v. Commissioner,T.C. Memo. 1970-178 (expense of flying lessions held to be deductible by a news photographer); Shaw v. Commissioner, T.C. Memo. 1969-120↩ (expense of proficiency flights held to be deductible by a physician).11. / Compare Harbor Medical Corp. v. Commissioner, T.C. Memo. 1979-291↩.12. / In passing, we note that there is no evidence that the instrument flight training qualified petitioner for a new trade or business. See sec. 1.162-5(b)(3), Income Tax Regs.↩	01-04-2023	11-21-2020

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