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https://www.courtlistener.com/api/rest/v3/opinions/4619113/	F. & D. Rentals, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentF. & D. Rentals, Inc. v. CommissionerDocket No. 4723-62United States Tax Court44 T.C. 335; 1965 U.S. Tax Ct. LEXIS 77; June 9, 1965, Filed 77 Decision will be entered for the respondent. 1. Held, that respondent was not bound to accept the allocation of a lump-sum purchase price paid for a mixed aggregate of the operating assets of a going business purchased by petitioner, which was made by petitioner's shareholders. Rather, respondent was free to make an independent allocation; and his allocation is approved, by reason of petitioner's failure to establish error therein.2. Held, that petitioner, an accrual basis taxpayer, is not entitled to deductions for contributions to employees' pension plans, which it accrued but did not pay either by cash or check or promissory note, or other property, within the time specified in the controlling statutes (sec. 404 (a)(1) and (6) and sec. 6072 (b), 1954 Code). James F. Thornburg and Frank P. Maggio, for the petitioner.Howard K. Schwartz, for the respondent. Pierce, Judge. PIERCE 336 The respondent determined a deficiency of $ 98,540.50 in the petitioner's income tax for the fiscal year ended April 30, 1958.The issues for decision are:(1) What is the proper allocation of the lump-sum purchase price paid for the mixed aggregate of the operating assets of a going business which petitioner purchased? The precise income tax question involved concerns the computation of petitioner's cost of goods sold for the taxable year; and this requires a determination of what portion of said lump-sum purchase price should be allocated to the inventory which petitioner acquired.(2) Is petitioner entitled to a claimed deduction for contributions to two employees' pension trusts, where it made no payment of such contributions by way of cash, check, promissory note, or other property, during 80 the time specified in the controlling statutes (secs. 404 (a) (1) and (6), and 6072(b), 1954 Code)?FINDINGS OF FACTSome of the facts were stipulated. The stipulation of facts and the exhibits identified therein, are incorporated herein by reference.The petitioner, F. & D. Rentals, Inc., is a corporation organized and existing under the laws of the State of Indiana. At the present time its office and principal place of business is in Chicago. It kept its books of account and filed its Federal income tax returns on an accrual basis of accounting and for fiscal years ending April 30. For the taxable year ending April 30, 1958, which is here involved, petitioner filed its Federal corporation income tax return with the district director of internal revenue at Indianapolis, Ind.Facts re Issue 1Petitioner was organized in May 1957, under the name of the South Bend Toy Manufacturing Co., Inc., for the purpose of engaging in a business of manufacturing and selling toys. It will be sometimes hereinafter called South Bend Toy No. 2, in order to distinguish it from two other corporations involved in the instant case which bore the same name and which are hereinafter more fully described. 81 One of these other just-mentioned corporations, South Bend Toy Manufacturing Co. (hereinafter called South Bend Toy No. 1), was organized under Indiana law in 1882 for the purpose of engaging in a business of manufacturing toys. As of May 1957, the 54,750 shares of capital stock outstanding of South Bend Toy No. 1 were owned in principal part by the trustees of two trusts: (1) The National Bank & Trust Co. of South Bend, Successor Trustee of the Frederick H. Badet Trust (an inter vivos trust), 27,600 shares; and (2) The National Bank & Trust Co. of South Bend, Trustee of the Henry S. Badet Trust (a testamentary trust), 24,750 shares. Both of such trusts were administered 337 under the jurisdiction of the St. Joseph Superior Court No. 1, sitting at South Bend, Ind. The sole beneficiaries of each of said trusts at all times here pertinent, were: (1) Edna Badet, the widow of Henry S. Badet, Sr., and the mother of Barbara Banzhaf and Henry S. Badet, Jr.; (2) Henry S. Badet, Jr., and his sister Barbara Banzhaf; and (3) the respective descendants of Henry Badet, Jr., and Barbara Banzhaf.After the year 1952, when Henry Badet, Jr., moved to Tucson, Ariz., none of the beneficiaries82 of either of the trusts took an active part in the management of the business of South Bend Toy No. 1. Sometime during the year 1953, the trustee-bank began to search for prospective purchasers of the business. Although it actively attempted to sell the toy business owned and operated by South Bend Toy No. 1, and conducted preliminary negotiations with several interested parties, no firm offer was received by the trustee-bank prior to March 15, 1957.On the last-mentioned date, Benjamin F. Fohrman and John W. Dorgan, who were two Chicago attorneys who had engaged together in several prior business transactions, submitted a letter-offer to the trustee-bank to purchase the business then being operated by South Bend Toy No. 1. Said letter-offer stated, in here material part, as follows:In connection with the acquisition by ourselves of The South Bend Toy Manufacturing Company, we have made a survey of the company and have come to the conclusion that the most desirable manner of acquiring said company is by purchase of its assets.* * * We propose to buy all assets as disclosed on balance sheet dated December 31, 1956 excepting cash, government bonds and negotiable securities for83 a price of $ 300,000.00 less than the book value of said assets * * . * * All accounts receivable acquired shall be guaranteed by sellers and after 150 days from date of closing all uncollected receivables shall be delivered to sellers and balance due thereon credited to buyers. * ** * * For the purposes of this offer, all matters concerned in the purchase have not been set forth in detail, but upon the entering into of a purchase and sale agreement by sellers and purchasers, all matters and details attendant thereto will be spelled out in full.We think it important for the sellers to know that our methods of operation of South Bend Toy Manufacturing Company, after acquisition of its assets, would be to continue the present management and personnel and make only such changes as shall inure to the success and profit of the company.At all times relevant, neither Fohrman nor Dorgan was related to, and each was independent of, South Bend Toy No. 1, the trustee-bank, and the beneficiaries of the two Badet trusts.The trustee-bank accepted the offer of Fohrman and Dorgan; and on May 13, 1957, it filed a petition with the St. Joseph Superior Court No. 1, in which in substance84 it sought the court's approval for voting, as the majority stockholder, for South Bend Toy No. 1's consummating 338 the transaction proposed by Fohrman and Dorgan. The petition contained, inter alia, the following representations by the trustee-bank:4. That certain of the beneficiaries of these trusts have been desirous and have importuned the Trustee and the life tenant, Edna P. Badet, to make a disposition, either through sale, liquidation or otherwise, of the shares of stock owned by these trusts and issued by said corporation in order to create a greater diversification of trust investment; that Edna P. Badet, the life tenant has agreed and subscribed to the proposed transaction hereinafter detailed and also the primary contingent beneficiaries, Henry S. Badet, Jr. and Barbara Badet Banzhaf, likewise have concurred in the transaction hereinafter detailed; that, accordingly, there appears a unanimity of opinion respecting the advisability of consummating the transaction related in this petition as among the beneficiaries of said trusts;5. That The South Bend Toy Manufacturing Company has received a proposal from Messrs. Benjamin F. Fohrman and John W. Dorgan of Chicago, 85 Illinois to purchase all assets of The South Bend Toy Manufacturing Company as the same shall exist on May 31, 1957, excepting and excluding from such sale cash on hand and in banks, refund claims for taxes, if any there be, federal, state and local, whether or not arising from the contemplated transaction; * * * that said prospective purchasers have offered to pay the "book value" of the assets to be purchased as such book value is determined by the auditors of the company to be as at May 31, 1957 in accord with the normal accounting procedures employed by such company auditors in computing the book value thereof, less the sum of Three Hundred Thousand Dollars ($ 300,000.00), * * 6. That it is anticipated that such sale will result in a corporate loss of Three Hundred Thousand Dollars ($ 300,000.00) which, together with the seasonal net operating loss for the current fiscal year of the corporation, is likely to result in a federal net income tax refund to The South Bend Toy Manufacturing Company of approximately One Hundred Ninety-two Thousand One Hundred Dollars ($ 192,100.00), dependent upon variables, including the variable of the exact seasonal loss to date of closing; that, 86 therefore, the net realization to be experienced by the corporation on account of the transaction would be approximately One Hundred Forty-four Thousand Dollars ($ 144,000.00) less than the book value of the net worth of the corporation as at December 31, 1956 in the amount of One Million Five Hundred Fifty-eight Thousand Six Hundred Seventy-six Dollars ($ 1,558,676.00) and accordingly that the net realization anticipated to the corporation from the transaction is likely to approximate One Million Four Hundred Fourteen Thousand Six Hundred Seventy-six Dollars ($ 1,414,676.00), subject to Indiana gross income tax and costs incident to perfecting the transaction; that Messrs. Dorgan and Fohrman, as an incident to the transaction, have undertaken to enter into a certain contract with the shareholders of the corporation whereby they will guarantee such anticipated tax refunds, all in accord with and as detailed in a certain proposed contract entitled "Agreement" between Messrs. Dorgan and Fohrman, on the one hand, and Edna P. Badet, of South Bend, Indiana, Henry S. Badet, Jr., of Tucson, Arizona, Barbara Badet Banzhaf of Milwaukee, Wisconsin, * * * [and the trustee-bank] which proposed87 form of agreement, together with the proposed form of agreement between The South Bend Toy Manufacturing Company and Messrs. Dorgan and Fohrman, is herewith submitted to the court contemporaneously with the filing of this petition; * * 8. That the purchasers are requiring that the Trustee, together with the principal stockholders, enter into a non-compete agreement with the purchasers in connection with The South Bend Toy Manufacturing Company business for a 339 period of five (5) years, for which Messrs. Dorgan and Fohrman have agreed in writing to pay to the Trustee of each of the trusts herein, on a quarterly basis the sum of Three Thousand Dollars ($ 3,000.00) per annum, or a total of Six Thousand Dollars ($ 6,000.00) per annum for the two trusts, which compensation your Trustee considers to be reasonable and adequate for such noncompete agreement;On the same date of May 13, the St. Joseph Superior Court No. 1 entered an order which in substance and effect authorized the trustee-bank to vote in favor of consummating the transaction proposed by Fohrman and Dorgan and outlined in the trustee-bank's petition.Subsequently, on May 22, 1957, the formal purchase and sale88 agreement contemplated in Fohrman and Dorgan's letter-offer of March 15, was entered into by and between South Bend Toy No. 1, as seller, and Fohrman and Dorgan, as buyers. This agreement provided, in substance and effect, that South Bend Toy No. 1 would sell to Fohrman and Dorgan, or to their nominee, all of the operating assets 1 of the former's business, at a purchase price equal to the "book value" of the assets, reduced by the sum of $ 300,000. All the assets to be sold were to be listed and priced, "with proper and appropriate agreed reductions therein to reflect said Three Hundred Thousand Dollars ($ 300,000.00) reduction in 'book value.'" In the event the parties were unable to agree to the proper allocation of the $ 300,000 reduction as among the several assets to be sold, it was provided that any disagreement was to be submitted to a neutral third party whose decision on the disagreement should be final and binding on both parties.89 On May 24, 1957, the petitioner corporation was organized under the laws of the State of Indiana, with an authorized capital of $ 50,000 represented by 1,000 shares of the par value of $ 50 per share. Five hundred of such shares were issued to Fohrman, and 500 were issued to Dorgan. Petitioner's capitalization, and the ownership of its stock, remained unchanged during the year in issue.The parties have stipulated that thereafter and prior to May 31, 1957 (the closing date specified in the above agreement), Fohrman and Dorgan transferred and assigned to petitioner, as their nominee, all of their right, title, and interest in, to, and under the said agreement, in a transaction to which section 351 of the 1954 Code 2 was applicable.340 The balance sheet of South Bend90 Toy No. 1, as of the May 31, 1957, closing date, was as follows:The South Bend Toy Manufacturing Co., South Bend, Ind.BALANCE SHEET, May 31, 1957AssetsCurrent assetsCash on hand and in bank$ 151,363.49Accounts receivable:Trade$ 251,513.96Employees139.21Miscellaneous407.22252,060.39Claim for refund -- Federal income tax43,026.96Inventories:Raw material353,677.93Work in process111,687.77Finished goods324,986.69Factory supplies2,352.03Fuel5,607.00798,311.42Advances for material29,014.83Prepaid insurance15,240.38 Total current assets$ 1,289,017.47AccumulatedNetFixed AssetsCostdepreciationbook valueLand$ 33,645.930$ 33,645.93Buildings271,458.35$ 118,688.34152,770.01Elevated railroadsiding14,423.004,200.7410,222.26Driveway andparking lot4,572.281,885.972,686.31Machinery andequipment468,797.15210,393.80258,403.35Office furnitureand fixtures10,267.513,327.466,940.05Office machines15,590.858,989.546,601.31Truck and tractor4,362.383,481.51880.87Factory trucks2,173.87745.701,428.17Construction inprocess1,609.3101,609.31Totals826,900.63351,713.06475,187.57Other assets and deferred charges:Airline deposits425.00 Miscellaneous deferred charges2,438.142,863.14Total assets1,767,068.18Liabilities and CapitalCurrent liabilitiesEmployees' funds withheld:Federal income tax$ 12,799.00 Federal insurance contribution2,088.90Miscellaneous608.89$ 15,496.79Accounts payable79,804.88Accruals: Salaries, wages, and commissions21,772.91Insurance4,468.45Taxes:Federal income --1956$ 46,000.00Federalunemploymentcompensation1,038.69Federal insurancecontribution2,088.90Federal excise --manufacturers9,406.84Indianaunemploymentcompensation4,316.86Indiana gross income29.10Local property18,896.0481,776.43108,017.79Provision for vacationand holiday pay27,616.51Provision forcontribution topension fund17,500.00 Total current liabilities$ 248,435.97CapitalCommon stock -- $ 10 par value; authorized 100,000 shares; issued and outstanding 54,750 shares547,500.00Retained earnings971,132.211,518,632.21 Total liabilities and capital1,767,068.1891 341 Those assets belonging to South Bend Toy No. 1 which were to be sold and transferred to the petitioner, had a book value as of May 31, 1957, of $ 1,576,179.57. In accordance with the above-mentioned agreement of May 22, that the buyers were to pay $ 300,000 less than the book value of said assets, the total purchase price to be paid by Fohrman and Dorgan or their nominee under said agreement was $ 1,276,179.57. At a time not shown with certainty by the evidence herein, Fohrman and Dorgan made an allocation of the last-mentioned amount among the assets being sold by South Bend Toy No. 1. 342 The trustee-bank, as the majority shareholder of South Bend Toy No. 1, agreed to this allocation in order to meet the terms of the purchaser. If the trustee-bank had not so agreed, it would have been unable to effect the sale to petitioner. The following tables shows the book value of the assets as carried on the books of South Bend Toy No. 1; the allocation made by Fohrman and Dorgan of the "reduced" purchase price to and among said assets; and the reduction, if any, from book value for the various groups of assets:(1)(2)(3)Value perAllocation ofReduction, ifbooks of South"reduced"any, from bookBend Toypurchase pricevalueNo. 1by Fohrmanand DorganCURRENT ASSETSPetty cash$ 750.00$ 750.000Cash in bank100.00100.000Accounts receivable252,060.39252,060.390Advances for material29,014.8329,014.830Prepaid insurance15,240.3815,240.380Airline deposit425.00425.000Total current assets297,590.60297,590.600INVENTORYRaw materials353,677.93353,677.930Work in process111,687.77111,687.770Finished goods324,986.69324,986.690Total inventory790,352.39790,352.390DEFERRED CHARGESFactory supplies5,003.875,003.870Fuel5,607.005,607.000Miscellaneous deferred charges2,438.142,438.140Total deferred charges13,049.0113,049.010FIXED ASSETSLand33,645.9311,817.18$ 21,828.75Building (net)152,770.0156,524.9096,245.11Railway siding (net)10,222.263,782.246,440.02Driveway and parking lot (net)2,686.31993.931,692.38Machinery and equipment (net)258,403.3595,609.24162,794.11Office furniture and fixtures(net)6,940.052,567.824,372.23Office machines (net)6,601.312,442.484,158.83Truck-tractor (net)880.87325.92554.95Factory trucks (net)1,428.17528.42899.75Construction in process1,609.31595.441,013.87Total fixed assets475,187.57175,187.57300,000.00Total assets1,576,179.571,276,179.5792 The trustee-bank as the principal stockholder of the seller corporation, realized that a sale of South Bend Toy No. 1's assets at less than their book value would produce a loss which would form part of a net operating loss for the year of sale that could be carried back and made the basis of a refund of Federal income taxes for prior years, regardless of which assets were sold for a consideration less than their book value. The only additional advantage inuring to the seller as a result of allocating all of the reduction from book value to fixed assets, as opposed to allocating such reduction in part to inventory 343 and in part to fixed assets, was a comparatively small saving of $ 1,400 in Indiana gross receipts taxes. The loss sustained by the seller as the result of selling its assets at less than book value was substantially allowed by the respondent; and South Bend Toy No. 1 eventually received a refund of prior years' income taxes of approximately $ 190,000.On or about May 24, 1957, in accordance with the agreement dated May 22, South Bend Toy No. 1 changed its name to Badet, Inc. Badet, Inc., did not engage in the manufacture or sale of toys at any time subsequent93 to June 1957, but rather became an investment company.Beginning on or about June 1, 1957, petitioner began carrying on the toy business which had previously been operated by South Bend Toy No. 1.About 8 months later, on February 1, 1958, Fohrman and Dorgan entered into an agreement with two individuals by which a new corporation would be formed under Indiana law to operate the toy manufacturing and selling business then carried on by petitioner. The contemplated new corporation was organized on February 1, 1958, and it was named South Bend Toy Manufacturing Co., Inc. (hereinafter called South Bend Toy No. 3). South Bend Toy No. 3 leased from petitioner all of the machinery and fixed assets that the petitioner had purchased from South Bend Toy No. 1. Also on February 1, 1958, the petitioner's name was changed to its present form.On its return for the taxable year ended April 30, 1958, which is here involved, petitioner computed its cost of goods sold, utilizing as the cost of its opening inventories the amounts which Fohrman and Dorgan had allocated thereto (i.e., the same amounts as South Bend Toy No. 1's book values for such inventories). In addition, petitioner computed94 its depreciation deduction, utilizing as its cost basis for its depreciable assets, the amounts which Fohrman and Dorgan had allocated thereto (i.e., for the aggregate of the fixed assets (land and depreciable assets), an amount which was $ 300,000 less than South Bend Toy No. 1's book values for said assets).In his statutory notice of deficiency, respondent determined that the allocation made by Fohrman and Dorgan of the total purchase price, as regards inventory and land and fixed assets, was not in accord with their relative values. Accordingly, respondent made his own independent allocation, in which he reduced the cost basis of petitioner's opening inventory by $ 186,959.93 (thereby increasing petitioner's gross income in a like amount); and as a complement, he increased the cost basis of land and fixed assets (thereby increasing the depreciation deduction to which petitioner is entitled).344 The following table shows a comparison between the allocation made by Fohrman and Dorgan, and that made by the respondent:Allocation byAllocation byFohrman byrespondentDorganCURRENT ASSETSPetty cash$ 750.00$ 750.00Cash in bank100.00100.00Accounts receivable252,060.39252,060.39Advances for material29,014.8329,014.83Prepaid insurance15,240.3815,240.38Airline deposit425.00425.00Total current assets297,590.60297,590.60INVENTORYRaw materials353,677.93270,014.48Work in process111,687.7785,267.74Finished goods324,986.69248,110.24Total inventory790,352.39603,392.46DEFERRED CHARGESFactory supplies5,003.875,003.87Fuel5,607.005,607.00Miscellaneous deferred charges2,438.142,438.14Total deferred charges13,049.0113,049.01FIXED ASSETSLand11,817.1825,686.90Building (net)56,524.90116,631.86Railway siding (net)3,782.247,804.16Driveway and parking lot (net)993.932,050.85Machinery and equipment (net)95,609.24197,277.36Office furniture and fixtures (net)2,567.825,298.36Office machines (net)2,442.285,039.74Truck-tractor (net)325.92672.50Factory trucks (net)528.421,090.33Construction in process595.44595.44175,187.57362,147.5095 OPINION RE ISSUE 1We must decide under this first issue whether the petitioner has sustained its burden of establishing error in the respondent's allocation of the lump-sum purchase price paid by petitioner for the operating assets of the going business of South Bend Toy No. 1, among those assets.Petitioner initially argues that the allocation made by Fohrman and Dorgan on petitioner's behalf, which allocation was agreed to by the seller, was a contractual arrangement between parties dealing at arm's length that is final and binding and conclusive upon the parties thereto and the respondent as well. We agree that the aggregate purchase price was arrived at by negotiation between independent parties with adverse interests. But, as regards the allocation of that aggregate purchase price among the several assets purchased, the following testimony given by Roland Goheen, the trust officer of the trustee-bank, a director of South Bend Toy No. 1, and the individual representing said seller corporation in the negotiations with Fohrman and 345 Dorgan, is persuasive evidence that the allocation was in actuality the unilateral determination of Fohrman and Dorgan:Q. Mr. Goheen, in96 regard to the column two allocation on Exhibit 18-R [being the allocation contended for by petitioner in the instant case], would you please explain to the Court what financial interest the seller had in agreeing to the allocation?A. The seller received an offer from Messrs. Dorgan and Fohrman. Included in the offer was a stipulation that we agree to the allocation of the discount to specific assets. If we had not agreed, we would have had no sale.Q. Is it correct to say that this was made to meet the terms of your purchaser?A. Right.Q. * * did it make any financial difference to the seller, other than to meet the terms of his purchaser, did it make any financial difference how the amounts are allocated?A. Not insofar as the seller was concerned, no.[Emphasis supplied.]Moreover, it is now well settled that the Commissioner is not bound to accept an artificial and unrealistic allocation of a lump-sum purchase price made by the seller and purchaser; rather, the Commissioner may in such circumstances make an independent allocation of his own, assigning portions of the aggregate purchase price to individual assets or groups of assets in accordance with their relative values97 and in accordance with the realities of the transaction. Kunz v. Commissioner, 333 F. 2d 556 (C.A. 6), affirming a Memorandum Opinion of this Court; Copperhead Coal Co. v. Commissioner, 272 F. 2d 45 (C.A. 6), affirming a Memorandum Opinion of this Court; Hamlin's Trust v. Commissioner, 209 F. 2d 761 (C.A. 10), affirming 19 T.C. 718">19 T.C. 718; Sidney V. LeVine, 24 T.C. 147">24 T.C. 147; C. D. Johnson Lumber Corp., 12 T.C. 348">12 T.C. 348. See also Income Tax Regs., sec. 1.61-6 and sec. 1.167(a)-5.We think that Fohrman and Dorgan's allocation was artificial and unrealistic in at least one important and significant respect. In their allocation, they have treated (we think primarily to serve petitioner's interests for Federal income tax purposes) the inventory acquired as the equivalent of cash, by allocating a portion of the lump-sum purchase price thereto, equal to the seller's book value. This is the same way that Fohrman and Dorgan treated such items as cash, guaranteed accounts receivable, and prepaid expenses. The98 seller's inventory was composed of three elements -- raw materials, work in process, and finished goods -- all having an aggregate book value to South Bend Toy No. 1 of $ 790,352.39. Of that total, $ 353,677.93 was raw materials to be used in the manufacture of toys and on which no work had been performed; $ 111,687.77 of said total represented work in process, partially completed toy products that had varying degrees of additional work to be performed thereon before they could become finished products ready for sale in the ordinary course of business; and only 346 $ 324,986.69 of such total represented finished goods, ready for sale in the ordinary course of business. Even as to these articles of finished goods, it would be necessary to incur further costs in selling and shipping the same. We are not at all convinced that a realistic allocation would have accorded these categories of inventory the same dollar-for-dollar values, equal to the seller's book values, such as was done in the case of the cash and the guaranteed accounts receivable, prepaid expenses, and the like.We therefore hold that the respondent, in the instant case, could properly disregard the Fohrman and99 Dorgan allocation and proceed to make one of his own.In our opinion, after a consideration and weighing of all the evidence on the point, we have concluded that petitioner has not established error in the allocation which formed the basis of the respondent's determination in the instant case.It is now established that where a taxpayer purchases a mixed aggregate of assets for one lump-sum purchase price, said lump-sum purchase price must be fragmented, and the resultant portions thereof assigned to the several assets, or groups or classes of assets, that went to make up the aggregate purchased. In this connection, this Court stated in the C. D. Johnson Lumber case, "if the total consideration is paid for a mixed aggregate of assets, its allocation among the several properties acquired should be based upon the relative values of each item to the value of the whole. Cf. Nathan Blum, 5 T.C. 702">5 T.C. 702; Clifford Hemphill, 25 B.T.A. 1351">25 B.T.A. 1351." The allocation called for by the rule in the Johnson case requires that the fair market value of each item of the aggregate be established, and then that the proportion which the fair100 market value of each item bears to the total fair market value of the aggregate be applied to the lump-sum purchase price, to fix the portion of the lump-sum price to be allocated to each particular item. Thus, assume that the mixed aggregate consisted of items A, B, C, and D, having fair market values of $ 30,000, $ 15,000, $ 10,000, and $ 5,000, respectively, and that this mixed aggregate had been purchased for $ 50,000. The total fair market value would be $ 60,000. The portion of the lump-sum purchase price to be applied to item A, for example, would be $ 30,000/$ 60,000 X $ 50,000, or $ 25,000.Bearing these principles in mind, we turn to the facts of the instant case. Petitioner did introduce evidence as to the fair market value of the land and certain depreciable assets acquired by it from South Bend Toy No. 1. Such fair market values are, it is to be noted, out of line with the amounts assigned to the said items by Fohrman and Dorgan, in their allocation. But, more significantly, petitioner did not produce evidence as to the fair market value of any of the three 347 elements of inventory -- raw materials, work in process, and finished goods. Petitioner's evidence101 on this aspect of the case was no more than an attempt to justify Fohrman's and Dorgan's allocation to inventory, which in effect treated the inventory as the equivalent of money in the bank. That, as we have already said, is an unsound position; and the evidence on which such position is predicated does not, in our opinion, constitute proof of the fair market value of the inventory. Inventory, book-value-wise, was the largest group of assets acquired by petitioner from South Bend Toy No. 1. In the absence of evidence as to its fair market value, the method of allocation presented in the C. D. Johnson Lumber case, supra, cannot be applied in the instant case.In the light of petitioner's unsuccessful efforts to sustain the allocation made by Fohrman and Dorgan or to establish an alternative thereto based upon relative fair market values, we are left with the allocation made by the respondent. Said allocation is presumptively correct; appears reasonable on its face; and appears also to be in line with the method which the Commissioner employed and this Court approved in Nathan Blum, 5 T.C. 702">5 T.C. 702. We accordingly approve the Commissioner's102 allocation in the absence of competent evidence that it is erroneous.We decide this first issue for the respondent.Facts re Issue 2All of the facts respecting this issue were stipulated. Such facts are summarized as follows.In connection with petitioner's transaction with South Bend Toy No. 1, petitioner became obligated to acquire and assume the burden of two pension plans: (1) A pension plan for factory employees paid on an hourly basis; and (2) a plan covering salaried employees. Both plans were approved by the respondent; and at all times said plans qualified under existing internal revenue laws. The liabilities assumed by petitioner relative to said pension plans, were as follows:Pension plan for factory employees$ 5,000Pension plan for salaried employees12,500Total17,500On its Federal income tax return for the year ended April 30, 1958, which is here involved, petitioner claimed a deduction in the amount of $ 24,500 (presumably including the above-mentioned $ 17,500), representing an accrual on its books for contributions to pension plans. Petitioner did not pay any of this amount during the taxable year either by cash or by check or by note103 or by any other property; but petitioner did make a payment of $ 10,816.18 to the plan for factory 348 employees on October 23, 1958, approximately 6 months after the close of the taxable year here involved.The respondent, upon audit, disallowed the claimed deduction.OPINION RE ISSUE 2Section 404(a) of the 1954 Code provides, insofar as is here material, as follows:SEC. 404 DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN.(a) General Rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, * * * such contributions * * * shall not be deductible under section 162 * * * or section 212 * * * but, if they satisfy the conditions of either of such sections, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: (1) Pension trusts. -- In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501 (a), * * ** * * * 104 (6) Taxpayers on accrual basis. -- For purposes of paragraph (1) * * a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).Section 6072(b) provides that returns of corporations using a fiscal year shall be filed on or before the 15th day of the third month following the close of the fiscal year. Petitioner actually filed its return on July 15, 1958, which was the due date for filing the same.In order for petitioner to be entitled to the deduction here in issue, it would be necessary, under the statutes just quoted, for it to have made payment to the pension trusts on or before July 15, 1958 (the 15th day of the third month following the close of its taxable fiscal year ended April 30, 1958). Petitioner made no payment by cash or by check or by note or by any other property within such prescribed time.Petitioner's primary contention is that its assumption of the obligation from South Bend Toy No. 1 to make contributions to the pension plans, 105 was "analogous to a promissory note and the date on which said * * obligation was incurred should be recognized as the date of Petitioner's payment."There is, in our opinion, no merit to petitioner's primary contention. We believe that petitioner's agreement with South Bend Toy No. 1 to step into the latter's shoes insofar as these pension plans are concerned, is not the equivalent of the statutory requirement of payment. 349 While we have held that a contribution to a pension trust could be made by a conveyance of real estate ( Colorado National Bank of Denver, 30 T.C. 933">30 T.C. 933) and while the Court of Appeals for the Tenth Circuit has held that the payment requirement is satisfied by the employer's delivering to the pension plan trustee of the employer's unsecured promissory note ( Wasatch Chemical Co. v. Commissioner, 313 F. 2d 843, reversing 37 T.C. 817">37 T.C. 817), we have found no authority to support petitioner's primary contention, that an agreement with some other party than the trustee to whom payment is due, constitutes payment to the trustee. The statutory scheme, it seems clear106 enough, requires that an accrual basis taxpayer part with something of value to the pension plan trustee. Petitioner did not part with anything during the required time. It only accrued an obligation on its books. And that is not enough.As an alternative to its primary contention, petitioner argues that it should be allowed to increase the cost basis of the assets it acquired from South Bend Toy No. 1, by adding thereto the amount of its unpaid obligations to the pension plans. The ultimate effect of this procedure would be to permit petitioner to deduct, by way of depreciation deductions or as part of its cost of goods sold, the very amounts which it cannot deduct directly (because of its tardy payment) under the only statutory authority for deductions for contributions to pension plans -- section 404. We will not sanction this bypassing of the statute. Deductions are a matter of legislative grace. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435. Congress spelled out quite clearly what accrual basis taxpayers must do in order to get deductions for payments to pension plans. Petitioner did not fulfill the requirements imposed by Congress; 107 and it cannot have the deduction, either directly or by way of the indirect route embraced in its alternative contention.We decide the second issue for the respondent.Decision will be entered for the respondent. Footnotes1. Par. 1 of sec. C of the purchase and sale agreement provided as follows with respect to the assets to be sold to buyers: * * all assets of the Seller as they shall exist as at the "closing date", as hereinafter set forth, excepting and excluding from such sale only the following assets of the Seller as at the "closing date", viz., cash on hand and in banks; refund claims for taxes, if any there be, federal, state and local, whether or not arising from this contemplated transaction; other rights, claims or choses in action of any nature not disclosed by the statement of financial condition on Exhibit "A"; any and all rights arising from or undertaken by this agreement or any instrument to be executed pursuant hereto in favor of Seller; and government or private securities and any interest or dividends thereon.↩2. Sec. 351 of the 1954 Code provides, in substance, that no gain or loss shall be recognized if property is transferred to a corporation in exchange for stock, and immediately after the exchange the transferors are in control of the corporation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619119/	ROBERT E. SEYMOUR AND NORDINE W. SEYMOUR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSeymour v. CommissionerDocket No. 2265-83.United States Tax CourtT.C. Memo 1984-391; 1984 Tax Ct. Memo LEXIS 277; 48 T.C.M. (CCH) 650; T.C.M. (RIA) 84391; July 30, 1984. Robert E. Seymour, pro se. Donna J. Rice, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $168 in petitioners' Federal income tax for 1979. The only issue in dispute is whether petitioner Robert E. Seymour, an automobile salesman, is entitled to deduct $900 which he paid his employer for the lease of a demonstrator automobile in 1979. FINDINGS OF FACT At the time the petition was filed, petitioners were legal residents of Sacramento, California. During278 1979, petitioner Robert E. Seymour (hereinafter petitioner) was employed by Frank Hurling Chevrolet (sometimes Hurling) as an automobile salesman. He was paid a commission on his sales. Hurling provided him with a demonstrator vehicle for the lease of which petitioner paid his employer $75 per month. This monthly rental charge was more favorable to petitioner than any he could have obtained from other sources. Petitioner used the vehicle in his efforts to sell automobiles including making calls on potential customers, permitting customers to drive it for demonstration purposes, and making the car available to customers whose cars were being serviced. Hurling had a rental fleet and, as a general rule, made the rental automobiles, rather than automobiles leased to its sales personnel, available to service customers. Petitioner also used the automobile to drive from his home to his work and for personal purposes after working hours and on weekends. Subject to availability, petitioner could choose the model that would be leased to him. During 1979, petitioner leased a station wagon because it would better accommodate his large family. If he drove the automobile more than 150279 miles from the place of his employment, he was expected to obtain the permission of Hurling, but that permission was usually forthcoming. Under Hurling's arrangements with its sales personnel, Hurling could revoke the privilege of using such an automobile if it was driven by anyone other than the salesperson or a prospective buyer. In the employee lease agreement covering the automobile, Hurling agreed to furnish collision and liability insurance and to maintain the mechanical condition of the vehicle; petitioner agreed to be responsible for vehicle appearance and gasoline charges. The employer reserved the right to change the automobile leased to petitioner at any time and to substitute another vehicle. Petitioner's employer followed a policy of substituting new vehicles for automobiles leased to a salesperson after the automobiles had built up substantial mileage. When a substitution was made, the demonstrator was returned to inventory so that all salespersons could concentrate on selling it. On his 1979 Federal income tax return, petitioner claimed a deduction of $1,197 for gasoline, oil, lubrication, car washes, and insurance expenses, based on a 90-percent business use280 of the demonstrator. Respondent allowed $703 of these expenses based upon a reduction of the amount expended and an allocation of the remainder based upon a 65-percent business use of the automobile. Petitioner does not challenge this determination. Respondent also disallowed the deduction of the full amount of $900 claimed as demonstrator lease expenses. Petitioner maintains that the $900 lease expense is deductible. OPINION Petitioner's automobile sales commission employment was obviously a trade or business within the meaning of section 162(a), 1 and he is entitled to deductions for the ordinary and necessary business expenses paid or incurred in that business. On the other hand, his deduction is limited to business expenses. Section 262 provides, with certain exceptions not here relevant, that "no deduction shall be allowed for personal, living, or family expenses." Petitioner maintains with earnest sincerity that the demonstrator automobile for which he was required to pay a $75 monthly rental charge was a tool of his trade which, as a condition of his employment, 281 his employer required him to have available in his dealings with customers. Without this tool, he argues, he could not have conducted his commission sales business and, therefore, he should be entitled to deduct the expense of leasing his demonstrator. The evidence is clear, however, that petitioner used the automobile for both business and personal purposes and Hurling's management knew that he would do so. As to its use for business purposes, he has been allowed a deduction for 65 percent of the cost of his gasoline, oil, lubrication, and other upkeep items. Had he actually paid a rental charge for the business use of the automobile, he would also have been entitled to deduct the amount of the charge. He is not, however, entitled to deductions for the cost of the automobile in his commuting to and from work, , or the cost of his other personal use of the automobile for family or vacation purposes. Sec. 262. Petitioner frankly admitted that the $75 per month lease charge was less than he would have had to pay had he leased the automobile from someone other than his employer. He declined, however, to estimate282 the difference. We think that the most reasonable inference is that the monthly rental represented an estimate of the value to petitioner and the cost to Hurling of the car's personal use. In other words, Hurling recognized, as petitioner argues, that petitioner needed access to an automobile as a tool of his trade so that he could show it to potential customers in connection with his sales efforts. Hurling could have made such a demonstrator available to him without charge and forbade him to use it for personal purposes. Instead, Hurling leased petitioner the demonstrator station wagon, chosen by petitioner because it would accommodate his large family, at the favorable monthly rental rate of $75 per month, and permitted him to use it for personal as well as business purposes. Petitioner has not shown that the value of such personal use was less than $75 per month and, in fact, he does not contend that it was. In the absence of any evidence to the contrary, we can only conclude that the lease charge of $75 per month covered petitioner's personal use of the station wagon. Petitioner is not entitled to the claimed deduction. .283 To reflect 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 noted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619121/	ALEX PILKINGTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPilkington v. CommissionerDocket No. 15740-79United States Tax CourtT.C. Memo 1983-111; 1983 Tax Ct. Memo LEXIS 678; 45 T.C.M. (CCH) 814; T.C.M. (RIA) 83111; February 23, 1983. Ben L. Zarzaur and Henry B. Maring, for the petitioner. Katherine Weed, for the680 respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioner's Federal income taxes for calendar years 1974, 1975, and 1976 in the amounts of $2,580.12, $5,438.13, and $1,510.86, respectively. Respondent also determined an addition to tax under section 6651(a)(1) 1 of $298.43 for calendar year 1974 and additions to tax under section 6653(a) of $129 and $271.91 for calendar years 1974 and 1975, respectively. The issues for decision are (1) whether capital was a material income-producing factor in petitioner's lounge businesses within the meanings of section 911(b) and section 1348 so as to cause a 30 percent limitation on the amount of petitioner's net profits to which the 50 percent maximum tax on earned income may apply; and (2) if so, whether petitioner is liable for additions to tax under section 6651(a)(1) and section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, Alex H. Pilkington, 681 who resided in Birmingham, Alabama, at the time of filing his petition in this case, filed his Federal income tax returns for calendar years 1974, 1975, and 1976 with the Internal Revenue Service Center at Chamblee, Georgia. Petitioner, who for approximately 20 years has operated bars and lounges in the Birmingham, Alabama, area, during 1974 owned and operated two lounges as sole proprietorships--the Gizmo Lounge (Gizmo) for 11 months and the Gold Torch Lounge (Gold) for 5 months. During the several months of 1974 that petitioner owned both lounges he dedicated his primary efforts and the majority of his time to Gold; he hired someone to bartend at Gizmo during the overlap period. Petitioner leased the buildings in which Gizmo and Gold were located. The total 1974 rental for Gizmo was $3,900 and for Gold was $3,250. Prior to yearend 1974, the Gold lease expired, and petitioner transferred to Gizmo the furnishings of Gold, including tables, chairs, glasses, etc. The Gizmo lease expired by December 31, 1974, and petitioner sold or abandoned the Gold furnishings. On April 1, 1975, petitioner opened Al's Cabaret Lounge (Al's). He operated Al's as a sole proprietorship from682 April through December 1975, and for the entire 1976 calendar year. In 1975, at a price of $184,630, petitioner purchased the building and property in which he operated Al's and, at a cost of $42,272, he purchased new furniture and fixtures including tables, chairs, sinks, glasses, refrigeration equipment, air conditions, etc. During the years under consideration petitioner worked at his lounges approximately 15 hours daily. His major responsibilities included bartending, hiring and hiring his employees, procuring food for sale to customers, contracting bands, and supervising his employees. Petitioner's primary source of revenue came from the sale of beer and liquor; 2 he realized a lesser amount from the sale of sandwiches and other foods. Petitioner also realized some income from fees collected from customers for the usage of pool tables at the lounges and from admission charges of $1 to $2 per person collected on those nights that bands played at Gold's or at Al's. Petitioner's total gross receipts from these various sources were $218,929.97, $291,487.40 and $347,908 in 1974, 1975, and 1976, respectively. 683 Petitioner incurred significant costs in operating the lounges, including the cost of his beverage inventory. For the years in issue, petitioner's largest expenditures were as follows: COST OF GOODS197419751976GoldAl'sAl'sGizmoTorchTotalCabaretCabaretBeginninginventory$ 1,000.00$ 1,500.00$ 2,500.00$12,200.00Purchases(Less cost ofitems withdrawn forpersonal use)35,967.5222,093.7058,061.22$62,305.7574,783.00Cost of laborMaterials andsuppliesOther costsTotal$36,967.52$23,593.70$60,561.22$62,305.75$86,983.00Less: Endinginventory500.00500.0012,200.008,682.00Cost of goodssold$36,467.52$23,593.70$60,061.22$50,105.75$78,301.00OTHER EXPENDITURESExpenditure197419751976Salaries of bar attendants,waitresses, cleanup crew, etc.$21,584.35$16,628.17$25,409Rental of pool tables andequipment 4,376.685,225Insurance82.504,534.006,463Utilities4,837.304,059.048,331Liquor license and taxes52,120.3322,350.0232,102Supplies (glasses, etc.)2,254.227,280.014,761Contracting bands7,555.1059,270.5596,286Advertising2,075.823,263.185,424684 Petitioner's net profits from his lounges, after taking business deductions, were $77,730.12, $96,477.42 and $58,835 for 1974, 1975 and 1976, respectively. His schedule of business assets was as follows: BOOK VALUE OF BUSINESS ASSETSDecember 31, 1973December 31, 1974AssetsAssetsCash in Bank--(Check accounts)$ 2,150.99 $ 1,036.34 Accounts ReceivableInventory (Beer,liquor and food)2,500.00 500.00 Building, Improvementsand LandFixed Depreciable Assets: (Tables, chairs, sinks,glasses, refrigerators,air conditioners, etc.)Gizmo$31,789.00$33,044.38Gold45,761.1477,550.14 33,044.38 Al'sTotal82,201.13 34,580.72 Less: AccumulatedDepreciation: Gizmo7,505.3112,948.36Gold37,719.45(45,224.76)(12,948.36)Al'sTotal Book Value ofAssets$36,976.37 $21,632,36 BOOK VALUE OF BUSINESS ASSETSDecember 31, 1975December 31, 1976AssetsAssetsCash in Bank--(Check accounts)$ 737.43 $ 200.00 Accounts ReceivableInventory (Beer,liquor and food)12,200.00 8,682.00 Building, Improvementsand Land* 184,630.00 185,148.00 Fixed Depreciable Assets: (Tables, chairs, sinks,glasses, refrigerators,air conditioners, etc.)GizmoGoldAl's42,272.00 42,217.00 Total239,839.43 236,247.00 Less: AccumulatedDepreciation: GizmoGoldAl's(10,515.15) ** (24,982.15)Total Book Value ofAssets$229,324.28 $211,264.85 685 On his income tax returns for calendar years 1974, 1975 and 1976 petitioner utilized the 50 percent maximum tax on earned income and applied this maximum tax rate to the total net profits realized from his lounge businesses. In his statutory notice of deficiency, respondent adjusted the amount to which the maximum tax rate on earned income applied with the explanation that-- It is determined that capital is a material income-producing factor in your your business; therefore, your tax has been recomputed allowing only 30 percent of the net profits as earned income for purposes of the maximum tax computation. Income averaging was utilized in the computations for 1974 and 1975 as such method is more advantageous to you. OPINION Petitioner asserts that his entire 1974, 1975 and686 1976 income from his lounge businesses was earned income within the meaning of section 1348. On the other hand, respondent contends that capital was a material income-producing factor in petitioner's lounge businesses and therefore a maximum of 30 percent of the income from his businesses may be considered earned income for purposes of section 1348. We agree with respondent. Section 1348 provides for a maximum marginal tax rate of 50 percent on earned taxable income. 3 Earned income for purposes of section 1348 means, inter alia, any income which is earned income within the meaning of section 401(c)(2)(C) or section 911(b). The controlling section in this case is section 911(b) which defines the term "earned income" as wages, salaries or professional fees and other amounts received as compensation for personal services and limits the portion of a proprietor's income that will qualify as such earned income where both personal services and capital are material income-producing factors. Section 911(b) states: (b) Definition of Earned Income.--For purposes of this section, the term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation687 for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary or his delegate, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income. The section 911(b) definition of earned income is amplified by section 1.1348-3(a)(3)(ii), Income Tax Regs., which provides: (ii) Whether capital is a material income-producing factor must be determined by reference to all the facts of each case. Capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business, as reflected, for example, by a substantial688 investment in inventories, plant, machinery, or other equipment. In general, capital is not a material income-producing factor where gross income of the business consists principally of fees, commissions, or other compensation for personal services performed by an individual. Thus, the practice of his profession by a doctor, dentist, lawyer, architect, or accountant will not, as such, be treated as a trade or business in which capital is a material income-producing factor even though the practitioner may have a substantial capital investment in professional equipment or in the physical plant constituting the office from which he conducts his practice since his capital investment is regarded as only incidental to his professional practice. This regulation has been cited with approval in numerous cases. See Gaudern v. Commissioner,77 T.C. 1305">77 T.C. 1305 (1981); Moore v. Commissioner,71 T.C. 533">71 T.C. 533 (1979); Bruno v. Commissioner,71 T.C. 191">71 T.C. 191 (1978). 689 Although we do not question that petitioner's personal services greatly contributed to the success of his lounges, this fact does not establish that capital was not a material income-producing factor. It is not uncommon for personal services and capital to be material income-producing factors in a single business. Gaudern v. Commissioner,supra at 1310. Whether capital is a material income-producing factor is a question to be determined from the facts and circumstances of each case. Bruno v. Commissioner,supra at 197; Rousku v. Commissioner,56 T.C. 548">56 T.C. 548, 550 (1971). The basic test for determining whether capital is a material income-producing factor is the form of the income received and the nature of the business. Moore v. Commissioner, supra at 538; Rousku v. Commissioner,supra at 551. In those cases where capital has been determined to be a material income-producing factor, a substantial portion of the gross income of the business is attributable to the employment of capital in that business. For example, the courts have found capital to be a material income-producing factor690 where the operation of the business has required substantial inventories or major investments in facilities, equipment, machinery, sales inventory, etc. E.g. Holland v. Commissioner,70 T.C. 1046">70 T.C. 1046, 1050 (1978), affd. 622 F.2d 95">622 F.2d 95 (4th Cir. 1980). On the other hand, the courts have held capital not to be a material income-producing factor if the gross income from business has consisted primarily of fees, compensation, and commissions for personal services rendered, such as in the case of professional accountants, lawyers, and real estate brokers. 4 E.g. Miller v. Commissioner,51 T.C. 755">51 T.C. 755, 759 (1969).Petitioner takes the position that only a small portion of the income from his businesses is attributable to the utilization of capital. He argues that in any business a certain amount of capital must be utilized for purchasing business furnishings, paying office rent, or making mortgage payments on the place of business. Relying upon Edward P. Allison Co. v. Commissioner,63 F.2d 553">63 F.2d 553 (8th Cir. 1933), affg. 22 B.T.A. 1371">22 B.T.A. 1371 (1931),691 and Miller v. Commissioner,supra, petitioner labels such use of his capital as merely having been incidental to his businesses' operations rather than as having given character to a sizable portion of the operations of his businesses. Moreover, petitioner contends that the amount of capital employed in his inventory of beer, liquor and good was minimal, especially because his inventory turnover was rapid-approximately every 2 weeks. Petitioner states that he was required neither to tie up large sums of money in the inventory nor to furnish new capital with each replenishment of the inventory. It is clear from our reading of the Allison and Miller cases that there is no specific point at which capital becomes a material income-producing factor. Rather, it is the way in which capital makes its contribution to income that is important. Where capital is utilized solely to pay salaries, costs of renting or purchasing office space, and other such general business expenses, capital is not considered to be a material income-producing factor. Allison v. Commissioner,supra at 558; Miller v. Commissioner,supra at 759.692 Yet, as a general rule, money of a business which is spent to purchase real property, to own a valuable leasehold interest, and to invest in depreciable assets and inventory, is considered capital in nature, and where such assets materially contribute to the production of income, capital is a material income-producing factor. Moore v. Commissioner,supra at 539; Rousku v. Commissioner,supra at 551; Fairfax Mutual Wood Products Co. v. Commissioner,5 T.C. 1279">5 T.C. 1279, 1282 (1945). In the instant case, the use of capital played a vital role in carrying on the lounge businesses. During 1974, petitioner held leasehold interests in the facilities in which Gold and Gizmo were located; in 1974, petitioner paid rent of $3,900 with respect to Gizmo and $3,250 with respect to Gold. In 1975, petitioner purchased for $184,630 the building and land in which he located Al's. Additionally, petitioner had a relatively large sum of money invested in the furnishings of his lounges, including tables, chairs, glasses, sinks, refrigeration equipment, air conditioners, etc. The book value of these depreciable assets from Gizmo was $31,789 at the693 beginning of 1974 and $33,044.38 at the end of that year. The book value of petitioner's depreciable assets in Gold was $45,761.14 at the beginning of 1974 and zero at the end of that year because the fixtures and furnishings were either sold or abandoned. In 1975, petitioner purchased the furniture and fixtures for Al's at a cost of $42,272. Petitioner employed some of his capital in the purchase of inventory. For 1974, his beginning inventory was $2,500; he purchased $58,061.22 of beer, liquor and food during that year and his ending inventory was $500. For 1975, petitioner's beginning inventory for the operation of Al's was zero; he purchased $62,305.75 of inventory and his ending inventory for the year was $12,200.In 1976, in addition to the $12,200 of beginning inventory, petitioner purchased $74,783 of beer, liquor, and food; his ending inventory was $8,682. We consider these uses of capital to have been substantial in size and essential to the operation of petitioner's lounge businesses. Petitioner further argues that his lounge businesses were not traditional retail merchandising businesses and therefore capital should not be considered a material income-producing factor. 694 To support this contention, petitioner maintains that his customers did not purchase a tangible item to take home. We have no doubt that the lounge customers did not take home a tangible item. In fact, it is most likely that the customers consumed their purchases of drink and food at the lounges and we have assumed this to be the fact. However, the location at which business inventory is utilized or consumed by the customer is not a consideration in determining whether capital is a material income-producing factor and it does not convert the proceeds collected from the sale of inventory into personal services income. Petitioner next contends that his personal services to the lounges were principally responsible for the successes of the businesses, and, consequently, the entire net profits of the lounges should be considered personal services income. We are certain that petitioner's personal services were essential to the operation of the lounges. Petitioner's services included selecting and supervising employees, preparing food and drink for sale to customers, and listening to problems of drinking customers. These services were unquestionably one income-producing factor; however, 695 it does not follow that the lounges were personal service businesses. We view petitioner's services as inseparable from the food and drink inventory purchased and consumed by the customers. We are of the opinion that gross income of the lounge businesses came from the prices paid for the purchase of food and drink and not from any fees, commissions, or other compensation paid directly for personal services. See Moore v. Commissioner,supra at 539. 5Petitioner's expert witness testified that in comparison to other businesses for which he has performed accounting work, he would consider petitioner's investment of capital to have been minimal and not to have been a material income-producing item. Although undoubtedly the witness is a well-qualified accountant, we do not consider him qualified to address the legal question of whether capital was a material income-producing factor for purposes of section 1348. In fact, the witness admitted that he had no other clients in the business of operating a lounge and that most of his clients were professionals. Thus, although we consider696 petitioner's witness credible in his testimony on the computation of petitioner's income, assets and expenses, we do not rely upon his interpretation of when capital is a material income-producing factor. On brief petitioner referred our attention to numerous cases which he considered as supportive of his position. Although we have not discussed all of these cases, we have reviewed and considered them. However, we have neither found them to be apposite to petitioner's circumstances nor to be helpful to his position. Because we have concluded that capital was a material income-producing factor in petitioner's lounge businesses in 1974, 1975, and 1976, petitioner is entitled to apply the 50 percent maximum tax rate of section 1348 only to 30 percent of the net profits realized during these years by his lounge businesses. Petitioner has conceded that if we find capital to have been a material income-producing factor in his lounge businesses, he is liable for the additions to tax under section 6651(a)(1) and section 6653(a) as determined by respondent. In accordance with our conclusion and petitioner's concession, 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 during the years here in issue.↩2. As required by Alabama law during the years in issue, petitioner purchased and sold liquor by the miniature bottle. Petitioner set the retail sales prices of the bottles at least five times higher than his purchase costs.↩. Petitioner rented the pool tables from a third party on a "share" basis. Petitioner charged and collected a fee from his customers for usage of the pool tables and remitted to the lessor his portion of the proceeds.↩. as stipulated. ** This accumulated depreciation figure is calculated from the information reported by petitioner on his tax returns. This amount exceeds the $24,726 in accumulated depreciation which petitioner stipulated was correct. We have been unable to determine the reason for the $256.16 difference in the two figures; however, this variance is not material to the outcome of the case.↩3. Beginning after 1971, sec. 1348 provided: (a) General Rule.--If for any taxable year an individual has earned taxable income which exceeds the amount of taxable income specified in paragraph (1), the tax imposed by section 1 for such year shall, unless the taxpayer chooses the benefits of part I (relating to income averaging), be the sum of-- (1) the tax imposed by section 1 on the lowest amount of taxable income on which the rate of tax under section 1 exceeds 50 percent, (2) 50 percent of the amount by which his earned taxable income exceeds the lowest amount of taxable income on which the rate of tax under section 1 exceeds 50 percent, and (3) the excess of the tax computed under section 1 without regard to this section over the tax so computed with reference solely to his earned taxable income. (b) Definitions.--For purposes of this section-- (1) EARNED INCOME.--The term "earned income" means any income which is earned income within the meaning of section 401(c)(2)(C) or section 911(b), except that such term does not include any distribution to which section 72(m)(5), 402(a)(2), 402(e), or 403(a)(2)(A) applies or any deferred compensation within the meaning of section 404. * * * Pub. L. 94-455, sec. 302(a), 90 Stat. 1520,1554 (Oct. 4 1976), amended section 1348 for taxable years beginning after December 31, 1976. It provided, inter alia, that the maximum tax rate of 50 percent was retained although the term "earned income" was replaced by the more inclusive expression "personal service taxable income." This newer term meant any income within the meaning of sec. 401(c)(2)(C) or sec. 911 (b) or which is an amount received as a pension or annuity. The Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172,183, sec. 101(c)(1), repealed sec. 1348 effective for taxable years beginning after December 31, 1981.↩4. Petitioner has conceded that he does not fall into the category of professionals.↩5. See also Novikoff v. Commissioner,T.C. Memo. 1980-330↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619122/	WALTER C. VERMILLION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentVermillion v. CommissionerDocket No. 9485-79.United States Tax CourtT.C. Memo 1982-192; 1982 Tax Ct. Memo LEXIS 555; 43 T.C.M. (CCH) 1057; T.C.M. (RIA) 82192; April 13, 1982. Walter C. Vermillion, pro se. John L. Hopkins, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioner's income taxes for the calendar years 1976 and 1977 in the amounts of $ 539.44 and $ 1,023, respectively. The issue for decision is whether petitioner is entitled to deduct traveling expenses including the cost of meals and lodging near the site of the Watts Bar Nuclear Plant as ordinary and necessary business expenses and, if so, the amount of such deduction for 1976. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner filed his Federal556 income tax returns for the calendar years 1976 and 1977 with the Director, Internal Revenue Service Center, Memphis, Tennessee. At the time of the filing of his petition in this case, petitioner resided in Rogersville, Tennessee. On June 23, 1976, petitioner was employed by the Tennessee Valley Authority (TVA) as an electrician at the Watts Bar Nuclear Plant. On June 22, 1976, he signed a document, TVA Form 9880A, entitled "Appointment Affidavit and Conditions." Among the statements contained in this document was the following: "Trades and labor temporary construction hourly, not to extend past: 77 06 06." This same document showed that petitioner was affiliated with Local 934 of the International Brotherhood of Electrical Workers (IBEW), Kingsport, Tennessee, and that the local union having jurisdiction over the job if other than home was "IBEW Local 175, Chattanooga, Tennessee." The TVA had an agreement with the Chattanooga, Tennessee, Local of IBEW with respect to supplying electricians at its project at the Watts Bar Nuclear Plant. The Chattanooga Local was unable to supply all the individuals needed for work on the Watts Bar Nuclear Plant and obtained electricians from other557 locals. Petitioner received his assignment to work for TVA at the Watts Bar Nuclear Plant through the union agent of IBEW Local 934 because there was no work availlable for electricians within the jurisdiction of IBEW Local 934. Work on the Watts Bar Nuclear Plant was begun in 1975 and it was expected that it would require 8 years or more to complete the plant. The Watts Bar Nuclear Plant was approximately 250 miles from Hiltons, Virginia, where petitioner lived until the latter part of 1978, and was approximately 200 miles from Rogersville, Tennessee, where petitioner lived after the latter part of 1978. Petitioner had lived in Virginia all his life until he moved to Rogersville, Tennessee, in the latter part of 1978. Petitioner and his wife moved to Rogersville, Tennessee, because they found an old house which they bought to fix up. During the late 1970's and until sometime in 1980, the Watts Bar Nuclear Plant was at a construction stage that required a great number of sheet metal workers, steam fitters, and electricians and qualified individuals in those trades in the area of the Watts Bar Nuclear Plant were in short supply. Even though electricians were in short supply558 in the area of the Watts Bar Nuclear Plant and other nuclear plants which were under construction at that time by the TVA, it was the policy of the TVA to employ all hourly construction workers on a temporary basis. For some time prior to 1978 and up to approximately October 1978 when the provision was deleted from the "Appointment Affidavit and Conditions" signed by hourly workers, TVA placed a date of 11 months and some odd days not to exceed 29 from the date of employment as the termination date of all hourly construction workers. These hourly construction workers were hired as temporary workers so that they could be dropped immediately from the TVA roles if necessary. TVA is an agency of the United States Government and at times was required by the Office of Management and Budget or a presidential directive to comply with certain employment ceilings. During the time the provision for termination of a temporary employee at the end of 11 months and 29 days was contained in the "Appointment Affidavit and Conditions," officials of TVA were of the view that this provision further aided in quink termination of hourly construction employees if such quick termination were necessary. 559 While this provision was in the appointment conditions, the temporary worker would be terminated at the stated termination date for a period usually of approximately 10 workdays and after that brief termination period generally would be reemployed. For electricians the chance of reemployment was well over 90 percent. When the 10-day furlough would occur, the employee at times would be told that he would very likely be needed and be reemployed after the 10-day break. Petitioner was told that he would be reemployed after his break in 1977 and after a similar break in 1978. Petitioner worked at the Watts Bar Nuclear Plant from June 23, 1976, until June 2, 1977 (leaving early at his own request), from June 21, 1977, until June 2, 1978, and from June 26, 1978, until July 26, 1979, when he left at his own request to accept employment with the TVA at its Phipps Bend Nuclear Plant at Surgoinsville, Tennessee, which is 6 miles from his home in Rogersville, Tennessee. At the time of the trial of this case he was still employed at the Phipps Bend Nuclear Plant. In June 1977 and June 1978 petitioner signed an "Appointment Affidavit and Conditions" similar to the one he had signed in 1976. 560 When petitioner went to work at the Watts Bar Nuclear Plant in June 1976, he did not know how long he would be employed at that plant. He had been working at various jobs assigned to him by the agent of IBEW Local 934 for a number of years. From December 20, 1971, until August 20, 1973, he had worked for the TVA at the Sequoyah Nuclear Plant at Daisy, Tennessee. He had resigned from this position to accept other employment. During the years 1976 and 1977 petitioner drove from his home in Hilton, Virginia, to the Watts Bar Nuclear Plant site every Sunday evening and drove home to Hilton on Friday evening. He kept a room near the Watts Bar construction site. During 1976 petitioner spent $ 787.95 for lodging in the vicinity of the Watts Bar Nuclear Plant. Petitioner on his Federal income tax return for the year 1976 deducted $ 2,887.65 as employee business expenses for travel away from home, consisting of $ 2,683.65 for meals and lodging and $ 204 for automobile expenses. On his Federal income tax return for 1977 petitioner deducted $ 3,717.40 as employee business expenses for travel away from home consisting of $ 3,663 for meals and lodging and $ 54.40 for automobile expense. 561 Respondent in his notice of deficiency disallowed $ 2,544.05 of the claimed travel expense deduction for 1976 and all the claimed travel expense deduction for 1977 with the following explanation: It is held that, since the termination of your employment at this job site could not be foreseen within a fixed and reasonably short period, the employment was indefinite, rather than temporary, and any travel expenses incurred in connection therewith were nondeductible personal expenses rather than ordinary and necessary business expenses. Further, it has not been established that any amount in excess of $ 343.60 allowed in 1976 was expended for the purpose designated. * * * OPINION Section 162(a)(2) 1 provides for a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business including traveling expenses while away from home in pursuit of a trade or business. Generally speaking, a taxpayer's home for the purpose of determining whether he is away from home in pursuit of a trade or business within the meaning of section 162(a) is considered to be his principal place of employment. .562 However, when a taxpayer's employment at some location is temporary as distinguished from indefinite or indeterminate, he is considered while so employed to be away from home in pursuit of his trade or business. ; ; As we have pointed out on a number of occasions, employment is considered to be temporary where it can be expected to last only for a short period of time. ; . The record shows that petitioner in this case viewed his work at the Watts Bar Nuclear Plant as temporary since he had no definite commitment of the length of time his employment at that site would last. He argues that because he was an hourly employee who could be terminated at any time there was insufficient work available for his continued services to be563 needed, his employment was temporary. However, this is not the definition of "temporary" that this Court has used in determining whether an individual is entitled to deduct traveling expenses while away from home under section 162(a)(2). . Petitioner testified that he did not know how long he would work at the Watts Bar Nuclear Plant when he commenced his employment there but that he was told that after about one year he would be terminated for approximately two weeks and then reemployed. The record shows that the need for workers, particularly electricians, at the Watts Bar Nuclear Plant was steady and this fact was known to petitioner. Also, the fact that construction on the plant would be expected to extend 6 or 7 years after 1978 was generally known. The fact that petitioner was working in the territorial jurisdiction of the Chattanooga Local of his union is not a reason to conclude that his employment at the Watts Bar plant was temporary. We have held that where skilled workers in a taxpayer's craft were in short supply in a certain area so that workers from another area were sent in to work there on a basis stated564 to be "temporary," this fact did not cause the taxpayer's work to be temporary rather than indefinite for the purposes of section 162(a). . Nor has the fact of temporary layoffs interrupting otherwise continuous employment of a construction worker at a particular site been considered to necessarily cause the taxpayer's employment to be temporary rather than indefinite. . Considering the facts in this case against the background of our holdings in other cases, we conclude that petitioner's employment at the Watts Bar Nuclear Plant site in 1978 was not temporary but was indefinite. The record shows that workers in petitioner's craft were in short supply. Although the termination provision was put in petitioner's employment agreement, this did not mean that petitioner's work at Watts Bar Nuclear Plant would in fact be terminated. The record shows that the chances of an electrician not being terminated but merely furloughed for 10 days were over 90 percent. Since petitioner had previously been employed by TVA, his own chances of remaining employed at the565 Watts Bar plant site after the one-year period were close to 100 percent. The record shows that petitioner was aware of this fact. Petitioner in this case is in effect arguing that since a construction worker's job is never permanent in the sense that he will be terminated when the project on which he is working is completed, he should not be expected to disrupt his family by moving them to his work site regardless of how long his work there will continue. However, this lack of absolute permanence is not the criteria which this Court and other courts have used in determining whether a taxpayer's work is temporary as distinguished from indefinite or indeterminate. See , affd. ; , affd. . On the basis of this record, we conclude that petitioner is not entitled to deduct the expenses of his meals, lodging, and transportation while living near the Watts Bar Nuclear Plant during the years 1976 and 1977 since he was not away from home in the pursuit of a trade or business within the*566 meaning of section 162(a)(2). Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619123/	APPEAL OF INTER-URBAN CONSTRUCTION CO.Inter-Urban Constr. Co. v. CommissionerDocket No. 4387.United States Board of Tax Appeals4 B.T.A. 1030; 1926 BTA LEXIS 2098; September 25, 1926, Decided 2098 William D. Riter, Esq., and T. Ellis Allison, Esq., for the petitioner. P. J. Rose, Esq., for the Commissioner. LITTLETON1030 LITTLETON: The Commissioner determined a deficiency in income and profits tax of $2,020.44 for the calendar year 1919, and by this proceeding petitioner questions the correctness of a portion of that amount, alleging as its reason, first, that it should have been allowed a deduction of $18,308.27 instead of $16,168.90 on account of bond discount, and secondly, that it should have been permitted to deduct $13,000 as compensation paid to its general manager. FINDINGS OF FACT. The petitioner and the Salt Lake-Utah Railroad Co. were, during 1919, affiliated corporations. They were both organized under the laws of Maine and during the taxable year had their principal offices at Salt Lake City, Utah. The petitioner was engaged in general construction work and the railroad company was organized for the purpose of building and operating an electric railroad extending from Salt Lake City to Pason, Utah, a distance of approximately 75 miles. The railroad company and the construction company entered into a contract about2099 1912, whereby the latter was to construct a railroad and deliver it to the former. This work was completed about 1916, at which time the railroad company concluded to construct a branch line approximately 15 miles in length and the contract for this work was given to the construction company. The branch line was completed in 1917. During the year 1919, the outstanding common stock of the railroad company amounted to $3,000,000 and the outstanding preferred stock amounted to $1,980,000 par value. The petitioner owned ninetenths of the common stock and all of the preferred stock. W. C. Orem was in 1912, and since that time has been, general manager of the construction company and president and general manager of the railroad company. At the time the contract for the construction of the railroad was entered into in 1912, it was contemplated that the work would be completed within two years, and the directors of the construction company adopted a resolution on October 8, 1912, providing that "said Orem's compensation in full for his services shall be $50,000.00 payable at the rate of $25,000 each year, in such installments as may be specified in the contract." On November 7, 1914, the2100 directors of the construction company adopted a resolution which read "On Motion of Mr. Murphy, and 1031 seconded by Mr. Fisher, W. C. Orem was continued as manager of the company at his old salary, his services to be discontinued at the pleasure of the Board." On October 6, 1915, the directors adopted another resolution reading as follows: The Secretary reported that the General Manager, W. C. Orem, had suggested that inasmuch as his third year as general manager of the Interurban Construction Company would be up in a few days and he had the company's needs largely financed for the present, that his salary for general manager be discontinued at the close of the year for the present, leaving future salary to be accrued upon such basis as was deemed fair when the time should come. On motion of F. S. Murphy, seconded by Frank Fisher, it was unanimously voted to discontinue the salary of the general manager at his own suggestion and have the minutes show that the Board considered the suggestion of the general manager a very generous one, especially in view of the fact that he would still be required to give a great deal of time and energy to the company's affairs. On2101 January 20, 1916, the directors of the construction company considered the matter of salary of its general manager and adopted the following resolution relative thereto: At this point W. C. Orem retired from the meeting in order that the Board of Directors and other interested parties present might consider the question as to whether his services during the present year as general manager of the Construction Company, were needed, and if they decided in the affirmative, to fix his salary. After full discussion, it was unanimously decided by those present that the company did need his services and that his salary should be fixed at $1,000 per month, having in mind that during the year, they probably wanted to build a line to Magna but not do any other new construction of any magnitude, also having in view that during the year a number of questions and deals involving policy and interests of the company would have to be handled. In case it was decided to do any considerable amount of new construction, thus increasing the duties and responsibilities of our general manager in excess of what was contemplated, his salary should be fixed accordingly. Under authority of this resolution, 2102 and with the knowledge and consent of the directors of the construction company, but without any further formal resolution, Orem was regularly paid a salary of $1,000 a month, throughout and subsequent to the taxable year in question. In December, 1919, the company paid Orem $2,000. The petitioner kept its books on the cash receipts and disbursements basis. Subsequent to 1917, the petitioner carried on no construction work and its only asset consisted of the stock of the railroad company. The duties performed by Orem as petitioner's general manager were in protecting and advancing its interest as owner of the stock of the railroad company, of which he was president and general manager. He was paid no compensation by the railroad company. 1032 At the conclusion of the hearing, it was stipulated by the parties that $17,909.45 should be allowed as a deduction for 1919, as bond discount. Judgment for the petitioner. Order of redetermination will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619126/	Andrew F. Kay and Mary M. Kay v. Commissioner.Kay v. CommissionerDocket No. 5547-69.United States Tax CourtT.C. Memo 1971-173; 1971 Tax Ct. Memo LEXIS 159; 30 T.C.M. (CCH) 745; T.C.M. (RIA) 71173; July 22, 1971, Filed 159 Clyde R. Maxwell, for the petitioners. Allan D. Teplinsky, for the respondent. RAUMMemorandum Findings of Fact and Opinion RAUM, Judge: The Commissioner determined the following deficiencies in petitioners' income tax for the calendar years 1965 and 1966: YearDeficiency1965$84,10319667,132Two issues remain for adjudication: (1) What was the fair market value of 100,000 shares of Delta Design, Inc., on May 8, 1965, when petitioner Andrew F. Kay sold such shares to his wholly owned corporation, Non-Linear Systems, Inc., for $275,000? The Commissioner had determined that those shares had a fair market value of $138,200 and that the excess of the sales price over that value, namely, $136,800, constituted a dividend from Non-Linear Systems, Inc. (2) Did petitioners in fact make a charitable gift of certain real estate in 1966? A stipulation of facts filed by the parties is incorporated herein as part of our findings of fact. 1. Petitioners are husband and wife. They resided in Del Mar, California, when the petition herein was filed. Andrew F. Kay ("petitioner") has been the sole stockholder of Non-Linear Systems, Inc. ("N. L.S.") since its160 incorporation in California in 1953. Delta Design, Inc. ("Delta") was incorporated under the laws of California in 1959. It was the successor to a two-man partnership composed of Trigg Stewart and David Comey, both of them unrelated to petitioner. Its authorized stock was fixed at 600,000 shares in 1961, of which 500,000 shares were issued: 200,000 shares each to Stewart and Comey, and 100,000 shares sold to the public at $4.50 a share. In authorizing the public sale of the 100,000 shares, the California Corporations Commissioner required that the 400,000 shares issued to Stewart and Comey were to be nontransferable without prior approval of the Corporations Commissioner and were to be subject to various restrictions including ineligibility to receive dividends until dividends in 746 specified minimum amounts had been paid upon the unrestricted shares. In February 1962, 100,000 of the restricted shares were released from the restrictions. Sometime in 1961 Stewart's wife obtained a divorce, and as part of the property settlement agreement she received 100,000 shares of Stewart's Delta stock. During this time relations between Stewart and Comey became strained. In July, 1962, 161 petitioner purchased 40,000 shares of Delta stock from Mrs. Stewart for $1.25 a share, and at about the same time Comey sold 150,000 of his restricted shares: 25,000 to petitioner and 125,000 to 15 other persons, including 65,000 to eight persons who were then friendly to petitioner and who could be characterized as constituting or being part of the "Kay group." The sales by Comey were at $1.25 or $1.50 a share. Petitioner was interested in acquiring control of Delta, primarily because it manufactured products that were related to N.L.S.'s products, and N.L.S.'s distribution system could be profitably employed in selling Delta's products. At about the time of petitioner's foregoing acquisitions of Delta stock in July, 1962, strained relations developed between him and Stewart. The difficulties between them were resolved when on or about September 5, 1962, petitioner purchased Stewart's 100,000 shares (75,000 of which were restricted and the remaining 25,000 unrestricted) for $275,000. The Delta shares acquired by petitioner and his group were sufficient to enable petitioner to obtain control over Delta, and a marketing agreement was entered into between Delta and N.L.S. whereby162 Delta's manufactured products were to be distributed through N.L.S.'s distribution system. The following schedule reflects the comparative sales and net income of Delta, the dividends paid by Delta and the earnings per share and book value of the outstanding shares of Delta stock for its fiscal years ended November 30, 1961 through November 30, 1965: YearSalesNet IncomeDividendsEarningsPer ShareBookValue1961$ 757,224.19$82,748.31$0$.1655$ 1.301962996,831.0066,402.0045,000.13281.341963889,319.0050,862.0022,500.10171.391964954,379.0024,613.0045,000.04921.3619651,203,581.0055,270.0045,000* .115* 1.34From the time of the public issuance through and including all times material herein, the bid and ask prices of the Delta stock were listed in the over-the-counter stock quotations in the Financial Sedtion of the San Diego Union newspaper. A transcription of the foregoing bid and ask price listings from August 9, 1961 through163 May 11, 1965 discloses a gradual decrease in quotations generally from 4 1/8 bid and 4 7/8 ask in 1961 to 1 1/2 bid and 1 7/8 and 2 ask in April and May, 1965. These quotations related to Delta's unrestricted stock. The record contains the annual bid and ask price range of the Delta public shares listed in Walker's Manual of Far West Corporations, as shown in each of its volumes for the years 1962-1965, respectively. The record also contains the bid and ask or want and offering prices of the Delta public shares as well as the brokers involved in the transactions resulting in the quotations as listed semiannually in the National Stock Summary Books for the period April 1, 1961 through October 1, 1965. On or about May 8, 1965, petitioner sold to N.L.S. for $275,000 the 100,000 shares (75,000 restricted and 25,000 unrestricted) of Delta which he had purchased from Stewart in September, 1962. The Commissioner determined that these shares had a fair market value of $138,200 on the date of petitioner's sale to N.L.S. and treated the difference, namely, $136,800, as a taxable dividend. We heard extensive testimony in respect of the fair market value of these shares as of May 8, 1965, and164 after evaluating that testimony and considering the stipulated materials, we have concluded that these 100,000 shares had a fair market value of $200,000 on that date. We so find as a fact. At the end of the trial we announced our finding and indicated some of the considerations that we took into account in reaching that result. It would serve no useful purpose to restate 747 those considerations or to review the voluminous materials in the record that led us to that conclusion. Suffice it to say that the matter is not one that is susceptible of the application of any precise mathematical formula, nor is any one particular factor conclusive. We have taken the entire record into account. 2. In petitioners' 1966 return a deduction of $12,907 was claimed in respect of an alleged charitable gift of an interest in real property. The Commissioner disallowed the deduction in its entirety. Petitioners now concede that the property had a fair market value of only $9,000. However, at issue is whether they made the gift at all in 1966. The evidence discloses that a deed dated December 28, 1966, was executed in respect of the property and that petitioners' books contain entries for 1966165 relating thereto. The Government contends that the deed was never delivered in 1966. The evidence relating to this issue was most unsatisfactory. The deed was never recorded; it remained in petitioners' possession, and we are far from satisfied that there was any effective delivery of the deed to a representative of the charitable donee, as contended by petitioners. The evidence in support of petitioners' position is weak and unpersuasive. In view of the state of the record, bearing in mind that the burden of proof is upon the petitioners, we must find that such burden has not been carried by reasonably satisfying evidence. Decision will be entered under Rule 50. Footnotes. As a result of the treasury purchases began by Delta in 1965, its outstanding stock as of November 30, 1965 had decreased from 500,000 to 478,734 shares.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619130/	Earle C. Parks and Bernice D. Parks, Petitioners, v. Commissioner of Internal Revenue, RespondentParks v. CommissionerDocket No. 67563United States Tax Court33 T.C. 298; 1959 U.S. Tax Ct. LEXIS 36; November 23, 1959, Filed 36 1. Determination of deficiency as to 1952 held not barred by petitioners' claim of "accord and satisfaction."2. Addition to tax under section 294(d)(1)(A), I.R.C. 1939, sustained. Earle C. Parks, Esq., pro se.Raymond T. Mahon, Esq., for the respondent. Raum, Judge. RAUM298 Respondent determined deficiencies in petitioners' income tax and additions thereto, as follows:Additions to tax, I.R.C. 1939YearDeficiencySec. 294(d)(1)(A)Sec. 294(d)(2)1952$ 2,279.36None$ 833.591954949.66$ 1,184.92710.96The principal questions are:1. Was there an "accord and satisfaction" between petitioners and respondent with respect to petitioners' income tax liability for 1952 so as to preclude respondent from assessing additional taxes for that year?2. Are petitioners relieved of liability for addition to tax under section 294(d)(1)(A) for failure to file a declaration of estimated tax for 1954 by reason of certain alleged representations made by or in the presence of an assistant district director of internal revenue?FINDINGS OF FACT.Petitioners, husband and wife residing in Belmont, Massachusetts, filed joint income tax returns for the37 calendar years 1952 and 1954 with the district director of internal revenue for the district of Massachusetts. Earle C. Parks, hereinafter referred to as petitioner, is a practicing attorney at law and is a member of the bars of the Commonwealth of Massachusetts, the United States District Court for Massachusetts, the United States Supreme Court, and the Tax Court of the United States.Petitioners filed their 1952 return on or about March 16, 1953, reporting a tax of $ 14,705.88 and a "balance of tax due" in the amount of $ 11,613.88 after withholding and payments on their 1952 Declaration of Estimated Tax. Petitioners did not then pay the balance due. At that time they also owed back taxes for the years 1950 and 1951 which, pursuant to an arrangement made at some undisclosed time, they were paying at the rate of $ 1,000 a month. By March 1954, $ 10,000 of petitioners' 1952 taxes as reported on the 1952 return remained unpaid, and a lien had been placed upon real estate owned by petitioner to insure payment of such tax.299 In March 1954, petitioner was called to a conference at the Boston office of the district director. Present at this conference were petitioner, his 38 law partner, Frank C. Hession, and two revenue agents attached to the district director's office. Petitioner was informed of the lien that had been placed upon his property and was requested to make payment of the balance due on his 1952 return. As a result of this conference and an examination of petitioner's books and records incident thereto, it was agreed that the lien would be lifted if petitioner raised the requisite $ 10,000 by placing a mortgage on his home. Shortly thereafter, at a second conference, petitioner paid the amount due with a check representing the proceeds of a mortgage placed on his home, and the lien was discharged. Present at this second conference were petitioner, the assistant district director, Charles J. King, and two revenue agents, one of whom had attended the earlier conference. After presentation of the check for 1952, petitioner agreed to make further payments of $ 1,000 per month, such payments to be applied first against petitioner's tax liability for 1953, and then against his liability for 1954. Although some discussion was had with respect to petitioner's possible liability for "penalties" for 1954, neither King, nor any other internal revenue39 official present at the conference, represented to petitioner that only one "penalty" would be assessed against him in the event he failed to file a declaration of estimated tax for 1954. Petitioners failed to file a declaration of estimated tax for 1954.Sometime after the second conference, "in either the fall of 1954 or the spring of 1955," a revenue agent named James Hooley examined petitioner's books and records for 1952, 1953, and 1954. This examination covered a period of 10 months during which time Hooley spent 2 or 3 days per month in petitioners' office. Petitioner did not hear from Hooley again after the expiration of the 10-month period. A month or two after Hooley's departure, petitioner's books for 1952, 1953, and 1954 were examined again by a revenue agent named Martin Berg. Berg visited petitioner's office every day for a period of 3 weeks. Petitioner told both Hooley and Berg that he objected to their examinations with respect to 1952 on the ground that that year had been "settled" or "closed."Form 872, attached to petitioners' 1952 return and entitled "Consent Fixing Period of Limitation Upon Assessment of Income and Profits Tax" was executed by petitioners40 on January 24, 1956, and by the Commissioner on February 16, 1956; it extended to June 30, 1957, the period for assessing additional income tax for the taxable year 1952. On July 6, 1956, petitioner received respondent's letter of intent to determine deficiencies for 1952, 1953, and 1954, and petitioner 300 filed a protest thereto on July 31, 1956. The protest stated in part as follows:1952 -- this return was priorly audited and finally settled and a tax lien removed. Taxpayers claim no further adjustment is due, nor any penalty chargeable.1954 -- taxpayers object to penalties imposed, especially under Sec. 294(d)(1)(A) upon ground that director's office advised paying taxes due for prior years and that no penalty would be charged.The deficiency notice involved in this case was mailed to petitioner on March 4, 1957.OPINION.1. Petitioners do not challenge the correctness of the Commissioner's determination as to 1952. Instead, they argue that there has been an "accord and satisfaction," a compromise or settlement for 1952, between them and the then collector of internal revenue for the Boston district; and that the Commissioner is therefore precluded from determining41 any deficiency as to 1952.(a) In the first place, it is highly dubious whether this issue is properly pleaded. Rule 7(c)(4)(B) of our Rules of Practice requires a petitioner to include in paragraph 4 of his petition "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," and provides further that "[each] assignment of error shall be lettered." Also, the same rule provides that paragraph 5 of the petition must contain "[clear] and concise lettered statements of the facts upon which the petitioner relies as sustaining the assignments of error." See Nathan Goldsmith, 31 T.C. 56">31 T.C. 56, 63.These requirements are not idle technicalities. It is important to the orderly conduct of a lawsuit that both the Court and the opposing party be properly informed by the pleadings as to precisely what issues are presented for decision.Petitioner's paragraph 4, to the extent that it relates to the year 1952, consists of two sentences which are set forth in full in the margin. 1 The first sentence deals with the basic deficiency and nothing therein, or42 in the schedules referred to, in any way is concerned 301 with the defense of "accord and satisfaction." The second sentence deals only with the so-called "penalty," and nothing set forth therein could possibly be described as a "clear and concise" assignment of error based on "accord and satisfaction." To be sure, the second sentence does undertake to say that the "penalty" was in error "for the reasons set forth hereafter," 2 and there is some language in paragraph 5, which, in the light of the contention made by petitioner for the first time at the hearing, could possibly be construed to relate to "accord and satisfaction." But, at best from petitioner's point of view, (1) paragraph 4 itself is faulty under our rules, (2) it deals in this regard only with the "penalty" and not with the basic tax, and (3) even if paragraph 5 may be engrafted upon paragraph 4 -- a situation not contemplated by our rules, since we look to paragraph 4 for assignments of error and to paragraph 5 for allegations of fact backing up such assignments -- the allegations in paragraph 5 are not of such character as to present clearly an accord and satisfaction issue without further elaboration. However, 43 it is not necessary to decide this issue merely upon the pleadings, for it is clear in any event that the point is without merit.44 (b) On the merits of this issue, petitioner has failed to establish any "accord and satisfaction," compromise or settlement for 1952 which would preclude respondent from assessing additional taxes with respect to that year. As was stated in Victoria R. Johnston, 19 B.T.A. 630">19 B.T.A. 630, 633: "The action of the Commissioner in determining the deficiency is presumably correct and the burden is upon the petitioner * * to show the contrary." Petitioner has failed to carry that burden. No written agreement evidencing "an accord and satisfaction" was ever drafted or signed by the parties, nor was there any exchange of correspondence which might be interpreted as such an agreement. Moreover, there is no basis in the facts and circumstances material to the year 1952 from which an "accord and satisfaction" might be implied. Although the Government agreed to discharge its tax lien upon payment by petitioner of the balance of tax due on the face of the return, it is settled that such an agreement does not operate as an "accord and satisfaction" with respect to petitioner's total tax liability for the year in question, nor does it estop respondent from thereafter assessing45 additional taxes and penalties. George H. Baker, 24 T.C. 1021">24 T.C. 1021, 1025; see Joseph T. Miller, 23 T.C. 565">23 T.C. 565, affirmed 231 F. 2d 8 (C.A. 5). Petitioner's testimony on direct, if credible, tends merely to establish his own conclusion 302 that the year 1952 was "closed." There is no evidence that there was any controversy at that time between the parties as to the amount of liability for 1952, or that petitioner did anything more than pay the taxes reported on the return. Petitioners have failed to show that there was any consideration for an accord and satisfaction in respect of any additional liability. Moreover, we are not satisfied by the evidence that respondent agreed to accept petitioner's check in complete satisfaction of the 1952 tax liability. And finally, in any event, even if the subordinate revenue officials present at the second conference informally agreed to accept petitioner's payment as an "accord and satisfaction" for 1952, such an agreement would not be a compromise pursuant to the exclusive statutory method of compromise authorized by section 3761, I.R.C. 1939, and 46 would not be binding on the Commissioner. Botany Worsted Mills v. United States, 278 U.S. 282">278 U.S. 282; Leach v. Nichols, 23 F. 2d 275 (C.A. 1); L. Loewy & Son, Inc. v. Commissioner, 31 F. 2d 652 (C.A. 2), affirming 11 B.T.A. 596">11 B.T.A. 596; Hughson v. United States, 59 F. 2d 17 (C.A. 9), certiorari denied 287 U.S. 630">287 U.S. 630; Hanby v. Commissioner, 67 F. 2d 125 (C.A. 4), affirming 26 B.T.A. 670">26 B.T.A. 670; Joyce v. Gentsch, 141 F. 2d 891 (C.A. 6); Bank of New York v. United States, 170 F. 2d 20 (C.A. 3); Victoria R. Johnston, supra;Henry Hudson, 39 B.T.A. 1075">39 B.T.A. 1075; George H. Baker, supra.2. As to the year 1954, petitioners do not contest the basic deficiency of $ 949.66, but they do argue that the addition to tax under section 294(d)(1)(A) is improper since petitioner was allegedly assured at the second conference47 at the director's office that "only one penalty would be assessed." Although we are satisfied that there was some discussion at that conference with respect to penalties, we are far from satisfied on the evidence -- in the absence of more precise testimony as to the nature of the alleged representations -- that petitioner received any such assurance. The burden of proof in this respect was on petitioners, and by reason of their failure to meet that burden we have found as a fact that no such representations were made. Petitioners did not in fact file a declaration for 1954, and we hold that the addition to tax under section 294(d)(1)(A) was justified. However, the Supreme Court's decision in Commissioner v. Acker, 361 U.S. 87">361 U.S. 87, makes clear that the further addition under section 294(d)(2) for substantial underestimation was improper. In the circumstances, the section 294(d)(1)(A) addition is approved, but the section 294(d)(2) addition is disapproved.Decision will be entered in accordance with the foregoing opinion. Footnotes1. "4. The determination of tax set forth in the notice of deficiency for the year 1952 is based in the main upon the disallowance of certain cash expenditures for alleged depreciable furniture, fixtures and office equipment, and certain other minor adjustments upon audit, all as more fully set forth in Exhibit B, Schedules 1 and 1-A attached hereto. The penalty of $ 833.59 for substantial under-estimation of the estimated tax for the year 1952 under Section 294(d)(2) of the 1939 Code was in error for the reasons set forth hereafter, as well as being precluded by Section 3631 of the Internal Revenue Code of 1939↩."2. The reference to section 3631↩ has nothing to do with "accord and satisfaction." It relates to "unnecessary examinations or investigations," and petitioner in his opening statement to the Court has made clear that he does not now challenge the deficiency by reason of allegedly multiple audits made by Government agents.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619132/	SAUNDERS COUNTY NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Saunders County Nat'l Bank v. CommissionerDocket No. 8985.United States Board of Tax Appeals11 B.T.A. 606; 1928 BTA LEXIS 3763; April 16, 1928, Promulgated 3763 Ernest Dworak, C.P.A., for the petitioner. Arthur H. Murray, Esq., for the respondent. LANSDON 606 The respondent asserts a deficiency in income and profits tax for the year 1919 in the amount of $115.82. The only issue pleaded by the petitioner is that the respondent erroneously held that it was affiliated with the Nebraska State Savings Bank during the taxable year. FINDINGS OF FACT. The stockholders and stock holdings of the two corporations which have been held by the respondent as affiliated for Federal tax purposes in the year in question were as follows: StockholderSaunders County National BankNebraska State Savings BankSharesPer centSharesPer centW. C. Kirchman2054197 1/239F. J. Kirchman107 1/221.563 1/425.3J. J. Johnson102 1/220.559 1/423.7F. J. Bastars204104Hartford, Conn., Trust Co., trustee255None.Maude Humphry Chase102None.A. Safranek10252W. C. Peters10252Chas, F. Keith512 1/21Ora Johnson Wilson512 1/21W. H. KirchmanNone.52Total500100250100607 3764 OPINION. LANSDON: During the year 1919 the owners of 100 per cent of the stock of the petitioner owned 98 per cent of the stock of the Nebraska State Savings Bank, and the owners of 100 per cent of the stock of the Nebraska State Savings Bank owned 93 per cent of the stock of the petitioner. Substantially all the stock of the petitioner and the Nebraska State Savings Bank was owned or controlled by the same interests in the taxable year. The determination of the respondent that under the provisions of section 240(b)(2) of the Revenue Act of 1918 such corporations were affiliated in the year 1919 is approved. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619133/	Edward A. Kerr v. Commissioner.Kerr v. CommissionerDocket No. 5579.United States Tax Court1946 Tax Ct. Memo LEXIS 5; 5 T.C.M. (CCH) 1101; T.C.M. (RIA) 46292; December 26, 1946Chester J. McGuire, Esq., William R. Spofford, Esq., and Charles S. Jacobs, Esq., 1035 Land Title Bldg., Philadelphia 10, Pa., for the petitioner. Robert H. Kinderman, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: This proceeding seeks a redetermination of a deficiency in income tax in the amount of $25,578.91 for the year 1941. The issue presented is whether respondent erred in including in petitioner's income for the year in question $39,164.54, reported as income by petitioner's wife on the premise that she was a partner with petitioner in a contracting-building business. Findings of Fact Petitioner is an individual now residing in Miami Beach, Florida. During the year 1941, he resided6 in Philadelphia, Pennsylvania, and filed his income tax return for that year with the collector of internal revenue for the first district of Pennsylvania, at Philadelphia. Petitioner is married, has a wife, a son and a daughter. In 1940 the son was eleven years old and the daughter was seven. They attended public school and came home after school. Petitioner at this time was 38 years old. On or about August 1, 1940, petitioner, in his own handwriting, drew up an instrument signed by himself and his wife, reading as follows: Elkins Park, Pa.August 1, 1940 To whom it may concern Edward A. Kerr and Mary M. Kerr hereby enter into business partnership as of this date. Each to share and share alike in the profits or losses and liabilities of said partnership. Be it known that Edward A. Kerr is now engaged as partner in building business with Wm. F. Homiller trading as Homiller & Kerr. Mr. Homiller financed the start of Homiller & Kerr but knew nothing about the business. The business was successful despite Mr. Homiller's lack of knowledge of said business. Mr. Homiller has recently started pressing his opinions as to policy of said Homiller & Kerr which were at variance7 with the opinions of Edward A. Kerr and it is the intention of Mr. Homiller & Mr. Kerr to terminate the partnership. Be it further known that the mother of Mary M. Kerr died last month leaving Mrs. Kerr and her brother the only heirs and a substantial inheritance is expected by Mrs. Kerr. Mrs. Kerr agrees to use this inheritance as an investment in the partnership or as a basis of credit to obtain money for the partnership. This inheritance plus the cash and credit of Edward A. Kerr should warrant the risk of starting in business as Edward A. Kerr & Co. Mrs. Kerr who has counseled Mr. Kerr in the past is to act in an advisory capacity and do such actual work in meetings together or on the job or in the office as the partners agree mutually between themselves. Witness our hands and seals this 1st day of August 1940. (Signed) Edward A. Kerr (seal) (Signed) Mary M. Kerr (seal) On July 22, 1941, petitioner and his wife executed certificates stating that they were carrying on a building and construction business in the Commonwealth of Pennsylvania under the name of Edward A. Kerr and Co. One of the certificates was filed in the office of the Secretary of the Commonwealth and the8 other with the Prothonotary of Philadelphia County. Until just before the certificates were filed petitioner understood that filing was necessary only if the name used was an assumed name. He had been without legal advice concerning the matter, and was finally informed by a certified public accountant. Books for the business were opened shortly after its formation. They are kept on an accrual basis with a fiscal year ending August 31. Petitioner and his wife had joint bank accounts. The business maintained bank accounts in two financial institutions, and the exercise of checks on its accounts was authorized by either petitioner or his wife, Mary M. Kerr. In changing the name of the account with the Land Title Bank & Trust Company from Edward A. Kerr to Edward Kerr & Co., by letter dated August 5, 1941, petitioner requested signature cards and stated that Mary M. Kerr was his wife and partner. The signature card for Edward A. Kerr and Mary M. Kerr was dated October 9, 1941. There was never any formal or general notification that a "partnership" had been formed. Business stationery designed for use after the execution of the August 1, 1940, agreement was titled: Edward A. 9 Kerr, Builder and General Contractor, 6701 N. Broad Street, Philadelphia, Pa. The letterhead was changed about the time of the filing of the fictious name registrations in July, 1941, to read as follows: Edward A. Kerr & Co., Builders and General Contractors, 3701 Richmond Street, Philadelphia, Pa. Subsequently this address was changed to 441 West Cheltenham Avenue (Oaklane P.O.), Philadelphia, Pennsylvania. The books disclose that petitioner, on the dates indicated, made the following capital contributions to the business either in cash or from profits: September 6, 1940$25,432.81September 20, 19405,000.00September 25, 194010,000.00October 11, 1940700.00October 19, 19405,000.00November 15, 19403,000.00November 26, 19404.60November 27, 19401,000.00November 27, 19401,000.00October 27, 19415,000.00October 31, 19415,000.00November 12, 19415,000.00February 26, 19421,365.15$67,502.56In a Cash Receipts and Disbursements Account Book of Edward A. Kerr & Co. under cash disbursements for August, 1941, appears the following: General Ledger1941 * * * AccountAmountAug. 5 Kerr Con-struction Co.49,600.00Exchange Acct.49,600.0010 In the Cash Receipts and Disbursements Account Book of Kerr Construction Co. under cash receipts for August, 1941, appears the following: BankDep.NetGeneral LedgerLand1941Cash * AccountAmt.TitleAug. 6 Mary M. Kerr - 250 pfd. sharesPfd. cap.E. A. Kerr - 246 pfd. shares49,600 -stock49,600 -49,600 -The Sales Register and Journal of Edward A. Kerr & Co. discloses the following entry for August 31, 1941: DebitCreditAug. 31 E. A. Kerr, Personal24,600 -Mary M. Kerr Personal25,000 -to Kerr Const. - Accts. Receivable(receipt from Kerr Const. Co. on 8/5/41 posted toExchange Acct.)49,600 -Check issued on 8/5/41 also charged to Exchangeacct., was actually for purchase of stock in KerrConstruction Co.EAK - 246 sharesMary K. 250 shares) And under "Closing Entries - 8/31/41" appears the following: DebitCreditAug. 31 Profit & Loss78,328.07to E. A. Kerr Capital39,164.04M. M. Kerr Capital39,164.03Aug. 31 E. A. Kerr Capital28,749.45to E. A. Kerr Personal28,749.45(drawings closed into capital acct.)Aug. 31 M. M. Kerr Capital25,000 -to M. M. Personal25,000 -(drawings closed into capital acct.)11 The General Ledger of Edward A. Kerr & Co. in an account entitled "E. A. Kerr - Personal" discloses the following: 1941Debits1941CreditsAug. 31 Stock in Kerr Const. Co.24,600 -Aug. 31 to close into capital28,749.45 And in an account entitled "E. A. Kerr - Capital" it discloses the following: 1941Debits1941CreditsAug. 31 Stock in Kerr Const. Co.24,600 -Aug. 31 Profit39,164.0431 Personal Drawing4,149.45 And in an account entitled "E. A. Kerr - Personal," it discloses the following: 1941Debits1941CreditsAug. 31 Stock in Kerr Const. Co.24,600 -Aug. 31 to close into capital28,749.45 And in an account entitled "Mary M. Kerr - Capital," it discloses the following: 1941Debits1941CreditsAug. 31 Stock in Kerr Const. Co.25,000 -May 81,000.00May 311,500.00Aug. 2913,000.00Aug. 31 Profit39,164.04 And in an account entitled "M. M. Kerr, Personal," it discloses the following: 1941Debits1941CreditsAug. 31 Stock in Kerr Const. Co.25,000 -Aug. 31 to close into capital25,000 -In the General12 Ledger of the Kerr Construction Co. in an account entitled "Capital Stock (Preferred)" appears the following: 1941ItemsCreditsAug. 6Mary M. Kerr - 250 sharesEdward A. Kerr - 246 shares49,600.00At the time of the execution of the August 1, 1940, instrument, petitioner's wife was a beneficiary under her mother's estate. The first and final accounting of the estate of the wife's mother made in December of 1941, resulted in the distribution to her of stocks and bonds stated at that time to be of a value of $7,864. She also received cash of $17.62. There was also some real estate in the mother's estate, not included in the accounting. By note dated Augst 29, 1941, Mary M. Kerr promised to pay on demand to herself at the Liberty Title and Trust Company $13,000 with 5 percent interest. The note was endorsed by Mary M. Kerr, and on the reverse side listed bonds posted as collateral in the face amount of $22,500. A payment on account of principal of $3,165 was also indicated on the back as having been made "10/30." Payment of the balance of $9,835 was made on December 31, 1941. Payment was by check on an outside bank. The $3,165 payment was effected from13 the proceeds of the redemption of one of the bonds held as collateral. The character of the business is such that capital in the form of cash is not of prime importance. Financing is handled by means of progress payments. The personal worth of operators in the business might become of some importance if the regular lines of credit fail. Prior to 1937 petitioner had a varied business experience, including early experience in the speculative building business. He had operated as a proprietor and employee, the latter capacity being sometimes as salesman. In 1937 he and William F. Homiller entered into a partnership for the conduct of a business engaged in speculative building. The business operated until 1939, when it was mutually decided to liquidate. In that partnership petitioner contributed no working capital, Homiller contributed $10,000. In the beginning, Homiller and petitioner shared equally, but before dissolution petitioner's interest was increased to 60 percent. Petitioner made more than $50,000 from Homiller and Kerr, some of which was not received until after the dissolution of that partnership. Petitioner, through his connections with the National Home Builders' Association, 14 Philadelphia Defense Council, and Philadelphia Housing Association procured the business of the construction of a large project known as the Richmond project. Petitioner arranged the financing of the Richmond project. Credit was obtained from the Land Title Bank & Trust Company for the loan to the Kerr Construction Company by means of a commitment from the New York Life Insurance Company. Kerr Construction Company was a corporation, the stock of which was owned equally by petitioner and his wife. It was upon this commitment that the Land Title Bank & Trust Company relied in the event of default by the Kerr Construction Company. The Land Title Bank & Trust Company loaned approximately $3,100 per house when completed and $2,300 before completion. Kerr Construction Company owned the houses and land on the Richmond project. Edward A. Kerr & Co.'s only interest in the Richmond project was the building of houses under contract. Edward A. Kerr & Co. was paid sufficient money during the progress of the work to discharge its obligations to subcontractors and laborers, and was paid in full on completion of the houses. The project was guaranteed by the United States Government under Title VI15 of the National Housing Act. Edward A. Kerr & Co. was paid less than its contract price for most of the houses for the Richmond project but eventually made money notwithstanding the reduced price. Petitioner drew the rough plans and wrote the specifications for the houses built by Edward A. Kerr & Co. Petitioner dealt with the superinendents on the job and checked to ascertain if the specifications were adhered to. The activities of Mary M. Kerr, befor and after the creation of Edward A. Kerr & Co., were substantially the same. She had no actual knowledge of the construction or physical superintendence of the work of Edward A. Kerr & Co., and was not concerned with the execution of the plans for the houses it built. The total time consumed by the services rendered by her to the company was more than one week but was not considerable in the aggregate. It consisted of sporadic services usually varying from fifteen minutes to three hours a day. During the time in question petitioner's wife was engaged in the normal responsibilities and duties of a housewife and mother of two children. She had domestic help two or three days a week. Prior to August 1, 1940, she had never been in16 business in a formal way. Part of her activity in the business was related to the interior decorating of the properties. She kept herself informed on this work by visiting the sample homes of other builders and by reading news-stand periodicals on the subject. In some instances it was possible for petitioner's wife to view and compare the work of competitors with less difficulty than petitioner would have had. She persuaded petitioner to accept her views on painting interior walls and installing gas heat on a group project. In addition to the Richmond project which involved the construction of 410 houses, Edward A. Kerr & Co. constructed 25 or 26 houses on Landis Street at one time, and a similar number on a continuation of that project; and there was also a construction of 48 houses in the same neighborhood. Petitioner's wife was interested in all the projects. She assisted in locating possible building sites and considered with him the advisability of their purchase. She would also make suggestions about the plans which petitioner drew up. The construction of the houses was under the supervision of a superintendent employed by the company. Neither petitioner nor his wife had17 any direct participation in sales which were handled by a sales department. Mary M. Kerr made the following cash withdrawals from Edward A. Kerr & Co. in 1942: June 28$ 2,500June 282,500August 1210,000Total$15,000Petitioner made the following cash withdrawals from Edward A. Kerr & Co.: December 4, 1940$ 1,000.00February 10, 1941100.00April 29, 1941500.00May 2, 1941400.00May 5, 1941500.00June 9, 194157.42August 6, 19411,413.50January 2, 1942218.54February 4, 194275.00February 16, 1942200.00February 28, 19422,010.00March 2, 194269.98April 2, 1942500.00June 24, 19425,000.00June 28, 19422,500.00June 28, 19422,500.00July 6, 19427,000.00July 11, 194211,650.52August 5, 1942200.00August 12, 194230,000.00August 18, 1942184.60$66,079.56Balance sheet as of August 31, 1941, for Edward A. Kerr & Co. shows cash of $42,951.35 among its assets. As of August 31, 1942, a similar balance sheet shows cash of $9,764.71. The profits of Edward A. Kerr & Co. for its fiscal year ended August 31, 1941, were $78,328.07, of which $39,164.03 was credited to the capital account18 of petitioner and an identical amount to the capital account of his wife. A similar practice was followed in distributions of the profits in later years. For the fiscal year ended August 31, 1941, a partnership return of income on Form 1065, was filed by Edward A. Kerr & Co. Petitioner and his wife filed individual returns on which were reported as taxable income the distributive shares of the profits reported by Edward A. Kerr & Co. This was the first time the wife had filed a Federal income tax return. In his notice of deficiency respondent stated: In accordance with section 22(a) of the Internal Revenue Code, it has been determined that you are the sole proprietor or owner of the business conducted under the name of Edward A. Kerr and Company and the alleged partnership is merely a device for the allocation of your income between you and Mrs. Kerr, with retention of control by you. Petitioner's wife contributed neither capital originating with her nor vital services to the business of Edward A. Kerr & Co. No partnership in that business between petitioner and his wife existed for income tax purposes. Opinion Although a genuine effort is made to19 create a more favorable picture, the sole conclusion to be elicited from this record is that the business in which the ostensible partnership was engaged was preponderantly a personal service operation. It did not own the land on which it constructed the houses, nor the houses themselves. It was kept in funds by anticipatory payments as the work progressed. Petitioner's capacity as architect, engineer, and construction supervisor was the source of the business income. No need for any sizeable capital is shown, and none is shown to have been used. See M. M. Argo, 3 T.C. 1120">3 T.C. 1120, affirmed (C.C.A., 5th Cir.), 150 Fed. (2d) 67, certiorari denied, 326 U.S. 762">326 U.S. 762. If there was any actual deposit of funds in the business by petitioner's wife - a circumstance not definitely established by the record - its necessity in the business or use in the operations cannot be inferred. The largest credit appears after an amount almost twice as large had apparently been advanced for her account, and at about the same time as the first distribution of earnings. It was without apparent purpose or effect as far as that business was concerned. At most it was no more than20 a gesture which cannot give reality to so practical an activity as the conduct of a business enterprise. It does not suffice to alter the inference that it was petitioner's services and possibly some small amount of petitioner's funds which earned the income in question. Earp v. Jones (C.C.A., 10th Cir.), 131 Fed. (2d) 292, certiorari denied, 318 U.S. 764">318 U.S. 764; Paul G. Greene, 7 T.C. 142">7 T.C. 142. We cannot find that petitioner and his wife did "really and truly intend * * to join together" in the operation of a business. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, 287. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619135/	MARY PYNE FILLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Filley v. CommissionerDocket No. 98818.United States Board of Tax Appeals45 B.T.A. 826; 1941 BTA LEXIS 1068; November 25, 1941, Promulgated 1068 1. INCOME - TRUSTS - DISTRIBUTED CURRENTLY. - Income paid to a beneficiary under a provision to "pay over the net income thereof in semiannual or other convenient payments * * or in the uncontrolled discretion of the Trustees to apply the same to her use and benefit", and under the provision of another trust to "pay over the net income to the child for whom the trust is held during the term of his or her natural life", is income to be distributed currently within the meaning of section 162(b), Revenue Act of 1936, and is taxable to the beneficiary even though it was not paid to her until shortly after the close of the taxable year. Section 162(c) is inapplicable. 2. DEDUCTION - EXPENSES - BUSINESS. - Deduction for expenses under section 23(a) denied to petitioner, who merely handled her own securities, upon authority of Higgins v. Commissioner,312 U.S. 212">312 U.S. 212, and similar cases. 3. EXCLUSION FROM INCOME. - An amount withdrawn from trusts to pay office expenses of an office maintained for the trusts was improperly included in the petitioner's income as trustee commissions. Allen G. Gartner, Esq., and Edward I. Sproull, C.P.A., for the1069 petitioner. J. R. Johnston, Esq., for the respondent. MURDOCK 827 The Commissioner determined a deficiency of $12,131.25 in income tax for the calendar year 1937. The petitioner assigns as error the action of the Commissioner in including in her income the income of two trusts of which she was beneficiary. The Commissioner claims that he erred in allowing certain deductions as ordinary and necessary expenses of the petitioner's business. FINDINGS OF FACT. The petitioner is married and resides at Bernardsville, New Jersey. She filed her individual income tax return for the calendar year 1937 with the collector of internal revenue for the third district of New York. Her books are kept and her income is reported on the basis of cash receipts and disbursements. The petitioner is one of the children of Percy R. Pyne who died in August 1929, a resident of New Jersey. Her father created an irrevocable inter vivos trust for her benefit on July 31, 1923. The original trustees were the grantor and a trust company. Percy R. Pyne, Jr., became trustee in place of his father after the latter's death. The trust instrument provided in part: During1070 the lifetime of my daughter Mary Pyne Filley to hold, invest and reinvest the Trust Fund, and to receive and collect the income therefrom, and to pay over the net income thereof in semi-annual or other convenient payments to said Mary Pyne Filley, or in the uncontrolled discretion of the Trustees to apply the same to her use and benefit, and upon her death to pay over the Trust Fund absolutely to her lawful issue * . There were similar trusts for other of the children of Percy R. Pyne. Those Pyne children decided in 1936 to discontinue the practice of paying the income within the year and they notified the trust company to retain the income of the trust for each year and not to pay it out until after the close of the year. The income of the trust for 1937 was paid to the petitioner on January 3, 1938. The trustees filed a fiduciary income tax return for this trust for the calendar year 1937, showing that all of the income of the trust, 828 save a small amount, was distributable to the beneficiary, Mary P. Filley, and showing no tax due. A separate testamentary trust was set up under the will of Percy R. Pyne for the benefit of each of his children. The pertinent1071 provision of the will was as follows: The other equal part or share into which my residuary estate is to be divided I direct my trustees to divide into as many separate equal shares or parts as shall be equal to the number of my children who shall survive me and of those who may have died before me leaving issue me surviving, one of such shares for each of my children so surviving me and one share for the issue collectively of each child of mine who shall have died before me leaving issue me surviving; and as to the share for each child of mine surviving me, to hold the same on similar but several trusts, one for the benefit of each of the said children, and to invest and reinvest the same, collect the income thereof, and pay over the net income to the child for whom the trust is held during the term of his or her natural life; * . The trust for the petitioner under this provision of the will was set up prior to the beginning of the calendar year 1937. It has been the practice of the trustees of these trusts to retain the income of the trust for each year until after the close of that year and pay it over to the beneficiary early in the following year. The income of this1072 trust for 1937 was paid to the petitioner in January 1938. The trustees of this turst filed a fiduciary income tax return for the calendar year 1937, showing all of the income taxable to the trust. They paid the tax shown on that return. The petitioner did not report in her individual income tax return for 1937 any income from either of the trusts above mentioned. Percy R. Pyne had maintained an office in New York during his lifetime for his convenience in conducting his business affairs. The employees consisted of a manager and four subordinates. The children of Percy R. Pyne were cotrustees under the trusts created by their father. They continued his New York office after his death for their convenience in carrying out their duties as trustees. They also used it in looking after their individual affairs. They set up a bank account known as the "Pyne Trustees' Commission Account" and paid the general expenses of the office from that account. Sufficient amounts were withdrawn from the testamentary trusts of Percy R. Pyne and deposited in that account to pay those expenses. There were only three surviving children in 1937. The petitioner, who was one of those children, 1073 deducted $8,502.91 on her individual return for 1937, representing one-third of the total office expenses for the year. She reported on that return $8,505.84 as trustees' commissions from the trusts created by the will of Percy R. Pyne. She did not receive the $8,505.84, but that was one-third of the amount which was withdrawn from the trusts druing 1937 to pay the office expenses. Neither 829 the petitioner nor any of her three brothers ever received any commission as trustee under the trusts created by their father. The petitioner on her return claimed a deduction which included the following items: Custodian Fees, City Bank Farmers Trust Co$750.00Office Miscellaneous Expenses4.50Accountants' Fees750.00Security Management Services2,650.00Wire charges3.39The first item is the amount she paid to the bank to hold her securities and keep them in negotiable form. The third is the amount which she paid for accounting and service in connection with her income tax return. The fourth item is the amount paid to a firm of investment counsel who advise her on the purchase and sale of securities. The two small items are for stationery and1074 other small items incident to her use of the office. None of those items relates to any of the trusts. The petitioner is the owner and lessor of a house in New York City. She makes all decisions in connection with this property. She deals through a real estate agent in renting the property. The income is collected through the Pyne office. The gross income from the property for 1937 amounted to $8,083.31. She reported net income from the property of $5,073.31 for that year and claimed a separate deduction for taxes on the property in the amount of $6,900. The petitioner has an estate in her own name, including a large number of securities from which she derived income in 1937 of about $34,000. She made a number of purchases and sales of securities during 1937. She attends tp her own financial affairs and makes all decisions in regard thereto, including all decisions relating to the purchase and sale of securities. She went to the Pyne office occasionally and was in communication with that office by telephone or by other means of communication on an average of two or three times a week. She came to the office whenever her presence was necessary. The petitioner was1075 not engaged in carrying on any trade or business during 1937. OPINION. MURDOCK: It is provided in section 162(b) of the Revenue Act of 1936 that a trust shall be allowed a deduction of the amount of the income of the "trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries", and in section 162(c) that "in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated", the amount which is properly paid or credited during such year to the beneficiary 830 shall be allowed as a deduction. The amount allowed as a deduction under either of the above provisions is required to be included in computing the net income of the beneficiary. The Commissioner has made his determination upon the theory that the income of each trust was taxable to the beneficiary under section 162(b) as income which was to be distributed currently by the fiduciary to the beneficiary. Actual receipt by the beneficiary during the taxable year is not essential under that provision. Cf. 1076 ; . The petitioner contends that the trustee had the discretion to accumulate the income of this trust or to distribute it to the beneficiary, consequently, (c) applies, and, since none of the income was actually paid to the beneficiary during the year, none of it is taxable to the petitioner. Although the proof does not show that the income was not properly credited to the petitioner during the year, decision need not turn upon this failure of proof. "Accumulated" in (c) is used in opposition to "distributed currently" in (b). The latter is intended to cover all cases where the trust instrument imposes a duty upon the trustee to make a prompt or periodic distribution of the trust income to the beneficiary. ; , affirming ; ;1077 . Cf. . (c), by its express terms, covers only those cases where the fiduciary has the right and the duty to choose between prompt distribution and accumulation beyond the time when a prompt distribution would normally have been made. Discretion requires the exercise of judgment and reason. It involves consideration of whether, on the one hand, there is good reason to distribute and no justification for withholding, or whether, instead, he should deliberately refrain from distributing at the usual time and withhold for some definite reason which, in his opinion, better carries out the purpose of the trust than would a current distribution. A provision for the distribution of "net" income does not make (b) inapplicable. This is so even though distribution is not to be made until after the close of the year in which the income is earned by the trust. Income which is distributed annually is being distributed currently, as well as promptly and periodically, and comes within (b), upon authority of the cases above cited. The grantor in the present case did not1078 intend that the income of either trust should be accumulated within the meaning of that word as it is used in (c), but intended that the income should be distributed currently to the beneficiary within the meaning of (b). This is apparent from the words he used in the trust instruments. 831 Similar words have been similarly interpreted. Cf. ; affd., ; ; . The only discretion given under the two trusts here in question was a discretion to the trustees of the inter vivos trust to pay the income directly to the beneficiary or to apply the same to her use and benefit. That is not a discretion to accumulate within the trust and is not the kind of discretion which brings the case within (c). The income was not to be accumulated, but was to be distributed currently, either directly to the beneficiary or for her use and benefit. It is taxable to the beneficiary. The commissioner, by an amended answer, raises the issue that he erred in allowing the petitioner a deduction1079 of $12,660.80 under section 23(a). That amount included the office expenses, fees for investment counsel, for custodian, and for accounting, as well as two other small charges. Recent decisions hold that merely keeping records, collecting interest and dividends, and keeping funds invested, with or without the aid of investment counsel, and regardless of the size of the estate, do not constitute carrying on a trade or business within the meaning of section 23(a). ; ; ; ; ; ; and . The facts in the present case, when considered in the light of the foregoing cases, permit no other finding than that the petitioner was not engaged in any trade or business during 1935. It is unnecessary to decide whether the activities of the petitioner relating to the rental1080 of one house in New York City constituted the operation of a business or whether a proportionate part of the expeses properly allocable thereto should be allowed as a deduction. The general office expenses are not deductible in any event, since they were not paid by the petitioner. See further discussion in the last paragraph of this opinion. Obviously, no part of the investment counsel fees or the custodian fees could be allocated to the real estate. No basis for allocation of any of the other expenses to the real estate is shown in the record and, furthermore, any part which might properly be allocable thereto is too insignificant for further consideration. The petitioner contends that, if the office expenses are to be disallowed as a deduction, then she erred in including in her income the amount of $8,505.84 described as trustees' commission. This point is well taken. She never received any commission for her services. She and her brothers intended to contribute their services to the trusts under their father's will without charge. The money in question was 832 withdrawn directly from the testamentary trusts to pay office expenses for the office from which the*1081 affairs of those trusts were conducted. It was merely intended to pay the office expenses of the trusts from the trust funds. The withdrawal of the money from the trusts did not benefit the petitioner personally and the fact that she called it trustees' commission in her return does not make it so. She erred in including it as part of her gross income. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619136/	Industrial Loan Society, Inc., (Md.), Petitioner, v. Commissioner of Internal Revenue, RespondentIndustrial Loan Soc. v. CommissionerDocket Nos. 9247, 16534United States Tax Court14 T.C. 487; 1950 U.S. Tax Ct. LEXIS 245; March 27, 1950, Promulgated 245 Decision will be entered for the respondent. Net earnings of a business conducted during part of base period prior to petitioner's existence by a wholly owned affiliate, and of which the affiliate has obtained the benefit in computing its own credit for base period income, held insufficient by itself to demonstrate petitioner's right to relief from excess profits tax under section 722 (b) (4). Archie M. Dawson, Esq., and Paul Smith, Esq., for the petitioner.Francis X. Gallagher, Esq., for the respondent. Opper, Judge. Disney, J., dissenting. OPPER488 These consolidated proceedings involve the correctness of the determinations of respondent which disallowed petitioner's applications for excess profits tax relief for 1941, 1942, and 1943, filed under section 722 of the Internal Revenue Code.The deficiencies determined in excess profits tax liability were as follows:Docket No.YearAmount92471941$ 344.45924719422,559.47In Docket No. 16534 for 1943 no deficiency is involved, and petitioner claims an overpayment of $ 1,912.67, the amount of its excess profits tax payment.The question presented is whether petitioner corporation, 247 which was organized on July 1, 1939, and thereupon acquired the business and assets of a small loan office in Cumberland, Maryland, is entitled to use in the reconstruction of its constructive average base period net income under section 722 the actual income realized by such office during the base period years when it had been operated as a branch office of another corporation, also a wholly owned subsidiary of petitioner's parent.All the facts are stipulated and are hereby found accordingly.Petitioner is a Maryland corporation, with its principal office in Cumberland, Maryland. It filed its corporation excess profits tax returns for 1941, 1942, and 1943 with the collector of internal revenue for the district of Maryland, at Annapolis, Maryland.Petitioner was incorporated on July 1, 1939, and commenced business on that date. On the same date it acquired the assets and business of a small loan office located in Cumberland, Maryland, which had formerly been owned and operated as a branch office by Industrial Loan Society, Inc., (Del.), hereinafter sometimes referred to as Delaware.Delaware also owned and operated small loan offices at Erie, Harrisburg, and York, Pennsylvania, 248 which it retained and continued to own and operate after July 1, 1939.Delaware at all times here pertinent was a wholly owned subsidiary of American National Finance Corporation, a Delaware corporation. Petitioner, since its organization on July 1, 1939, has been a wholly owned subsidiary of American National Finance Corporation.American National Finance Corporation, Delaware, and petitioner have at all times here pertinent filed separate income and excess profits tax returns.Delaware and petitioner are licensed small loan companies, operating small loan offices. American National Finance Corporation is a 489 holding company which holds the stock and obligations of a number of subsidiaries operating small loan companies.Each of the four offices (Erie, Harrisburg, York, and Cumberland), which had been owned and operated by Delaware had, so long as it was so owned and operated, maintained its own earnings record for each of the years 1936 through 1939, inclusive. The earnings of the offices at Cumberland, Maryland, the assets and business of which were acquired by petitioner on July 1, 1939, for the period indicated were as follows:1936$ 13,726.60193715,405.34193814,597.461939 (Jan. 1 to June 30)6,163.751939 (July 1 to Dec. 31)5,559.40249 The average annual income during this period was $ 13,863.14. These figures are not derived by any process of constructing or reconstructing the earnings of the Cumberland office, but are the actual earnings during each of the years above mentioned as taken from the books and records separately maintained for said office and shown in detail in the statements included in the applications for relief under section 722, hereinafter referred to.Petitioner filed applications for relief under section 722 of the Internal Revenue Code on Form 991, claiming its benefits for 1941 and 1942, on September 15, 1943; and for 1943 petitioner filed its application for relief on July 30, 1945. Therein, petitioner, using a constructive average base period net income of $ 13,863.14 and a resulting excess profits credit of 95 per cent thereof, or $ 13,169.96, claimed that its excess profits liability for the period indicated was as follows:1941$ 738.4819422,248.121943NoneRespondent disallowed these applications for relief under section 722, and determined petitioner's base period net income under the provisions of section 713 (d) (2) and section 713 (f) of the Internal Revenue Code250 as $ 6,759.68 for the years 1941 and 1942, which resulted in an excess profits tax credit of $ 6,421.70 for each of the years 1941 and 1942, and similarly determined petitioner's average base period net income as $ 6,759.69 for 1943, which resulted in an excess profits tax credit of $ 6,421.71 for 1943. From these figures respondent determined petitioner's excess profits tax liability as follows:1941$ 3,100.3819428,340.4719431,912.67The earnings of the office at Cumberland hereinabove set out were included by Delaware in its base period income for the years 1936, 490 1937, 1938, and January 1 to June 30, 1939, for the purpose of computing its excess profits credit based on income for the taxable years in question, and such computation has been allowed by respondent.Neither Delaware nor American National Finance Corporation has filed any application for relief under section 722 of the Internal Revenue Code, Form 991, for any of the taxable years here involved.In rejecting the claim for refund under section 722 for 1941 and 1942, respondent stated:It has been determined that you have not established that the tax computed under subchapter E of Chapter 2 of251 the Internal Revenue Code, without the benefit of section 722 of the Code, results in an excessive and discriminatory tax within the provisions of section 722 (a) and (b) of the Code, and that you have not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purpose of an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax taxable years ended December 31, 1941 and December 31, 1942.Accordingly, the claims for refund contained in Forms 991, Application for Relief under Section 722 of the Internal Revenue Code, are disallowed.The claim for 1943 was rejected without explanation.OPINION.Petitioner's application for section 722 relief seems to us to require disallowance for two reasons, or perhaps two aspects of the same one. The essence of both is that the prior corporate owner of the business which petitioner acquired, and the activity of which it seeks to use as the measure of its reconstructed base period earnings, is and always has been under complete common ownership and control with petitioner.Although petitioner itself was not in252 business for more than the last six months of the base period, respondent has not computed its tax liability with regard only to the actual figures of that limited experience. It is stipulated that he has employed the provisions of section 713 (d) (2), which amount to an application of an invested capital theory on a species of annualized basis; and of section 713 (f), which is the so-called "growth formula." While these adjustments are expressly authorized by the statute and are clearly applicable by their terms to petitioner's situation, it insists that their inadequacy permits it to resort to the more flexible provisions of section 722.There can be no question that petitioner, its transferor, and their common parent are separate juristic persons, and for tax purposes would ordinarily be treated as such. See National Carbide Corporation v. Commissioner, 336 U.S. 422">336 U.S. 422. But we are here asked to apply a section of the law whichspeaks essentially in terms of what is "fair 491 and just." 1254 In a suit for refund of taxes, equitable principles may require unitary treatment of a trust and its beneficiary -- ordinarily at least as separate as a253 corporation and its wholly owned subsidiary. 2Stone v. White, 301 U.S. 532">301 U.S. 532, 537.The terms of section 722, which also makes provision for the recovery of taxes already paid, show that it was no more intended to be a vehicle of inequity than the action for money had and received involved in the Stone case. We can not assume that the doctrine of corporate individuality should result in making it one. See United States Paper Exports Association v. Bowers (C. C. A., 2d Cir.), 80 Fed. (2d) 82; Crocker v. Malley, 249 U.S. 223">249 U.S. 223. " * * the fact that the petitioners and their beneficiary must be regarded as distinct legal entities for purposes of the assessment and collection of taxes does not deprive the court of its equity powers or alter the equitable principles which govern the type of action which petitioners have chosen for the assertion of their claim." Stone v. White, supra.In that case "The question for decision * * * [was] whether the petitioners, testamentary trustees, who have paid a tax on the income of the255 trust estate, which should have been paid by the beneficiary, are entitled to recover the tax, although the government's claim against the beneficiary has been barred by the statute of limitations." The Court concluded that: "Equitable conceptions of justice compel the conclusion that the retention of the tax money would not result in any unjust enrichment of the government. All agree that a tax on the income should be paid, and that if the trustees are permitted to recover no one will pay it. It is in the public interest that no one should be permitted to avoid his just share of the tax burden except by positive command of law, which is lacking here."492 We do not suggest that this is an equitable proceeding or that there has been conferred upon the Tax Court by section 722 any equitable jurisdiction. But in the light of considerations analogous to those appealing to equity and the good conscience of the chancellor, we are required here to apply a statute using the words "fair and just," and dealing with the concept of an "inadequate standard of normal earnings," where the test of adequacy or inadequacy must be employed in determining whether the tax would otherwise "be256 excessive and discriminatory." When petitioner seeks to use for its constructive average base period income under section 722 the same experience which its corporate brother has already used up under section 713, its attempt to obtain the duplicate benefits for its parent does not seem to us distinguishable from the conduct which Stone v. White forbids.The second ground for disallowing the claim has to do with legislative intent as evidenced by the statutory design and the interplay of related sections such as those in Supplement A. The latter provisions are admittedly inapplicable. Otherwise, resort to section 722 would have been unnecessary, and probably unavailable. See George J. Meyer Malt & Grain Corporation, 11 T.C. 383">11 T. C. 383. But it seems evident that the relief Supplement A furnishes to certain related or successor businesses if they qualify under its terms is identical with what is being proposed here, namely, to employ the base period experience of a predecessor. See A. C. Burton & Co., 14 T. C. 290. The purpose to limit these benefits so as to avoid duplications seems equally clear. See, e. g., section257 742. While the actual experience of a predecessor might in ordinary circumstances be adequate evidence upon which to base a finding of a taxpayer's constructive base period net income, the situation is otherwise here, in view of the relationship between petitioner and the owner of the business during the base period and the undoubted duplication which would otherwise result. It is hard to believe that in the more flexible provisions of section 722 (e) (2), addressed as it is moreover to attempts at redressing inequitably harsh results, 3 there should have been incorporated a purpose contrary to that of the other comparable sections.258 493 We are not now confronted with a case where the corporate affiliate has refrained from availing itself of its portion of the net income credit based upon the same earnings or where it offers to relinquish it. Cf. Excess Profits Tax Council Ruling, E. P. C. 20, 1947-2 C. B. 135. Still less do we have a case where the petitioner represents a wholly separate interest and has had no benefit from such a credit. We are not required to pass upon such situations, and express no opinion as to their proper disposition.It may even be that had petitioner attempted to prove otherwise what a new business of the same kind and in the same locality would have earned during the "pushback" period, such evidence would have raised a different question. But all that the present record shows is the actual earnings of the related predecessor. We are unable to find that such figures, based as they are upon the necessary duplication of excess profits credits, could possibly represent a "fair and just amount," constituting also the simultaneous constructive base period income of this petitioner.Petitioner, having contested the deficiencies and claimed the overpayment259 only by resort to section 722 relief,Decision will be entered for the respondent. DISNEYDisney, J., dissenting: Because section 722 (a) requires the applicant for relief to reconstruct average base period net income in a "fair and just amount," the majority deny petitioner relief for the reason that it measured such amount by the experience of its coaffiliate from which it purchased its business during the base period, and because the coaffiliate had been allowed excess profits tax credit based upon such experience. The majority view is that such experience was improperly "used" by petitioner, having already once been used, and that the petitioner obtains for its parent "duplicate" benefits. I can not agree that petitioner "used" such experience a second time. It merely pointed to it as a good example of a comparative, as it could have pointed to any other similar corporation, under a well established technique of proving a base period norm of earnings by comparison with those of a comparative business. The majority seems to consider petitioner as claiming, as a matter of right, the use of the experience of its coaffiliate, but since the petitioner is not, and does not260 claim to be, an "acquiring corporation" under Supplement A, section 740, it is clear that the coaffiliate is cited only as a comparative.Moreover, under sections 141 and 730 of the Internal Revenue Code, a consolidated excess profits credit is provided in case of consolidation of return by corporations like petitioner, its coaffiliate from whom it purchased, and the common parent corporation. No such consolidated return having been filed in this matter, petitioner must for purpose 494 of such credit be regarded as a separate juristic entity. Though paying lip service to that principle, the majority, in my view, violate its essentials and in effect compel the petitioner to be treated as if on a consolidated return basis. The petitioner, filing separate return and having none of the benefits of consolidated basis, and having a right to point to its coaffiliate, as a comparative, in my view is not duplicating the benefits of the coaffiliate, and I find nothing "fair and just" in denying relief. I therefore dissent. Footnotes1. SEC. 722. [I. R. C.] GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. * (b) Taxpayers Using Average Earnings Method. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because -- * * (4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. * ↩2. Cf. secs. 161, 162, I. R. C., with sec. 45, I. R. C.↩3. "8. GENERAL RELIEF PROVISIONS"Section 213 of the bill amends the relief provisions of existing law, section 722, broadening its application to cases which do not fall within the specific provisions of existing law, thereby removing certain inequities and alleviating hardships for which relief cannot be obtained at the present time."NEED FOR THE LEGISLATION"The need for this legislation was recognized when the excess-profits tax was enacted in 1940, and in the excess-profits-tax amendments of 1941, as pointed out in the committee reports on those acts. (H. Rept. No. 146, S. Rept. No. 75, on H. R. 3531, 77th Cong., 1st sess.)"It was there stated that equitable considerations demand that every reasonable precaution should be taken to prevent unfair application of the excess-profits tax in abnormal cases; * * Such experience demonstrates that abnormal and unusual cases arise, diverse in character and unforeseeable, for which special legislation is necessary if the purpose of the law is to be carried out." (Ways and Means Committee Report, No. 2333, 77th Cong., 2d sess., p. 21.)↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619137/	James D. Lancaster and Marian W. Lancaster v. Commissioner. Harry C. Garner and Susan G. Garner v. Commissioner.Lancaster v. CommissionerDocket Nos. 93976, 94512.United States Tax CourtT.C. Memo 1964-108; 1964 Tax Ct. Memo LEXIS 225; 23 T.C.M. (CCH) 631; T.C.M. (RIA) 64108; April 24, 1964225 Upon its organization, petitioners and other stockholders paid $1,000 for all the capital stock of a corporation organized to acquire, subdivide, develop, and sell real estate, and also paid to the corporation $25,000, in direct proportion to their stockholdings, for which they received promissory notes. Held, the $25,000 paid to the corporation represented equity capital rather than loans to the corporation and respondent's determination, that amounts paid to petitioners by the corporation as repayments of loans, and interest thereon, were taxable as dividends, is sustained. James D. Lancaster, 216 Claremont Dr., Gadsen, Ala., for the petitioners. Robert G. Faircloth, for the respondent. DRENNENMemorandum Findings of Fact and Opinion DRENNEN, Judge: In these consolidated proceedings respondent determined a deficiency in the income tax of petitioners James D. and Marian W. Lancaster for the year 1958 in the amount of $148.40, and in the income tax of petitioners Harry C. and Susan G. Garner for the years 1958 and 1959 in the amounts of $214.08 and $218.88, respectively. The only issue is whether certain payments received by petitioners in the years involved from Argyle Hills, Inc., a corporation in which petitioners were stockholders, were repayments of bona fide loans and interest thereon, or were dividends. Findings of Fact Most of the facts were stipulated and are so found. Petitioners James D. and Marian W. Lancaster are husband and wife residing at 216 Claremont Drive, Gadsden, Ala. Petitioners Harry C. and Susan G. Garner are husband and wife residing at 313 Azalea Drive, Gadsden, Ala. All returns for the taxable years involved were filed with the district director of internal revenue at Birmingham, 227 Ala.Petitioners Harry C. Garner and James D. Lancaster (hereinafter called Garner and Lancaster, respectively), during the years involved, were directors and stockholders and were president and secretary-treasurer, respectively, of Argyle Hills, Inc. (hereinafter referred to as Argyle). Argyle was organized under the laws of Alabama on January 9, 1958, for the purpose of acquiring, developing, subdividing, and selling real estate lots. Its authorized capital stock was 1,000 shares with a par value of $1 per share. Garner, Lancaster, and Gordon L. James, as incorporators, subscribed for all the capital stock; Garner for 940 shares, Lancaster for 20 shares, and James for 40 shares. Stock certificate No. 1, representing Garner's 940 shares, was canceled before payment therefor and the 940 shares were issued to various individuals on the dates and in the amounts as follows: Certifi-Date Is-catesued -No.NameShares19584G. W. Leach, Jr.401/105Jack Floyd201/106Alton H. Powell1001/107Susan G. Garner201/118A. L. Wagnon201/119Bill Maulding1001/2210Lookout Land Co., Inc.3201/2311Paul F. and Audrey B.Schnabel, Jr. 1202/ 312Harry C. Garner402/1413Jack L. Ray202/1414Corley W. Odom402/1415Westbrook Finlayson102/1516C. Walter Pyron102/1817James B. Allen52/1818James B. Allen, Jr.52/1819Hoyt D. and Jewell S.Edwards402/2720Charles Watts203/1421James Watts203/1422Aleck Greenwood 1404/2423The Gadsden Corporation505/ 6228 On January 15, 1958, each of the stockholders paid over to Argyle certain funds, totaling $25,000 and equal individually to 25 times the par value of their stock, and received promissory notes in like amount from Argyle in exchange therefor, payable 4 years after date with interest at 8 percent. These notes were issued to the stockholders, in the amounts, and were paid in full by Argyle, as follows: DatenoteNotepaid inNo.NameAmountfull1-ALookout Land Co., Inc. 1$8,0006/ 1/612Alton H. Powell2,5005/14/593Jack Floyd5006/29/594Gordon James1,0006/29/585Susan G. Garner5003/17/596A. L. Wagnon5003/17/597Bill Maulding2,5005/ 9/59G. W. Leach, Jr. 21,0002/13/598Paul F. and Audrey G.Schnabel 15005/18/599Harry C. Garner1,0009/12/5810James D. Lancaster50010/18/5811Jack L. Ray5006/29/5912Corley W. Odom1,00010/18/5813Westbrook Finlayson2506/29/5914Walter Pyron2505/23/5915James B. Allen2505/23/5916Hoyt Edwards1,0006/29/5917Charles and James Watts1,0004/ 9/5918Alex Greenwood 11,0003/17/5919The Gadsden Corporation1,25011/ 3/58229 On January 22, 1958, Argyle entered into a contract for the purchase of a tract of land from Lookout Land Co. (hereinafter referred to as Lookout) for $59,000, payable $1,000 cash down and the balance of $58,000, evidenced by notes from Argyle to Lookout, as follows: $12,500.00 due1 year from contract date withinterest at 4%.$12,500.00 due2 years from contract date withinterest at 4%.$12,500.00 due3 years from contract date withinterest at 4%.$12,500.00 due4 years from contract date withinterest at 4%.$ 8,000.00 due4 years from contract date withinterest at 8%.Argyle did not receive legal title to the land, but Lookout agreed to convey individual lots to Argyle, or its order, upon the payment of $1,000 cash for each lot sold until the entire purchase price was paid, at which time Lookout would convey the remaining lots in the tract to Argyle. It was further agreed that if Argyle defaulted in the payment of any note when due, 10 days after such default Lookout, at its option, could cancel230 the contract of sale and Argyle would forfeit any improvements which had been made upon the land. Argyle used the $1,000 received for its stock to make the downpayment under the contract to Lookout and used the $25,000 paid in by the stockholders in exchange for notes to subdivide and develop the property. The venture was successful and all the lots in the first subdivision were sold within a little more than a year's time. All the notes issued to the stockholders were paid in full before they were due and all interest thereon was paid when due. Proceeds from the sale of lots were first used by Argyle to pay the installment obligations to Lookout and the remaining proceeds were used to pay off the notes issued to the stockholders. On October 12, 1958, Lancaster and Corley W. Odom entered into an agreement to purchase seven of the above lots from Argyle and as part of the purchase price, they canceled their notes from Argyle of $500 and $1,000, respectively. One $1,000 note of Argyle held by Garner was paid in cash in 1958 and another $1,000 note of Argyle held by the Garners was paid in cash in 1959. 2231 Lancaster received $40 from Argyle in 1958 which he reported as interest income on his 1958 return. The Garners received $160 from Argyle in 1958, in addition to the cash received on payment of the note, $120 of which Garner reported as business income in 1958. Respondent determined that Lancaster received a dividend of $540 from Argyle in 1958, representing the $500 note applied against the purchase price of the seven lots and the $40 reported as interest, increasing Lancaster's dividend income by $540 and decreasing his interest income by $40. Respondent determined that the Garners received dividends of $1,160 from Argyle in 1958, increasing their dividend income in that amount and decreasing their business income by $120. Respondent also determined that the Garners received dividends of $1,000 from Argyle in 1959, none of which they had reported on their returns. Opinion Respondent determined that the amounts received by petitioners from Argyle in the years involved were dividends. Petitioners claim that the amounts received were repayments of bona fide loans made by them to Argyle, plus interest thereon. Respondent's determination is presumptively correct and the burden232 of proof is on petitioners. Rule 32, Tax Court Rules of Practice.The basic issue is whether the payments made by petitioners to Argyle, for which they received Argyle's promissory notes, may be considered for tax purposes as bona fide loans, the repayments of which would not be taxable income to petitioners, or must be considered for tax purposes as contributions of capital to Argyle, so that repayments thereof, to the extent paid out of earnings and profits, 2 will be considered dividends, as defined in section 316, I.R.C. 1954, includible in gross income under section 301(c)(1) of the Code. This in turn depends on whether the advances by the stockholders to the corporation in fact constituted investments of equity capital or loans, which must be determined from the facts shown by the evidence in each case. McSorley's Inc. v. United States, 323 F. 2d 900 (C.A. 10, 1963); Gilbert v. Commissioner, 262 F. 2d 512 (C.A. 2, 1959), affirming a Memorandum Opinion of this Court, certiorari denied 359 U.S. 1002">359 U.S. 1002 (1959); Gooding Amusement Co., 23 T.C. 408">23 T.C. 408 (1954), affd. 236 F. 2d 159 (C.A. 6, 1956), certiorari233 denied 352 U.S. 1031">352 U.S. 1031 (1957). This and other courts have often been faced with so-called "thin-capitalization" cases, usually involving questions of whether losses sustained by the stockholders for advances to the corporation are deductible as ordinary losses or capital losses, or whether payments made by the corporation to the stockholders are deductible as interest or are nondeductible dividends, neither of which questions we have here because the corporate venture was successful and the corporation is not before us. Out of these cases the courts have derived numerous criteria for determining whether advances by stockholders to corporations are contributions of risk capital or bona fide loans, see Wilbur Security Co., 31 T.C. 938">31 T.C. 938 (1959), affd. 279 F. 2d 657 (C.A. 9, 1960), but it would be of little value to repeat them here because we do not have sufficient evidence upon which to apply many of the tests. The only evidence234 presented was a stipulation of facts and the oral testimony of Lancaster, and we have made an effort to include in our Findings of Fact all pertinent facts which can be gleaned from those sources. These give us very little insight into the subjective intent or thinking of the parties or the actual financial condition of the corporation and its credit rating, so our conclusions must be arrived at without the benefit of tests based on such facts. From the evidence we do have it appears that the payments by the stockholders to the corporation on January 15, 1958, with which we are here concerned were cast in the form of loans. At least Argyle issued its promissory notes to the stockholders equal in face amount to the amount advanced by each stockholder. We assume that these amounts were recorded on Argyle's books as notes payable - although there is no evidence to support this assumption. It is stipulated that the notes had a fixed due date, 4 years after January 15, 1958. Lancaster testified that the notes had priority over the stock, but the evidence is that the first $1,000 received from the sale of each lot had to be paid to Lookout before the sale could be completed. We do not235 know the relative priority of these notes with other possible creditors of the corporation, and even if we accept Lancaster's statement that the notes had priority over the stock, this means little or nothing when the stockholders all received notes in direct proportion to their stockholdings. Lancaster testified that the notes bore interest at the rate of 8 percent and that all interest was paid. While the obligation to pay interest regardless of profits is one of the characteristics of a loan, we do not know what would have happened here had the corporate venture not been successful and other creditors had pressed claims. It is at least clear that the obligation to Lookout had to be met first because Argyle could not operate unless Lookout released the lots. There was apparently no security for the payment of the stockholders' notes and the rate of interest suggests either that there was considerable risk involved or that profits might be paid over to the stockholders in a form deductible by the corporation. In any event, the form alone in which a transaction is cast between related parties is not controlling for tax purposes. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935);236 Gooding Amusement Co., supra; Wilbur Security Co., supra. In this situation the controlling factor is whether the payments made by the stockholders to the corporation were in substance and reality equity capital put at the risk of Argyle's business. If so, and absent any evidence of liquidation of the corporation, the distributions or repayments here involved must be considered dividends. Aside from the form given the transactions, the payments by the stockholders to the corporation had many of the indicia of investments of equity capital. The corporation was organized with and issued only the very minimum capital stock, the proceeds from which were clearly nowhere near sufficient to pay for the acquisition and development of the property, which was the purpose for its organization. The payments received from the stockholders were used to subdivide and develop the property, being in the nature of capital expenditures. The ratio of Argyle's capital stock to the stockholders' notes alone was 25 to 1, and the ratio of its capital to debt after it purchased the property appears to have been 83 to 1. As Lancaster testified, the $25,000 advanced was at the risk237 of the business as well as the $1,000 paid in for the stock. The noteholders could look only to the earnings and profits of the business for payment of interest on and repayment of the advances, because there were no assets available for same except the lots, when and as released by Lookout, and the $1,000 capital they themselves had paid in. And Lancaster also testified that no bank would have loaned the corporation $25.000 under the same circumstances. In Isidor Dobkin, 15 T.C. 31">15 T.C. 31 (1950), affd. 192 F. 2d 392 (C.A. 2, 1951), where the facts were quite similar to the facts here, this Court said: Ordinarily contributions by stockholders to their corporations are regarded as capital contributions that increase the cost basis of their stock, thus affecting the determination of gain or loss on ultimate dispositions of the stock. Harry Sackstein, 14 T.C. 566">14 T.C. 566. Especially is this true when the capital stock of the corporation is issued for a minimum or nominal amount and the contributions which the stockholders designate as loans are in direct proportion to the shareholdings. Edward G. Janeway, supra. See also Edward G. Janeway, 2 T.C. 197">2 T.C. 197 (1943),238 affd. 147 F. 2d 602 (C.A. 2, 1945); McSorley's Inc. v. United States, supra. Petitioners argue that there was a business purpose for organizing the corporation with a minimum capital and lending it the necessary funds to get started in business, being to save charter, capital stock assessment, and other State and local fees and taxes. Such objective may be perfectly legitimate and acceptable in corporate business practice but it alone will not control the character of the stockholders' investments in the corporation for Federal tax purposes. We are somewhat reluctant to tax these payments to petitioners in cases such as these, where we do not have the usually concurrent problem of deductible interest v. nondeductible dividends at the corporate level, nor the question of business loss v. capital loss at the stockholder level, because these petitioners should be entitled to a return of their investment, at some time or another, tax free. But no claim has been made that any part of the payments made by the corporation to these petitioners was a return of capital, and furthermore we could not treat the stockholders' contributions to the corporation as bona239 fide loans for one purpose and as equity capital for another purpose. We believe the weight of the evidence characterizes the payments by the stockholders to the corporation as investments of equity capital rather than bona fide loans, but more important we conclude without hesitation that petitioners have failed to carry their burden of proving that the payments by the corporation to them were not dividends as determined by respondent, so we must hold in favor of respondent. See Gooding Amusement Co., supra. We do not believe the cases cited and relied upon by petitioners lay down any principles inconsistent with those we have used in reaching our conclusion here, although they at times reached different conclusions based on different facts. The issue here involved must be decided on the particular facts of each case. This principle is recognized in Rowan v. United States, 219 F. 2d 51 (C.A. 5, 1955), and other cases cited by petitioners as well as in the cases cited herein. Decisions will be entered for the respondent. Footnotes1. As stipulated.↩1. No cash paid in to Argyle for this note. Per notice of deficiency and petition. There is no explanation in the record how the Garners acquired the additional $500 note, notes totaling only $1,500 having been issued to them in January 1958.2↩ This amount paid in to Argyle in the form of a note due Leach from Gadsden Development Co., Inc2. No evidence was presented to show the earnings and profits of Argyle, so we must assume, based on the presumptive correctness of respondent's determination, that earnings and profits were available to make the payments.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619138/	JOHN THOMAS SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Smith v. CommissionerDocket Nos. 65717, 71888, 75858.United States Board of Tax Appeals42 B.T.A. 505; 1940 BTA LEXIS 991; August 9, 1940, Promulgated 991 1. JURISDICTION. - The Board has jurisdiction to vacate its decision and to correct an error prior to the expiration of the time for taking an appeal and prior to any appeal. 2. DEDUCTION - LOSSES - SALES. - Sales of stock to a wholly owned corporation were too insubstantial to give rise to deductible losses. Higgis v. Smith,308 U.S. 473">308 U.S. 473, followed. David Sher, Esq., for the petitioner. Frank D. Strader, Esq., and Ellyne E. Strickland, Esq., for the respondent. MURDOCK 506 SUPPLEMENTAL OPINION. MURDOCK: The Board promulgated findings of fact and an opinion in this case. See . It then entered its decision on October 31, 1939. Thereafter, on January 8, 1940, the Supreme Court decided a case of this same taxpayer for another year. . The Board, upon motion of the Commissioner, vacated its decision to consider the possible effect of the Supreme Court decision upon the Board decision. See order of January 18, 1940. The parties were heard and they filed briefs. The Board now concludes that the decision of the Supreme Court requires992 modification of the decision of the Board in one respect and in only one respect. The petitioner argues that we have no power to change our original decision. That decision was vacated before it became final, before the taking of an appeal, and before the time for appeal had expired. If the Board correctly interprets the Supreme Court decision, then the vacation was proper because it permits the Board to correct an error which would otherwise justify an appeal. The Board believes that it has jurisdiction and deems the question of the timeliness of the Commissioner's motion unimportant under the circumstances. The Board allowed the petitioner deductions for losses in 1929 upon sales of stock by the petitioner to his wholly owned corporation, Innisfail. The Supreme Court disallowed deductions for losses from similar sales in 1932 upon the ground that such transactions were too insubstantial to give rise to deductible losses. That decision is controlling here, and upon its authority we hold that the petitioner is not entitled to deductions for the losses of $48,811 and $39,240 claimed for 1929 upon the sales of 1,900 shares of Hudson Motor Car Co. common and 1,000 shares of993 Aldebaran Corporation stock to Innisfail. The decision does not require complete disregard of the separate corporate entity, Innisfail, for tax purposes and we are not disposed to go further than has the Supreme Court. Reviewed by the Board. Decisions will be entered under Rule 50 and those for 1930 and 1931 will be in the same amounts as were entered on October 31, 1939.507 Supplemental Dissenting Opinion.HARRON HARRON, dissenting: The Board's reconsideration of the original majority opinion makes it necessary to supplement the original minority opinion in this case, reported in 40 B.T.A. 387">40 B.T.A. 387, at pages 402-424. The reconsideration now given in the supplemental opinion of the majority is limited to the question of whether petitioner sustained losses on the Hudson Motors and Aldebaran stocks, purportedly sold to his wholly owned corporation in 1929, so as to be entitled to deductions from taxable income. This limited reconsideration of the several questions presented in this case is premised upon the belief that the Supreme Court's decision in 994 , involving a later tax year, 1932, does not require reconsideration of any of the other questions decided by the Board in the original opinion. With this I disagree. Petitioner received dividends in 1930 and 1931 on the Hudson Motors stocks purportedly sold to Innisfail in 1929. No dividends were paid on the Aldebaran stock. Petitioner received dividends on Chrysler stocks in 1929, 1930, and 1931. The Commissioner has determined that all of these dividends constituted petitioner's income, taxable to him, and part of the deficiency is due to this determination. While the Supreme Court did not have before it any question relating to petitioner's liability for tax on dividends on stocks used in transactions of petitioner with his wholly owned corporation, it seems clear that the views expressed by the Supreme Court on the question that was before it requires that the Board should reconsider the additional question relating to taxation of petitioner on the dividends in question in this case. In the Higgins v. Smith case, the Supreme Court held that the continued dominion and control of petitioner over the securities995 there involved was such that there was not "enough of substance" in the transactions to determine a loss to petitioner. In this case, with respect to the dividends in question there is so much evidence to show a continued dominion and control of petitioner over the stocks on which the dividends were paid and over other stocks which petitioner claims to have sold on credit to his wholly owned corporation in transactions exactly like the "sales" involved in the case before the Supreme Court, that there appears to be much similarity between the dividends question before the Board and the particular question that was before the Supreme Court in the other case. Petitioner disclaims liability for tax on the dividends in question upon the claim that his wholly owned corporation was in debt to him and that he received the dividends in liquidation of the debt, with respect to the dividends received in 1929 and 1930. Petitioner disclaims liability 508 for tax on the dividends received by him in 1931 upon the claim that he borrowed from Innisfail those sums, albeit they were paid to him directly by the Chrysler and Hudson Motors corporations. In the case before the Supreme Court, 996 the Court went to the substance of certain transactions and held that there was no real loss to support petitioner's claim for deductions. In this case, by the same reasoning, the Board should examine the situation to determine whether the so-called debt of the wholly owned corporation to petitioner had enough of reality to relieve petitioner from tax on the dividends of 1929 and 1930 allegedly kept in liquidation of the debt; and, also, whether there was any real loan of the 1931 dividends from Innisfail to petitioner to relieve petitioner from tax on the dividends of 1931. Or, from another viewpoint, it would seem that, without considering the reality or the unreality of the alleged debt of Innisfail to petitioner in 1929 and 1930, or the reality or unreality of the alleged debt of petitioner to Innisfail in 1931, the Board should consider whether for tax purposes these dividends which were so completely within the petitioner's control as to be subject at all times to his unfettered command and use, should be attributed to petitioner as his income, taxable to him in each of the three years. Without attempting to repeat the facts, which are set forth more fully in the earlier997 minority opinion than in the earlier majority opinion () it should be pointed out again that the Hudson and Chrysler stock certificates remained in petitioner's name, that the dividends paid on those stocks by the Hudson and Chrysler corporations were paid to petitioner by checks made directly his name, and that the checks were deposited by petitioner directly in his own bank account. At some time in 1930 petitioner did not any longer have, as an excuse for the continued receipt of those dividends, the existence of any so-called debt of the corporation he owned to him, but, nevertheless, he continued to receive and retain the dividends in the guise of borrowings by him from the corporation. With respect to his transactions constituting debits and credits in a running account with the corporaton owned by him, and the socalled lending and borrowing back and forth, petitioner testified that he did not want the corporation ever to pay him any money, which only means that petitioner's plan was devised primarily for the purpose of relieving himself from taxation on income which he claims he effectively siphoned into the corporation so as to relieve himself998 from income tax. It appears to have been stated so frequently by the Supreme Court, in various ways in various cases, that a taxpayer is to be taxed on income subject to his unfettered command and use, from which he is the real recipient of the economic benefits, that the question here would seem to turn on just that. See ; 509 ; . Taking the question of petitioner's liability for tax on the Hudson and Chrysler dividends in 1929, 1930, and 1931 in its board and most essential aspects, does not petitioner's income tax liability rest upon the fact that petitioner's command, use, privileges, and benefits in those dividends were so substantial and so real as to make him taxable on that basis? While I believe strongly that there was no debt from the wholly owned corporation to petitioner in 1929 and 1930, cognizable for tax purposes, against which the dividends could be offset to relieve petitioner from taxation, even if such were assumed to be technically true, is the situation here not the type of situation which may999 be disregarded in order to effectively serve the purposes of the taxing statutes? Is it not true that, so far as petitioner's dominion and control were concerned, neither the wholly owned corporation nor the transactions relied on effected any substantial change in petitioner's ownership of the stocks on which the dividends in question were paid? Should it not be held that petitioner's devices fail to relieve him from the burden of taxation? As for the situation in the year 1931, there seems no ground whatever over which petitioner can escape taxation on the dividends paid directly to him in that year. He could not then anticipate future "debts" of his wholly owned corporation to him to offset the income he received in 1931 from the dividends. See . The reasoning employed by the Supreme Court in the Higgins v. Smith case, if applied here to the question of petitioner's liability for tax on the Hudson and Chrysler dividends in 1929, 1930, and 1931, would seem to support sustaining the Commissioner's determinations. I respectfully dissent from the majority's contrary conclusion and its failure to reconsider this particular1000 question in the light of the recent Supreme Court decision. TURNER agrees with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619142/	Victor S. Gittens and Bernice Gittens, Petitioners v. Commissioner of Internal Revenue, RespondentGittens v. CommissionerDocket No. 6783-65United States Tax Court49 T.C. 419; 1968 U.S. Tax Ct. LEXIS 185; January 25, 1968, Filed 185 Decision will be entered for the respondent. Incident to a corporate reorganization in which the assets and liabilities of one corporation were transferred to another in exchange for stock, a distribution was made to petitioner within 1 taxable year of the total amount due him under a profit-sharing plan. The plan was adopted by a corporation established to carry on the business of the transferor corporation under the same name but in a different State of incorporation. There was no substantial change in the makeup of employees, and petitioner was employed in the same capacity under the same supervisors both before and after the reorganization. Held, the distribution to petitioner was not made "on account of the employee's * * separation from the service" and therefore the amount received by him in 1962 is taxable as ordinary income and not as a long-term capital gain under sec. 402(a)(2), I.R.C. 1954. Thomas P. Glassmoyer and Fred L. Rosenbloom, for the petitioner.Edward L. Newberger, for the respondent. Dawson, Judge. Tannenwald, J., concurring. Raum, J., agrees with this concurring opinion. Featherston, J., concurring. Drennen, Raum, and Scott, JJ., agree with this concurring opinion. DAWSON419 Respondent determined a deficiency of $ 3,499.44 in the income taxes of petitioners for the year 1962.Although petitioners placed the entire deficiency in dispute, they failed to allege error as to certain minor adjustments. Consequently, such matters are not in controversy. The only issue for decision is whether a distribution of $ 19,125.30 to petitioner, Victor S. Gittens, on March 31, 1962, of his entire interest in the Philco Corp. employees profit-sharing plan was made on account of his separation from the service of his employer so as to qualify as a long-term188 capital gain under the provisions of section 402(a)(2), I.R.C. 1954. 1FINDINGS OF FACTMost of the facts have been stipulated by the parties. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.Victor S. Gittens and Bernice Gittens are husband and wife whose legal residence was Philadelphia, Pa., at the time they filed their petition in this proceeding. They filed their joint Federal income tax return for the calendar year 1962 with the district director of internal revenue at Philadelphia, Pa. Victor S. Gittens will be referred to herein as the petitioner.On December 31, 1943, Philco Corp., a Pennsylvania corporation (herein called Philco-Penn), established a noncontributory profit-sharing plan (herein referred to as the plan) for the benefit of its salaried employees. The First Pennsylvania Banking & Trust Co. was named trustee of a fund established to implement the 189 plan. The 420 trust satisfied the requirements of section 401(a) and was exempt from tax under section 501(a).The board of directors of Philco-Penn was given broad discretion, subject only to an upper limit, in determining its yearly contribution to the trust. No contribution had to be made if deemed to be contrary to the best interests of Philco-Penn. Benefits under the plan were made payable generally to "any member who for any cause separates from the service." Philco-Penn was given the right to amend or discontinue the plan at any time so long as the benefits inured exclusively to the employees. As a salaried employee of Philco-Penn, petitioner participated in the plan from its inception.On September 13, 1961, Philco-Penn entered into an "Agreement and Plan of Reorganization" with the Ford Motor Co. (herein called Ford) under which Ford agreed to purchase all the assets and assume all the liabilities of Philco-Penn in exchange for shares of Ford common stock. In addition, Ford agreed to "take appropriate action and to enter into appropriate agreements with respect to adoption of, amendment of, or substitution for [all welfare or benefit plans and arrangements of Philco-Penn]." 190 The transaction was closed on December 11, 1961, and Ford formed a new wholly owned Delaware corporation, also named Philco Corp. (herein called Philco-Del), to take title to the assets and to continue the business of Philco-Penn. Following the sale of assets, Philco-Penn was liquidated by the distribution of Ford common stock to the Philco-Penn shareholders.Philco-Del announced the impending reorganization to its employees on December 7, 1961, in a letter which provided inter alia:Philco-Delaware has no present plan to change Philco-Pennsylvania's personnel policies, procedures and employment conditions, or current wage and salary structure, retirement and pension plans, or group insurance plans, but reserves all rights to change or discontinue them. For these purposes, service or employment with Philco-Pennsylvania will be considered equivalent to service or employment with Philco-Delaware, and the transition from employment by Philco-Pennsylvania to employment by Philco-Delaware will not interrupt the continuity of your employment or service.It is planned that commencing with the opening of business on December 11, 1961, which is the time presently scheduled for Philco-Delaware191 to take over the operations, your employment at will by Philco-Delaware will commence.Your continuing to perform your assigned duties with Philco-Delaware will constitute your acceptance of and agreement to these terms.On December 8, 1961, the board of directors of Philco-Penn adopted in accordance with the terms of the plan the following amendments which are relevant to this case:"Philco Corporation" shall mean Philco Corporation, a Pennsylvania corporation, as of any time prior to the closing under the Agreement and Plan of Reorganization dated September 13, 1961, as amended, between it and Ford Motor Company, and shall mean Philco Corporation a Delaware corporation, as of any time thereafter.* * * *421 Each member shall be entitled to elect to have distributed to him as of March 31, 1962, the benefit to which he would have been entitled under the Plan in the event of his separation from the service on that date and any distribution of benefits with respect to a member who shall not so elect will be deferred until his death or other separation from service. Each such election shall be made in writing, and shall be irrevocably made not later than January 31, 1962, in192 accordance with such reasonable rules as the Committee appointed to administer the Plan shall prescribe.* * * The adoption of the Plan by Philco Corporation, a Delaware corporation, effective upon the closing under the Agreement and Plan of Reorganization dated September 13, 1961, as amended, between Philco Corporation, a Pennsylvania corporation, and Ford Motor Company, shall constitute a continuation of the Plan without any interruption whatsoever in its existence and operation. Any person who was employed by Philco Corporation, a Pennsylvania corporation, immediately prior to such closing and who becomes employed by Philco Corporation, a Delaware corporation, promptly following such closing shall not be deemed to have separated from service for purposes of the Plan.An agreement between Philco-Penn, Philco-Del, and the First Pennsylvania Banking & Trust Co. on December 9, 1961, provided that Philco-Del would succeed, by reason of its adoption of the plan, to all the rights and liabilities of Philco-Penn under the trust agreement implementing the plan, effective upon the closing under the reorganization agreement.Participants of the plan received notice on January 5, 1962, 193 of the amendments and of their right to elect to have their benefits distributed to them as of March 31, 1962. The letter of notification stated, in part, as follows:The transfer of service from Philco-Corporation (Pennsylvania) to the present Philco Corporation (Delaware) in connection with the recent acquisition of the business and assets of Philco Corporation (Pennsylvania) does not constitute a separation from service for purposes of the Plan.* * * It is planned to present a proposal to the Board of Directors of the Corporation to discontinue contributions under the Profit Sharing Plan. As you know, the last contribution to the Plan was made for the year 1959. No contribution was made for 1960, and in view of the profit performance of the Corporation during 1961, no contribution can be made for that year. * * Under present income tax laws the distribution would be taxed as ordinary income, and would not be entitled to long term capital gain treatment.Petitioner was an engineer specialist in Philco-Penn's Engineering Department prior to the acquisition by Ford. He continued in the same capacity in Philco-Del's Engineering Department after December 11, 1961. He performed194 the same functions with both companies under the same immediate superiors. Petitioner executed the election form and on or about March 31, 1962, received from the trust a lump-sum distribution of $ 19,125.30 which represented the total amount payable 422 to him under the plan and which consisted of $ 7,390.92 in cash and Ford stock with a fair market value of $ 11,734.38.As of December 11, 1961, there were 6,689 participants in the plan, 3,553 of whom executed the election to withdraw. All others remained in the plan which continued in existence, administered by a new trustee, a bank in Detroit. Philco-Del made no contributions to the plan, and in 1963 Ford established a stock-purchase plan for Philco-Del employees, similar to ones established in other Ford-controlled installations. Petitioner retired from the employment of Philco-Del on June 30, 1965.Petitioner's distribution from the profit-sharing plan was reported as long-term capital gain in the joint Federal income tax return filed by him and wife for the year 1962. Respondent determined that the distribution represented ordinary income.OPINIONPetitioner received within 1 taxable year the total distribution payable195 to him under an employees' trust which was exempt from tax under section 501(a). Consequently, we must decide whether the distribution was made "on account of the employee's * * * separation from the service," resulting in capital gains treatment under section 402(a)(2). 2196 Petitioner was a salaried employee of Philco-Penn from its inception and continued to be employed in the same capacity by Philco-Del until his retirement on June 30, 1965. He contends that when the corporate reorganization occurred the change in his employment from Philco-Penn to Philco-Del constituted a "separation from the service" of his employer, Philco-Penn, and claims that the lump-sum distribution he received from the trust was "on account of" that separation. Respondent joins issue on both points.Passing for the moment the question whether the reorganization of Philco-Penn caused a "separation from the service," we think it is perfectly clear that the distribution received by petitioner was "on account of" the reorganization. The facts establish a causal relationship between the reorganization and the distribution. On December 8, 1961, incident to the "closing" process, the board of directors of Philco-Penn amended the plan to authorize an election by the participants to remain 423 in the plan or to withdraw from it and receive a lump-sum distribution. Since the board believed that the reorganization would not entail a "separation from the service" by its employees, 197 within the terms of the plan, but that it was such occasion as to allow an election to withdraw, it considered the amendment necessary to authorize the extraordinary distribution.Election and distribution to the withdrawing employees followed within 4 months of the closing date under the reorganization agreement. We do not read the phrase "on account of" to require strict coincidence in time of the date upon which the right to the distribution accrues and the date of "separation." Accordingly, we view the distribution as having been made incident to and "on account of" the reorganization. Cf. E. N. Funkhouser, 44 T.C. 178">44 T.C. 178, 184 (1965), affd. 375 F. 2d 1 (C.A. 4, 1967).In reaching this conclusion, we disagree with petitioner's argument that there was no real assumption and continuance of the plan by Philco-Del. We attach little significance to the fact that Philco-Del did not contribute to the plan in 1961 and that in 1963 Ford established its standard stock-purchase plan for the Philco-Del employees. Under the terms of the plan, the Philco board of directors had the unfettered discretion to make any or no contribution 198 to the trust according to the best interests of the corporation. No contribution was made in 1960, the year before the reorganization, because of low earnings, a condition which continued through 1961. There is no requirement under section 401(a) that the employer contribute every year, and the inference that there was no bona fide adoption of the plan by Philco-Del cannot be drawn because the suspension of contributions was motivated by "business necessity." Sec. 1.401-1(b)(2), Income Tax Regs. About half the participants remained in the plan after the distribution and continue to be subject to its provisions. Philco-Del's adoption of the plan was more than a mere "formality designed to give it a short breathing spell until it could consummate the mechanics of discontinuance." Jack E. Schlegel, 46 T.C. 706">46 T.C. 706, 709 (1966).This determination raises squarely the question as to whether the reorganization of the Philco Corp. resulted in an en masse "separation from the service" of its employees. It is well established that the transfer of a controlling interest in the stock of a corporation alone does not cause a "separation from the service." See United States v. Johnson, 331 F. 2d 943199 (C.A. 5, 1964); United States v. Martin, 337 F. 2d 171 (C.A. 8, 1964); Harry K. Oliphint, 24 T.C. 744">24 T.C. 744 (1955), affirmed per curiam on another point 234 F. 2d 699 (C.A. 5, 1956). On the other hand, two earlier decisions of this Court based upon section 165(b), I.R.C. 1939, held that when, pursuant to a corporate reorganization, all the assets and liabilities of one corporation are transferred to another and the transferor corporation is dissolved, the employees of the 424 transferor corporation are "separated from the service" of their employer as of the date of dissolution, even though there is no change in the management, policies, or personnel of the transferor corporation. Mary Miller, 22 T.C. 293">22 T.C. 293 (1954), affirmed per curiam 226 F. 2d 618 (C.A. 6, 1955); Lester B. Martin, 26 T.C. 100">26 T.C. 100 (1956). The rationale of these cases has been tacitly accepted in some cases as applicable to section 402(a)(2), e.g., Jack E. Schlegel, supra;Rybacki v. Conley, 340 F. 2d 944200 (C.A. 2, 1965); Thomas E. Judkins, 31 T.C. 1022">31 T.C. 1022 (1959); but it has been seriously questioned by others, e.g., United States v. Johnson, supra;United States v. Martin, supra;E. N. Funkhouser, supra.The "separation from the service" criterion of section 402(a)(2) must be applied on a case-by-case basis. We conclude on the facts of this case that the reorganization of the Philco Corp. did not cause petitioner's "separation from the service." The enactment of section 402(e)3 of the 1954 Code and the legislative history relating thereto reflects the intent of Congress that, except in the year 1954, capital gains treatment should not be accorded to distributions spawned by "reorganizations which do not involve a substantial change in the make-up of employees." S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 54 (1954). Moreover, as Judge Wisdom said in the majority opinion of the Court of Appeals for the Fifth Circuit in United States v. Johnson, 331 F. 2d at 949:On its face, Section 402(e)201 seems to say that after 1954 distributions will not qualify for capital-gain treatment if they are made as a result of the termination of a plan incident to a corporate reorganization, even if the corporate employer is completely liquidated. Apparently, Congress was willing to approve Miller for one year, for the benefit of the limited number of persons who acted in reliance on that decision. In other words, after 1954 a separation from service would occur only on the employee's death, retirement, resignation, or discharge; not when he continues on the same job for a different employer as a result of a liquidation, merger or consolidation of his former employer.202 When viewed in this context, it is plain that "separation from the service" requires a change in the employment relationship in more than a formal or technical sense. The Court of Appeals in Johnson held that when one corporation purchases all the outstanding stock of a second corporation, then merges into the second corporation, there occurs a mere technical change in the employment relationship of the persons employed throughout by the surviving corporation. In the present case the first corporation (Ford) purchased all the assets and 425 liabilities of the second (Philco-Penn), then changed the second corporation's State of incorporation. In applying the provisions of section 402(a)(2) to these facts, we discern no meaningful distinction between the transfer of stock and the transfer of assets. We are left, then, with the question of whether, as to an employment relationship, a change in the employer's State of incorporation is one of form or substance.In answering this question, we place great weight on the congressional intent to ignore reorganizations not involving a "substantial change in the make-up of employees." The employees of Philco-Penn became employees203 of Philco-Del in the same capacities simply by reporting to work on December 11, 1961. No substantial change was made in the supervisory personnel after that date. Petitioner worked in the same capacity under the same superiors both before and after the reorganization. Apparently, the only personnel change involved the selection of a new president and a new production manager. The facts of this case do not establish a "substantial change in the make-up of employees" to render petitioner's change in employment more than one in form only. Consequently, we conclude that there was no "separation from the service" which entitles petitioner to have his distribution taxed as a long-term capital gain under section 402(a)(2). 4 Since the distribution did not occur in 1954, section 402(e) is inapplicable, and petitioner must report the entire amount received in 1962 as ordinary income.204 Since we have found that the instant distribution was made "on account of" the corporate reorganization, 5205 we believe that the adoption of the plan by Philco-Del does not serve as a basis for distinguishing the rationale of the Mary Miller case. 6 Therefore, to the extent inconsistent with the result reached here, we consider the Miller case, as well as the Lester B. Martin case, to be abrogated by the provisions of 426 the Internal Revenue Code of 1954. See the thorough treatment of this point in United States v. Johnson, supra at 946-949.Decision will be entered for the respondent. TANNENWALD; FEATHERSTONTannenwald, J., concurring: I think the majority has reached206 the right result for the wrong reason.Contributions to the plan were discretionary with the original employer, Philco-Penn. The agreement with Ford provided that Ford would be furnished with "assignments of all pension, retirement, profit-sharing, bonus, and other welfare or benefit plans" of Philco-Penn and "evidence of such other corporate action by [Philco-Penn] as may be needed to place Ford in the position [Philco-Penn] now occupies under such plans" and that "Ford agrees to take appropriate action and to enter into appropriate argeements with respect to adoption of, amendment of, or substitution for such plans." Moreover, the agreement between Philco-Penn, Philco-Del, and the trustee of the plan provided that Philco-Del "shall succeed to all the rights and liabilities of [Philco-Penn] under the Trust Agreement." Philco-Penn by appropriate corporate action amended the plan to implement the foregoing and specifically provided in such amendment that the term "Philco Corporation" as used in the trust agreement should include Philco-Del. All of the foregoing antedated the closing of the transfer of the business of Philco-Penn to Philco-Del on December 11, 1961.It seems to me 207 that, by virtue of that closing, Philco-Del adopted the plan. By the terms of the plan, contributions were permitted but not required, and there is nothing in the record before us to indicate that the decision of Philco-Del in this regard had to be made before the end of 1962. 1 To be sure, Philco-Del in fact made no contributions to the plan but we have no way of determining on the record herein when the decision not to contribute was taken. For aught that appears, that decision may not have been made until well into 1962. 2208 Petitioner became an employee of Philco-Del at the time of the closing, to wit, December 11, 1961. He did not receive notice of his right to elect withdrawal of his share under the plan until January 1962 and did not exercise this right of election until later in that month. He was still an employee of Philco-Del at the time of actual distribution on March 31, 1962, and did not retire until June 30, 1965.427 Under the foregoing circumstances, I think this case falls squarely within the ambit of Jack E. Schlegel, 46 T.C. 706 (1966), and E. N. Funkhouser, 44 T.C. 178">44 T.C. 178 (1965), affd. 375 F. 2d 1 (C.A. 4, 1967).Even if petitioner's right to withdraw was fixed prior to the closing and therefore these two decisions are not controlling (see Jack E. Schlegel, supra at 709), the result herein should be the same. It cannot be gainsaid that petitioner separated from the service of Philco-Penn on December 11, 1961. But it does not follow that the distribution to him was "on account of" such separation. Petitioner had the option either to have his share distributed209 to him or remain under the plan. It was his choice, not his "separation from the service," which was the reason for the distribution. E. N. Funkhouser, 44 T.C. at 184-185.For the foregoing reasons, it is, in my opinion, unnecessary to face, as the majority does, the question whether there is a conflict between section 402(a)(2) and Mary Miller, 293">22 T.C. 293 (1954), affirmed per curiam 226 F. 2d 618 (C.A. 6, 1955), and Lester B. Martin, 26 T.C. 100 (1956). As Judge Raum succinctly pointed out in E. N. Funkhouser, 44 T.C. at 184, those cases are "To be sharply distinguished" with respect to situations such as are involved herein.I also think the majority's rationale that "separation from the service" under section 402(a)(2) requires a "substantial change in the make-up of employees" is incorrect.When the "separation from the service" provision ( sec. 165(b), I.R.C. 1939) was first introduced into the Revenue Act of 1942, the Senate Finance Committee explained that it was intended to cover a situation where an employee was entitled210 to bepaid his total distributions in the year "in which he retires or severs his connection with his employer." (Emphasis added.) See S. Rept. No. 1631, 77th Cong., 2d Sess., p. 138 (1942). See also Estate of Frank B. Fry, 19 T.C. 461">19 T.C. 461, 464 (1952), affirmed per curiam 205 F. 2d 517 (C.A. 3, 1953); Edward Joseph Glinske, Jr., 17 T.C. 562">17 T.C. 562, 565 (1951). In 1952, when the Congress amended section 165(b) to deal with the problem of appreciation of distributed securities of the employer corporation, the committee reports again emphasized "the employee's separation from the employer's service." (Emphasis added.) See H. Rept. No. 2181, 82d Cong., 2d Sess., p. 1 (1952); S. Rept. No. 1831, 82d Cong., 2d Sess., p. 1 (1952). When the proposed Internal Revenue Code of 1954 was first introduced and as it passed the House of Representatives, it contained sections 402(a)(2) and 402(a)(3)(B)(ii). 3 H.R. 428 8300, 83d Cong., 2d Sess., pp. 97-98 (1954); H. Rept. No. 1337, 83d Cong., 2d Sess., p. A147 (1954). During the course of the hearings before the Senate Finance Committee, it was pointed out211 by the Association of the Bar of the City of New York that such a provision might lead to abuse in that there could be technical compliance with the provision even though the business was continued. See Hearings before the Committee on Finance, United States Senate, 83d Cong., 2d Sess., p. 572 (1954). The result was a more restrictive provision which, with minor changes in conference not material herein, became section 402(e) of the 1954 Code (see H. Rept. No. 2543, 83d Cong., 2d Sess. (1954)). In incorporating this provision, the Senate Finance Committee stated:The House bill extends capital gains treatment to lump-sum distributions to employees at the termination of a plan because of a complete liquidation of the business of the employer, such as a statutory merger, even though there is no separation from service. This was intended to cover, for example, the situation arising when a firm with a pension plan merges with another firm without a plan, and in the merger the pension plan of the first corporation is terminated.Your committee's bill revises this provision of the House bill to eliminate the possibility that reorganizations which do not involve a substantial change 212 in the make-up of employees might be arranged merely to take advantage of the capital gains provision. Thus, your committee's bill would grant capital gains treatment to lump-sum distributions occurring in calendar year 1954 where the termination of the plan is due to corporate liquidation in a prior calendar year. The purpose of granting capital gains treatment to such distributions is to avoid hardship in the case of certain plans which it is understood were terminated on the basis of mistaken assumptions regarding the application of present law. [See S. Rept. No. 1622, 83d Cong., 2d Sess., p. 54 (1954).]213 The majority, following the lead of Judge Wisdom in United States v. Johnson, 331 F. 2d 943 (C.A. 5, 1964), seizes upon the words "substantial change in the make-up of employees" to support its rationale. In so doing, the majority, in my opinion, misreads the report of the Senate Finance Committee. That report reflects a concern with changes in employment involving no realistic structural change in the employer, such as the liquidation of a subsidiary corporation into its parent and a continuation of the business and the employment relationship without any accompanying change in beneficial ownership. That this is the case is revealed by the language in the committee report referring to "a substantial change in the make-up of employees" which "might be arranged merely to take advantage of the capital gains provision" (emphasis added; see S. Rept. No. 1622, supra) and to the fact that section 402(a)(2) is by its terms directed toward the narrow area of corporate liquidations and not reorganizations generally. 4214 429 In effect, the majority unnecessarily and erroneously indicates that a change of employer accomplished as a part of a transfer of ownership can never be a "separation from the service" unless there is also a change in the makeup of the employee group -- something that, in most transfers of businesses, is in fact unlikely to occur. Nothing in the legislative history requires such a rationale. Indeed, although section 402(e) may not have accomplished all that was originally intended by the House provision, I think it unwarranted, within the context of the total legislative history, to extend that section to situations beyond those involving modifications in corporate structures which bring about "a change in the employment relationship in no more than a formal or technical sense," i.e., unaccompanied by a meaningful change in the beneficial ownership of the business. See Rev. Rul. 58-94, 1 C.B. 194">1958-1 C.B. 194, 196; Sellin, Taxation of Deferred Employee and Executive Compensation 368 (1960).Concededly, the decided cases and rulings have a "bramble bush" character. See Jack E. Schlegel, supra at 708. United States v. Johnson, supra,215 and United States v. Martin, 337 F. 2d 171 (C.A. 8, 1964), are distinguishable on their facts since, in those cases, the taxpayer remained as an employee of the same entity after the transfer of ownership. The same can be said of United States v. Peebles, 331 F. 2d 955 (C.A. 5, 1964); language in the opinion in that case indicating that the identity of the employer was an immaterial consideration is pure dicta and, I think, wrong. 5 Perhaps some language in the opinions in Mary Miller, supra, and Lester B. Martin, supra, can be construed to permit capital gains treatment of distributions where there is only a formal or technical change in the employment relationship; if so, I think such a construction should not be followed.216 A whole series of rulings by respondent reflects the rationale that change of employer plus meaningful change of beneficial ownership is sufficient to constitute "separation from the service" and that, if these two conditions are met, a "substantial change in the make-up of employees" is not a prerequisite. Rev. Rul. 58-94, 1 C.B. 194">1958-1 C.B. 194; Rev. Rul. 58-95, 1 C.B. 197">1958-1 C.B. 197; Rev. Rul. 58-96, 1 C.B. 200">1958-1 C.B. 200; Rev. Rul. 58-97, 1 C.B. 201">1958-1 C.B. 201; Rev. Rul. 58-98, 1 C.B. 202">1958-1 C.B. 202; Rev. Rul. 58-99, 1 C.B. 202">1958-1 C.B. 202; Rev. Rul. 58-383, 2 C.B. 149">1958-2 C.B. 149. Even if the discernible pattern of legislative history is not as clear as I think it is, these rulings constitute a contemporaneous construction of what is at best an unclear statutory provision, the interpretation of which is controversial. See Funkhouser v. Commissioner, 375 F. 2d 1, 5 (C.A. 4, 1967). Particularly217 since respondent at no point herein seeks to disavow these rulings, they should be accorded substantial weight. 430 Cf. Hanover Bank v. Commissioner, 369 U.S. 672 (1962). Under these circumstances, I simply do not understand their gratuitous rejection by the majority.In the area of section 402(a)(2), taxpayers are sufficiently victims of decisions over which they have no control. See Jack E. Schlegel, supra at 710. I see no justification for adding to their misery.Featherston, J., concurring: While I agree with the majority that petitioner was not "separated from the service" within the meaning of section 402, I do not believe this conclusion requires us to sweep aside the now existing precedents on which taxpayers and the Service have relied. I would hold merely that since Philco-Del succeeded to all the rights and liabilities of Philco-Penn under the trust agreement, and petitioner remained in the employ of Philco-Del, there was no "separation from the service" as required under section 402(a)(2). E. N. Funkhouser, 44 T.C. 178">44 T.C. 178, 184 (1965), affd. 375 F. 2d 1*218 (C.A. 4, 1967). Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise specified.↩2. SEC. 402(a)(2) Capital gains treatment for certain distributions. -- In the case of an employees' trust described in section 401(a), which is exempt from tax under section 501(a)↩, if the total distributions payable with respect to any employee are paid to the distributee within 1 taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount of such distribution, to the extent exceeding the amounts contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months.3. SEC. 402(e)↩. Certain Plan Terminations. -- For purposes of subsection (a)(2), distributions made after December 31, 1953, and before January 1, 1955, as a result of the complete termination of a stock bonus, pension, or profit-sharing plan of an employer which is a corporation, if the termination of the plan is incident to the complete liquidation, occurring before the date of enactment of this title, of the corporation, whether or not such liquidation is incident to a reorganization as defined in section 368(a), shall be considered to be distributions on account of separation from service.4. See contra Haggart v. Rockwood ( D. N. Dak. 1967, 20 A.F.T.R. 2d 5460, 67-2U.S.T.C. par. 9629). For a general discussion see Nagel, "Capital Gains Treatment for Employees on Lump-Sum Distribution from Qualified Pension and Profit-Sharing Plans," 43 Taxes 403">43 Taxes 403 (1965). See also Goodman, "How to Obtain Capital Gain Treatment on Distributions from Qualified Plans," 24 J. Taxation 76 (1966)↩.5. Adoption of a profit-sharing plan by a transferee corporation has been a stated ground for disqualification under sec. 402(a)(2) only where the distribution was made subsequent to the transfer of assets and could not be said to "relate back" to the transfer. See and compare Jack E. Schlegel, 46 T.C. 706">46 T.C. 706 (1966); E. N. Funkhouser, 44 T.C. 178 (1965); Rybacki v. Conley, 340 F. 2d 944 (C.A. 2, 1965); Clarence F. Buckley, 29 T.C. 455">29 T.C. 455↩ (1957).6. We recognize that the Commissioner issued in 1958 a series of revenue rulings on the question of "separation from the service" as related to corporate acquisitions. See Rev. Ruls. 58-94, 58-95, 58-96, 58-97, 58-98, 58-99, 1 C.B. 194">1958-1 C.B. 194-204. The revenue ruling most like this case is 58-94, where the assets and liabilities of the M corporation were transferred through the P corporation to its subsidiary S, in exchange for the stock of P. The employees' pension plan and trust of the M corporation were terminated and lump-sum distributions were made incident to the reorganization. The ruling held that the distributions were entitled to capital gains treatment. These rulings are discussed and severely criticized in United States v. Johnson, 331 F.2d 943">331 F. 2d 943, 949-953 (C.A. 5, 1964). Petitioner does not rely on Rev. Rul. 58-94↩; nor does respondent disavow it.1. The plan provided that contributions, if any, were to be made on account of the fiscal year of the corporation ending with or within the fiscal year of the plan and that the amount of any contribution was to be fixed prior to the close of the fiscal year of the corporation. The record indicates that the plan was on a calendar year but is silent as to the fiscal year of Philco-Penn or Philco-Del.↩2. On Dec. 7, 1961, Philco-Del wrote to all employees that Philco-Del had "no present plan to change [Philco-Penn's] retirement and pension plans."↩3. Sec. 402(a)(2) provided for capital gains treatment with respect to total distributions in 1 year "by reason of the termination of the plan as a result of the complete termination of the business of the employer." Sec. 402(a)(3)(B)(ii) provided as follows: (ii) the term "complete termination of the business of the employer" means, in the case of an employer which is a corporation, the complete liquidation of such corporation whether or not such liquidation qualifies as a complete liquidation under section 336 and whether or not such liquidation is incident to a corporate acquisition of property, a statutory merger, or consolidation.↩4. The reference to "reorganizations" would seem to have been intended to make sure that a statutory merger of a subsidiary into a parent would still be considered a liquidation.↩5. The Fifth Circuit Court of Appeals rceognized that the taxpayer was on the payroll of the subsidiary corporation prior to the transfer of stock ownership, but, because of its approach, found it unnecessary to question the District Court's finding that the taxpayer was an employee of the parent corporation prior to the transfer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619143/	JEAN NIDETCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNidetch v. CommissionerDocket No. 7396-75.United States Tax CourtT.C. Memo 1978-313; 1978 Tax Ct. Memo LEXIS 202; 37 T.C.M. (CCH) 1309; T.C.M. (RIA) 78313; August 11, 1978, Filed Leonardo T. Radomile and Mead I. Greenberg, for the petitioner. Steven L. Wood, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the years 1971 and 1972 in the amounts of $ 11,377 and $ 65,252, respectively. Certain203 issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision whether petitioner properly deducted under section 162(a) or section 212, I.R.C. 1954, 1 attorney's fees in the amounts of $ 1,100 and $ 102,500 for the years 1971 and 1972, respectively. All of the facts have been stipulated and are found accordingly. Petitioner, who was a legal resident of Los Angeles, California, at the time of the filing of her petition in this case, timely filed her Federal income tax returns for each of the years 1971 and 1972. Petitioner is one of the founders of Weight Watchers International, Inc. (Weight Watchers). During 1971 and 1972 petitioner was a substantial shareholder, a member of the board of directors and president of Weight Watchers. She devoted substantially all her time to the corporation's business affairs and substantially all of her income was from her salary and dividends from Weight Watchers. Weight Watchers was formed in 1963. At that time the controlling204 interest was evenly divided between petitioner and her husband and Mr. and Mrs. Albert Lippert. In 1971 and 1972 Mr. Lippert served as chairman of the board of the corporation. During the years 1967 through 1969, differences of opinion developed between petitioner and other members of the board of Weight Watchers with regard to the management policy of the corporation. When it became apparent that important differences with respect to management policy could not be resolved, petitioner retained the services of an attorney to advise her with respect to the steps to be taken to resolve the problems with the opposing faction of management. Petitioner subsequently engaged the advice of two other attorneys who specialized in the field of proxy litigation. Petitioner believed that the management policy being followed by Weight Watchers was deficient and that the corporation was not being run in the best interest of the corporation or its shareholders in the following respects: (1) Not all of the directors were being provided with enough policy information to make decisions on major issues during board meetings. (2) The board of directors was controlled by a group composed of205 opposing management's family and friends who lacked the experience and ability to run a multi-million dollar publicly-held corporation. (3) Although the corporation had substantial earnings, it was paying no dividends. (4) The corporation's policy toward its franchises was unwise in that there was friction between the franchisees and the corporation. (5) The board's philosophy regarding the publishing policy was unwise in that the magazine publishing business should either be restructured or spun off as a separate entity. (6) Petitioner took issue with the terms of a pending merger with Bristol-Meyers Company and in the choice of an investment banker. (7) Petitioner did not believe that the corporation's mailing list should be sold to outside sources since such action could be detrimental to Weight Watchers' own mailing campaigns. On the basis of discussions with her respective counsel and with various members of the business and financial community, petitioner believed that her position as president of the company could be in jeopardy due to the tension between her and other officers and directors. This fact together with the corporation's restrictive dividend policy, 206 both of which could potentially endanger petitioner's primary source of income, led petitioner to decide to undertake a proxy contest. In early 1970 there were 1,025,000 shares of Weight Watchers stock outstanding. Petitioner owned some 162,500 shares of Weight Watchers. Her husband, Mortimer Nidetch, owned some 137,500 shares. The 300,000 shares owned and controlled by petitioner and her husband accounted for approximately 29.24 percent of the outstanding stock of the company. The opposing management group controlled 48.78 percent of the outstanding stock. The remaining 21.98 percent of the stock was in the public market, with a large portion held by franchisees. On January 2, 1966, petitioner and her husband had executed two irrevocable trusts naming their sons, David and Richard Nidetch, as beneficiaries. They contributed 25,000 shares of Weight Watchers stock to each of the trusts at the time of their inception. The original trustees of these trusts were Martin Weinstein and Charles Feit. These trustees, who pursuant to the trust agreements had sole power to vote the Weight Watchers shares held by the trusts, were regarded by petitioner as being closely aligned with207 the management group she was opposing. The 50,000 shares in the two trusts amounted to approximately 5 percent of the outstanding shares of Weight Watchers and were included in the opposing management group's outstanding stock percentage of 48.78. Petitioner determined that by replacing the two trustees with individuals who were more closely aligned with her position, she would have a reasonable chance of success in a proxy contest. A change in trustees would reduce by 5 percent the stock held by the management group and increase petitioner's respective share by 5 percent. Accordingly, petitioner undertook steps to change the trusteeship of the trusts by requesting the trustees to resign.She simultaneously met with various franchisees of the corporation to elicit their support. Each trust agreement provided that the trust would be administered in New York and its validity, construction and all rights thereunder would be governed by the laws of New York. Under section 77 of the New York Civil Practice Law and Rules, before a trustee can resign from his fiduciary position he must make208 an accounting which is satisfactory to the responsible judicial forum. Normally, the expenses incident to this accounting are borne by the trust. Each of the trust agreements contained the following provision: 11. Accounting and Compensation. The Trustee shall render an annual accounting of the Trust to the beneficiary, and such reasonable costs as are incurred in connection therewith shall be reimbursed and/or paid out of Trust funds. The Trustee and Successor Trustee designated herein shall receive no compensation for services rendered under this agreement, except as set forth in this paragraph. On June 26, 1970, Charles Feit, one of the original trustees, and Manny Mark, a successor trustee for the two trusts, addressed a letter to the law firm of Geller, Gold and Cuddy authorizing the firm to file on their behalf and to prosecute petitions to the Supreme Court of the State of New York for settlement of the trustees' account and for leave to resign as trustees of the two trusts. This authority was specifically conditioned upon the understanding that the trustees would not be required to pay any legal fees or other costs and expenses incident to the filing for settlement209 of account and for leave to resign and that all such fees, costs and expenses would be borne by petitioner. At the bottom of this letter the following appeared: Gentlemen: Pursuant to the foregoing, I agree to pay your fee for legal services rendered to and on behalf of Mr. Manny Mark in connection with this matter, the sum of $ 1,500.00 no later than July 10, 1970. /s/ Jean Nidetch / Mrs. Jean Nidetch On January 15, 1971, petitioner, as one of the settlors of the trusts, signed an agreement in which she requested the appointment of Sanford E. Moore, Esquire, an attorney admitted to practice in New York, as Substituted Trustee under each of the trusts upon judicial acceptance of the resignations of the present trustees which were then pending before the Court. Petitioner further agreed to indemnify the trusts for any expenses incident to this substitution by stating in her request the following: In order to save the Trusts harmless from Mr. Moore's fees and commissions as Trustee, to the end that the assets of the Trusts210 will not be charged with such fees and commissions, the undersigned hereby undertakes to pay such fees and commissions as would otherwise be chargeable to the Trusts. When Manny Mark and Charles Feit, as trustees, filed their account for the two trusts with the Supreme Court for the State of New York, Mario A. Procaccino and Joel I. Genzer as guardians ad litem for Richard Nidetch and David Nidetch, respectively, filed objections to the accounting. Hearings were then ordered before Special Referee Arthur N. Field to determine the trustees' liability, if any. Upon conclusion of these hearings, a settlement was achieved. The guardians' ad litem objections were withdrawn and the trustees were discharged from all liabilities incident to their trusteeship. The Supreme Court for the State of New York, County of New York, in December 1972 set the following fees for the proceedings to settle accounts and for leave of Manny Mark and Charles Feit to resign as trustees: Joel I. Genzer$ 24,000Mario A. Procaccino24,000Eisenberg & Weiss(attorneys for MannyMark and CharlesFeit)39,000Arthur N. Field(Referee)14,000Total$ 101,000 The stipulation and211 order embodying the settlement of the parties with respect to the proceeding for settlement of accounts and resignation of the trustees in which the fees were set provided as follows: Petitioners MANNY MARK and CHARLES FEIT, having brought on these Special Proceedings pursuant to Section 77 of the Civil Practice Law and Rules for the settlement of their accounts and for leave to resign as Trustees under Agreements dated January 2, 1966 for the benefit of RICHARD NIDETCH and DAVID NIDETCH, and MARIO A. PROCACCINO, ESQ., having appeared as Guardian Ad Litem for RICHARD NIDETCH, and JOEL I. GENZER, ESQ., having appeared as Guardian Ad Litem for DAVID NIDETCH, and pursuant to an order of this Court dated June 14, 1971, said Petitioners, to wit, MANNY MARK and CHARLES FEIT, were permitted to resign as Trustees of said Trusts and SANFORD E. MOORE, ESQ. was appointed as the Trustee of said Trusts, and the Guardians Ad Litem having filed objections to the account of the Petitioners and the Court having directed hearings to be held before Honorable ARTHUR N. FIELD, ESQ. as Special Referee to hear and report on the issue of the Petitioners' liability, if any, and hearings thereunder having212 been held, and the parties having agreed upon a settlement of the subject Special Proceedings, it is hereby stipulated and agreed subject to the approval of the Court, by and between the Petitioners, their attorneys, the Guardians Ad Litem for the respective infants, the Settlor of the trusts, her attorney and the Court appointed Trustee as follows: * SECOND: On or before December 31, 1972, one of the Settlors of the Trusts, JEAN NIDETCH, shall contribute an additional 1,550 shares of the common stock of Weight Watchers International, Inc. to each of the subject trusts. * SEVENTH: That the indemnity agreement executed by JEAN NIDETCH, dated January 15, 1971, a copy of which is annexed hereto, be incorporated into and made a part of this order. In December of 1972 petitioner transmitted to Sanford E. Moore, as trustee of the trusts, 1,550 shares of Weight Watchers common stock for each of the trusts. The letter of transmittal stated: In accordance with my obligation under the Agreements dated June 25, 1970 (executed by Mortimer Nidetch and me and Charles Feit and Manny Mark), and in accordance with the Stipulation and Order of the Supreme Court of the State213 of New York, New York County, dated December , 1972, I do herewith deliver to you 1,550 shares of stock for each of the aforesaid trusts, together with stock assignments thereof. Subsequent to the change of trustees but prior to actually undertaking a proxy contest, the board of directors and petitioner agreed to settle their differences. They agreed upon the following: (1) Removal from the board of directors of two directors friendly to the management interest and replacement of those directors with new directors approved by petitioner; (2) a reduction of the responsibilities of members of the management group's family employed by the company; (3) a change in the company's publishing policy; (4) withdrawal by management of its proposed sale of mailing lists; (5) a long-term employment contract for petitioner at a higher salary along with the adoption of a more aggressive dividend policy; (6) abandonment of the pending merger with Bristol-Meyers; (7) guarantees that all information requested by board members would be supplied; and (8) a change in the company's attitude with respect to franchises and agreements regarding reconciliation. No proxy contest214 was ever actually commenced. On her Federal income tax return for 1971 petitioner deducted $ 3,000 paid to Sanford E. Moore, successor trustee of the two trusts. Of this sum, only $ 1,100 is now in controversy. This sum is comprised of a payment on May 6, 1971, of $ 200 "for conference with guardians, etc." and a payment on October 14, 1971, of $ 900 "for a conference regarding children's trusts and a security and exchange review." On her Federal income tax return for 1972 petitioner deducted legal expenses of $ 102,500. This sum was comprised of the $ 101,000 set by the Court as fees which were paid by the trusts and $ 1,500 paid by petitioner on November 22, 1972, to the law firm of Schur, Rosenberg, Handler and Jaffin for legal services rendered to and on behalf of Manny Mark. The $ 101,000 paid by the trusts was not derived from the sale of the same 3,100 Weight Watchers shares that petitioner contributed to the trusts pursuant to her indemnification agreement. Petitioner's attorney addressed a letter to petitioner under date of December 22, 1972, in explanation of the Court's December 1972 order which stated in part as follows: You will recall I had indicated that215 we would put in enough shares to equal $ 100,000. I fixed that amount at 3,100 shares at this particular point. * * * The Judge then made a quick calculation and decided that 3,100 shares was worth $ 101,000 and he thereupon cut each of the fees of the various parties by $ 1,000 so that it became: Procaccino$ 24,000Genzer24,000Eisenberg39,000Field14,000Total$ 101,000 I indicated that we wanted to make the contribution this year for tax reasons. Sandy Moore, the trustee, indicated that for tax reasons for the trusts he prefers that 30% of the $ 101,000 be paid out in 1972, and 70% in 1973. He has sufficient cash on hand to pay $ 30,000 this year and he will do so. The balance would be paid in early January and he will have to sell some shares to produce the extra money. In his notice of deficiency respondent disallowed the claimed deductions for legal expenses on the grounds that petitioner had not established that she had incurred these legal expenses and that even if they were in fact incurred, it had not been established that the legal expenses were ordinary and necessary business expenses or were paid for the purposes designated in section216 212. Petitioner contends that the expenses which she paid in 1971 and 1972 in connection with the proceeding to have the trustees of her sons' trusts resign and a substitute trustee appointed by the Court are deductible under either section 162(a) or section 212. Section 162(a) allows "as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Petitioner argues that her positions as president and a director of Weight Watchers constitute a trade or business, that the legal expenses in dispute were incurred in this trade or business and are therefore proper deductions under section 162(a). Petitioner also argues that the expenses are deductible under section 212. This section provides, in pertinent part: SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-- (1) for the production217 or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; * * Petitioner contends that she paid the legal and related fees to improve corporate policy, in order to assure her retention of her salary from the corporation and also to increase the income productivity of her stock by way of increased dividends. On this basis petitioner claims that the expenses are properly deductible under section 212. Section 1.162-1(a), Income Tax Regs., provides that business expenses must be ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business. Section 1.212-1(d), Income Tax Regs., similarly provides that for expenses to be deductible under section 212, they must bear a reasonable and proximate relationship to the production and collection of income. The requirements for deductibility under section 162(a) and section 212 are inparimateria with the one exception that under section 162(a), the income-producing218 activity must qualify as a trade or business. United States v. Gilmore,372 U.S. 39">372 U.S. 39, 45 (1963). Respondent contends that petitioner has failed to show the requisite proximate relationship between the legal expenses and her trade or business or her income-producing activities. 2219 In Surasky v. United States,325 F.2d 191">325 F.2d 191 (5th Cir. 1963), the taxpayer-appellant was a shareholder of Montgomery Ward and Co. He was not an officer, director or employee, and he did not aspire to any of these positions. Together with other shareholders, the taxpayer formed a committee whose purpose was to rebuild and reform Montgomery Ward, and to effectuate broad changes in company policy. The committee initiated a proxy campaign to elect a new majority of the board that was favorable to the committee's views. The taxpayer contributed $ 17,000 to the committee. Although the committee's efforts to secure a majority on the board of directors were not successful, many of the goals the committee sought were nevertheless attained after the board election. In holding that the taxpayer's $ 17,000 contribution was deductible under section 212, the court reasoned that in enacting section 212 " * * Congress had in mind allowing deduction of expenses genuinely incurred in the exercise of reasonable business judgment in an effort to produce income that may fall far short of satisfying the common law definition of proximate cause." (325 F.2d at 195.) The220 court observed that the payments were indisputably made in anticipation of increased profit to the taxpayer. In Central Foundry Co. v. Commissioner,49 T.C. 234">49 T.C. 234 (1967), a Court reviewed case holding the amount paid by a corporation in reimbursement to the successful insurgents of their entire cost of a proxy contest to be deductible by the corporation under section 162, we stated at page 248: It is now settled law that costs incurred by a stockholder in a proxy contest may be deducted by him as "ordinary and necessary" expenses under section 212, at least to the extent that they are proximately related to the stockholder's incomeproducing activities. Graham v. Commissioner,326 F.2d 878">326 F.2d 878, 880 (C.A. 4), reversing 40 T.C. 14">40 T.C. 14; Surasky v. United States,325 F.2d 191">325 F.2d 191 (C.A. 5). And the Internal Revenue Service has ruled that it will follow the decisions in these cases, if the expenditures "are proximately related to either the production or collection of income or to the management, conservation, or maintenance of property221 held for the production of income." Rev. Rul. 64-236, 2 C.B. 64">1964-2 C.B. 64. * * * [Footnote omitted.] Respondent in the instant case does not contend that the payments made by petitioner would not be deductible if they had been paid directly in a proxy contest, but attempts to distinguish between the expenses incurred in proxy contests and those at issue here. Respondent argues that proxy contest expenses are incurred to directly affect corporate policy whereas the expenses involved in this case were merely undertaken to put petitioner in the position to challenge corporate policy at some future date. In our view, the expenses petitioner incurred in the trustee substitution proceeding affect corporate policy in as direct a manner as do ordinary proxy expenses. In neither case does the expenditure itself directly affect corporate policy. Proxy expenses incurred to secure authorization to vote shares of stock merely put the initiating party in a position to affect corporate policy by use of the authority at some future date. Likewise, the expenses incurred in the trustee substitution proceeding put the petitioner in a position to have increased support on the board of222 directors by having an additional 5 percent of the stock voted by persons favorable to her views. In our view, rather than being "one step removed" from a proxy fight, as respondent contends, under the stipulated facts in this case the expenses of the trustee substitution proceedings were a crucial first step in an anticipated proxy contest. Respondent suggests that a taxpayer wanting to change a trustee for personal reasons could try to make the expenses deductible by initiating the change at the time a proxy contest was contemplated. Whether the substitution of the trustee was undertaken for personal reasons rather than for the purpose of having the stock voted favorably to the taxpayer is a fact question. Here, respondent has stipulated the reasons for the substitution, so we have no such factual determination before us. The stipulated facts show that petitioner determined that the trustee substitution was a necessary first step to a reasonable chance of her success in a proxy contest. Respondent's position here effectively is that expenses of anticipated proxy fights are not deductible when a full-blown proxy contest is not undertaken because the parties reach a compromise223 agreement on their own. In our view, this position is untenable. The preliminary steps taken in anticipation of a proxy fight pre-empted by settlement are incurred for the same purposes as those incurred in the initial stages of a dispute culminating in an actual proxy battle. To deny deductibility of the former while according deductibility to the latter would penalize those parties who are able to amicably settle their disputes. In sum, we conclude that by the substitution of trustees petitioner secured the voting support of a substantial block of Weight Watchers shares. This action strengthened her position in the event of a proxy contest and weakened the position of those who sought to interfere with her efforts to change corporate policy. In our view, the facts support the inference that the trustee substitution was a causative factor in the agreement in which petitioner's views were to a large extent adopted as corporate policy. An expense paid for such a purpose falls within the ambit of section 212(2) when it is incurred to conserve or protect the income-producing potential of a taxpayer's stock. Having concluded that such expenses are deductible under section 212, 224 we need not decide whether they are also deductible under section 162(a). We now turn to an examination of the specific expenses petitioner submits that she incurred as part of the trustee substitution proceedings. Respondent contends that the expenses of $ 1,100 for 1971, which consist of two payments to Sanford E. Moore, the substitute trustee, one in the amount of $ 200 and one in the amount of $ 900, have not been shown to be directly related to the trustee substitution proceeding. The evidence shows that the $ 200 payment was by check number 309, dated May 6, 1971, "for conference with guardians, etc." and the $ 900 payment was by check number 460, dated October 14, 1971, "for a conference regarding children's trusts and a security and exchange review." The record shows that Sanford E. Moore was appointed substitute trustee by order dated June 14, 1971. The record also shows that Moore was willing to be appointed substitute trustee only with the agreement that petitioner pay the expenses connected therewith. One conference with the guardians shortly before the court approved his appointment and a review of the trusts' assets shortly thereafter appear to be normal expenses225 connected with his substitution. Since the substitution was for a purpose connected with petitioner's obtaining sufficient votes of shares to change the policies of Weight Watchers, these expenses were likewise for that purpose. We conclude that the $ 1,100 paid to Sanford E. Moore in 1971 is deductible under section 212. The amount of $ 101,000 represents the value of stock petitioner contributed to the trusts in 1972 to indemnify them for the cost of the substitution proceedings.The remaining $ 1,500 of the $ 102,500 in issue for 1972 consists of a fee paid by petitioner in 1972 to the law firm of Schur, Rosenburg, Hardler and Jaffin for services rendered in connection with the trustee substitution proceedings. The record contains a receipted bill from the law firm describing the services rendered and a letter showing payment of the $ 1,500 in 1972. We conclude that the expenditures of $ 102,500 in 1972 directly relate to the substitution proceedings and are therefore deductible under section 212. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue.↩. The following handwritten notation appears in the righthand margin with reference to the $ 1,500 fee: increased by oral agreement to fee↩2. Respondent on brief makes a statement that the $ 101,000 was not paid in 1972. The record indicates that the trusts did not pay the full amount to the various ultimate recipients in 1972. However, the stipulation states: In December 1972, the petitioner transmitted to Sanford E. Moore, as trustee for the trusts * * 1,550 shares of stock in Weight Watchers International, Inc., for each of the individual trusts. These shares were transferred pursuant to the order of the Supreme Court for the State of New York * * *. The record therefore is clear that petitioner made the payment under her indemnification agreement in 1972. While the stipulation does not specifically state that the value of the 3,100 shares of stock was $ 101,000, the clear indication from the exhibits as well as the stipulation itself is that $ 101,000 was the value of the 3,100 shares of Weight Watchers stock when petitioner transferred those shares to the trusts. Respondent at no point contends that the value of these shares was not $ 101,000. Petitioner appears to be a cash basis taxpayer. If respondent by his statement on brief is contending that the $ 101,000 was not paid by petitioner in 1972, his contention is without merit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619144/	Sally Conforte, Petitioner v. Commissioner of Internal Revenue, Respondent; Joseph Conforte, Petitioner v. Commissioner of Internal Revenue, RespondentConforte v. CommissionerDocket Nos. 8217-78, 8218-78United States Tax Court74 T.C. 1160; 1980 U.S. Tax Ct. LEXIS 71; September 8, 1980, Filed 71 Decisions will be entered under Rule 155. Petitioners owned and operated a legal house of prostitution, Mustang Ranch Brothel, Nev. The only contemporaneously prepared document evidencing the income of the prostitution during the years in issue was a sheet showing earnings of each prostitute during a 24-hour period. Petitioners also owned the Starlight Ranch Brothel. For the calendar years 1973 through 1976, petitioners filed a "Sullivan" Form 1040. Held:1. Gross income from the Mustang and Starlight brothels determined;2. Business expenses determined;3. Amount of deductible legal fees determined;4. Applicability of sec. 170 and/or sec. 616 to the construction and dedication of a roadway determined;5. Form 1040 filed by petitioners did not constitute a return for the purposes of secs. 1348 (maximum tax on earned income), 6501 (statute of limitations), and 6653(c) (definition of underpayment); and6. Sec. 6653(b) addition to tax for fraudulent underpayment imposed for each of the years in issue. Bruce I. Hochman, Harvey D. Tack, and Stanley H. Brown, for the petitioners.S. Clay Freed and Gordon W. Cook, for the respondent. Sterrett, Judge. STERRETT1160 By statutory notice dated April 14, 1978, respondent determined a deficiency in Mr. Joseph Conforte's income taxes and additions to tax as follows:Sec. 6653(b)YearDeficiencyaddition to tax1973$ 1,142,054.00$ 598,943.0019741,189,391.00622,701.5019751,228,480.20642,248.6019761,207,831.00631,918.00On the same day, a similar statutory notice of deficiency was sent to Mrs. Conforte. The deficiency and additions to tax pertaining to Mrs. Conforte were slightly lower than those 1161 stated above for the reason that self-employment tax was attributed only to75 Mr. Conforte.These cases were consolidated for the purpose of trial, briefing, and opinion. After concessions by both parties, the remaining issues are as shown below:(1) Whether the respondent's determination in each statutory notice of deficiency was arbitrary and excessive, and if so, on which issues does respondent have the burden of proof; (2) what is the correct net income of the Starlight Brothel for each year, and what portion of it is taxable to petitioners; (3) what is the correct net income of the Mustang Ranch Brothel for each year; (4) did the petitioners file "returns" sufficient to qualify as joint returns; (5) did the petitioners file "returns" sufficient to enable them to avail themselves of the maximum tax provisions of section 1348 of the Internal Revenue Code, and if so, are the petitioners entitled to the benefits of the maximum tax; (6) did either petitioner intentionally file a false return, subjecting either of them to the fraud penalty under section 6653(b), and if so, did they file "returns" sufficient to permit computation of the fraud penalty against the deficiency after credit for taxes reported on the returns. In the alternative, are the voluntary76 payments of tax to be deducted from the tax in computing the penalty; (7) is the assessment for the year 1973 barred by the statute of limitations under section 6501(a); and (8) are the taxpayers entitled to a business deduction under section 162 or 616(a) during the years 1974-76, or to a charitable deduction under section 170 during 1976 for the building and dedication of the road, bridge, and underpass to Storey County.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and the supplemental stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.Petitioners Sally Conforte's and Joseph Conforte's principal place of residence at the time of filing their petition herein was Sparks, Nev.Petitioners, who were married to each other during the years 1973 through 1976, jointly executed a Form 1040, U.S. Individual Income Tax Return for each of those years. Each of the tax returns contained the taxpayers' names, address, social security 1162 numbers, the filing status of "married, filing joint return," exemptions, amount designated as taxable income and computations of income and77 self-employment tax. Each return further contained a statement, reciting in some detail that the taxpayers were informed and believed that they were under criminal investigation by various agencies, and that the tax returns would be scrutinized by such agencies with a view to securing information that would lead to prosecution. The taxpayers then respectfully asserted their Fifth Amendment privilege with respect to setting forth the details of income and expense which could be used against them, relying upon applicable case law recited in the statement. The statement concluded by noting that the taxpayers had furnished, on the return, their taxable income which they believed to be correct, from which they had computed their tax liability, and noted that, if the Internal Revenue Service determined through appropriate processes that they were obligated to pay additional tax, they would comply with that determination.The tax returns for 1973, 1974, 1975, and 1976 were processed by the Ogden Service Center in the traditional manner. Each return was posted for filing, giving a document locator, and payment of taxes recorded in the following amounts:1973$ 111,664.001974112,022.801975112,033.901976112,008.7078 Payment of 1973 and 1974 taxes accompanied the returns; payments of the 1975 and 1976 taxes were made in installments. An estimated tax penalty was imposed for each year shortly after receiving the return, and interest was assessed on all eight payments. The 1973 and 1974 returns were selected for audit on December 10, 1974, and November 10, 1975, respectively.The petitioners owned and operated, in varying degrees, the Mustang Ranch Brothel (sometimes Mustang Ranch or Mustang) located in Storey County, Nev. The brothel was a legal business in Storey County and was licensed by it.Following a Federal grand jury investigation, petitioners were indicted, on April 5, 1977, in the U.S. District Court for the District of Nevada in a 10-count indictment charging a willful attempt to evade and defeat withholding and Federal Insurance1163 Contributions Act taxes, arising out of the operation of the Mustang Ranch Brothel. The 10 counts dealt with the first quarter of 1974 through the second quarter of 1976. Petitioners were acquitted on 6 counts, convicted on 4 counts, and sentenced on October 28, 1977.The grand jury record was not used in the formation of the statutory notices79 herein; only the criminal trial record and fruits of respondent's agents' investigation were used for such purpose.Ronald Wiggins, an experienced revenue agent, was assigned the task of examining petitioners' tax returns on November 10, 1977. He had earlier examined the 1967 through 1969 returns and made no adjustments with respect thereto. The purpose of his examination was to determine petitioners' tax liability. He was not advised at the time about the possibility of a jeopardy assessment, but 3 or 4 days later he was asked to make a computation based on the information available. At that time he had a sparse file, containing the Forms 1040, a copy of Exhibit 44 (hereinafter referred to as a "trick" sheet, which reflected the earnings of each prostitute for a given period of time) from the criminal employment tax case, and other various items.Between November of 1977 and February of 1978, Agent Wiggins issued a summons to the electric power company, obtained the amount of license fees paid from the county sheriff's office, and went to the Storey County assessor to obtain property and real estate tax payment records. In January 1978, he received and read the transcript from80 the criminal employment tax case to determine allowable expenses. He called Stanley Brown, the general attorney for petitioners, to determine the amount of the legal fees paid. No expenses were allowed without substantiation of the nature of the services performed.Agent Wiggins prepared a jeopardy assessment computation on or about February 17, 1978. The assessment relating to the Mustang Ranch Brothel was based primarily on the trick sheet from the criminal employment tax case. In that trial, the trick sheet was represented to be a one-page listing of 38 prostitutes and the gross receipts taken in by each during a 12-hour night shift. The total gross receipts from prostitutes was $ 4,961. In addition, the sheet reflected $ 70 of income from "check in," $ 1,000 withdrawn during the evening by Mr. Conforte, and 1164 expenses of $ 3,982. Agent Wiggins determined that the gross receipts for a 24-hour day should be computed by taking the receipts for the evening of $ 4,961, estimating that the day shift did 50 percent of the business of the night shift, or $ 2,480.50, with a resultant figure in daily gross receipts of $ 7,441.50. He then multiplied the daily receipts by81 365 days, thereby determining that the annual gross receipts of the Mustang Ranch were $ 2,716,147.50 for each of the years 1973 through 1976.The evidence discloses that there was a wide disparity in the earnings of prostitutes at the Mustang. The trick sheet shows that 2 of the 38 women had no earnings. The largest amount of gross receipts taken in by any prostitute was $ 736. The next highest amount of receipts was $ 472, and the remaining 34 prostitutes grossed between $ 10 and $ 260. A similar disparity is reflected in the testimony of the prostitutes during the trial. Ten prostitutes, who had worked at the Mustang during the years in issue, testified that their net earnings ranged from $ 1,400 a week during the summer ($ 700 in the winter) to $ 200 a week in the summer ($ 150 in the winter). From their earnings, the prostitutes were expected to pay for their supplies; pay $ 1 for each item of laundry washed at the Mustang; tip each maid, cashier, cook, and the manager $ 1 per day; pay for their venereal disease examinations by a doctor; have an expensive "dressy" and casual "out-date" outfit; and have their hair done regularly.Based upon Agent Wiggins' review of the criminal82 transcript, he determined that the prostitutes received 50 percent of the gross receipts and then made payment to petitioners for "room and board." He determined that the net amount paid to the prostitutes was 45 percent of the gross receipts and allowed a deduction for that amount. At trial, the parties stipulated that the amount realized as a result of each prostitute's activities during a shift is split evenly between the prostitutes and the house. From the prostitute's share is deducted an amount up to $ 10 which represents 10 percent of her earnings. In the event the prostitute's share is less than $ 50 per shift, there is no 10-percent deduction. In the event her share is more than $ 100, only $ 10 is deducted by the house. The stipulated division results in a slightly larger deduction than 45 percent of the gross receipts from prostitution, the amount allowed. A deduction for "salaries and wages -- other" was based upon the daily wage figures for nonprostitute help reflectd in the criminal trial, multiplied by 1165 the average number of people described in the transcript. A rental expense was allowed based upon the testimony of the landlord that $ 500 per month83 was paid for rent in cash. A deduction for utilities was allowed based upon information that Agent Wiggins received from the electric company. A deduction for taxes and licenses was allowed as ascertained from the records of the county sheriff and assessor. A deduction for groceries was allowed based upon testimony in the employment tax case that the average daily amount paid for groceries was up to $ 150.In preparing the jeopardy assessment, Agent Wiggins did not use the expense figure of $ 3,982 from the trick sheet in making his projection, because he did not feel that the expenses were adequately substantiated. Without the knowledge of what the money was actually spent for, he would not project the expense figure. In addition, there was testimony in the criminal case that the figure represented wages of the prostitutes and other help. When Agent Wiggins first made a computation for the jeopardy assessment, he used joint return rates; when it was concluded, he used married, filing separate rates.After the jeopardy assessment was made, Agent Wiggins was advised by Stanley Brown, the Confortes' attorney, that the petitioners owned an interest in the Starlight Brothel (sometimes84 Starlight Ranch or Starlight) and the land on which it was located, that Gloria Elliott (also known as Kitty Bono) ran the operation, and that the profits were split. He also received some records of Sleepy Hollow Trailer Park, and found some itemized deductions.On April 14, 1978, a statutory notice of deficiency was issued to Joseph Conforte based upon Agent Wiggins' computation. The notice set forth deficiencies in tax and penalty, as follows:CalendaryearIncome taxFraud penaltyTotal1973$ 1,142,054.00$ 598,943.00$ 1,740,997.0019741,189,391.00622,701.501,812,092.5019751,228,480.20642,248.601,870,728.8019761,207,831.00631,918.001,839,749.001166 On the same date, a statutory notice of deficiency was issued to Sally Conforte, based upon Agent Wiggins' computations, setting forth deficiencies in tax and penalty as follows:CalendaryearIncome taxFraud penaltyTotal1973$ 1,141,190.00$ 598,511.00$ 1,739,701.0019741,188,349.00622,180.001,810,529.0019751,227,366.20641,691.601,869,057.8019761,206,623.00631,313.501,837,936.50Agent Wiggins determined the receipts, expense, and net 85 income of the Mustang Ranch brothel to be:1973197419751976IncomeGross receipts fromprostitution$ 2,716,148$ 2,716,148$ 2,716,148$ 2,716,148ExpenseSalaries and wages --prostitutes1,222,2671,222,2671,222,2671,222,267Salaries and wages --other103,065105,709131,404140,468Rent6,0006,0006,0006,000Utilities8296,0829,72414,834Taxes and licenses26,04425,00025,52631,650Groceries54,75054,75054,75054,750Bank charges00035Payroll taxes0003,551Total expenses1,412,9551,419,8081,449,6711,473,555Net income1,303,1931,296,3401,266,4771,242,593The entire amount of this income was attributed to both Mr. and Mrs. Conforte.Agent Wiggins determined the receipts, expenses, and net income of the Starlight brothel to be: 1167 1973197419751976IncomeGross receipts fromprostitution$ 787,305$ 922,720$ 1,078,575$ 1,078,575ExpensesSalaries and wages --prostitutes354,237415,224485,359485,359Materials and supplies8,0538,0538,6768,676Taxes on businessproperty12,00012,00012,00012,000Cal-Gas Propane Co.1,4241,4241,5111,511Water1,4721,4721,4611,461Waste removal72727272Depreciation1101109999Sierra Pacific Power2,3982,3982,4852,485Total expenses379,766440,753511,663511,663Net income407,539481,967566,912566,91286 The entire amount of this income was attributed to both Mr. and Mrs. Conforte.In determining the gross receipts of the Starlight, Agent Wiggins was told by Revenue Agent Zuver that Zuver had interviewed a prostitute, named "Miko," who had said that she earned $ 20,000 a year from the Starlight. In order for a prostitute to earn $ 20,000, based upon the split of the gross receipts, she would have had to gross $ 44,444. Agent Wiggins determined that the average prostitute worked 3 weeks on and 1 week off, or 273 days per year. He divided the 273 days into $ 44,444 gross receipts to arrive at a daily gross receipts per prostitute of $ 162.80. Agent Wiggins was also told by Agent Zuver that Zuver had reviewed the State medical records and had determined that the average number of girls during the years 1973 through 1976 ranged from 13 to 18. Agent Wiggins then multiplied the $ 162.80 average receipts per prostitute by the number of prostitutes working per year, as determined by Agent Zuver, times 365 days. The expense for "salaries and wages -- prostitutes" was determined in the same manner as that for the Mustang Ranch, i.e., 45 percent of the gross receipts. The division of87 gross receipts at the Starlight was actually the same as the Mustang. The balance of the expenses were those claimed on the Elliotts' personal tax returns.1168 At the time the statutory notices were issued in this case, Agent Wiggins had ascertained that the income from the Starlight Ranch was reported in the standard format on the Schedule C's in the personal income tax returns of Gloria Elliott, the manager of the Starlight Brothel. The net income of the Starlight as set forth in those returns was:YearNet income1973$ 27,500197431,0001975$ 35,200197643,068All of the Starlight net income was attributed to both Mr. and Mrs. Conforte, and a statutory notice of deficiency was issued to Gloria Elliott on April 13, 1979, for the years 1974 and 1975, attributing all of the Starlight net income to her. Mrs. Elliott has contested that determination.In making the income computation for the Starlight in the statutory notice, Agent Wiggins used the information received from Agent Zuver without verifying it. He did not interview any prostitutes who had worked at the Starlight, did not ascertain the number of prostitutes who worked solely on weekends, 88 the earnings of prostitutes other than Miko, whether Miko was a top prostitute or average prostitute or whether the prostitutes received income which was not shared with the house. He had never been assigned the returns of Gloria Elliott for examination. Agent Wiggins did not discuss with Mr. Brown the question of the income of the Starlight, even though Brown had voluntarily told him of petitioners' interest and profit-sharing with Mrs. Elliott.The statements of Miko were not admitted into evidence in this case. Miko was a top earner at the Starlight and her earnings were not typical.Agent Wiggins, after personally reviewing the State medical records, determined that the number of prostitutes working at the Starlight was as follows:Estimated numberWeekly exams at Starlightof prostituteson Friday eveningsworking per week197413.214.3197515.717.1197614.215.41169 The above computation of prostitutes working at the Starlight does not take into consideration the possibility that there were fewer prostitutes working on weekdays than on weekends and, further, treats each prostitute examined by the doctor on the weekend as working the entire89 week. The computation also assumes that each prostitute examined was working, and does not exclude prostitutes examined who may have been ill and not working. Further, it does not exclude prostitutes who were examined and left the brothel for their vacations, while it includes prostitutes examined for more than 3 consecutive Fridays. Generally, the prostitutes were expected to work 3 weekends and be off a fourth. Finally, the above computation does not take into consideration that some prostitutes were examined by a doctor other than Dr. White, the Starlight house doctor.During the trial, it was established that Gloria Elliott ran the Starlight Ranch for petitioners. She retained one-third of the net income from the operation, and paid two-thirds to petitioners.During 1973, there were 12 rooms at the Starlight. During the years 1974 through 1976, there were 16 rooms. In addition to prostitution, the Starlight derived profits from the sale of liquor and T-shirts.Prior to May 1976, the Mustang Ranch Brothel consisted of 45 rooms. The old Mustang, in reality a trailer-park, was located on property rented from the Peri brothers. In May 1976, the old Mustang was closed, but90 a new structure located on land owned by petitioners was opened. This new Mustang consists of a complex resembling a spoked wheel. At the hub of the wheel is an octagonal-shaped building containing the main parlor, a bar, space for the cashier and security personnel, a room for waiting cab drivers, and storage room. The main parlor is approximately 30 X 55 feet. The bar is approximately 30 feet long. The hub of the wheel is ringed with a hallway from which 7 spokes or wings radiate. Four of the seven wings, containing approximately 56 rooms, are reserved for prostitution. One wing is devoted to kitchen and dining facilities; another wing is devoted to general use and includes a large spa. The remaining wing consists of office space, a beauty parlor, other rooms necessary for the operation of a brothel, and a living quarter. Petitioners reopened the old Mustang in October 1976.1170 When a customer entered the brothel, the prostitutes lined up and the customer made his selection. The prostitute and customer then went to her room, and she negotiated, in private, for the service to be performed and fee to be charged. The prostitute then collected the money and turned91 it in to the cashier. The brothel set minimum fees, beginning at $ 10, but the prostitutes would encourage the customer to spend more. In violation of house rules, prostitutes would, on occasion, not turn in all of the money they had received from a customer.Business at the Mustang was better in the summer than in the winter and greater on weekends than on weekdays. Included in the business of the Mustang Ranch would also be "out-dates." These were dates on which the customer took the prostitute out of the house for a period of time which could run as long as 3 days. Out-dates were prepaid by the customer. Mr. Conforte gave out complimentary passes to customers of Mustang Ranch, known as "house dates." The customer would be given a card containing a dollar denomination of its value initialed by Mr. Conforte. The house dates were treated as gross receipts on the accounting sheets kept by the cashiers and would be included in the total daily gross receipts. The values of these house dates were not actually gross receipts, since the services were complimentary. The cashiers treated the house passes as money in their recordkeeping, even though no money was received and the prostitutes92 were paid 50 percent of the amount of the house pass, which item was then treated as an expense.All prostitutes working at the Mustang received medical examinations at least once a week, including when they reported for work, when they were ill, when they returned to work after being out of the house for 48 hours, and as to some prostitutes, when they were going home. The prostitutes were examined at the Mustang on Sunday, Monday, or Tuesday, and sporadically at the office of Dr. Nelson, the Mustang house doctor. Some prostitutes were examined by the doctor and never came to work, or only stayed a day or so. Upon completion of the examination, Dr. Nelson would send the slides and other information to the Nevada State health authorities to be analyzed in their laboratories. A comparison of the Nevada State health laboratories and the physician's daily records of Dr. Nelson shows that the average number of prostitutes at the Mustang during the years in issue was as follows: 1171 197341.47197441.12197538.32197641.30The above computation attempts to take into consideration possible duplications of women who were examined more than once during the week. 93 It assumes that a woman, who was examined on a Monday, would work the entire week. With respect to the year 1973, the schedule begins on May 28 and concludes on November 19. Thus, the slow season of the winter is excluded. The year 1974 excludes the period January 1 to April 22 or a portion of the slow winter period. With respect to the year 1975, the above data is based solely on the State health slips, as Dr. Nelson's records were not available. As to those women who were checked on their way out of the Mustang, the computation would overstate the number of women available for work that day. If a woman were checked by a doctor other than Dr. Nelson, she would not be included, and the estimate would be understated. The computation includes all slides taken by Dr. Nelson at the Mustang, even if the woman examined was possibly not a prostitute. The rules of the house require a prostitute to work 3 weeks and take off 1. When working, she is required to be examined weeky by Dr. Nelson.Both the Mustang and the Starlight were operated almost exclusively in cash throughout the years at issue. The prostitutes and employees were generally paid daily and in cash. All expenses of94 the Mustang were paid in cash, including the license fee paid to Storey County.The contemporaneous records at the Mustang were systematically burned. These records would include the cashier checkout sheet, master sheet of the prostitutes' earnings, and the itemized expenses. Petitioners would receive a "closing sheet," similar to the trick sheet, which would set out each prostitute's earnings, miscellaneous income, total expenses for the day, and any withdrawals by Mr. Conforte. Mrs. Lynn, the manager of the Mustang since 1970, never made any entry into, or saw, any master set of books for the Mustang.In 1967, Mr. Conforte opened the Starlight. The Court does not have the entire chain of title of the property on which the Starlight was located. Gloria Elliott was named trustee on a deed of trust dated April 10, 1972, in which First American Title 1172 Co. was designated trustee, and Edith Thompson, beneficiary. The property upon which the Starlight was located was the subject of the deed of trust. By assignment of deed of trust dated April 11, 1972, Edith Thompson transferred her interest therein to Mr. Conforte. By quitclaim deed dated June 18, 1973, Mrs. Elliott 95 quitclaimed her interest to Mr. Conforte. By grant, bargain, and sale deed dated May 29, 1979, Wayne and Gloria Elliott transferred their interest in the Starlight property to Mr. Conforte. The April 10, 1972, deed of trust was not recorded until May 29, 1979. The other documents, transferring interest to Mr. Conforte, were not recorded until June 1979.During the years in issue, petitioners received two-thirds of the profits of the Starlight and Mrs. Elliott retained one-third. This is true even though petitioners had total ownership of the Starlight. Mrs. Elliott would place petitioners' share of the profits, the slips from the prostitutes, and a list of the expenses paid out during the week in a paper bag. She delivered the paper bag to the Mustang and handed it over to petitioners. All of the payments from Mrs. Elliott to petitioners were in cash.In 1969, petitioners purchased property in Storey County, Nev. (hereinafter referred to as the ranch), from James O. Parker and Jeanne N. Parker. As additional consideration for the purchase, petitioners agreed to form a joint venture with the sellers for the mining of a valuable sand deposit located on the ranch.The ranch is96 located in the northern part of Storey County. It is bounded on the east by a high range of mountains, on the west by the Peri Ranch, and on the north by the Truckee River, which forms the boundary between Storey County and Washoe County. To the immediate north of the Truckee River lie railroad tracks constituting the main east-west line of the Southern Pacific Railroad. The McCarran Ranch lies to the south of the ranch and is relatively inaccessible.At the time petitioners purchased the ranch, the sole access was over an unimproved dirt road across the Peri Ranch. Traveling from the Parker Ranch across the Peri Ranch, the road in question eventually crossed the Southern Pacific right-of-way, a dangerous railroad crossing, and reached the main highway to Reno. The road across the Peri Ranch also constituted access to the Mustang brothel, which was then located solely on the Peri Ranch. In 1965, the Parkers had attempted to utilize the road over the Peri Ranch for the purpose of hauling 1173 sand from the sand deposits on the ranch. Their attempt to do so resulted in litigation, and a Court order enjoining the Parkers and others from burdening the easement over the Peri97 property by hauling sand over the road. As a result, the sand on the ranch was inaccessible. Under their agreement with the Parkers, petitioners agreed to obtain access to the ranch for the purpose of mining and selling the sand. When their negotiations for access over the Peri Ranch failed to bear fruit, they searched for alternative means.Sometime thereafter, petitioners learned that a parcel of land immediately across the Truckee River from the ranch might be available for sale. The land in question (the north parcel) was owned by Southern Pacific and was no longer on the tax rolls. In August 1972, Southern Pacific executed a quitclaim deed conveying all of its right, title, and interest to Parco Sand & Gravel Co. (Parco), reserving its railroad right-of-way and pipeline easement in return for the sum of $ 1,500. Parco was a corporation whose stock was owned by Mr. Conforte. It was initially formed to market sand on the ranch and was subsequently used in negotiations with Southern Pacific and Storey County. Parco acted solely as Conforte's nominee. The money ostensibly expended by it was actually furnished by Mr. Conforte, deposited in the clients' trust account of Stanley98 Brown, and disbursed directly to payees by check. Both Southern Pacific and the chairman of the Storey County commissioners knew that petitioners, not Parco, were to pay for the cost of the bridge, underpass, and roadway. Petitioners entered into an agreement with Southern Pacific whereby the railroad granted an easement under its tracks on the north parcel to Storey County. In return, petitioners deposited the sum of $ 55,500 with Southern Pacific to construct the underpass.Petitioners also commenced work on a bridge over the Truckee River linking the north parcel with the ranch. The easement and new bridge across the Truckee River had the effect of opening up the northern part of Storey County to development, increasing the tax base, and providing access for fire fighting. Petitioners' arrangement with Southern Pacific provided that petitioners would pay the cost of constructing the underpass, bridge, and road. Commencing in 1972, the petitioners expended funds for this purpose, including the sum of $ 8,900 in 1972, $ 55,626.98 in 1974, $ 81,547.63 in 1975, and $ 7,640.86 in 1174 1976. The $ 8,900 expended in 1972 includes the $ 1,500 paid to Southern Pacific for the99 north parcel. In April of 1974, the Storey County commissioners resolved to accept the easement under the Southern Pacific railroad tracks for the underpass. The acceptance was conditioned on the fact that it would be constructed free of cost to the county and that the project and access road would be dedicated for unrestricted public use.By deed dated October 28, 1975, Parco Sand & Gravel Co. conveyed to petitioners certain real property consisting of a roadway easement across the property which had previously been deeded by Southern Pacific to Parco. The roadway easement terminated at the Truckee River. The easement does not say whether it terminates on the north or south bank of the river.By deed dated October 28, 1975, petitioners quitclaimed and dedicated to Storey County, Nev., the roadway easement they had received from Parco. This easement was for the purpose of a public road and, as a condition for the conveyance, Storey County agreed to utilize the easement for that purpose and no other. Under the provisions of the deed dedicating the easement to Storey County, the easement automatically reverted to petitioners or their heirs should any part of it ever be used for100 a purpose inconsistent with that of a public roadway.During 1976, petitioners paid legal fees to Stanley H. Brown in the amount of $ 57,149, 80 percent of which is claimed by petitioners to be deductible as ordinary and necessary business expenses of the Mustang Ranch. Mr. Brown did not keep detailed records for the year 1976 and did not send itemized bills to petitioners. The 80 percent claimed to be a business deduction related to matters involving two grand jury investigations of petitioners. The first grand jury investigation was a Washoe County grand jury which issued its report in March 1976, and was critical of Mr. Conforte's influence in Washoe County. The second grand jury investigation involved matters relating to purported violations by petitioners of Federal immigration laws, voting laws, alcohol and tobacco tax laws, income tax and withholding tax laws, Federal firearm laws, obstruction of justice, and murder. The county grand jury specifically found that Mr. Conforte was guilty of no crimes. The Federal grand jury investigation returned an indictment in the criminal employment tax case.1175 OPINIONGenerally, the burden of proof with respect to income tax101 deficiencies is on petitioners. Welch v. Helvering, 290 U.S. 111 (1933). Absent a finding that respondent's determination is arbitrary and excessive, petitioners must go forward and establish by a preponderance of the evidence that respondent's determination is erroneous. Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935); American Pipe & Steel Corp. v. Commissioner, 243 F.2d 125">243 F.2d 125, 126, 127 (9th Cir. 1957), affg. 25 T.C. 351">25 T.C. 351 (1955), cert. denied 355 U.S. 906">355 U.S. 906 (1957). In this Court, the above rule has been applied uniformly to both omission from gross income and deduction cases. Weimerskirch v. Commissioner, 67 T.C. 672">67 T.C. 672, 674 (1977), revd. on another issue 596 F.2d 358">596 F.2d 358 (9th Cir. 1979); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324">62 T.C. 324, 330 (1974). Recognizing, however, that in the former situation petitioner must prove a negative, we have relaxed the quantum of evidence necessary to make out a prima facie case of nonreceipt of income. Jackson v. Commissioner, 73 T.C. 394">73 T.C. 394 (1979).102 On the other hand, respondent has the burden of proof if he raises a new matter at trial or seeks to impose a penalty for fraudulent underpayment. Rule 142, Tax Court Rules of Practice and Procedure. Further, respondent must prove fraud by clear and convincing evidence. Sec. 7454, I.R.C. 1954.With the above in mind, we turn to petitioners' first three arguments regarding the shifting of the burden of proof.First, citing Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), and its progeny, petitioners contend that the statutory notices in general, as they relate to omissions of income from the Mustang Ranch and the Starlight Ranch, are arbitrary and excessive.Secondly, petitioners contend they have established that respondent's determination with respect to omission of income from the Mustang Ranch and the Starlight Ranch is erroneous and that, therefore, under Herbert v. Commissioner, 377 F.2d 65">377 F.2d 65, 69 (9th Cir. 1967), revg. a Memorandum Opinion of this Court, and Cohen v. Commissioner, 266 F.2d 5">266 F.2d 5, 11 (9th Cir. 1959), revg. a Memorandum Opinion of this Court, the burden of proof shifts to respondent. 103 Thirdly, petitioners argue that respondent has changed his method of determining the taxable income of the Mustang Ranch, that this change represents new matter within the 1176 meaning of Rule 142, Tax Court Rules of Practice and Procedure, and, therefore, the burden of proof is on respondent.Specifically, petitioners allege that the following facts establish that the notice was arbitrary and capricious.(1) Allowance of only 1 month's utility expense for the year 1973.(2) The manner in which Agent Wiggins computed the deduction for payments to prostitutes, a flat 45 percent, rather than computing the deduction based upon the manner in which "board" was actually computed.(3) The failure of respondent to investigate, in any fashion, the amount of expenses known to exist.(4) The failure of respondent to allow an estimate of expenses known to exist, but at that time unsubstantiated, as computed by Agent Wiggins prior to issuance of the statutory notices.(5) The failure of respondent to attempt, independently, to investigate the receipts of the Mustang by interviewing cashiers, maids, prostitutes, or other knowledgeable persons.(6) Ignoring the community property laws, failing104 to investigate their applicability, and using the married, filing separate tax rates, those least beneficial to the petitioner.(7) Taxing all of the income to both Joseph and Sally Conforte.(8) Taxing all of the Starlight income both to Joseph and Sally Conforte and to Gloria Elliott, after being advised by Mr. Brown that the income was shared between Mrs. Elliott and petitioners.(9) Allowing only one-half of the itemized deductions to each petitioner in the year 1976.(10) Allowing only one-half of the tax paid with the joint returns to each petitioner.(11) Failing adequately to investigate and ascertain known itemized deductions.(12) Failing to attempt to ascertain or corroborate petitioners' taxable income by means of the net worth or any other method.Respondent argues that the inconsistent positions taken in the two statutory notices were protective positions which he recognizes would in part be resolved in favor of one or the other petitioner, but only with the assistance of petitioners, or after litigation. Further, respondent concedes that certain errors do exist in the determination but argues that he has been forthright and fair about the errors and that errors in 105 favor of 1177 petitioners also occurred. Thus, respondent contends that his actions do not warrant a shifting of the burden of proof because the protective nature of the inconsistent positions negates any air of capriciousness and that the errors were not of sufficient magnitude to support a finding that the determination was excessive. 1Our discussion of the burden of proof with respect to the Starlight Ranch is set out in detail infra. For reasons hereinafter stated, we find that the determinations with respect to the general soundness of106 the statutory notice, and to that portion which relates to the Mustang Ranch, were not arbitrary and excessive.Petitioners' argument that the statutory notices were arbitrary in essence asks the Court to look behind the notices of deficiency. This Court has recently restated the general rule that we will not honor such a request. Llorente v. Commissioner, 74 T.C. 260 (1980). The rare exception to the general rule, the unreported income case in which respondent rests without presenting any evidence, is not applicable to the instant case. Jackson v. Commissioner, 73 T.C. 394 (1979).The rationale for the general rule is "that a trial before the Tax Court is a proceeding de novo; our determination of a petitioner's tax liability must be based on the merits of the case and not any previous record developed at the administrative level." Jackson v. Commissioner, supra at 400; Greenberg's Express, Inc. v. Commissioner, supra at 328.Turning to the above list of alleged errors or arbitrariness, we note that items 1, 2, and 3 have been corrected either by stipulation107 or concession. Items 6 through 11 clearly represent protective positions by respondent. Further, item 6, which is discussed in detail infra, represents a genuine issue in light of the manner in which petitioners filed their income tax returns for the years in issue.When petitioners will neither assist nor cooperate with respondent in attempting to ascertain their rights to claim certain expenses or deductions, then this Court will not hear an 1178 argument by petitioners that respondent acted arbitrarily in failing to estimate such unsubstantiated claims. The Internal Revenue Code and the self-assessment system place the responsibility of maintaining records and substantiating claimed deductions upon the taxpayer. Sec. 6001. Respondent is not required to make estimations of unsubstantiated expenses or to ferret out every possible itemized deduction without the assistance or cooperation of the taxpayer. Accordingly, we find that petitioners' allegations that respondent failed to investigate and estimate unsubstantiated expenses and to ascertain petitioners' itemized deductions is without merit. Finally, we note that respondent has conceded petitioners' right to take108 certain expenses which were overlooked at the time the notices of deficiency were mailed. Items 4, 5, and 12 do not support petitioners' contention.Our decision infra makes adjustments to respondent's determination; however, those adjustments are based upon the merits of the case and not upon a finding that respondent's determination was arbitrary.Petitioners argue that, once they have established that respondent's determinations are erroneous, the burden of proof shifts to respondent with respect to the entire deficiency or, alternatively, with respect to those items to which they have proven respondent is in error. In support of this position, petitioners rely on Herbert v. Commissioner, supra, and Cohen v. Commissioner, supra. In Herbert, the Ninth Circuit appeared to hold that, once petitioners have shown that respondent's determination is erroneous with respect to unreported income, the ultimate burden of proof or persuasion shifts to respondent. However, with respect to deduction cases, the Ninth Circuit has made it clear that "after satisfying the procedural burden of producing evidence to rebut the 109 presumption in favor of the Commissioner, the taxpayer must still carry his ultimate burden of proof or persuasion." Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882, 885 (9th Cir. 1975).This case is appealable to the Ninth Circuit and to the extent that that Circuit applies a different rule with respect to the burden of proof in omission from gross income cases from the rule applied by this Court, we have bound ourselves to apply the rule of the Court of Appeals. Golsen v. Commissioner, 54 T.C. 742">54 T.C. 7421179 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1971). We do not believe that Herbert and Cohen2 require a shifting of the ultimate burden of persuasion. In Rockwell v. Commissioner, supra at 886, the Ninth Circuit specifically left open the question of the rule to be applied in omission from gross income cases. However, the Circuit Court intimated that Herbert, and the other cases, do not shift the ultimate burden of persuasion but only forewarn respondent of the consequences should a petitioner present110 evidence that the deficiency is erroneous and "there is added to the record (whether from the Commissioner's or taxpayer's witnesses or documents) no contradictory evidence supporting the bare assessment." Rockwell v. Commissioner, supra at 886 n. 1. The court then added that Caratan v. Commissioner, 442 F.2d 606">442 F.2d 606 (9th Cir. 1971), revg. 52 T.C. 960">52 T.C. 960 (1969), supported this proposition. We believe the rule of the Ninth Circuit is expressed in note 1 of the Rockwell case. While possibly not identical, this approach is at least similar to the rule of this Court in that it recognizes a relaxation of the quantum of evidence necessary to establish nonreceipt. However, application of this rule is inappropriate in the instant case. Both parties have presented a substantial amount of substantive evidence in support of their respective positions. Thus we are not here dealing with a "bare assessment."111 Petitioners' final contention with respect to shifting the burden of proof is that respondent is no longer relying on the trick sheet as the method for calculating gross receipts of the Mustang. If respondent is using a different method of projection, petitioners contend that the act would be "new matter," thereby shifting the burden of proof on this issue to respondent. Rule 142(a), Tax Court Rules of Practice and Procedure. We note that petitioners have not argued that they were surprised and substantially disadvantaged by respondent's attempt to establish the average number of girls and their average earnings at the Mustang during the years in issue. Such argument would have been bootless, as petitioners introduced similar evidence during their case in chief in an effort to disprove the accuracy of respondent's determination. Thus, having found that petitioners were not surprised and substantially disadvantaged, we turn to 1180 the question of whether respondent is advancing a new reason in support of the deficiency or raising a "new matter." Estate of Horvath v. Commissioner, 59 T.C. 551">59 T.C. 551, 555 (1973).It is well settled that respondent's112 determination may be affirmed for reasons other than those assigned in his notice of deficiency. Estate of Finder v. Commissioner, 37 T.C. 411 (1961). Without attempting to define the term "new matter," we think it is clear in the instant case that respondent has presented the evidence in question as corroboratory of the correctness of the deficiency and not as a new theory different from, and inconsistent with, his earlier determination. Tauber v. Commissioner, 24 T.C. 179">24 T.C. 179, 185 (1955). At trial, and in his briefs, respondent has maintained that the original determination with respect to the gross receipts of the Mustang is correct, that the manner in which it was determined was reasonable, and that the evidence presented at trial supported sustaining the determination. Accordingly, we find that evidence suggesting the Mustang's average number of girls and their average earnings during the years in issue is not new matter and therefore the burden of proof has not shifted on this issue.We note that, in the absence of books and records, any method used in determining the receipts of the Mustang will be, at best, inexact113 projections. This Court, based upon the evidence presented, has the responsibility to determine the correct amount of the deficiency, if any. Sec. 6514. Projections are only an aid in making that determination. In fulfilling our jurisdictional responsibilities, this Court may utilize the projections of respondent, petitioner, or make its own, based upon the merits of the case.Mustang RanchThe next issue presented is whether petitioners failed to report income derived from the business activities carried on at the Mustang Ranch Brothel. Factual determinations required to resolve this issue include:(1) Does the trick sheet represent income for a 12 or 24 hour period?(2) What were the gross receipts for the years in issue?(3) What is the proper deduction for payment to prostitutes for each year?(4) What is the proper deduction for rent for each year?1181 (5) What amount of deduction should be allowed for such business expenses as groceries, repairs and maintenance, laundry, and other established business expenses?(6) What is the proper deduction for utilities for the year 1973?(7) What is the proper deduction for attorney's fees paid to Stanley Brown during 1976? 114 To determine petitioners' gross income from the Mustang, we must first determine their gross receipts for the years in issue.With respect to this question, we note that all taxpayers are required to "keep such permanent books of account or records * * as are sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown," in any return of tax. Sec. 1.6001-1(a), Income Tax Regs.; see Plisco v. United States, 306 F.2d 784">306 F.2d 784, 786-787 (D.C. Cir. 1962). Where a taxpayer keeps no books or records, or his records are inadequate, or where the taxpayer deliberately destroys his records, the respondent is authorized to compute income by whatever method will, in his opinion, clearly reflect the taxpayer's income. No particular method is required since the circumstances will vary in individual cases. Harbin v. Commissioner, 40 T.C. 373">40 T.C. 373, 377 (1963); see also Agnellino v. Commissioner, 302 F.2d 797">302 F.2d 797, 799 (3d Cir. 1962), affg. on this issue a Memorandum Opinion of this Court. Certainly, where the taxpayer has deliberately and willfully failed and refused115 to keep and maintain any books or records of his business transactions, or where the taxpayer has destroyed such records, the courts have not required mathematical exactness of the respondent in determining the taxpayer's income. Harbin v. Commissioner, supra at 377.Indeed the courts have reacted flexibly in fashioning allowable methods of income reconstruction. Thus, they have permitted the respondent to reconstruct a taxpayer's income by computing the average daily gross gambling revenues received over periods as short as 1 day and then projecting such average daily gross gambling income over the entire period of gambling activity shown. See, e.g., Gordon v. Commissioner, 63 T.C. 51">63 T.C. 51, 61 (1974), modified 63 T.C. 501">63 T.C. 501 (1975), affd. per curiam 572 F.2d 193">572 F.2d 193 (9th Cir. 1977) (1 day); Fiorella v. Commissioner, 361 F.2d 326 (5th Cir. 1966), affg. per curiam a Memorandum Opinion of this Court (2 days); Gerardo v. Commissioner, 552 F.2d 549">552 F.2d 549, 551, 553 (3d Cir. 1977), affg. on this issue a Memorandum Opinion of this116 1182 Court (3 days); Mitchell v. Commissioner, 416 F.2d 101">416 F.2d 101 (7th Cir. 1969), affg. a Memorandum Opinion of this Court (4 days). The rule was recently stated by the Third Circuit as follows: "Where unreported income from gambling is at issue, the projection of average daily gross receipts over a period of time in order to calculate gross income is an acceptable method of reconstruction." ( Gerardo v. Commissioner, supra at 552 n. 6.)The flexibility shown in gambling cases appears appropriate in the instant case. All books and records were either destroyed or unavailable as a result of petitioners' assertion of their Fifth Amendment privilege. The only independent document which evidences gross receipts as such is the trick sheet. Concededly, it was prepared at the Mustang Ranch and removed without petitioners' consent; nonetheless it represents actual receipts and not the projections of either party. However, the trick sheet is not without controversy. Respondent contends that it reflects the following: (1) A 12-hour night work shift, (2) for the winter of 1975, and (3) probably a weeknight. Petitioners, on 117 the other hand, contend that it represents: (1) A 24-hour period, (2) during the summer of 1975, and (3) a weekend.The stakes are clear, the record is filled with testimony that the Mustang's business was one of ups and downs, typical of the industry. Business was up during the summer and on the weekends, with downs occurring on weekdays and during the winter. The testimony spoke only of a two-season year, and the terms winter and summer were never clearly defined by either party. Petitioners, assuming the trick sheets represent a summer day, argue that any projection therefrom should reflect some form of seasonal adjustment. The greatest dispute among the parties, with respect to the trick sheet, is whether it represents a 12- or 24-hour period. Respondent, in making his determination, treated the sheet as representing a 12-hour night shift. To reflect the day shift receipts, he divided the night shift receipts in half. Then he added the night and day shift totals, and multiplied by 365 days to determine the annual receipts for the Mustang for each of the 4 years here in issue.The history of the trick sheet is sordid. It was taken from the trash of the Mustang Ranch by Joe118 Peri. Mr. Peri worked at the Mustang when he was home on school breaks. One of his duties was to burn certain trash. It was from this trash that Mr. Peri took the trick sheet. He turned it over to his father's attorney 1183 who, in turn, gave it to a Federal grand jury. Mr. Peri was uncertain with respect to the exact time of year he took the trick sheet. After reviewing his testimony before the grand jury and from the criminal employment tax trial of petitioners, Mr. Peri testified that his best recollection was that the trick sheet was taken during the 1975 Christmas season or Easter 1976; however, it may have been during the summer of 1975. If it were in the summer, it probably represents receipts from a Sunday, Monday, or Tuesday because he usually worked the first 3 weekdays, and the sheet, we assume, would represent receipts for the previous day's business.Ascertaining with certainty whether the trick sheet represents a 12- or 24-hour period is impossible. Neva Tate, the trick sheet preparer, testified that it represented a 24-hour period. However, on three previous occasions, twice before the grand jury and at petitioners' criminal employment tax trial, Ms. 119 Tate testified that it represented a 12-hour shift. Petitioners contend that Ms. Tate's answers before the grand jury reflected the accounting method used in August 1976, the month in which she was testifying, and not the 1975 method evidenced on the sheet in issue. Further, Ms. Tate testified that she was tired and upset at the time of her testimony before the grand jury. Finally, while unexplained by Ms. Tate, petitioners contend that because the criminal trial involved employment tax, not income tax, Ms. Tate's testimony on this point was not fully developed because it was totally irrelevant to the criminal case. The latter reason apparently represents the cause for petitioners' failure to cross examine Ms. Tate on this point at the first trial. Even though Ms. Tate's testimony lacked sufficient candor and consistency upon which we could find her a totally credible witness, we do accept her testimony on this point. Further, all other witnesses with knowledge of the accounting systems of the Mustang testified that the sheet represented a 24-hour period. We recognize that the testimony of Ms. Tate and Ms. Lynn, and that of Ms. Ash, petitioner Sally Conforte's sister, may have120 been prejudiced by their continued employment at the Mustang and personal friendships with petitioners. We did not find their testimony truthful for the most part, but on this point we are inclined to so find. Further, former cashiers at the Mustang who are unrelated to petitioners also testified that they believed the sheet to represent a 24-hour period. Accordingly, we find that 1184 petitioners, by a preponderance of the evidence, have established that the trick sheet represented a 24-hour period.This finding is based upon the following findings of fact:(1) That Mr. Peri obtained the sheet during either the Christmas or Easter holiday.(2) That 38 women working at the Mustang at that time of the year would probably represent the entire number of women at the Mustang. (See infra our discussion of the average number of prostitutes per day at the Mustang.)(3) That a 12-hour report would not list all the women at the Mustang.(4) That some of the women did not have earnings listed supports, we believe, a finding that the sheet represents a full report to petitioners of the earnings of all the prostitutes in the house.(5) Treating the slip of paper representing petitioner121 Joseph Conforte's withdrawal separately as opposed to cash also indicates that the sheet did not represent a shift change but a closing of a full day's books.Our finding that the trick sheet represents a 24-hour period is not without reservation. Respondent's brief on this point is well written. Ms. Ash's previous testimony that the receipts shown represented a slow day, combined with our finding that it represents a winter day and a 24-hour period, further convinces us that our determination is very conservative. We have already indicated our approval of respondent's method of reconstructing the Mustang's gross receipts. The only error determined is respondent's treatment of the trick sheet as representing 12 hours instead of 24.Petitioners have asked the Court to base its determination, with respect to the Mustang, on the average number of women working per day times their average daily earnings as determined by testimony of the prostitutes and employees of the Mustang. Respondent contends that, if the average number of prostitutes is used in making the determination, then respondent's analysis of Dr. Nelson's records and the State health records best evidence that number. 122 This analysis shows the average number of prostitutes working at the Mustang during the years at issue to be as follows: 1185 YearNumber197341.47197441.12197538.32197641.30While respondent has attempted to maximize the accuracy of the above figures, potential errors exist. Only partial-year figures were available with respect to 1973 and 1974. Dr. Nelson's records were not available for 1975 so that year's analysis is based entirely on State records. Notwithstanding those factors which make for potential inaccuracies, this analysis does substantiate the use of 38 prostitutes, the number on the trick sheet, as a reasonable approximation of the average daily number of women working at the Mustang.With respect to average daily earnings per prostitute, the testimony is extremely varied. Predictably enough, most of the prostitutes' testimony was less than candid and generally their answers were evasive. Since we are convinced that the number of women shown on the trick sheet represents a reasonably accurate estimation, it is appropriate to refer to the gross receipts figure thereon in reconstructing gross receipts for all the years in issue. 123 In short, we are satisfied that the trick sheet does not evidence an abnormally high number of prostitutes, and we are not prepared to accept the testimony of higher average daily earnings by respondent's witnesses or lower average daily earning by petitioners' witnesses. Neither party has convinced us that the receipts shown on the trick sheet are anything other than an average day's receipts. Further, in light of our finding that it most likely was taken by Mr. Peri on either a Monday, Tuesday, or Wednesday, we are convinced that it is probably a weekday's receipts and not a weekend day when business was up. Furthermore, the thrust of the prostitute witnesses tends to support the trick sheet figures as being roughly typical of their average day's earnings.We find that the gross receipts and gross income of the Mustang should be determined by multiplying the gross receipts shown on the trick sheet ($ 4,961) times the number of days in the year for each of the years here at issue.ExpensesPetitioners are entitled to deduct from the gross income figure all ordinary and necessary business expenditures paid 1186 during the years. Sec. 162(a). The parties have stipulated124 that the receipts were divided as follows:The amount realized as a result of each prostitute's activities during a shift is split evenly between the prostitute and the house. From the prostitute's share is deducted an amount, up to $ 10.00, which represents ten percent of her earnings. This latter amount also goes to the house. In the event the prostitute's share is less than $ 50.00 per shift, there is no ten percent deduction. In the event a prostitute's share is more than $ 100.00, only $ 10.00 is deducted by the house.Applying the above formula to the receipts of each prostitute as shown on the trick sheet, we determine that the prostitutes netted, and petitioners are entitled to deduct, $ 843,935 per year for each year in issue. Petitioners contend that if the Court finds that the trick sheet represents a 24-hour period and then uses the receipts figure to extrapolate gross receipts, it should use expenses shown on the trick sheet to extrapolate all the expenses of the Mustang. Put differently, they argue that the expense figure and gross receipt figure are of equal dignity. This argument has superficial appeal, but does not withstand analysis.The prostitutes were125 paid on the day succeeding the day they worked. Thus, the expense figure shown on the trick sheet represents mostly at least, the previous day's earnings of the prostitutes. Further, there is no substantiation, or breakdown of the nature, of the alleged expenses.Respondent allowed deductions for rent, salaries, utilities, groceries, taxes, and licenses for all the years in issue. In addition, he allowed deductions for bank charges and payroll taxes for calendar year 1976. This approach is far more accurate, and thus more reasonable, than that proposed by petitioners.The burden to prove that respondent underestimated or omitted expenses to which petitioners were properly entitled is on the petitioners. Rule 142, Tax Court Rules of Practice and Procedure. Except to the extent modified below (or stipulated to by the parties) we find that petitioners have failed to carry this burden.With respect to the utilities expenses, respondent allowed only 1 month's utilities for the year 1973. Petitioners contend, and we find, that they are entitled to a utilities' deduction of $ 6,082 for 1973. Respondent does not contest this adjustment.Petitioners contend that respondent's groceries126 expense of 1187 $ 150 per day is inadequate. They argue that groceries were closer to $ 200 per day; meat, $ 800 per week; 3 and dairy products, $ 300 per week; and that these figures more accurately reflect the true grocery expenses of the Mustang. The errand boy who picked up the groceries, Mr. James Peri, testified at the criminal trial that the average bill was $ 100 to $ 150. It was this testimony upon which respondent based his determination. The accuracy of this testimony is corroborated by Ms. Crisp, the cook at the Mustang. She testified that meals were prepared twice a day, breakfast and dinner, and that the errand boy picked up the needed supplies daily. Petitioners, on the other hand, rely primarily on the testimony of Ms. Lynn, the manager of the Mustang, to substantiate the existence and claimed amount of expenses. We did not find Ms. Lynn a credible witness. Accordingly, we are not prepared to make any finding of fact from her testimony. We note that she testified that groceries, excluding meat and dairy products, could run "as high as" $ 150 to $ 200 per day. Her testimony with respect to the weekly cost of meat was couched in equally uncertain terms127 -- "I could say meat could be $ 400." Further, Ms. Crisp testified that meat was not delivered but instead picked up by the errand boy. Mr. Peri worked at the Mustang off and on during 1971-76 and had occasion to work each season of the year. Thus, it seems appropriate for us to conclude that his "average" grocery estimate represents the best estimate available. The fact that respondent used the high side of Mr. Peri's estimate for each day of the year further convinces us that the amount allowed is reasonable.On the other hand, petitioners have failed to offer any other evidence on this point. They have not shown by a preponderance of the evidence that respondent's determination was erroneous. Accordingly, we sustain respondent's determination with respect to the grocery expenses and find included therein the cost of meat and dairy products.Petitioners also contend that respondent erroneously and arbitrarily failed to128 allow them a deduction for laundry supplies, cleaning supplies, paper goods, laundry cleaning expenses, and daily repairs.1188 The only evidence introduced with respect to laundry being sent out was the testimony of Ms. Lynn. We repeat that we will not make a finding of fact from her testimony. Petitioners, realizing the lack of substantiation with respect to this expense, ask the Court to apply a "Cohan" approach since the existence of the expense is known, but the amount is uncertain. See Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540, 544 (2d Cir. 1930). There was truthful testimony that the Mustang did the laundry of the prostitutes at a fee of $ 1 per article (e.g., $ 2 for a pair of socks). Thus, while respondent did not make allowances for these expenses, we are not convinced, from the evidence presented, that the expenses were not offset by the income derived from charging the prostitutes for laundry service or that the laundry was actually sent out to a cleaner.With respect to the Petrolane, sheets, and paper goods expenses, petitioners have again failed to present any evidence upon which the Court can establish the existence of the expense 129 or make an estimation of the amount. The burden of proving the existence of an expense and the amount thereof is on petitioners. They could have satisfied this burden by a number of different methods.There is a probability that such expenses were incurred. However, when petitioners fail even to try to substantiate the existence or amount of the claimed deduction, such as in this case, then they fail to carry their burden of proof. Accordingly, we must sustain respondent's determination with respect to these items. We cannot help but point out that the uncertainty as to these items is of petitioners' own making and not that of respondent or this Court. Under this circumstance, we find no justification for allowing deductions for these items and would not feel comfortable in applying Cohan v. Commissioner, supra.Petitioners argue that they paid a rental expense of $ 6,000 a month. Respondent, based on the testimony of the landlords at the employment trial, allowed a rental expense deduction of $ 500 a month. At the trial of the instant case, the landlords affirmed their testimony of the prior trial. According to the landlords, they were paid 130 $ 500 a month for years 1968 through 1977, with an increase in 1978 to $ 1,000, and in 1979 to $ 6,000 per month. Records of the payments do not exist because petitioners always paid the rent in cash. Petitioners entered into the record tapes of conversations between Mr. Conforte and the landlords 1189 which sufficiently impeached the landlords' testimony to prevent making a finding therefrom. In fact, the landlords' testimony was unreasonable, which was consistent with their demeanor and inappropriate attitude on the stand. They contend that for 9 years the rent went unchanged but that in 2 years it was increased 1,200 percent by reason of inflation. We believe that the increase was due to change in method of payment in 1979 from cash to check. Logic dictates this result. During most of the years in issue, petitioners were dependent upon the landlords for a location upon which to operate the Mustang. In late 1976, petitioners had completed building the new Mustang. To believe that petitioners paid only $ 500 a month, when they were totally dependent upon the landlords, and $ 6,000 a month, subsequent to the opening of the new Mustang, is unrealistic. We conclude, based131 upon the record presented, that petitioners paid $ 6,000 a month rent during all years here in issue.Legal FeesPetitioners paid $ 57,149 in legal fees to Stanley Brown during 1976. Petitioners contend that they are entitled to deduct 80 percent ($ 45,719.20) of that amount as a business expense of the Mustang Ranch, or under section 212(3), as tax advice. Respondent contends that the testimony by Mr. Brown was too general to permit allocation of the fees to deductible legal services.In United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 49 (1963), the Supreme Court held that the deductibility of legal expenses is determined by the "origin" and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayers. Mr. Brown stated that the 80-percent figure represented legal work related to a Washoe County grand jury report issued March 1976, a Federal grand jury investigation, litigation involving an ejectment action brought by the landlords of the Mustang, and a railroad crossing accident near Mustang.According to Mr. Brown's testimony, the Washoe County grand jury work accounted132 for the largest portion of the fees. That grand jury reportedly "criticized certain public officials for dealing with Mr. Conforte -- allegedly dealing with Mr. Conforte. They criticized his influence in the community." Mr. Brown's efforts were in an attempt to prevent the publication of the report.1190 The Federal grand jury investigated income tax evasion, withholding tax violations, firearms violations, immigration violations, obstruction of justice, and possibly murder. An indictment for withholding tax violations resulted from that investigation.Based upon a thorough review of Mr. Brown's testimony, we further allocated the 80-percent figure as follows:Washoe County grand jury$ 32,003.4470%Federal grand jury6,857.8815%Litigation6,857.8815%Respondent concedes that the litigation involving the railroad crossing accident and the ejection action directly related to the operation of the Mustang. Accordingly, we conclude it is deductible as an ordinary and necessary business expense under section 162. We find that one-half of the fees allocated above to the Federal grand jury investigation involved operation of the Mustang and are deductible under133 section 162. With respect to the Washoe County grand jury report, we find that its origin was personal in nature. The Mustang Ranch, as stated earlier in our findings of fact, is located in Storey County, not Washoe County. While Mr. Conforte's reputation and influence in Washoe County may have resulted from his ownership of the Mustang, we will not infer that the investigation involved the actual operation of the Mustang. A negative grand jury report might, as a practical matter, have damaging consequences to Mr. Conforte's operation of the ranch, but that is not a sufficient ground for deducting the legal expenses. See Nadiak v. Commissioner, 356 F.2d 911">356 F.2d 911, 912 (2d Cir. 1966), affg. a Memorandum Opinion of this Court.Starlight RanchMiko was a prostitute at the Starlight Ranch during part of the years here in issue. Prior to her deportation, she was interviewed by the IRS and the Immigration and Nationalization Service on two separate occasions. Among other things, Miko stated she earned $ 20,000 a year as a prostitute at the Starlight. Respondent, utilizing the State health records, then determined the average number of prostitutes working134 at the Starlight. Respondent projected the Starlight's gross receipts by utilizing Miko's statement of her earning ability as an average 1191 and applying that to the average number of prostitutes working at the Starlight. Petitioners, relying on the Court's exclusion from evidence of the statements of Miko, argue that respondent's determination concerning the Starlight is arbitrary and capricious as a matter of law. Thus petitioners argue that the burden of proof is on respondent.The fact that Miko's statements were not admitted into evidence does not automatically make respondent's determination arbitrary. Respondent's determination may rest in part upon inadmissible evidence. Greenberg's Express, Inc. v. Commissioner, supra.However, after a careful review of the testimony of prostitutes who worked at the Starlight and the Internal Revenue agent who interviewed Miko, we find that she was indeed an above average earner. Therefore, the projection based upon her earning ability times the average number of prostitutes at the Starlight is erroneous.Were there no other evidence with respect to the Starlight, we might be in the position contemplated135 in Herbert and Cohan: evidence that respondent's determination of unreported income is erroneous and a void of evidence upon which to determine the correct deficiency, if any (see page 1179 supra). In this situation, petitioners would have effectively carried their burden of proof.However, we have no such void of evidence. Mrs. Elliott, the manager of the Starlight during the years in issue, testified, as did prostitutes who worked at both the Mustang and the Starlight. Unfortunately, the amount and probative value of the evidence presented with respect to the Starlight is relatively minimal in comparison with the voluminous evidence concerning the Mustang. In addition, the testimony of Mrs. Elliott was self-serving because she shared in the profits and has her own case pending before this Court. Nonetheless, a thorough review of the record and evidence convinces us that a determination on the merits can be reached.We start out by noting that respondent's determination was based upon two factors: (1) The average number of prostitutes, and (2) a presumption that Miko's earnings represented what each of those prostitutes could earn.Respondent determined the average136 number of prostitutes working at the Starlight by reviewing the State medical records of examinations given at the Starlight. The agent preparing the determination, upon which the deficiency was based, had figures 1192 for 1973 through 1975, showing an average number of between 13 and 18 women during those years. Since respondent did not have any figures for 1976, he "rolled over" the 1975 figure and used it for the next year's average.During trial, respondent placed into evidence an exhibit which summarized the medical examination slips which had been submitted by Dr. White, the Starlight's regular physician. After comparing the State records with Dr. White's records respondent determined, in this trial exhibit, that the average number of prostitutes working at the Starlight on a daily basis was as follows:YearNumber197414.3197517.1197615.4To reach this figure, prostitutes who were examined twice during a week were eliminated. However, a weighted averaging method was used which presumed that each prostitute worked the entire week. Further, women who may have been examined on their way out of the Starlight would also be included. On the other137 hand, women who worked at the Starlight but were examined by a doctor other than Dr. White -- and this did occur occasionally -- would not be included in the above average.Again, we are faced with potential error on both the high and low sides. After thoroughly reviewing the testimony of the prostitutes and Dr. White, and our own review of the exhibits, we find that the above average should be reduced by three women per day. Accordingly, we find the average daily number of prostitutes working at the Starlight to be as follows:YearNumber197411.3197514.1197612.4We believe the above figures more accurately take into account the time when women were checked on their way out, did not work the entire week, or were unable to work because of illness, contrasted with the number of times women were examined by someone other than Dr. White.With respect to the year 1973, petitioners failed to present any 1193 evidence that the average number of women working at the Starlight was not 13 as determined by respondent. Furthermore, this number is consistent with the number of prostitutes we have just found for the other years in issue. Petitioners have given us138 no reason to refuse to accept respondent's determination on this point; they have not carried their burden.The next part of the question presented is the average earning per prostitute per year. The average prostitute grossed $ 130.55 per day at the Mustang. According to the testimony of Ms. Moore, a woman who worked at both brothels, she could earn only one-half as much at the Starlight as compared to the Mustang. It is true that, unlike the Mustang, there were other brothels within the immediate vicinity of the Starlight. Further, it can reasonably be inferred from the record that the Starlight was not as well publicized or known throughout the area as the Mustang. Accordingly, we find that the average prostitute at the Starlight grossed approximately $ 75 per day. Based upon our analysis of the Mustang, we know that the management received approximately 53.4 percent of the gross amount. 4139 There was also evidence that the Starlight had gross income from the sale of liquor and T-shirts. However, due to the total lack of evidence concerning the amount of income, we make no finding that these sales resulted in a gross profit and net taxable income to petitioners. Notwithstanding our reluctance to make such a finding, the existence of these sales indicated to us that our above finding of gross receipts and income is a conservative determination.With respect to the expense of the Starlight, the record is void of credible testimony. 5140 The burden of proving these expenses was upon petitioners. The testimony presented on this point by petitioners was by Mrs. Elliott and her accountant, Mr. Crawford. 1194 The Court said at trial it would not make a finding of fact for either party from Mr. Crawford's testimony. 6 The same is true with respect to Mrs. Elliott's testimony. Accordingly, in the absence of any evidence to the contrary, we sustain respondent's determination with respect to the expenses of the Starlight, except as otherwise changed by either stipulation or agreement of the parties.We next consider those issues which relate to petitioners, directly, as opposed to businesses in which they shared an ownership interest. These issues include: (1) Whether the Form 1040 filed by petitioners constitutes a viable return for all purposes; (2) whether petitioners are entitled to the benefits of section 1348 (i.e., the maximum tax provision); (3) whether petitioners are entitled to deductions in 1974-76 under section 616, or alternatively, as a charitable contribution in 1976; (4) whether petitioners are liable for the addition to tax under section 6653(b) for fraudulent underpayment; and (5) whether the statute of limitations bars assessment for calendar year 1973.During the years 1973 through 1976, petitioners jointly executed a Form 1040 U.S. Individual Income Tax Return. Each contained only the taxpayers' names, address, social security numbers, filing status, exemptions, an amount designated as taxable141 income, and computations of income and self-employment tax. Attached to each Form 1040 was a statement which set forth petitioners' belief that Mr. Conforte was under criminal investigation and that detailed information would be used against him in a criminal proceeding. 7 Petitioners contend 1195 that under the circumstances of this case, they were justified in filing the Form 1040 as they did and that it constitutes a valid return for all purposes.142 It is well settled that a taxpayer's obligation to file a return does not violate his Fifth Amendment privilege against self-incrimination. United States v. Sullivan, 274 U.S. 259">274 U.S. 259 (1927). On the other hand, any disclosure on the return represents a waiver of the taxpayer's privilege with respect to the information disclosed. Garner v. United States, 424 U.S. 648">424 U.S. 648 (1976).This Court has long held that a Form 1040 filed within the allocated time will not qualify as "a return" when it does not state specifically the amounts of gross income and the deductions and credits claimed. Sanders v. Commissioner, 21 T.C. 1012">21 T.C. 1012, 1018 (1954), affd. 225 F.2d 629">225 F.2d 629 (10th Cir. 1955).We recognize that requiring a taxpayer to claim the privilege at the time he files his Form 1040 and our rule of specificity with respect to the amount of gross income and deductions claimed can potentially conflict. However, the Fifth Amendment claim should relate to the source of the income and not the amount, for even income obtained by illegal means must be reported. See James v. United States, 366 U.S. 213 (1961).143 Further, a taxpayer should exercise the privilege on an item-by-item basis so that the propriety of the claim could be tested properly. Heligman v. United States, 407 F.2d 448">407 F.2d 448, 450-451 (8th Cir. 1969).Petitioners contend that detailed disclosure on a return "could furnish leads relating to sources of income for earlier years under criminal investigation; disclosure of dividends and interest lead to evidence of net worth increases; disclosure on depreciation schedule and Schedule D show acquisition dates and cost of assets for net worth purposes." The point of petitioners' contention appears to be that the Fifth Amendment privilege can be claimed on the tax return as a defense for past violations of income tax laws. This position is clearly erroneous. In Garner, the Supreme Court expressly limited its decision to "only those [claims of privilege] justified by a fear of self-incrimination other than under the tax laws." (Emphasis added.) Garner v. United States, supra at 650 n. 3. Thus, a taxpayer cannot use the privilege to further efforts to evade payment of taxes. Stated differently, but traditionally, a taxpayer144 may not use the privilege as a sword instead of the shield for which it was 1196 intended. United States v. Carlson, 617 F.2d 518">617 F.2d 518 (9th Cir. 1980); United States v. Schmitz, 525 F.2d 793">525 F.2d 793, 795 (9th Cir. 1975).The exercise of the privilege with respect to nontax matters requires weighing the taxpayer's claim to constitutional protection against the need for public revenue collection which by necessity must rely upon self-assessment. See California v. Byers, 402 U.S. 424">402 U.S. 424, 427 (1971). Where the taxpayer makes a blanket refusal to answer any question on the return, the submitted Form 1040 is not a return. See United States v. Daly, 481 F.2d 28">481 F.2d 28, 30 (8th Cir. 1973). In such situation, respondent is without sufficient information to detemine whether petitioners' self-assessment has been properly determined.In the case before us, petitioners' Form 1040 mirrors that of a blanket refusal. Neither a gross income figure nor the amount of deductions claimed appear on the Form 1040. The Form 1040 filed by petitioners does not provide sufficient information to permit145 computation and assessment. Effectively, petitioners' returns only state tax owed; by looking at the amount of tax paid respondent could have determined most of the other information provided, except for petitioners' names and social security numbers. To provide any less information would have been a violation of a criminal statute. See sec. 7203. Nor did petitioners attempt to make an item-by-item assertion of the privilege. They claimed any further information, required either in the Form 1040 or the schedules required to be attached thereto, was privileged. Balancing petitioners' right against self-incrimination and the respondent's right and need for the information, we conclude that the requirement that they provide such information is not a violation of their Fifth Amendment privilege.We do not believe that the recent decision of the Ninth Circuit, to which any appeal in this case lies, in United States v. Long, 618 F.2d 74">618 F.2d 74 (9th Cir. 1980), requires a different result under our rule established in Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. 146 denied 404 U.S. 940">404 U.S. 940 (1971). 8 In the Long case, the taxpayer at least made a pretense of filling out his return by answering the spaces provided with respect to income (i.e., "Gross Income," "Adjusted 1197 Gross Income," and "Taxable Income") with a zero. It can be argued that a zero is a numeral and accordingly an amount was given where required by the Form 1040, an amount that can be challenged. Here, petitioners made no efforts to respond to the demands for information concerning gross income and adjusted gross income. The essential information upon which verification of the petitioners' calculation of tax owed would be based. Thus petitioners gave no information that would permit any sort of audit.It follows from our foregoing discussion that we find the Forms 1040 filed in each of the years in issue do not qualify as returns.The next issue presented is whether petitioners are entitled147 to the benefits of section 1348. That provision provides for a 50-percent maximum tax rate on earned income.To be entitled to the benefits of section 1348, a married individual must file a joint tax return for the taxable year. Sec. 1348(c). We have already found that petitioners did not file a return for the years in issue. See supra. Accordingly, we find that petitioners may not elect the section 1348 maximum tax provisions.The next issue is whether petitioners are entitled to deductions in 1974-76 for the cost of the road, bridge, and underpass (road) under section 616 as a "development expenditure."Section 616 provides that there shall be allowed as a current deduction in computing taxable income "all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit * * if paid or incurred after the existence of ores or minerals in commercially marketable quantities have been disclosed." Sec. 616(a). However, section 616(a) specifically excludes from its coverage "expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167."The burden148 of proving that the expenditures were for the development of the sand deposit and were incurred after commercially marketable quantities of the sand had been discovered is on petitioners. Santa Fe Pacific R.R. Co. v. United States, 378 F.2d 72">378 F.2d 72, 75 (7th Cir. 1967). In the case before us, petitioners have failed to prove either fact. With respect to this 1198 issue, the only testimony is that of Mr. Brown, petitioners' counsel.Mr. Brown testified that the sand deposit was a very fine quality of sand and that it had added value because it was only a short distance from Reno. However, when asked whether Parco, the corporation formed to market the sand, had any income, he responded in the negative. He then qualified his answer by stating his belief that Mr. Conforte had received $ 700 from the sale of sand in 1976. 9 Such testimony falls far short of that necessary to prove the marketable nature of the sand deposit.149 With respect to the purpose of the road, Mr. Brown inferred, but did not specifically state, that the reason for building the road was to allow development of the sand deposit. The exhibit indicates that that was a purpose. However, the facts muddy this evidence because the road provides one of only two means of reaching the new Mustang. The other route was over the property of the Peri brothers, with whom, we surmise, it would be difficult to have a stable and friendly relationship. By building the road, petitioners were able to remove their reliance upon the Peris for both location of the old Mustang and access to the new Mustang. Thus, it appears that one of the purposes for building the road was to protect the continued operation of the Mustang. Petitioners have not attempted to allocate between the different purposes. Thus, while we do not find that the sole reason for building the road was to facilitate the building of the new Mustang, we do find petitioners have failed to establish by a preponderance of the evidence that the purpose was for "development" within the meaning of section 616.Finally, we note that petitioners have failed to establish that the road is not150 depreciable. Petitioners concede the road has a useful life independent of the sand deposit. The logical conclusion from this fact would be that it is depreciable. Cf. Amherst Coal Co. v. United States, 295 F. Supp. 421">295 F. Supp. 421 (S.D. W. Va. 1969), affg. an unreported District Court decision. Being a depreciable asset of either venture (Parco or Mustang) would preclude current deductibility of the expenditure under section 616.Petitioners contend that they are entitled to a charitable 1199 contribution deduction under section 170 by reason of their dedication of the roadway easement to Storey County.After purchasing the north parcel, constructing the bridge over the Truckee River, depositing funds with Southern Pacific for the purpose of constructing the underpass, petitioners caused Parco to grant them a roadway easement over those portions of the ranch and north parcel covered by the road. Immediately thereafter, they dedicated the easement to Storey County, retaining a reversion should the dedicated easement ever cease being used as a public roadway. The dedication was accepted by the County in March of 1976.Respondent contends that, as a factual151 matter, Storey County did not acquire its right to the bridge or underpass by reason of the petitioners' dedication. With respect to the underpass, we agree with respondent. Storey County acquired its rights in the underpass directly from the Southern Pacific Railroad. Further, the right to the land on which the underpass was constructed was clearly excepted in the original deed from Southern Pacific to Parco. Because Parco did not own the right-of-way, petitioners could not have owned it either, since they acquired their interest from Parco. With respect to the bridge, respondent contends that the roadway easement terminated at the Truckee River and therefore did not include the bridge. The resolution of acceptance of dedication clearly indicates petitioners dedicated roadways over two parcels in both Storey and Washoe Counties. While the exhibits may conflict on this point, we think it is clear, and find, based on Mr. Brown's testimony and the resolution, that petitioners dedicated both the bridge and the roadway.Respondent, relying on Taynton v. United States, an unreported case ( E.D. Va. 1960, 5 AFTR 2d 1466, 60-1 USTC par. 9458),152 and Minzer v. United States, an unreported case ( N.D. Tex. 1969, 35 AFTR 2d 75-1416), contends that petitioners' contribution of the roadway does not qualify as a charitable contribution because petitioners were the "chief economic beneficiaries of the roadway." Petitioners contend that they did not receive any economic benefits from the dedication, other than a possible tax deduction. Further, they claim they opened access to the public out of true "disinterested generosity."It cannot be gainsaid that petitioners were the chief economic beneficiaries of the roadway. By constructing the roadway, petitioners were able to avoid a $ 65,000 forfeiture to Mr. Parker 1200 for failing to arrange access to the sand deposit. Further, petitioners were able to insure continued access to the new Mustang without having to rely on use of the Peris' property. Finally, we assume that this new accessibility enhanced the fair market value of petitioners' property.Petitioners contend that this case is controlled by Collman v. Commissioner, 511 F.2d 1263 (9th Cir. 1975), revg. a Memorandum Opinion of this Court. In Collman153 , the Court of Appeals held that the trial court erred in finding that the taxpayer had made the dedication in exchange for a zoning change or some other direct economic benefit. Collman v. Commissioner, supra at 1269. In the case before us, petitioners clearly received economic benefit from the exception that the roadway be maintained as a public right of way. In this respect, the instant case more closely resembles United States v. Transamerica Corp., 392 F.2d 522 (9th Cir. 1968), where the taxpayer conveyed a private roadway on the understanding that the city would improve and maintain it as a public street to the taxpayer's benefit. In that case, the court had no difficulty in finding that the taxpayer received a direct economic benefit. United States v. Transamerica Corp., supra at 524.Even assuming petitioners were entitled to a charitable contribution deduction, the amount to which they would be entitled has not been established. We have found that petitioners did not dedicate the underpass. Thus, petitioners have dedicated only the bridge and a portion of the roadway. Petitioners154 contend that the actual cost of the bridge and roadway represents the fair market value of the contribution. We do not agree. As previously stated, petitioners, by making conditional the dedication, effectively retained an economic benefit in the roadway. We are not prepared to find that the fair market value of the right-of-way to the public in fact equals the cost of the underpass, bridge, and road.Accordingly, we conclude that petitioners are not entitled to a charitable contribution deduction under section 170 for their dedication of the roadway.FraudThe final issue presented is whether any of the underpayment of tax in 1973 through 1976 was due to fraud within the meaning of section 6653(b). Fraud is an actual intentional wrongdoing; 1201 the intent required is the specific purpose to evade a tax believed to be owing. McGee v. Commissioner, 61 T.C. 249">61 T.C. 249, 256 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975), cert. denied 424 U.S. 967">424 U.S. 967 (1976). In order to prove an underpayment is due to fraud, respondent must prove, by clear and convincing evidence, that petitioner had the specific purpose155 and intent to evade tax. Sec. 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure. The existence of fraudulent underpayment can be established by circumstantial evidence and reasonable inferences drawn from the record. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1005 (3d Cir. 1968). However, the mere suspicion of fraud is insufficient and it will not be imputed or presumed. Carter v. Campbell, 264 F.2d 930">264 F.2d 930, 935 (5th Cir. 1959).We have already established that petitioners underreported their income from the Mustang and Starlight. Therefore, the primary focus, with respect to the fraud issue, is whether the resultant underpayment of tax, or any part thereof, was due to intent by petitioners to evade tax.Substantial discrepancies between petitioners' net income and reported income for 4 successive years strongly evidence an intent to defraud the Government. Rogers v. Commissioner, 111 F.2d 987">111 F.2d 987, 989 (6th Cir. 1940). Petitioners correctly contend that, where the finding of a consistent underpayment is based upon petitioner's failure to overcome the presumptive correctness of 156 a deficiency, that finding will not be regarded as proof of fraud. George v. Commissioner, 338 F.2d 221">338 F.2d 221, 223 (1st Cir. 1964). However, as we stated earlier, our previous finding of underpayment was not based upon the procedural rules with respect to burden of proof, but upon the substantial amount of evidence before this Court. Put differently, we have found that there was substantial affirmative evidence of consistent underpayment of tax by petitioners.A further indication of fraud is the destruction of records. Spies v. United States, 317 U.S. 492">317 U.S. 492, 499 (1943). The evidence clearly establishes a pattern of burning papers at the Mustang. Specifically, the papers in the trash can next to the cashier were to be burned. Contrasting this practice was the general policy of placing trash in a pickup truck which was used to take trash to the Mustang dump. Notwithstanding the fact that papers other than the business records were occasionally destroyed and that the burning was done in a nonsecretive manner in clear view of 1202 the public parking area, these actions evidence an intent to destroy or at least minimize 157 the existence of any business records. Further, there is no evidence that any permanent accounting records were maintained with respect to either the Mustang or the Starlight. To the contrary, with respect to the Starlight, it is clear that contemporaneous records were not maintained nor did they exist at the time of trial. With respect to the records of the Mustang, Mr. Conforte has asserted his Fifth Amendment privilege. We have drawn no negative inference therefrom. However, the assertion of this constitutional right is no reason for us to ignore, as petitioners would have us do, the fact that the manager of the Mustang never saw any permanent records.Petitioners operated almost exclusively in cash throughout the years in issue. The Mustang employees were paid daily in cash, and expenses of the Mustang were also paid in cash. This fact, alone, would not be significant. However, Mr. Conforte had been convicted of tax evasion in earlier years based upon a net worth analysis. One of the methods of preventing a net worth reconstruction of income is to operate solely in cash. We think it is proper to take into consideration a taxpayer's knowledge of the indirect effects of158 his actions in determining whether those acts were taken to avoid taxes.Direct or clear-cut evidence of intent to evade taxes is seldom available. It is for this reason that we permit circumstantial evidence to be utilized to establish fraud. Pigman v. Commissioner, 31 T.C. 356">31 T.C. 356, 370 (1958). Further, the question of whether petitioner had the requisite fraudulent intent is resolved from a consideration of the entire record.In addition to consistent and substantial underpayments, lack of knowledge by anyone other than petitioner of the existence of any permanent business records, and the operating almost exclusively in cash, Mr. Conforte owned the property where the Starlight was located in the name of a nominee for approximately 6 years. A quitclaim deed from Mrs. Elliott (also known as Kitty Bono) to Mr. Conforte dated June 18, 1973, was not recorded until June 1, 1979. Prior to the quitclaim deed, Mrs. Elliott, on April 10, 1972, had received title to the Starlight property subject to a deed of trust. Also on April 10, 1972, Mr. Conforte was assigned the deed of trust. This assignment was not recorded until June 4, 1979. Thus, over a 6 or 7159 year period, 1203 Mr. Conforte was the actual owner of the Starlight property, while recorded title was in someone else's name.Petitioners contend that, because their attorney advised respondent that they owned an interest in the Starlight, the fact that the property was in someone else's name should not be held against them. While petitioners' candor may militate in their favor, it does not make the fact that property was held in the name of a nominee, irrelevant. Petitioners' attorney apparently did not disclose the extent of petitioners' interest in the Starlight.Consistent and substantial understatement of income, operating exclusively in cash, destruction of records, and holding of property in the name of a nominee are indicia of the requisite fraudulent intent. See Spies v. United States, supra. After an exhaustive review of the record we are convinced that the evidence clearly establishes petitioners' understatement of income was with intent to evade tax. Accordingly, we sustain respondent's addition to tax under section 6653(b).Petitioners argue that, even if Mr. Conforte had the requisite intent, the evidence is insufficient to 160 sustain the fraud penalty with respect to Mrs. Conforte. We do not agree. The evidence clearly establishes that Mrs. Conforte was knowledgeable with respect to operations of the Mustang and was there off and on during the years in issue. Dr. Nelson testified that he would occasionally examine Mrs. Conforte and have medication sent to her at the Mustang. Other witnesses testified that they were instructed by Mrs. Conforte to burn paper. Based upon the entire record, we are convinced that, at the time Mrs. Conforte signed the Form 1040, she knew that it understated income. Further, we find that, at the time Mrs. Conforte filed the Form 1040 for each of the years in issue, she understated income with intent to evade tax.Petitioners contend that respondent incorrectly computed the addition to tax for fraudulent underpayment. Section 6653(b) provides that "if any part of any underpayment * * is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment." The term underpayment is defined in section 6653(c), in so far as applicable here, as a deficiency as that term, in turn, is defined in section 6211.Section 6211 defines deficiency, again 161 as applicable here, as the amount by which the true tax due exceeds the sum of: (1) 1204 The amount shown by the taxpayer as the tax due on his return if a return was made (sec. 6211(a)(1)(A)), and (2) amounts previously assessed (or collected without assessment) as a deficiency (sec. 6211(a)(1)(B)).Petitioners contend that the amount of tax shown on their Form 1040 qualifies as an "amount shown as the tax by the taxpayer upon his return" within the meaning of section 6211(a)(1)(A). Alternatively, petitioners contend that the amount of tax shown on their Form 1040 represents an amount previously assessed (or collected without assessment) under section 6211(a)(1)(B). Respondent argues that the Form 1040 timely filed by petitioners does not constitute a return for the purpose of section 6211 and that the prior payment of taxes by petitioners was neither assessed nor collected without assessment as a deficiency within the meaning of section 6211(a)(1)(B). Therefore, respondent contends that the amount shown on the Form 1040 should not reduce the amount of the underpayment to which the so-called fraud penalty would apply.We have noted that section 6211(a)(1)(A) reduces the162 amount of the deficiency by the amount shown on the return. The underpayment definition section, sec. 6653(c)(1), codified a pre-1954 Code judicial doctrine which required that the return be timely filed before the amount shown on the return would reduce the amount of the underpayment. See Still, Inc. v. Commissioner, 19 T.C. 1072">19 T.C. 1072, 1076-1077 (1953), affd. 218 F.2d 639">218 F.2d 639 (2d Cir. 1955). However, as we found supra, the forms filed, though timely, did not constitute returns. Put in this light, petitioners' payments are similar to estimated tax payments which do not reduce the amount of the underpayment. Tomlinson v. Lefkowitz, 334 F.2d 262">334 F.2d 262, 267 (5th Cir. 1964). Petitioners have failed to establish why a filed Form 1040, which does not constitute a return for purposes of section 1348, 6501, or other section, should be treated as a return for the purpose of section 6211 and section 6653(c). Further, sound judicial judgment, we believe, compels us to give the same word the same meaning throughout the Code whenever possible and in the absence of statutory direction to the contrary. Therefore, 163 we find that a timely filed Form 1040 which does not constitute a return does not satisfy the requirements of section 6211(a)(1)(A).We believe that petitioners' alternate contention, that the amount paid with the filing of the Form 1040, or subsequent *1205 thereto, reduced the amount of the deficiency under section 6211(a)(1)(B), is also without merit. The amount shown by petitioners on their Form 1040 was assessed by respondent, but not as a deficiency as required by that section. Such assessment was impossible because respondent did not possess sufficient facts at the time of the payments to permit him to assert a deficiency. Finally, we note that this Court has held on prior occasion that the mere fact that respondent assessed payment made without a return does not reduce the amount of the underpayment for the purposes of section 6653(b). See Stewart v. Commissioner, 66 T.C. 54">66 T.C. 54, 61 (1976). Accordingly, we sustain respondent's method of calculating the section 6653(b) addition to tax.Decisions will be entered under Rule 155. Footnotes1. Excessiveness by itself is insufficient, "since this is the situation in many cases where the courts determine that the respondent is entitled to a deficiency in a lesser amount than that set forth in his deficiency notice. Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), used the words 'arbitrary' and 'excessive' conjunctively." Llorente v. Commissioner, 74 T.C. 260">74 T.C. 260, 267 (1980), Judge Tannenwald↩ concurring.2. See also Clark v. Commissioner, 266 F.2d 698">266 F.2d 698, 706 (9th Cir. 1959); Niederkrome v. Commissioner, 266 F.2d 238">266 F.2d 238, 241 (9th Cir. 1958), cert. denied 359 U.S. 945">359 U.S. 945↩ (1959).3. We note that the Mustang observed the religious dietary laws by serving fish on Fridays.↩4. Thus, by way of example, gross receipts and the prostitute's share would be determined as follows:Average number of prostitutes per day x Average gross receipts per prostitute per year = Gross receiptsGross receipts x 53.4 = Gross income of Starlight↩5. For example, we have had to sustain respondent's objection to the introduction of the Starlight's 1978 expense records. Consequently, we have not used that exhibit in reaching our determination.↩6. Mr. Crawford admitted that Mrs. Elliott never brought in complete expense records and that he never asked for them; he just accepted her word on what her taxable income had been.↩7. The pertinent part of the statement was, generally, as follows:"Although I would like to file a complete and detailed return, I am truly concerned that any details of my income and expense would be used against me in any criminal proceedings which the Internal Revenue Service and the Department of Justice contemplate. I therefore respectfully declare that any information for which space is contained on Form 1040, the attached Individual Income Tax Return, for my wife and myself, and which is not filled in, might lead to or uncover information which might tend to, or actually will incriminate me under either State or Federal law. U.S. v. Sullivan, 274 U.S. 259">274 U.S. 259 (1927); Marchetti v. U.S., 39">390 U.S. 39 (1968); Haynes v. U.S., 390 U.S. 85">390 U.S. 85↩ (1968)."8. Cf. United States v. Smith, 618 F.2d 280↩ (5th Cir. 1980).9. Q. Did Parco have any income?A. No. Mr. Conforte, I think, received -- from the sale of sand in 1976, about $ 700.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619145/	ATHENS BRICK & TILE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Athens Brick & Tile Co. v. CommissionerDocket Nos. 12926, 19339.United States Board of Tax Appeals14 B.T.A. 1359; 1929 BTA LEXIS 2945; January 17, 1929, Promulgated 2945 The value of a clay deposit paid in for capital stock, determined for purposes of invested capital and of allowances for depletion. G. D. Hunt, Esq., L. B. Smith, C.P.A., and J. C. Harris, C.P.A., for the petitioner. C. H. Curl, Esq., for the respondent. LOVE 1359 These proceedings result from the determination of deficiencies amounting as follows: 1921, $1,578.02; 1924, $596.20. The clay deposits paid in to the petitioner for capital stock of the petitioner in January, 1917, had an aggregate value of $117,477.80. The petitioner alleges error with reference to two issues: (1) Invested capital is understated, due to the failure to allow a value greater than $5,350 for the clay deposits, for invested capital purposes for 1921, and (2) allowances as deductions from income for depletion should amount to $2,596.37 in 1921, and $3,445.50 in 1924, in lieu of allowances by the respondent amounting respectively to $91.80 and $121.86. Upon motions duly made and granted, the petitioner was permitted to file an amended petition, and the appeals were consolidated for purposes of hearing and decision. FINDINGS OF FACT. The petitioner is2946 a Texas corporation with its principal place of business at Athens, Henderson County, Tex. C. H. Coleman started in the business of manufacturing brick in Texas in 1892, at a location within one-half mile of the plant of the petitioner. Coleman continued the manufacture of brick until 1902, when he abandoned the site he had occupied in 1892. His reasons for doing so were that the clay deposit was poor in quality and the business unprofitable. Coleman then investigated other available deposits of clay and satisfied himself that the site under consideration in this case, located about one-half mile from Athens, Tex., contained good quality clay for his purposes, and he acquired the land and established a brick-making plant, erecting the plant buildings on that portion of the land which showed little or no content of clay. The business operations of Coleman in this enterprise were fairly successful, financially. He sold his products in the States of Texas, Oklahoma, and Louisiana. The records of operations prior to 1917, however, have been destroyed. In the earlier operations from 1902 to 1360 1915, Coleman was engaged mainly in the manufacture of common brick, although2947 a small quantity of face brick was manufactured and sold, of a mixture of the upper and the lower deposits of clay. Through these earlier operations the deposits of clay nearer the surface were utilized and disposed of, resulting in the exposure of deposits, located deeper, containing high-grade clay suitable for fire brick and for face brick. In all three, strata of clay were encountered, the top stratum being some 8 or 9 feet in depth, and the lower strata containing the higher-grade clay, reaching to a depth of about 32 feet from the surface. At the time of the organization of the petitioner the deposit had been worked in a pit to a depth of 28 feet. At this time the representatives of the Evans & Howard Brick Co., of St. Louis, Mo., which concern had been conducting a branch brick manufactory in the vicinity under the name of the Athens Fire Brick Co., were endeavoring to acquire a deposit of clay in order that they might continue operations in the neighborhood, the deposit of clay they had previously been working having reached exhaustion and in addition the main building and power house of their plant having been destroyed by fire shortly before, in 1916. At the beginning2948 of 1917 Coleman was anxious to take his wife away in order to better her health, and he was unwilling to leave his brick-making business to the management of his assistants. Coleman conceived the idea of inducing R. F. Williams, formerly manager of the Athens Fire Brick Co. plant at Athens, to associate himself with the business owned by Coleman. Williams was an experienced brick manufacturer, and, in addition, was connected with a competitor and likely to personally influence the patronage of new customers. Coleman acquainted Williams with his idea and found Williams unwilling to consider a proposition unless a new plant with increased capacity were provided. As a result of the negotiations between Coleman and Williams, the petitioner was organized in January, 1917, with an authorized capital stock of $65,000 par value, of which $35,000 par value was issued to Coleman in consideration of various assets which were valued as follows: Clay deposit$5,350Other land900Plant19,750Additional equipment1,500Finished products7,50035,000Coleman turned over to Williams $5,000 par value of the stock, taking in return Williams' note for the amount of2949 the par value, and bearing interest at 8 per cent per annum. 1361 Twenty-seven thousand and one hundred dollars par value of the stock was issued for cash at par, paid in by various individuals, mainly friends or relatives of Coleman. None of the stock was offered for sale to the general public. In all, $62,100 par value of the capital stock was issued in 1917. In 1918 the remainder of the stock, $2,900 par value, was issued for cash at par, to the son of an individual who had originally subscribed for a greater amount but was prevented from taking the stock by ill health. The construction of a new plant on the site was immediately started, and it was completed by 1918. Representatives of the Evans & Howard Brick Co. had been endeavoring to persuade Coleman to sell his clay property to them. They first proposed to purchase the property on a basis of 25 cents per ton of clay deposit, but this offer Coleman refused. In the late fall of 1917, the same people offered to purchase the capital stock of the petitioner for a price of $250 per share, conditioned upon acquisition of the entire outstanding stock. This was at a time when the new plant was nearly completed by2950 the petitioner. This offer was also refused. At the date in 1917, when the property was transferred to the petitioner for stock, the clay deposits contained an aggregate of 847,705 tons of all kinds of clay. Of this tonnage approximately one-fourth was clay near the surface, of a depth of 8 feet, and the remaining three-fourths lay below the surface clay, and of an average thickness of 22 feet. The deposit was located between two railroads, with a spur track less than 1,000 feet running from the factory to both railroads. The open-pit method of quarrying was in operation, the clay being dug with plows and scrapers and hauled a distance of 400 feet to the clay sheds. In addition to the territory previously served by Coleman, the petitioner extended the sale of its products to Arkansas and Mexico. Clay consumed was recorded upon the books of the petitioner as follows: YearMilled fire clayBurned productsTonsTons191985020,711.419201,21322,119192175713,814192275519,583192375521,526192419519,091192551919,378192617615,774The allowances which were charged off on the books for depletion of the2951 clay deposit were at the following rates: 25 cents per ton in 1919, 1920, 1921, and in part of 1922; 15 cents per ton in the remainder of 1922, 1923, 1924, 1925, and 1926. 1362 In connection with the manufactured products of the petitioner, the clay which is "burned" is subject to a loss in weight of approximately 24 per cent of the weight of the finished product. Thus, where the weight of the burned product is 100 tons, the probable weight of the clay consumed was 124 tons. The output of the petitioner weighed as follows: YearManufactured burned productsSales of milled fire clayTonsTons192114,070464192418,475801The profits, according to the books of the petitioner, amounted as follows: Year:Amount1917$2,397.92191828,775.76191931,540.57192051,498.70192117,857.821922$47,658.98192354,149.52192423,880.59192535,071.29192611,019.51Selling prices of the products of the petitioner advanced slightly toward the end of 1917, and they advanced sharply in 1918. The fire clay in the deposit is of the plastic type as distinguished from flint clay. It can be worked by2952 the dry-press method and also by the stiff-mud or soft-mud method. Under a test made by the Bureau of Standards, of the United States, the fusing point was determined to be as of cone 32, which is understood in the ceramic industry to indicate a high refractory power. The deposit is uniform and unusually thick, the average of the deposits being for the United States between 5 and 10 feet thick. Clay is plentiful in Texas but fire clay of the high grade of the petitioner's is not plentiful. In the manufacture of burned-clay products, a large factor in the cost is the conveyance of the clay to the factory. About the beginning of 1917, P. E. Miller, an experienced manufacturer of pottery and hollow building tile, entered into an agreement with the authorities of Henderson County, Texas, to extract at his own expense, fire clay from the poor farm, and to pay for the clay 5 cents per ton. Clay was quarried from the site in 1917, and hauled a distance of about a mile at a cost to Miller for the haul, of 60 cents per ton. The agreement is still in operation. The clay deposit paid in to petitioner for stock had a value at the date paid in, of $117,477.80. 1363 OPINION. 2953 LOVE: The major question for decision in this case is the value of a deposit of clay at the time when it was paid in to the petitioner for stock in 1917. No questions of law are at issue. It is undisputed that the amount of the value is allowable for invested capital purposes, and also for the purpose of the computation of deductions from income by way of allowances for depletion of the deposit. The value originally entered upon the books for the clay amounted to $5,350, and has been accepted by the respondent. It appears, however, that there were many influences at work at the time when the petitioner was organized and capitalized for the purpose of taking over a going business and of expanding it through the construction and operation of a larger plant. We are satisfied that the amount is not representative of the then actual value of the clay deposit, and we are convinced of this, even though an amount of stock was sold in a restricted circle for cash at par concurrently with the acquisition of the clay deposit for stock. It is in evidence, and uncontroverted, that there was a ready market for the clay deposit at the beginning of 1917. The deposit was unusual in extent, 2954 of good quality, and favorably situated. A competitor temporarily disabled by the destruction by fire of its plant, and by reason of the exhaustion of its available clay reserve was negotiating for a purchase, and was anxious to acquire the property. We do not know what was the offer of this competitor at the beginning of 1917. At the latter part of 1917 the offer was for the entire capital stock of the petitioner on a basis of $250 per share. "Sometime in 1917," an offer of 25 cents per ton "for the clay" had been made. We agree with the respondent that this evidence is too indefinite to be relied upon as fully supporting the contention of the petitioner. However, fire clay, in the ground, in this part of Texas, was certainly worth 5 cents per ton, for an experienced manufacturer of fire clay products paid that price for clay quarried from the lands of the poor farm, in Henderson County wherein was located the petitioner's deposit, and the agreement to do so was entered into just about the time of the transfer here under consideration. After abstraction this 5-cent clay was hauled by the purchaser a distance of a mile or so at an additional cost, for the haul, of 60 cents2955 per ton. Obviously this question of expense of hauling enters into the of a deposit, and the deposit of the petitioner, due to its favorable location very near to two railroads and to its own plant site was probably worth much more than 5 cents a ton. The purchaser of the clay from the poor farm testified, and gave his opinion of 1364 the value of the clay deposit of the petitioner. Petitioner does not claim the full amount of this value, proposing to discount it over the probable life of the deposit, using a mathematical formula. Upon a careful consideration of the record upon which this case must be decided we feel that the petitioner has sustained the burden of proof laid upon it. With no satisfactory evidence to show that the contention of the petitioner is not correct, we conclude that the value claimed, amounting to $117,477.80, should be allowed for purposes of invested capital and for the computation of the deductions for depletion. The petitioner further contends that in the computation of the number of tons of clay extracted in each of the taxable years, recognition should be given to the fact that there is a loss of weight of the clay incident to the burning, 2956 consequently the amount of depletion charged off on the books and claimed in the returns does not measure the amount of clay extracted. The original records of the petitioner from 1919 to 1926, inclusive, are in evidence in the form of monthly vouchers prepared by Williams, who is now dead, charging off costs of manufacture and allowances for depletion. Williams was a practical and experienced manufacturer of clay products, probably well acquainted with the loss in weight of the clay. Some of the vouchers bear signs of probable consideration by the maker of them, of the loss in weight of the clay. Depletion should be based on the value herein determined, and on the clay, rather than the finished product tonnage. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619146/	APPEAL OF HERALD-DESPATCH COMPANY.Herald-Despatch Co. v. CommissionerDocket No. 4556.United States Board of Tax Appeals4 B.T.A. 1096; 1926 BTA LEXIS 2078; September 27, 1926, Decided 2078 1096 1. The Board has no jurisdiction to entertain an appeal from a determination by the Commissioner of deficiencies in excise taxes for the years 1909, 1910, 1911, and 1912, levied under the Corporation Excise Tax Act of August 5, 1909, or an appeal from a determination by the Commissioner of deficiencies in income taxes for the years 1913, 1914, and 1915, levied under the provisions of the Income Tax Act approved October 3, 1913. 2. Upon the evidence, held, that the actual cash value, at the date of acquisition, of the circulation of the Decatur Despatch, acquired by the petitioner for capital stock in 1906, was $4,500, and the invested capital, as determined by the Commissioner, should be increased by this amount. The evidence is insufficient to establish the value of the archives and good will acquired from the Despatch at the same time. 3. The circulation and good will of the Decatur Evening Republican, having, at the time, an actual cash value of $18,237.01, of which $15,000 was the actual cash value of the circulation, was paid in to the petitioner by its stockholders in 1899, without any consideration therefor. Held, that the circulation structure2079 of a newspaper so acquired is intangible property within the purview of section 207 of the Revenue Act of 1917 and section 325 of the Revenue Act of 1918. 4. Intangible property paid to a corporation, without any consideration therefor, may not be included in invested capital, under the provisions of section 207(a)(3) of the Revenue Act of 1917 and section 326(a)(3) of the Revenue Act of 1918, as paid-in surplus, 5. The Commissioner's reduction of petitioner's invested capital for the year 1919, on account of income and profits taxes for the years 1917 and 1918, is in conformity with the provisions of the regulations in force in respect of the year 1919, and, therefore, correct under the provisions of section 1207 of the Revenue Act of 1926. 6. Since the Commissioner has not asserted a deficiency for the year 1917, because of the running of the statute of limitations, this Board is without jurisdiction to consider the issues raised by this appeal in respect of that year. 7. The archives of a corporation engaged in the publication of a newspaper are tangible property, and their March 1, 1913, value is not susceptible of ascertainment by the formulae usually employed for2080 the valuation of intangibles. Petitioner's archives had a fair market value at March 1, 1913, of $12,000. 8. Upon the evidence, held, that the fair market value, at March 1, 1913, of petitioner's intangible assets was not in excess of the value of $102,548.86 placed thereon by the Commissioner, for the purpose of determining the gain or loss resulting from the sale thereof in 1920. Arnold L. Guesmer, Esq., for the petitioner. Arthur J. Seaton, Esq., for the Commissioner. ARUNDELL1097 The Commissioner has determined a deficiency in income and profits taxes for the taxable years 1909 to 1920, inclusive, in the net amount of $9,857.05, made up as follows: YearDeficiencyOverassessment1909$131.411910167.731911159.061912116.53191317.341916$28.6419181,783.061919230.92Two-month period Jan. 1 to Feb. 29, 192010,845.76Total11,668.751,811.701098 Five questions are presented for our consideration, as follows: (1) The inclusion in invested capital of $4,800 alleged to be the value of archives, circulation, and good will acquired for capital stock. (2) The inclusion2081 in invested capital of $18,237.01 as paid-in surplus, representing the value of certain assets paid in by the stockholders. (3) The reduction of invested capital for the taxable year 1919 by the amount of income and profits-tax liability for the years 1917 and 1918, respectively, prorated from the dates such taxes, or any installments thereof, became due and payable. (4) Whether the petitioner deducted 1916 income taxes in the amount of $628.73 in computing its taxable net income for 1917. (5) The amount of profits realized by the petitioner upon the sale of its assets and business in 1920. FINDINGS OF FACT. The petitioner, an Illinois corporation with its principal office at Decatur, was, during the taxable years and period in question, engaged in the publication of a morning newspaper. Petitioner was organized in 1890 and immediately acquired two newspapers, known as the Herald and the Despatch, which were being published by two separate organizations in Decatur, a town having then a population of approximately 16,000. The two papers were consolidated and thereafter published as a single publication under the name of the Morning Herald-Despatch, until about the2082 year 1906, when the name was changed to the Decatur Herald. For the archives, circulation, and good will of the Despatch, the petitioner issued its capital stock of a par value of $4,800. The Despatch had been published for less than a year as a daily paper, and at the time it was taken over had a circulation of approximately 1,000, of which number about 100 were subscribers to the Herald. The facilities of the Despatch had also been used for job printing. The Commissioner held that the petitioner had failed to establish satisfactorily the actual cash value at the date of acquisition of the archives, circulation and good will acquired from the Despatch, and in the computation of petitioner's invested capital allowed no values in respect of those assets. The actual cash value, at the date of acquisition, of the circulation acquired from the Despatch was $4,500. Until 1899 the petitioner had as a competitor in the morning field a daily newspaper known as the Decatur Daily Review. There was also being published in Decatur an evening newspaper known as the Decatur Evening Republican. The publication of the Decatur Evening Republican was discontinued on or about August 23, 1899, and2083 its circulation and good will, having a then actual cash value 1099 of $18,237.01, of which $15,000 represented the actual cash value of the circulation, were, by the then owners of that publication, who were also stockholders of the petitioner, paid in to petitioner without any consideration therefor. The Commissioner disallowed the said sum of $18,237.01 as a paid-in surplus, on the ground that the assets which it represents, viz, circulation and good will, are of an intangible nature, and consequently can not be included in invested capital as a paid-in surplus. On August 23, 1899, the petitioner entered into an agreement with the Review Publishing Co., owners and publishers of the Decatur Daily Review, the purpose of which was to eliminate that publication as a competitior of the Decatur Herald in the morning field, to establish the former as an evening newspaper, and to discontinue the publication of the Decatur Evening Republican, leaving the afternoon field entirely open to the Review without competition. Under the terms of this agreement the petitioner agreed to sell, transfer and convey to the Review Publishing Co. the subscription lists, good will and daily subscription2084 accounts of the Decatur Evening Republican; to abandon the publication of an evening paper in the County of Macon, State of Illinois, for a period of 15 years from August 26, 1899; to abandon and cease to print, for a like period, a Sunday edition, for circulation in Macon County, under any name or style; and to refrain for a like period from leasing, renting or granting to any person, type or machinery for the printing of a Sunday edition, for circulation in Macon County. In consideration of the foregoing covenants on the part of the petitioner, the Review Publishing Co. agreed to abandon the publishing of the Review as a morning paper, for a period of at least one year, saving and reserving to itself the right to publish such paper as a Sunday morning edition; and to refrain, for a period of 15 years, from leasing, renting, or granting to any person any type or machinery for the printing or circulation in Macon County of a morning paper, except a Sunday morning edition. Both parties agreed that in the event of the sale or lease by either of its plant, presses, type, good will, or newspaper, such sale or lease would be conditioned upon a full and strict compliance, by the purchaser2085 or lessee, with the terms of this agreement. In the computation of the petitioner's invested capital for the taxable years 1918 and 1919, the Commissioner deducted the amount of its liability for income and profits taxes for the years 1917 and 1918, respectively, as finally determined by him, prorated from the date such taxes, or any installment thereof, became due and payable. The Commissioner increased the net income, as reported by the petitioner in its return for the taxable year 1917, by the amount of $628.73, representing the income tax for the taxable year 1916, 1100 alleged by him to have been deducted by the petitioner, as an expense, in computing taxable net income. The petitioner did not make such a deduction in computing its taxable net income for the year 1917. Under date of February 16, 1920, the petitioner entered into an agreement with the Decatur Herald Co., whereby it agreed to sell, transfer, and set over to the latter company all of its "goods, chattels, leases, moneys, credits, accounts, bills, notes, good will, choses in action, bonds, securities, contracts, agreements, franchises, and all other assets" of whatever nature and kind. In consideration2086 for the assets to be transferred to it, the Decatur Herald Co. agreed "to pay, discharge, perform and fulfill all the debts, liabilities, contracts, engagements, and obligations" of the petitioner; to pay to the latter, in cash, the sum of $111,663.33; and to issue and deliver to it "Collateral Trust Serial seven per cent bonds of the par value of * * * $93,000, the same to be secured and issued in accordance with a certain collateral Trust Agreement." The contract was actually carried out and the sale consummated on or about March 1, 1920. The Commissioner held that upon this transaction the petitioner realized a taxable profit of $28,398.13, which he computed in the following manner: Average earnings for five-year period prior to 1913$21,970.89Less 8% on the average tangibles6,588.56Balance of earnings attributable to intangibles15,382.33Capitalized at 15%102,548.86March 1, 1913, value of intangibles102,548.86Subsequent additions to circulation structure9,614.86Total value to be used in computing profit112,163.72Amount included in balance sheet 2/29/20157,586.17Amount not allowable45,422.45Total assets shown on books 2/29/20324,135.71Less: Depreciation reserve as adjusted$36,435.68Excessive appreciation on intangibles45,422.4581,858.13242,277.58Less: Federal tax reserve included in accounts receivable3,482.40Value of assets sold238,795.18Consideration received:Cash$111,663.33Bonds93,000.00Accounts payable, assumed16,105.44Prepaid subscriptions assumed18,202.50Federal income tax, 1919, assumed15,422.62254,393.89Less: Overassessment of tax for prior years888.75253,505.1414,709.96Plus: Liability for 1920 tax13,688.17Profit28,398.132087 1101 In the foregoing computation the Commissioner has treated the circulation structure and archives as intangible property, and the March 1, 1913, value of intangibles, therein shown, is intended by the Commissioner to include the value of the circulation structure and archives at that date. The cost to the petitioner of the circulation structure to March 1, 1913, was $76,218.95, and the cost of subsequent additions to the date of the sale was $13,852.56 rather than $9,614.86, as shown by the foregoing computation. At March 1, 1913, the petitioner possessed such archives, commonly referred to in newspaper parlance as the "morgue," as are usually maintained in a newspaper establishment. The archives consisted of a library, plates, custs, classified newspaper clippings, and bound volumes of newspaper editions, which had been collected over a long period of years, and which were in constant use as reference works in the publication of the newspaper. The archives were in charge of a librarian who devoted her entire time thereto. They were a part of the assets sold and transferred to the Decatur Herald Co. in 1920. At March 1, 1913, W. H. Calhoun, one of petitioner's2088 principal stockholders, was a member of the Associated Press, an incorporated association, under the laws of the State of New York, of certain persons, who, owning or representing certain newspapers, are united in a mutual and cooperative organization for the collection and interchange of information and intelligence for publication in the newspapers owned or represented by them. The petitioner, being a corporation, was not eligible to membership in the Associated Press, the charter and by-laws of the latter limiting membership to the sole or part owner of a newspaper, or an executive officer of a corporation, limited liability company, or joint-stock or other association which is the owner of a newspaper. Under the provisions of section 5, article VII of the by-laws of the Associated Press, Calhoun was required to "publish the news of the Associated Press only in the newspaper, the language, and the place specified in his certificate of membership." Said certificate of membership specified the "Decatur Herald, a morning newspaper published in the English language at Decatur, Illinois," as the paper, language and place for publication of the news furnished by the Associated Press. 2089 Prior to, at, and subsequent to March 1, 1913, the service obtained through Calhoun's membership consisted of receiving, over a leased wire, about 13,000 words a night of markets, sports, domestic and foreign news. The news received through such service was published by the petitioner in the Decatur Herald. The service furnished by the Associated Press, at March 1, 1913, was extremely valuable to petitioner in the publication of a morning newspaper. No other satisfactory service was available at that date. Without such a service the news available for publication would have been more or less limited to 1102 local matters. The membership in the Associated Press was obtained by Calhoun without any cost to petitioner. The by-laws of the Associated Press provide, among many things, that in case any member shall cease to be the owner, or part owner, of the newspaper specified in his certificate of membership, or shall cease to be an executive officer of a corporation, limited liability company, or joint-stock company or other association which is the owner of the newspaper specified in his certificate of membership, he shall ipso facto cease to be a member; that in2090 case of the termination of his membership, by virtue of the cause above stated, a member, not then under process of discipline for violation of the rules of by-laws, may assign his membership to any other owner or part owner or executive officer of the corporation, limited liability company or joint-stock or other association which is the owner of such newspaper, who shall become a member upon signing the roll of members, and assenting to the by-laws, and, even without such assignment, such other executive officer, owner or part owner, thereupon shall become a member; that when a change is made in the ownership of any newspaper for which a member is entitled to receive a news service, the member may transfer his certificate of membership with his newspaper, and the new owner shall be constituted a member by virtue of such assignment; that the board of directors shall have no power to elect a new member until it shall have received a waiver in writing of the right of protest from all members entitled thereto, but no right of protest shall prevent such board from electing to membership the owner, part owner or executive officer of any corporation, limited liability company, joint-stock2091 or other association, which is the owner of any newspaper which was entitled to a service of news under an existing contract with the Associated Press at September 13, 1900; that when any person shall have ceased to be a member and his successor shall have become entitled to membership, the board of directors, at the next meeting held thereafter, shall formally elect such successor and ratify his admission as a member; and that every member shall be eligible to election and to enjoy the privileges of membership, solely by virtue of his relation to the newspaper named in his certificate of membership. OPINION. ARUNDELL: Since we have no jurisdiction over deficiencies asserted under revenue acts enacted prior to the Revenue Act of 1916, we can not consider the deficiencies proposed to be assessed for the years 1909 to 1913, inclusive. . Nor have we been shown any basis for taking jurisdiction 1103 over the years 1916 and 1918, in which years petitioner has been advised of overassessments. Our determination will therefore be limited to the deficiencies asserted for the years 1919 and the first two months of 1920. 2092 By stipulation of the parties the right of the petitioner to include in invested capital the actual cash value of archives, circulation, and good will acquired for stock, at the date of acquisition, is admitted. This leaves solely the question as to their value at the date of acquisition. In our findings of fact we have found that the circulation of the Despatch had a value when acquired of $4,500. This is predicated upon a subscription list of 900 names, and the evidence convinces us that the value thereof at the date of acquisition was not less than $5 per name. As to the value of the archives and good will, the evidence is insufficient to support a finding as to what that value may have been. The invested capital as computed by the Commissioner, in the deficiency letter, should be increased by the amount of $4,500. The second question is whether the petitioner is entitled to include in invested capital as paid-in surplus the sum of $18,237.01, representing the value of the circulation and good will of the Decatur Evening Republican, which assets were paid in by petitioner's stockholders without any consideration therefor. Of the value agreed upon $15,000 was assigned to2093 the circulation. It was further stipulated by the parties that said sum of $18,237.01 should be added to the invested capital, as shown by the deficiency letter, if the Revenue Acts of 1917 and 1918 authorize the inclusion in invested capital, as paid-in surplus, of the actual cash value of intangibles paid in to a corporation without any consideration therefor. Section 207 of the Revenue Act of 1917, in so far as it is pertinent to the present inquiry, defines invested capital as: (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: Provided, That (a) the actual2094 cash value of patents and copyrights paid in for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (b) the good will, trademarks, trade brands, the franchise of a corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash 1104 or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed. on March third, nineteen hundred and seventeen, twenty2095 per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock. Section 326 of the Revenue Act of 1918 defines invested capital as follows: (1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: Provided, That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in2096 which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257; (3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year; (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest; (5) Intangible property bona fide paid in for stock or shares on or after March, 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) 2097 the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year; * * In neither of the sections of the two Acts quoted above is any reference made specifically to intangible property paid in to a corporation 1105 without any consideration therefor. Both Acts specifically include within the definition of invested capital, intangible property bona fide paid in for stock or shares, subject to certain limitations. Unless intangibles acquired without cost can be included as a paid-in surplus they can not be included at all. Subdivision (a)(3) of section 207 of the Revenue Act of 1917 and subdivision (a)(3) of section 326 of the Revenue Act of 1918, taken by themselves, might conceivably be construed to permit the inclusion in invested capital of a paid-in surplus in respect2098 of intangible property acquired by way of gift. It seems clear to us, however, that in providing for the inclusion in invested capital of intangibles paid in for stock or shares, subject to very specific and arbitrary limitations, Congress intended to exclude intangibles paid in as a gift. It would be absurd construction indeed which would permit the inclusion in invested capital, under very arbitrary limitations, of intangibles paid in for a consideration, and at the same time permit the inclusion of intangibles paid in as a gift to the full extent of their actual cash value. It will be noted that under the provisions of both Acts intangibles paid in for stock or shares can not be included in invested capital to the full extent of their actual cash value, if that value exceeds the par value of the stock issued therefor or a fixed percentage of the outstanding capital stock at March 3, 1917, or the beginning of the taxable year, whichever is lower. This we believe lends strength to the construction which we have placed upon the statutes. Reading together subdivisions (a)(3) and (a)(4) of the sections above quoted, we feel constrained to hold that the petitioner is not entitled2099 under the Revenue Acts of 1917 and 1918, to include in invested capital, as paid-in surplus, intangibles acquired by way of gift. By stipulation of the parties it is agreed that if the petitioner's contention, that intangibles paid in as a gift should be included in invested capital as paid-in surplus, is rejected by the Board, then the invested capital shown in the deficiency letter should be increased by the sum of $15,000, representing the actual cash value of the circulation paid in by the stockholders without consideration, provided the Board finds that newspaper circulation is tangible property. The term circulation, as used in newspaper publishing businesses, comprehends something much broader than what may be characterized as mere subscription lists. As a practical matter it appears to be rather difficult to distinguish it from good will. It possesses many of the attributes of good will, and yet comprises other elements not common to the latter. It comprehends, on the one hand, a body of subscribers whom experience has demonstrated may be relied upon with some degree of certainty to continue to take and renew their 1106 subscriptions to the paper in the future. 2100 On the other hand, it includes within its scope an established advertising clientele who use the paper as a medium by which to reach the purchasing public. The paper assembles the individuals constituting the public in such a way that the advertiser can reach them by one announcement. Hence, what the advertiser buys is the privilege of addressing the people assembled by the paper. Quantity and quality of the circulation are the determinative factors in establishing the advertising rates of a newspaper. Quantity as expressed in units; quality as denoting not only the character of the readers whom it attracts, but also the editorial and advertising policies of the paper, and the extent to which the subscribers are concentrated within the retail trading radius. By editorial policy is meant not only the political bias of the paper, but the broad treatment of news, whether sensational, moderate or conservative; the scope of the paper's appeal, whether to the masses or a class; and similar policies which go to make up a paper's individuality. The rate the advertiser pays is not based, fundamentally, upon the space he uses, but upon the circulation back of that space. Circulation, 2101 in reality, is the very foundation upon which a newspaper publishing business is built. It is always matter of first importance in the purchase and sale of a newspaper publication. It is often the subject of barter and sale, and may be transferred separately from the remainder of the business. It is now the subject of a systemized audit conducted by an audit bureau, whose membership is made up of owners of newspaper publications. We think that in its important characteristics it is so closely related to good will that it must be included as "other like property" within the definition of intangible property as laid down in section 325(a) of the Revenue Act of 1918. Accordingly, we must approve the Commissioner's action in refusing to allow a paid-in surplus, for invested capital purposes, in respect of the circulation and good will, formerly the property of the Decatur Evening Republican, paid in to the petitioner by its stockholders without consideration therefor. The third question is whether the Commissioner is correct in reducing the invested capital for the taxable year 1919 by the amount of the income and profits-tax liability for the years 1917 and 1918. Since the adjustment2102 of invested capital as made by the Commissioner is in conformity with the provisions of the regulations in force in respect of the year 1919, the appeal, so far as it pertains to this proposition, must be denied in accordance with the provisions of section 1207 of the Revenue Act of 1926. The fourth question is whether the petitioner took a deduction, in computing its net income for the taxable year 1917, of $628.73, representing the income-tax liability in respect of the year 1916. It 1107 is noted from the deficiency letter that while the Commissioner has found a deficiency in respect of the year 1917, he does not propose to assert the same, as the statute of limitations has run and now bars its assessment. Therefore, this Board is without jurisdiction to consider and decide the question here raised. However, it should be pointed out that the Commissioner has stipulated that the petitioner did not make such a deduction in computing its net income for the taxable year 1917. The remaining question for decision is whether the petitioner realized a taxable profit upon the sale of its assets and business in 1920. The Commissioner, in the deficiency letter, computed a2103 taxable profit upon the transaction of $28,398.13. The Commissioner's computation is set out in our findings of fact. It will be noted from that computation that the Commissioner has determined the March 1, 1913, value of the intangibles plus the cost of subsequent additions to be $112,163.72, and that the book value of the assets classified by the Commissioner as intangibles was, at the date of sale, $157,586.17. Throughout the computation the Commissioner has treated circulation structure and archives as intangible property. The March 1, 1913, value of intangibles was determined by the Commissioner by deducting from the average earnings of the five years next preceding 1913 an amount equivalent to 8 per cent of the average tangibles for the same period, and capitalizing the remainder at the rate of 15 per cent. The Commissioner stipulated that the cost of additions to circulation structure which were made subsequent to March 1, 1913, was $13,852.56 rather than $9,614.86, as shown in his computation, and that proper adjustment should be made to correct this error. The Commissioner stipulated further that the cost to petitioner of its circulation structure to March 1, 1913, was2104 $76,218.95. Both parties agree that the basis for the determination of any gain or loss from this transaction should include the amount of any overpayments by the petitioner of income and profits taxes for the years 1917 to 1919, inclusive, and that the consideration or selling price will be affected by any change in the Commissioner's determination of the income and profits-tax liability of the petitioner for the year 1919 and the two-month period ended February 29, 1920. The first contention of the petitioner is that in the determination of the March 1, 1913, value of its intangibles the Commissioner should not have resorted to an arbitrary formula when other and better evidence of such value was available. Several witnesses testified during the hearing as to the character of the intangible properties owned by this petitioner at March 1, 1913, their relation to the petitioner's business and their importance and great value in the conduct thereof. Only one expressed an opinion as to the fair market value 1108 of these properties at March 1, 1913. This witness had been connected with the petitioner, in some capacity not disclosed to us, from 1912 to 1920, when the business2105 was sold. He estimated the March 1, 1913, values of the petitioner's intangible properties to be as follows: Circulation structure, $76,000 to $100,000; Associated Press membership, more than $10,000; good will, $25,000 or more; and contract with Review Publishing Co., dated August 23, 1899, $18,000 to $20,000. He also expressed an opinion that the March 1, 1913, value of the petitioner's archives (morgue) was about $15,000. Another former employee of the petitioner testified that in his opinion $12,000 would represent a conservative value for the archives at March 1, 1913. The next contention of the petitioner is that, if the formula used by the Commissioner for computing the March 1, 1913, value of intangibles is approved and adopted by the Board, the rate of 15 per cent used by the Commissioner for capitalizing the earnings, in excess of a return of 8 per cent on the net tangibles, is too high. However, the petitioner produced no evidence in support of this contention. During the oral argument counsel for petitioner asked us to adopt a rate of 12.42 per cent in lieu of the 15 per cent rate used by the Commissioner. Said rate of 12.42 per cent was computed by the petitioner2106 in the following manner: Net tangible assets at date of sale, as computed by the Commissioner$126,631.46Average earnings for five-year period preceding date of sale27,609.94Less: 8% on net tangibles10,130.52Earnings attributable to intangibles17,479.42Total consideration received for assets, as determined by Commissioner267,193.31Less: Net tangibles as shown above126,631.46Consideration received for intangibles140,561.85Percentage that $17,479.42 bears to $140,561.8512.42The computation is based upon an assumption that the tangible assets were purchased in 1920 by the vendee at their book value, while the intangibles were purchased at a value based upon a capitalization of excess earnings on the basis of an eight-year purchase. These are assumptions which the petitioner has not established, by any competent evidence, to have been the actual facts. Further, we have no reason to believe that a willing purchaser would have purchased these intangibles at March 1, 1913, upon the same basis on which they were sold in 1920. Speaking now in respect of the petitioner's contract with the Review Publishing Co., dated August 23, 1899, upon2107 which one of the petitioner's witnesses placed a value at March 1, 1913, of 1109 $18,000 to $20,000, we are of the opinion that that contract had no value at that date which should be included in the basis for the determination of the gain or loss realized by the petitioner upon the sale of its assets in 1920. The Review Publishing Co. was bound by its covenants for a period of but one year; hence, the life of the contract, so far as it conferred any benefits upon the petitioner, did not extend beyond that period. At any rate the contract had expired six years before the petitioner sold its business in 1920; hence, this contract could not have been one of the assets conveyed to the purchaser in 1920, and no part of the purchase price received for the business can be deemed to have been consideration for the contract. We think from the evidence before us that the value which the Commissioner has placed upon the intangibles at March 1, 1913, to wit, $102,548.86, represents the fair value of the circulation, good will, and Associated Press franchise at that date, and that such value was properly used by the Commissioner in the determination of the gain or loss on this transaction. 2108 From the evidence before us we find that the value of the archives at March 1, 1913, was not less than $12,000. The archives are tangible property and the Commissioner erred in treating them as intangible property for the purpose of the computation. Order of redetermination in accordance with the foregoing findings of fact and opinion will be entered on 15 days' notice, under Rule 50.GREEN, SMITH, and TRUSSELL dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619147/	W. H. Weaver and Edith H. Weaver, Husband and Wife, Petitioners v. Commissioner of Internal Revenue, RespondentWeaver v. CommissionerDocket No. 44978United States Tax Court25 T.C. 1067; 1956 U.S. Tax Ct. LEXIS 265; February 21, 1956, Filed 265 Decision will be entered under Rule 50. 1. Fair market value of stock which was issued for architectural services by corporations organized by petitioner, and which was immediately transferred by architect to petitioner pursuant to pre-existing agreement, held to be taxable to petitioner as ordinary income.2. Such stock issued in the years in controversy held to have a basis equal to fair market value.3. Redemptions of stock held to be essentially equivalent to the distribution of taxable dividends to the extent of earnings and profits, whether current or accumulated.4. Distributions in excess of earnings and profits held not taxable as ordinary income as either dividends or compensation. George M. Gross, 23 T. C. 756, followed.5. Gains from redemptions and sales of stock held not proved by respondent to be the stock of collapsible corporations as defined in section 117 (m), Internal Revenue Code of 1939, respondent having burden of proof. Sheldon Tauber, 24 T. C. 179, followed. Claude C. Pierce, Esq., Stanley Worth, Esq., and W. A. Kluttz, Esq., for the petitioners.Newman A. Townsend, Jr., Esq., and Herman Wolff, Jr., Esq., for the respondent. Opper, Judge. OPPER1067 Respondent 266 determined deficiencies of $ 19,640.14 and $ 69,869.41 in petitioners' income taxes for the respective calendar years 1949 and 1950. By amended answer, respondent has determined additional deficiencies of $ 64,720.36 and $ 178,285.58 for the respective years in controversy. Certain issues are now conceded by petitioners. The questions to be decided are (1) whether petitioners realized compensation for services rendered to certain controlled corporations, either at the time that certain housing projects undertaken by these corporations were completed and restrictions on their stock removed, or upon disposition of the stock, or at the time of the original receipt of the stock by petitioner W. H. Weaver, to the extent of the fair market value of certain stock issued by those corporations to an employed architect but immediately transferred to Weaver; (2) whether amounts received by petitioners during the years in controversy from the redemption and other disposition of stock held in their controlled corporations are taxable to them in those years as dividends; and (3) whether, if not otherwise taxable as ordinary income, the gains from distributions in redemption and sales of their 267 stock in the above corporations are taxable to them as ordinary income as gain realized upon stock in collapsible corporations.1068 FINDINGS OF FACT.Some of the facts have been stipulated and are hereby found.W. H. Weaver, hereafter sometimes called petitioner, and his wife, Edith H. Weaver, are citizens of the United States, residing in Greensboro, North Carolina. They filed, on a cash basis, timely joint income tax returns for the calendar years 1949 and 1950 with the collector of internal revenue for the district of North Carolina.Petitioner has been connected with the general construction business since 1938, operating this business in both proprietorship and corporate forms. He has engaged in all types of construction including residences, apartments, and commercial, industrial, and utilities plants.Petitioner, desiring to sponsor the construction of low-cost rental housing projects under section 608 of the National Housing Act, obtained property suitable for the location of such projects; endeavored, if necessary, to have the property zoned; and held preliminary discussions with the Federal Housing Administration, hereafter called F. H. A., to ascertain whether F. H. A. would accept 268 an application to insure a loan for the construction of each project.Between 1946 and 1949 he received insured F. H. A. commitments under section 608 of the National Housing Act for the construction of at least seven incorporated projects known as Eugene Apartments (two projects), Latham Park Manor, Lindley Park Manor, and Forest Grove Homes, all in Greensboro, North Carolina; West View Court, Salisbury, North Carolina; and Hillcrest Manor, High Point, North Carolina. Petitioner no longer has any interest in Latham Park Manor, Lindley Park Manor, Hillcrest Manor, and West View Court. In addition, petitioner had other corporations that constructed houses for rental and for sale under various other F. H. A. plans of operation, including Rosewood Park Homes, Inc., which constructed individual houses under insured commitments of F. H. A. Petitioner no longer has any interest in the latter corporation.Petitioner has also been connected with Piedmont Homes, Inc., a corporation organized to construct individual houses for sale. This corporation has been liquidated and petitioner no longer has any interest in it.During all years herein involved, petitioner was president of the W. H. Weaver 269 Construction Company, Inc., hereafter called Weaver Construction, a corporation engaged in the general contracting business, and, with his wife and their families, owned all outstanding stock therein. Weaver Construction constructed low-cost housing projects under agreements with Latham Park Manor, Inc., Lindley Park Manor, Inc., Hillcrest Manor, Inc., and Forest Grove Homes, Inc., hereafter sometimes called the corporations in controversy.1069 The corporations in controversy were incorporated on the following dates:Latham ParkNov. 19, 1947Lindley ParkMar 17, 1949HillcrestApr. 25, 1949Forest GroveMay 21, 1949Prior to the incorporation of these companies their charters were approved by F. H. A. From their respective dates of incorporation through December 31, 1950, these corporations had officers and directors as follows:Latham ParkPresident and treasurerW. H. WeaverVice president and secretaryEdith H. WeaverAssistant secretaryL. B. Hauser (until Jan. 10, 1949) 1DirectorsW. H. WeaverEdith H. WeaverL. B. Hauser (until Jan. 10, 1949) 1Lindley Park, Hillcrest, and Forest GrovePresident and treasurerW. H. WeaverVice president and secretaryEdith H. WeaverAssistant secretaryL. B. Hauser (until Jan. 9, 1950) 1270 DirectorsW. H. WeaverEdith H. WeaverL. B. Hauser (until Jan. 9, 1950) 1L. B. Hauser (Mrs. Lillian B. Hauser) is an office employee of the law firm which rendered legal services in connection with the incorporation and organization of these corporations.Each of the corporations in controversy maintained its books of account and filed its tax returns on an accrual basis. They used taxable years as follows:Taxable yearendedLatham ParkJune 30Lindley ParkDec. 31HillcrestMar. 31Forest GroveApr. 30During 1947 through 1950, R. J. Barbee was a duly qualified architect licensed to practice his profession under the laws of the State of North Carolina. His office address was in Greensboro. In April 1947, Barbee left the employment of F. H. A. and resumed the practice of architecture. He was registered with F. H. A. as the architect for the four projects undertaken by the corporations in controversy. Prior 1070 to his performance of any services in connection with these projects, he and petitioner agreed upon the fee Barbee was to receive on each project. With respect to each project the cash amount to be received by Barbee was as 271 follows:Latham Park$ 6,500Lindley Park2,000Hillcrest1,200Forest Grove1,300The agreement in each instance was made prior to the filing with F. H. A., by the corporations in controversy, of the application for mortgage insurance. These applications and the project analyses, prepared by F. H. A. with respect to each project before the commencement of construction and determinative of the maximum insurable mortgage, contained the following amounts for architect's fees:Application forProjectmortgage insuranceanalysisLatham Park$ 51,642$ 53,666Lindley Park65,88763,299Hillcrest27,38026,407Forest Grove59,66160,342According to the Standard Form of Agreement between owner and architect executed by petitioner, as president of each corporation in controversy, and Barbee, the stated consideration to be paid Barbee for his services in connection with each project was as follows:Shares of class BProjectCashcommon stockLatham Park$ 5,000480Lindley Park1,500600Hillcrest1,000250Forest Grove1,000580The stated par value of each share of class B common stock of each corporation was $ 100.With respect to the stock, referred to in the Standard Form of Agreement and purportedly to be issued to Barbee for 272 services rendered, there was a pre-existing agreement that the stock was to be issued in the name of Barbee and was to be endorsed by Barbee and immediately turned over to petitioner in exchange for cash in an amount equal to the difference between the cash consideration originally agreed to by Barbee and the cash consideration stated in the Standard Form of Agreement.Barbee received the following cash amounts from the corporations for architectural services:Latham Park$ 5,000Lindley Park1,500Hillcrest1,000Forest Grove1,0001071 At or about the time of the incorporation of each project these corporations issued stock certificates in Barbee's name for the number of shares stated in the Standard Form of Agreement. Pursuant to the pre-existing agreement described above, Barbee endorsed the certificates to petitioner. Barbee had possession of these stock certificates only for the time required to affix his signature. At the time he endorsed the stock certificates indicated he received the following amounts in cash from petitioner, pursuant to the pre-existing agreement:CorporationShares of stockAmountLatham Park480$ 1,500Lindley Park600500Hillcrest250200Forest Grove580300At about the same 273 time, these stock certificates were surrendered to the respective corporations which issued stock certificates to petitioner for the identical number of shares surrendered. The class B common stock of the corporations in controversy originally issued in the name of Barbee and subsequently reissued to petitioner was compensation to petitioner for services rendered. The fair market value of each share of class B common stock when received by petitioner was not less than $ 100.The issuance of stock in payment for architect's services was a normal practice and procedure in connection with F. H. A. projects under section 608 of the Federal Housing Act. Barbee performed architect's services in connection with the four projects handled by the corporations in controversy.According to their certificates of incorporation, some of the purposes for which each of the corporations in controversy was formed are to provide housing for rent or sale, to improve and operate real estate, and to obtain a contract of mortgage insurance from F. H. A., with the further provision that the corporation shall engage in no business other than the construction and operation of a rental housing project as long 274 as its property is encumbered by a mortgage insured by F. H. A.At or about the time of their respective incorporations, the corporations in controversy issued capital stock as follows:Latham ParkDateType of stockNo. ofName in whichsharesissuedDec. 1, 1947Class B common1,000W. H. WeaverClass B common480R. J. BarbeeDec. 9, 1947Class B common200W. H. WeaverDec. 8, 1947Class A common200W. H. WeaverClass A common100Edith H. WeaverJan. 13, 1948Preferred100Federal HousingAdministration1072 In exchange for the 1,000 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 17,932.03. This land upon which the project was later constructed, had been purchased by him on or about March 11, 1947, pursuant to his offer to purchase, made January 11, 1947, and an option which he had held for approximately 2 months previously. On August 5, 1947, while petitioner was the sole owner of the land and before it was conveyed to the corporation, he caused it to be zoned for apartment houses. At the time it was conveyed to the corporation, F. H. A. appraised it at $ 100,000, 275 taking into consideration the designated off-site improvements. By "off-site" improvements is meant all improvements required to be made that are not within the boundary lines of a project. They include the price of the land and any improvements, such as streets, utilities, curbs and gutters, which make up a part of the estimated cost of replacement of the property.Petitioner paid $ 20,000 in cash for the 200 shares of class B common stock issued to him. In exchange for the 200 shares of class A common stock issued to him and the 100 shares of class A common stock issued to his wife, he and his wife paid to the corporation $ 200 and $ 100, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.Lindley ParkDateType of stockNo. ofName in whichsharesissuedFeb. 24, 1949Class B common800W. H. WeaverApril 1, 1949Class B common215W. H. WeaverClass B common600R. J. BarbeeClass A common500W. H. WeaverPreferred100Federal HousingAdministrationIn exchange for the 800 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this 276 land was $ 16,800. This land, upon which the project was later constructed, had been purchased by him on or about the last day of February 1949, pursuant to an option he had acquired in September 1948. This land was zoned for apartments on December 9, 1948.In exchange for the 215 shares of class B common stock and the 500 shares of class A common stock issued to petitioner, he paid to the corporation $ 21,500 and $ 500, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it. 1073 HillcrestDateType of stockNo. ofName in whichsharesissuedMay 1, 1949Class B common375W. H. WeaverClass B common250R. J. BarbeeClass A common400W. H. WeaverClass A common100Edith. H WeaverPreferred100Federal HousingAdministrationIn exchange for 285 shares of the class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 18,800. This land, upon which the project was later constructed, had been purchased by him, pursuant to an option acquired by assignment on February 18, 1949. In exchange for the remaining 90 shares of class B common stock 277 and the 400 shares of class A common stock issued to him and for the 100 shares of class A common stock issued to his wife, petitioner and his wife paid to the corporation $ 9,000, $ 400, and $ 100, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.Forest GroveDateType of stockNo. ofName in whichsharesissuedJune 1, 1949Class B common1,200W. H. WeaverJune 11, 1949Class B common580R. J. BarbeeClass A common500W. H. WeaverPreferred100Federal HousingAdministration In exchange for 1,000 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 25,000. In exchange for the remaining 200 shares of class B common stock and the 500 shares of class A common stock issued to him, petitioner paid $ 20,000 and $ 500, respectively. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.On 278 each of the following dates, prior to the incorporations but after consultations with F. H. A., petitioner submitted applications for mortgage insurance in the following amounts on behalf of each corporation:Date ofAmount ofCorporationapplicationmortgage insuranceLatham ParkJuly 14, 1947$ 1,137,600Lindley ParkJan. 17, 19491,425,600HillcrestFeb. 28, 1949586,800Forest GroveMar. 9, 19491,270,0001074 The applications were accompanied by site information, a topographical survey of the site, preliminary drawings, and outline specifications showing a comprehensive delineation of the project design, planning, materials, construction, and sufficient detail for the preparation of an accurate cost estimate.In the application filed on behalf of Latham Park petitioner stated his equity in the proposed project to be $ 130,755, consisting of land valued at $ 25,000, cash of $ 4,930, and other equity of $ 100,825, composed of builder's fee of $ 49,183 and architect's fee of $ 51,642. The value of the land, including the contemplated off-site improvements, was stated to be $ 125,000. Petitioner proposed to furnish his personal warranty to assure completion of the project construction. In the project 279 analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 100,000.In the application filed on behalf of Lindley Park petitioner stated his equity in the proposed project to be $ 168,437, consisting of land valued at $ 135,000, cash of $ 1,000, and other undescribed equity of $ 32,437. Petitioner's stated equity in the land was equal to the estimated value of the land including contemplated off-site improvements. To assure completion of the project construction petitioner proposed, in this application, to furnish personal indemnity. In the project analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 80,000.In the application filed on behalf of Hillcrest petitioner stated his equity in the proposed project to be $ 71,681, consisting of land valued at $ 50,000, cash of $ 1,000, and other undescribed equity of $ 20,681. Petitioner's stated equity in the land was equal to the estimated value of the land including contemplated off-site improvements. In the project analysis prepared by F. H. A. the fair market value of the land, including 280 contemplated off-site improvements, was stated to be $ 28,500.In the application filed on behalf of Forest Grove petitioner stated his equity in the proposed project to be $ 152,225, consisting of land valued at $ 100,000, cash of $ 1,500, and other undescribed equity of $ 50,725. Petitioner's stated equity in the land was equal to the estimated value of the land, including contemplated off-site improvements. Petitioner proposed to furnish his personal indemnity to assure completion of the project construction. In the project analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 100,000. The cost of the estimated off-site improvements was stated in each of the project analyses under "Additional Requirements." To guarantee 1075 281 that the off-site improvements would be completed, it was required, at the time the F. H. A. commitment was made, that an Owner's Protective Bond be furnished. With respect to each corporation in controversy, except Hillcrest, this bond was furnished by Weaver Construction, as principal, pursuant to contracts for the construction of these improvements executed with petitioner as follows:Amount of contract andcost of estimatedCorporationDate of contractoff-site improvementsLatham ParkDec. 1, 1947$ 41,479Lindley ParkApr. 1, 194952,009Forest GroveJune 1, 194963,799With respect to Hillcrest, the cost of estimated off-site improvements was stated to be $ 761. To guarantee that the off-site improvements would be completed, an escrow deposit was furnished on May 1, 1949, by petitioner as principal stockholder.The F. H. A. project analyses estimated replacement cost of the proposed housing projects for a typical builder, rather than for the most or the least efficient builder.F. H. A. commitments were made, in accordance with the amounts contained in the project analyses, and each of the corporations in controversy executed a building loan agreement providing for a mortgage loan to the extent 282 of the commitment, as follows:Date ofCommitmentDate ofCorporationF. H. A.in anbuilding loancommitmentamount notagreementto exceedLatham ParkNov. 25, 1947$ 1,161,300Dec. 1, 1947Lindley ParkFeb. 28, 19491,338,300Apr. 1, 1949HillcrestMar. 24, 1949553,000May 1, 1949Forest GroveMar. 30, 19491,258,000June 1, 1949Petitioner was paid a premium in excess of $ 25,000 for the placing of the Latham Park loan.On the respective dates of the building loan agreements, Weaver Construction entered into lump-sum construction contracts with each of the corporations in controversy, providing that Weaver Construction would construct the projects in accordance with the drawings and specifications for the following contract prices, such contract prices being identical to the sum of the estimates in the project analyses for improvements to land (within property lines) and structures:CorporationContract priceLatham Park$ 1,022,217Lindley Park1,205,777Hillcrest502,644Forest Grove1,120,2491076 Hillcrest did not pay any amount in addition to the contract price with respect to the required off-site improvements in the amount of $ 761. Weaver Construction received no amount in addition to the contract price for the 283 construction of the off-site improvements with respect to the other three corporations. The corporations made expenditures in the following amounts out of the proceeds of the guaranteed loan, in addition to the construction costs set forth in contracts with Weaver Construction:AggregateCorporationexpendituresLatham Park$ 71,113.81Lindley Park91,795.91Hillcrest32,653.40Forest Grove61,616.99The commitments for insurance on each of the projects provided that the loans should bear interest at 4 per cent and that, calculated from the date of the mortgage, amortization should commence not later than the first day of the eighteenth month, as to Latham Park and Lindley Park, and of the twelfth month as to Hillcrest and Forest Grove. The first payment on the mortgage principal was made by Latham Park on June 1, 1949, by Lindley Park on October 1, 1950, by Hillcrest on May 1, 1950, and by Forest Grove on June 1, 1950.The construction of each of the projects commenced shortly after the contracts were signed, and was completed in less than the time required by F. H. A. Units in the project were first rented about August 1, 1948, by Latham Park; August 1, 1949, by Lindley Park; September 1, 284 1949, by Hillcrest; and October 1, 1949, by Forest Grove.A request for final endorsement of a credit instrument was submitted to F. H. A. by each of the corporations. Each request reported that the project was complete with the exception of minor items of construction which were covered by escrow agreements. The requests were submitted and final endorsements occurred on the following dates:RequestsFinal endorsementCorporationsubmitted onoccurred onLatham ParkDec. 30, 1948Jan. 31, 1949Lindley ParkFeb. 11, 1950Feb. 14, 1950HillcrestSometime after Dec. 7, 1949Dec. 15, 1949Forest GroveFeb. 11, 19501F. H. A. regards a project as being completed at the time of the final endorsement of the credit instrument, but the rental housing projects developed and owned by the corporations in controversy were completed physically not later than December 29, 1948, by Latham Park; December 13, 1949, by Lindley Park; December 7, 1949, by Hillcrest; and January 10, 1950, by Forest Grove.1077 The certificates of incorporation of each of the corporations in controversy provide in part that the class B common 285 stock shall not be retired until after the completion of the improvements on the property of the corporation in accordance with the terms of the building loan agreement between the corporation and the lending institution, nor before the final endorsement for mortgage insurance by F. H. A. of the credit instrument given to the lending institution.The minutes of a special meeting of directors and stockholders of Latham Park, dated June 2, 1949, read in part as follows:A review of the financial condition of the corporation revealed that the corporation had completed the building of the apartment units on Hill Street and Latham Road in the City of Greensboro; that out of the proceeds of the loan upon said apartments the corporation would have in its hands unexpended One Hundred Fifty Thousand Dollars at least; that the corporation would, in addition to the sum of $ 150,000 have funds in its hands on June 30, 1949, for the payment of all building expenses, taxes, assessments, fees and charges, whether due or accrued; that it would also have on hand, or would have paid, all interest and principal due or to become due within thirty days, and that it would have sufficient funds to pay, or 286 would have paid, all deposits for taxes, assessments, water rates, mortgage insurance premiums and hazard insurance premiums, all as required by the terms of the mortgage executed by this corporation to Leon Lentz, Trustee, and insured by the Federal Housing Commissioner; that the corporation had established and maintained a reserve fund for replacements as called for in the Certificate of Incorporation.It further appeared that the loan from the Wachovia Bank and Trust Company had been fully disbursed and had secured the final endorsement of the Federal Housing Administration.The President stated that the corporation contemplated no further building operations and had no productive use of the funds in its hands; that the Class B common stock bore dividends at the rate of six per cent per annum, and that it would be to the best interest of the Class A common stockholders and of the corporation that so much of the Class B common stock would be retired at the end of the next fiscal period as the corporation had funds to retire, Whereupon, Lawrence T. Hoyle introduced the following resolution:Be It Resolved that this corporation do retire at par One Hundred Fifty Thousand Dollars of the 287 Class B common stock; that the retirement be made by retiring the lowest numbered Certificates now outstanding, retiring a part of a Certificate, if same should be necessary, and the President and Secretary of the corporation are authorized and directed to issue such new Certificates as may be necessary to properly carry out the intent of this resolution, and the Secretary of the corporation is directed to notify the holders of Class B common stock of the retirement as provided for herein, and the President of this corporation is authorized and directed to issue the checks of the corporation in an aggregate amount of $ 150,000.00 upon the surrender to him of Class B common stock Certificates in said amount, such retirement to be made on the 30th day of June, 1949.The dividends on the class B common stock of Latham Park were noncumulative.On or about June 30, 1949, petitioner surrendered 1,500 shares of class B common stock of Latham Park to that corporation for retirement 1078 and received in exchange $ 50,000 in cash and "a credit of $ 100,000 to an accounts payable account to Latham Park." This account comprised amounts which petitioner had previously borrowed from the corporation, $ 288 50,000 on April 6, 1949, $ 25,000 on May 11, 1949, and $ 25,000 on June 15, 1949. The shares so surrendered included 300 of the 480 shares of class B common stock which had been issued originally in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1949 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 150,000 less their basis in the stock.On or about February 28, 1950, petitioner sold, for $ 18,000, 180 shares of Latham Park class B common stock, these shares being the balance of those issued originally in the name of Barbee and subsequently transferred to petitioner, to certain individuals who were not related to or associated with petitioner. At the same time petitioners sold their total holdings, which consisted of 300 shares, of Latham Park class A common stock to the same individuals for $ 62,000. After the disposition of these shares, petitioners no longer had any interest in Latham Park. On their tax return for 1950 petitioners disclosed a long-term capital gain from this transaction and reported the receipt of $ 80,000 less their basis in the stock.The net income of Latham Park, for its 289 fiscal year ended June 30, 1949, was $ 24,103.85 before deduction of a net operating loss carryover of $ 8,512.78. Its Federal income tax liability, based upon a taxable net income of $ 15,591.07, was $ 3,485.94.Except for the dates and other details, minutes of a joint meeting of stockholders and directors of Lindley Park, dated November 30, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of all of the class B common stock.On or about December 31, 1950, petitioner surrendered 1,615 shares of class B common stock of Lindley Park to that corporation for retirement and received in exchange $ 161,500 in cash. The shares so surrendered included the 600 shares of class B common stock which had been issued originally in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 161,500 less their basis in the stock.During 1951 and subsequent to the period in controversy, petitioner disposed of his entire holdings of 500 shares of Lindley Park class A common stock to certain individuals, who were not related to or associated 290 with him, for $ 103,500. After the disposition of these shares, petitioner no longer had any interest in Lindley Park.At the annual meeting of stockholders of Hillcrest, on January 9, 1950, a meeting was set for March 1, 1950, to consider the retirement 1079 of class B common stock before the close of the fiscal year, March 31, 1950. Except for the dates and other details, minutes of a special meeting of directors of Hillcrest, dated March 1, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of $ 35,000 of its par value class B common stock at par.On or about March 31, 1950, petitioner surrendered 350 shares of class B common stock of Hillcrest to that corporation for retirement and received in exchange $ 35,000 in cash. The shares so surrendered did not include any of the 250 shares of class B common stock which had been originally issued in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 35,000 less their basis in the stock.On or about May 8, 1950, petitioner sold, for $ 27,500, 275 shares of Hillcrest291 class B common stock, including the 250 shares issued originally in the name of Barbee and subsequently transferred to petitioner, to certain individuals who were not related to or associated with petitioner. At the same time petitioners sold their total holdings, which consisted of 500 shares, of Hillcrest class A common stock to the same individuals for $ 7,500. After the disposition of these shares petitioner no longer had any interest in Hillcrest. On their tax return for 1950 petitioners disclosed a long-term capital gain from the above transaction and reported the receipt of $ 35,000 less their basis in the stock.Except for the dates and other details, minutes of a joint meeting of stockholders and directors of Forest Grove, dated October 25, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of all of the class B common stock.On or about December 29, 1950, petitioner surrendered 1,780 shares of class B common stock of Forest Grove to that corporation for retirement and received in exchange $ 178,000 in cash. The shares so retired included 580 shares of class B common stock which had been issued originally in the name of Barbee and 292 subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 178,000 less their basis in the stock.The net income of Forest Grove, for its fiscal year ended April 30, 1951, was $ 10,286.94 before deduction of a net operating loss carryover of $ 861.95. Its Federal income tax liability for that fiscal year, based upon a taxable net income of $ 9,424.99, was $ 2,308.04.At the time the class B common stock of the corporations in controversy was retired, none of them "had accumulated earnings and profits and profits of the taxable year in which such stock was retired," except that Latham Park had accumulated earnings, including 1080 earnings of the taxable year, of $ 11,855.13 at June 30, 1949, and Forest Grove had accumulated earnings, including earnings of the taxable year, of $ 6,937.65 at April 30, 1951.The amounts distributed to petitioner by Lindley Park and Hillcrest upon retirement of his class B common stock in 1950 were from cash accumulated by each of these corporations from the following sources: (a) Cash paid in for stock; (b) borrowed funds received by these corporations; 293 (c) depreciation reserves; or (d) rentals collected from tenants. The amounts distributed to petitioner by Latham Park in 1949 and by Forest Grove in 1950 upon retirement of his class B common stock were from similar sources with the addition of earnings for the current year.From the respective dates of their incorporation through December 31, 1950, the books and records of these corporations do not show the voting or payment of any salaries to any of their officers, including petitioner and his wife.Upon the completion of each of the projects involved herein, the mortgagor, being in each instance the corporate owner and operator of the project, certified to F. H. A. and the mortgagee that it did not have outstanding any unpaid obligations contracted in connection with the purchase of the property, construction of the project, or the mortgage transaction except obligations which were secured by property or collateral owned by the mortgagor independently of the mortgaged property.Petitioner did not seek a market for the stock held by him in these four corporations, but shortly after the completion of the projects he was approached on numerous occasions to sell his stock in the project 294 corporations and he received numerous offers for such stock.In his original deficiency notice respondent determined (for example):It has been determined that Mr. Weaver realized during the taxable year income in the amount of $ 60,000, taxable to him under the provisions of section 22 (a) of the Internal Revenue Code, for services in connection with the construction of the Lindley Park Manor Apartments for Lindley Park Manor, Inc. * * * The amount of $ 60,000 has been determined by reference to the fair market value of the 600 shares of stock as of the time the services rendered by him were completed, and the project was finished and approved by the Federal Housing Commissioner, thereby removing conditions previously restricting retirement of the stock in question.In his amended answer respondent alleged:11. In addition to $ 60,000 received by petitioner, W. H. Weaver, in 1950 from Lindley Park Manor, Inc., upon redemption of or in exchange for stock originally issued to R. J. Barbee and subsequently transferred to petitioner, the further amount of $ 101,500.00 was received by petitioner from Lindley Park Manor, Inc., during 1950 upon redemption of or in exchange for 1,015 shares 295 of Class "B" common stock of said corporation which was issued and outstanding in petitioner's 1081 name, and the full amount of $ 161,500.00 so received is taxable to petitioner as ordinary income in said year. [Emphasis added.]12. In the alternative, during 1950 petitioners realized gain of $ 122,700.00 from the redemption of or in exchange for 1,615 shares of Class "B" common stock of Lindley Park Manor, Inc., a "collapsible" corporation, and said gain is taxable to petitioners in full pursuant to the provisions of Section 117 (m) of the Internal Revenue Code of 1939 as amended. [Emphasis added.]The italicized portions, among others, were not referred to on the deficiency notice.Respondent determined that petitioner, in 1949, realized $ 48,000 for services rendered to Latham Park and, in 1950, realized income of $ 25,000 and $ 58,000 for services rendered to Hillcrest and Forest Grove, respectively. The facts with respect to the deficiency notice and amended answer as to these three corporations were otherwise similar in principle to those set forth with respect to Lindley Park.OPINION.Although the multiplex issues are distinct they are so interconnected that it is difficult to 296 discuss them separately. For the sake of precision, however, an attempt will be made to do so.1. Compensation.Respondent has charged petitioner with income as a result of the receipt by him of stock in four controlled building corporations, of which he was promoter, and which respondent says is compensation for services. The four situations are sufficiently similar for a single discussion.Petitioner, as promoter, hired an architect for the project. The agreement was that a comparatively small amount of cash was to be paid him, and the balance of the architect's fee 1 shown on the cost estimate submitted to F. H. A. was paid in stock. This was immediately and by prior agreement assigned by the architect to petitioner. On these facts respondent says, first, the stock had no fair market value when issued, but was compensation when the projects became complete; if not, petitioner realized income, not when he received the stock, but when he sold it or had it redeemed; or finally, if it was income when received it had a fair market value equal to par.We think the stock was income to petitioner when received, and not later. See Robert Lehman, 17 T. C. 652. 297 Petitioner so contends alternatively. It was presumably issued lawfully, see Washington Post Co., 10 B. T. A. 1077, and if so, under local law, Gen. Stat. of N. C., sec. 55-62, and the operative facts, including the representation 1082 to F. H. A., could only have been in consideration for services. Whether they were the architect's services in the payment for which he was allowing petitioner to share for procuring the work, or whether petitioner himself can be considered as rendering services, architectural or otherwise, we need not pause to inquire. In any event the stock, when received, represented ordinary income to petitioner, as a part of the compensation paid by the corporations for services. Walter M. Priddy, 43 B. T. A. 18; Davis v. Commissioner, (C. A. 6) 81 F.2d 137">81 F. 2d 137.For similar reasons we are unable to agree that the stock had no fair market value at that time. We have found that, in fact, it was worth par. All the legal and factual considerations confirm this. See, e. g., Gen. Stat. of N. C., supra. Although there were restrictions on its immediate redemption, there were none on its transfer, and these were not, in our opinion, sufficient to reduce its value in petitioner's 298 hands to a nominal amount or deprive it of any fair market value. T. W. Henritze, 28 B. T. A. 1173; see Society Brand Clothes, Inc., 18 T. C. 304, 317; cf. Harold H. Kuchman, 18 T.C. 154">18 T. C. 154.The consequence of this disposition is that the stock in one of the corporations was received in a year not before us. Petitioner concedes that the stock of the other three corporations was received by petitioner in the year 1949. He contends that if taxable to petitioner as compensation for 1949 his basis for the stock upon disposition must be correspondingly increased. Respondent does not contest this proposition and admits that the stock in the three corporations would take as its basis the fair market value at which it is now to be included in ordinary income. But he urges that the stock of the one corporation received in an earlier year has no basis. Petitioner makes no contrary contention and this question is apparently not in issue. This brings us to the matter of how disposition of the stock in the years before us is to be treated.2. Redemption of Stock.That the transactions in question were redemptions at such time and in such manner as to be essentially the equivalent of taxable 299 dividends 2 would admit of little argument if the corporations had had sufficient earnings and profits. The over-all effect is the guiding 1083 consideration. Flanagan v. Helvering, (C. A., D. C.) 116 F. 2d 937; Boyle v. Commissioner, (C. A. 3) 187 F.2d 557">187 F. 2d 557, certiorari denied 342 U.S. 817">342 U.S. 817. And here there is almost no factor outside the formalities which lends a semblance of actuality to the procedure of turning in stock and receiving cash therefor.But except for the comparatively small amount of stipulated earnings, the Gross case 3 admittedly stands as an insuperable barrier 300 to the treatment of these distributions as dividends. Respondent insists that that case was an erroneous application of the law and relies, as he did there, on Commissioner v. Hirshon Trust, (C. A. 2) 213 F. 2d 523, certiorari denied 348 U.S. 861">348 U.S. 861, and Commissioner v. Godley's Estate, (C. A. 3) 213 F. 2d 529, certiorari denied 348 U.S. 862">348 U.S. 862. But here, as in the Gross case, he has in effect stipulated himself out of Court. Whatever possibility there might be of arguing that petitioner's exertions created earnings for the corporations represented by the excess value of the cash received from F. H. A. over the basis of its properties has been eliminated by the concession that earnings or profits did not exist beyond the stipulated figures. Availability of profits for the declaration of taxable dividends, whether or not the result of balance sheet treatment, is a subject not dealt with in General Utilities & Operating Co. v. Helvering, 296 U.S. 200">296 U.S. 200. But on these facts it can likewise not be decided here. The critical weakness of respondent's position is perhaps best illustrated by a quotation from his brief: "Whether 301 the applicable section of the Code is section 22 (a) or section 115 (a) is of no taxable consequence, since under either section the distributions are fully taxable at ordinary income rates." (Emphasis added.)The obvious difficulty is that section 22 (a) is qualified by section 22 (e), which refers to section 115 for the method of taxing corporate distributions. 4 And section 115 (a) requires for a distribution to be a dividend that it be out of "earnings or profits." Absence of the latter is hence a critical consideration. Section 115 (j) becomes applicable only after it has been determined that there was a dividend. We see no basis upon which we may depart from the theory of the Gross case. And see Harry Handley Cloutier, 24 T. C. 1006. There is a dispute between the parties as to how much was available for distribution as "earnings or profits." Essentially, petitioner insists that current earnings -- as distinguished from "accumulated earnings" -- cannot be included. But the word "dividend" 5302 in section 1084 115 (g) must reasonably be equated with the definition of that word in section 115 (a), where the inclusion of both types is explicit. This was not accidental. H. Rept. (Mar. 26, 1936), 74th Cong., 2d Sess. (1936), p. 6; S. Rept. No. 2156, 74th Cong., 2d Sess. (1936), p. 18; 1939-1 C. B. (Part 2) 689. "Equivalence" to a dividend under section 115 (g) means only that the source shall be either of those mentioned in section 115 (a). Vesper Co. v. Commissioner, (C. A. 8) 131 F.2d 200">131 F. 2d 200, affirming 44 B. T. A. 1274. And the reference in section 115 (g) to accumulations "after February 28, 1913" -- to borrow a phrase -- "is to re-emphasize -- though perhaps somewhat redundantly -- that distributions of earnings and profits accumulated prior to the date mentioned are excluded from * * * the statute." Vesper Co. v. Commissioner, supra, at 205. Finally it is urged that, if not dividends, the redemptions were compensation for services. Having already dealth with that alternative under 1, supra, we need discuss it no further than to say that, in our view, it was the stock, and not the cash ultimately exchanged for it, that constituted the compensation reasonably 303 to be gathered from the facts in the present record. George M. Gross, supra, at 773. See Jack Benny, 25 T.C. 197">25 T. C. 197.3. "Collapsible" Corporation.Respondent by amended answer, and not in the deficiency notice, attempts to tax the proceeds of both redemption and sales as ordinary income by invoking the provisions of section 117 (m). Since this provision 6304 305 306 first became effective in 1950, he makes no similar effort as to the gains realized in 1949. See Pat O'Brien, 25 T. C. 376.1085 Because the posture of the pleadings places upon respondent the burden of proving all necessary operative facts, Sheldon Tauber, 24 T. C. 179, we shall content ourselves by considering only one aspect of the application of section 117 (m). This is not a case where respondent advances a mere additional ground for sustaining a deficiency already determined. Cf., e. g., Raoul H. Fleischmann, 40 B. T. A. 672; see also Sol M. Flock, 8 T. C. 945. The item of income in controversy was not even mentioned in the original deficiency notice; and its inclusion by amended answer leads logically, and in fact, to respondent's application for increased deficiencies.One of the several requirements of section 117 (m) is that at least 70 per cent of the gain 307 realized shall be "attributable to the property so * * * constructed." Petitioner retorts that there is no proof of the origin of the gain and suggests that it may have been due to overappraisal, inclusion or increase in value of nonconstruction items, or activities prior or subsequent to construction such as rezoning or full occupancy. Respondent's only reply is "that the increase in value of the land was attributable to the construction of the apartment projects in the case of each corporation and that without such construction and off-site improvements the value of the land would never have increased to the extent that it did." (Emphasis added.)Of these statements there is no evidence in the record. Ordinarily, it would have been incumbent upon petitioner to disprove the fact. But we cannot assume it here. There seems an implicit concession 1086 by respondent that some of the gain was not attributable to the penalized source. We have no way of knowing how much was. On this record, and without considering petitioner's numerous other contentions relating to the general issue, we can only say that respondent has not, in our view, performed the requisite task of showing here that section 117 (m)308 is applicable. See Thomas Wilson, 25 T.C. 1058">25 T. C. 1058.4.If the statute of limitations issue has not been abandoned, which it seems to have been, it must be decided against petitioner on authority of Ticker Publishing Co., 46 B. T. A. 399, 415; Liebes v. Commissioner, (C. A. 9) 63 F. 2d 870. Once a deficiency notice, which is proper and timely, has been issued, respondent is authorized to apply for an increased deficiency "at or before the hearing or a rehearing," section 272 (e), regardless of whether in the meantime the statute may have run against the determination of an original deficiency.Decision will be entered under Rule 50. Footnotes1. On January 10, 1949, Lawrence T. Hoyle, Esquire, replaced L. B. Hauser as assistant secretary and director.↩1. On January 9, 1950, Lawrence T. Hoyle, Esquire, replaced L. B. Hauser as assistant secretary and director in the above-named corporations.1. Final endorsement of the Forest Grove credit instrument was made after the submission of the request.↩1. The figures are not exactly equal but nearly so.↩2. Internal Revenue Code of 1939.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. George M. Gross, 23 T.C. 756">23 T. C. 756; see also Michael P. Erburu, 23 T. C. 820↩.4. Internal Revenue Code of 1939.SEC. 22. GROSS INCOME.(e) Distributions by Corporations. -- Distributions by corporations shall be taxable to the shareholders as provided in section 115.↩5. Note 2, supra↩.6. Internal Revenue Code of 1939SEC. 117. CAPITAL GAINS AND LOSSES.(m) Collapsible Corporations. -- (1) Treatment of gain to shareholders. -- Gain from the sale or exchange (whether in liquidation or otherwise) of stock of a collapsible corporation, to the extent that it would be considered (but for the provisions of this subsection) as gain from the sale or exchange of a capital asset held for more than 6 months, shall, except as provided in paragraph (3), be considered as gain from the sale or exchange of property which is not a capital asset.(2) Definitions. -- (A) For the purposes of this subsection, the term "collapsible corporation" means a corporation formed or availed of principally for the manufacture, construction, or production of property, for the purchase of property which (in the hands of the corporation) is property described in subsection (a) (1) (A), or for the holding of stock in a corporation so formed or availed of, with a view to --(i) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, prior to the realization by the corporation manufacturing, constructing, producing, or purchasing the property of a substantial part of the net income to be derived from such property, and(ii) the realization by such shareholders of gain attributable to such property.(B) For the purposes of subparagraph (A), a corporation shall be deemed to have manufactured, constructed, produced, or purchased property, if --(i) it engaged in the manufacture, construction, or production of such property to any extent,(ii) it holds property having a basis determined, in whole or in part, by reference to the cost of such property in the hands of a person who manufactured, constructed, produced, or purchased the property, or(iii) it holds property having a basis determined, in whole or in part, by reference to the cost of property manufactured, constructed, produced, or purchased by the corporation.(3) Limitations of application of subsection. -- In the case of gain realized by a shareholder upon his stock in a collapsible corporation -- (A) this subsection shall not apply unless, at any time after the commencement of the manufacture, construction, or production of the property, or at the time of the purchase of the property described in subsection (a) (1) (A) or at any time thereafter, such shareholder (i) owned (or was considered as owning) more than 10 per centum in value of the outstanding stock of the corporation, or (ii) owned stock which was considered as owned at such time by another shareholder who then owned (or was considered as owning) more than 10 per centum in value of the outstanding stock of the corporation;(B) this subsection shall not apply to the gain recognized during a taxable year unless more than 70 per centum of such gain is attributable to the property so manufactured, constructed, produced, or purchased; and(C) this subsection shall not apply to gain realized after the expiration of three years following the completion of such manufacture, construction, production, or purchase.For purposes of subparagraph (A), the ownership of stock shall be determined in accordance with the rules prescribed by paragraphs (1), (2), (3), (5), and (6) of section 503 (a), except that, in addition to the persons prescribed by paragraph (2) of that section, the family of an individual shall include the spouses of that individual's brothers and sisters (whether by the whole or half blood) and the spouses of that individual's lineal descendants.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619148/	Realty Loan Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentRealty Loan Corp. v. CommissionerDocket No. 5202-67United States Tax Court54 T.C. 1083; 1970 U.S. Tax Ct. LEXIS 135; May 25, 1970, Filed 135 Decision will be entered under Rule 50. Held: 1. The $ 86,500 sales price of petitioner's mortgage-servicing business was in part for capital assets of the nature of goodwill and in part for its right to future income from servicing fees.2. On the basis of the evidence $ 10,000 is allocated as the sales price of the capital assets and the balance of the $ 86,500 as the sales price of the right to future income.3. The gain on the sale of the capital assets is taxable to petitioner as long-term capital gain and the gain on the sale of the right to future income is taxable to it as ordinary income.4. Since both the capital assets and the right to future income are property and the right to future income is not compensation for services, petitioner is entitled to report the entire gain from the sale on the installment method, the other requirements of sec. 453, I.R.C. 1954, having been met by it.5. The evidence does not show that any amount due by petitioner to another for procuring for it some of the mortgages being serviced at the date of the sale was accrued in 1962 except the amount of $ 1,100 representing a fee due petitioner in 1962 by the other person on a bond which136 amount petitioner permitted him to retain. Charles P. Duffy, for the petitioner.Gary C. Randall, for the respondent. Scott, Judge. SCOTT 1084 Respondent determined a deficiency in petitioner's income tax for the calendar year 1962137 in the amount of $ 32,474.78.One of the issues raised by the pleadings has been disposed of by agreements of the parties, leaving for our decision the following:(1) Whether the amount of $ 86,500 which Sherwood & Roberts, Inc., agreed to pay to petitioner for its mortgage-servicing business is in whole or in part in payment for the assignment by petitioner of its right to future service fees and therefore ordinary income or is the amount the sales price of a capital asset resulting in long-term capital gain to petitioner.(2) If any part of the $ 86,500 is taxable as ordinary income as an amount paid for the right to receive income from future fees, may such portion of the payment be reported on the installment method under section 453(b), I.R.C. 1954, 1 as income from a "casual sale or casual disposition of personal property?"(3) If any portion of the $ 86,500 is ordinary income and petitioner is not entitled to use the installment138 method of reporting this income, is the entire amount of $ 86,500 accrued income of petitioner in the year 1962?(4) What is the proper amount of deduction, if any, accrued to petitioner in 1962 because of its agreement to pay to another a portion of the amount received from any sale of servicing of mortgages originated by that other person for it? 2FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Realty Loan Corp. (hereinafter referred to as petitioner) is an Oregon corporation organized in 1920. Its principal place of business at the date of the filing of the petition in this case was in Portland, Oreg. During 1962 petitioner's president, Ralph M. Holmes139 (hereinafter referred to as Holmes), owned all its voting stock.1085 Petitioner kept its books and reported its income on an accrual basis of accounting. Its Federal corporate income tax return for the calendar year 1962 was filed with the district director of internal revenue at Portland, Oreg.For a number of years prior to 1962 petitioner had been in the mortgage banking business in the Portland, Oreg., area. When an individual desiring to buy or build a house would make application to petitioner for a loan of funds to be advanced for that purpose, petitioner would process the loan application and in the course thereof would, among other things, confirm the applicant's bank balance, check his credit rating, and procure a report from his employer regarding his employment record and his prospects for continued employment. In those instances in which the loan was to be insured by either the Federal Housing Administration or the Veterans' Administration, petitioner would obtain a commitment from the insuring agency. If petitioner was satisfied that the applicant was qualified for the loan for which he applied, it would make the loan. When the transaction was closed petitioner140 obtained a promissory note from the purchaser of the property secured by a mortgage on the property. A broker's fee of from 1 to 2 percent was received by petitioner from the mortgagor. Petitioner would have the mortgage recorded in the county in which the property was situated.Petitioner did not have sufficient capital to carry to maturity all loans which it made and therefore made contractual arrangements with several insurance companies to provide the necessary capital. Such a contract would provide that petitioner would offer for sale to the company the notes and mortgages which it had taken. If the company purchased any such note and mortgage, petitioner would execute an assignment of the note and mortgage to the purchaser upon the purchaser's remitting to it the agreed price. These assignments would be recorded in the public records of the county in which the property was situated.Under its contractual arrangements with the various insurance companies petitioner agreed to service the mortgages which it sold to them for a service fee payable only out of the interest it collected from the mortgagor. The servicing activities performed by petitioner consisted principally141 of collecting the mortgage payments from the mortgagor and remitting the same to the insurance company after deducting amounts to cover taxes and insurance on the particular properties involved. On FHA-insured loans the mortgages provided for a 1 1/2- percent additional fee on delinquent payments by the mortgagor and under its contracts with the insurance companies petitioner retained all such delinquent fees.On September 23, 1949, petitioner entered into a "Residential Loan Correspondent Agreement" with Bankers Life Co. of Des Moines, 1086 Iowa (hereinafter referred to as Bankers Life). On October 24, 1955, petitioner and Bankers Life entered into a second "Residential Loan Correspondent Agreement." These agreements provided that petitioner would make diligent effort to procure loans meeting the requirements of Bankers Life, deliver promptly after closing to Bankers Life all loan documents on loans on which Bankers Life had made a commitment, service the loans for Bankers Life for the fee agreed upon in the loan commitment, and in case of the termination of the agreement to deliver to Bankers Life the original or copies of all papers and records pertinent to the loan. Under142 the agreements Bankers Life was to promptly consider all loans offered it by petitioner, issue written commitments for such loans as it agreed to purchase, make prompt payments of loans previously approved, and allow petitioner to service each loan for the fee provided for in the commitment.Under petitioner's contract with Bankers Life the entire principal and interest payment from the mortgagor (with the exception of a reserve of $ 20,000) were forwarded to Bankers Life, Bankers Life would then make the necessary computation and return to petitioner its service fee.On June 3, 1955, petitioner entered into a "Purchasing and Servicing Agreement" with the Mutual Trust Life Insurance Co. (hereinafter referred to as Mutual Trust). The servicing contract agreement had a supplemental agreement and both these agreements were effective during 1962. The provisions in petitioner's contracts with Mutual Trust were generally comparable to those in its contracts with Bankers Life except that the agreements with Mutual Trust contained no limitation that loans be only on residential properties, made no reference to delivery of papers upon termination of the agreement, and did provide that petitioner143 deduct its service fee prior to forwarding the balance of principal and interest to Mutual Trust.Both the agreements between petitioner and Bankers Life and those between petitioner and Mutual Trust provided for termination by either party by written notice delivered to the other. Such a provision is customary in contracts between insurance companies and mortgage-servicing companies. However, as a practical matter if the mortgage-servicing company is functioning effectively, the contract is not canceled.Petitioner kept files on all mortgage contracts. Contained in these files would be copies of the note and mortgage, correspondence respecting the mortgages, and fire insurance policies. These files and their contents with the exception of the fire insurance policies which were the property of the investor company, were the property of petitioner.Petitioner performed its work in servicing mortgages without the use of computers. Its cost of servicing a mortgage averaged approximately 1087 one-half of the servicing fee. However, the cost of servicing a mortgage contract was approximately the same whether the balance of the principal was large or small. The servicing fee144 was a percentage, usually one-half of 1 percent a year, of the unpaid balance of the mortgage. Increased volume of mortgages serviced did not substantially reduce petitioner's cost of servicing each mortgage.Sherwood & Roberts, Inc. (hereinafter referred to as S & R), is a Washington State corporation dealing in mortgage-servicing contracts in much the same manner as petitioner. However, S & R's operations were much larger than petitioner's and its servicing operations are carried on primarily by use of computers. Because of its use of computers, its unit cost of servicing mortgages decreases as the volume of mortgages serviced increases.In 1926 S & R, which represented approximately 36 institutional investors, was servicing about $ 4.5 million in mortgages for about 10 institutional investors in the Portland, Oreg., area. S & R has represented Mutual Trust since 1957 in the State of Washington but never in the Portland area. It had never represented Bankers Life in any area.In 1962 representatives of S & R contacted Holmes with respect to purchasing petitioner's mortgage-servicing business. Holmes was willing to sell petitioner's mortgage-servicing business only if he also145 sold the business of a sole proprietorship which he operated under the name of Ladd Insurance Agency and received for the two businesses and any personal services he rendered the purchaser the amount of $ 175,000. The negotiations culminated in the sale of petitioner's mortgage-servicing business for $ 86,500 plus $ 4,000 for its personal property, the sale of the sole proprietorship operated by Holmes for $ 25,000 (plus $ 1,000 for furniture), an employment contract for 5 years for Holmes for $ 60,000 and payment by S & R of $ 1000 for a term life insurance policy of $ 60,000 for Holmes. A representative of the purchaser made the allocation of the $ 175,000 to each part of the "package deal."The bill of sale with respect to petitioner's mortgage-servicing business, executed on August 3, 1962, provided in part as follows:1. Subject only to the condition contained in paragraph 9 hereunder, for and in consideration of the sum of Eighty Six Thousand Five Hundred Dollars ($ 86,500) SELLER hereby grants, bargains, sells, transfers, and delivers unto PURCHASER all of the mortgage servicing business in which SELLER is engaged. SELLER has servicing contracts to manage loan portfolios146 consisting of outstanding principal mortgage balances owned by investor companies, the companies involved and mortgage balances connected therewith are set forth as at January 31, 1962, in Exhibit A attached hereto and made a part hereof. This is a sale and acquisition of the entire mortgage servicing enterprises of SELLER and, therefore, a complete transfer of all of SELLER's interest in and to the mortgage servicing portfolios heretofore serviced by SELLER.1088 2. Included in the aforesaid transfer are all of the investors' agreements, files, documents, contracts, supplies, records, accounts, and licenses of SELLER insofar as the same pertain to the mortgage servicing business, together with what is commonly referred to as the mortgage servicing portfolio from which the company has conducted its mortgage affairs. And SELLER hereby sets over unto PURCHASER whatever interest it may have in and to investors' agreements and privileges, and in addition thereto completely relinquishes to PURCHASER that which is best referred to as servicing fees arising from the heretofore mortgage business pursuits of SELLER.3. In connection herewith and as a part hereof SELLER covenants with147 PURCHASER that it will not in any form or manner of whatever kind or nature utilize the files and portfolios hereby transferred by SELLER to PURCHASER for business purposes which might in any way be competitive with those in which PURCHASER will now be engaged as a result of this acquisition.4. It is agreed that included in the properties hereby sold is the name "Realty Loan Corporation," or any part thereof, and SELLER hereby covenants to execute whatever additional documents may be involved in the surrender of its name to PURCHASER and the transfer of same in the office of the Oregon State Corporation Commission or whatever other public offices may be involved.5. As at January 31, 1962, SELLER and PURCHASER determined and agreed upon the servicing balances and figures contained in Exhibit A, and based thereupon the purchase price was established as aforesaid at $ 86,500. Time has been consumed in the negotiations attendant herewith, and each of the parties hereto agreed that a recomputation will be made as at the date upon which PURCHASER actually takes over that which it acquires hereunder and SELLER no longer has any responsibilities connected therewith. In the event of loss148 or failure of transfer to PURCHASER of all or any portion of said servicing and loan management accounts reflected in Exhibit A, for reasons other than cause by PURCHASER, at any time within two years from the date hereof the consideration as stated herein shall be reduced by 1% of the principal balances of such accounts lost or not transferred.6. All servicing balances, including loans in process, are to be redetermined as at the date of closing and delivery, and those balances are to be related to those reflected in Exhibit A. If the balances in their aggregate are less than those shown or greater than those shown in Exhibit A, then the aforesaid purchase price of $ 86,500 is to be adjusted in the following manner. If the servicing balances, including loans in process, differ from the balances reflected in Exhibit A, then and in that event the purchase price shall be adjusted upwards or downwards by amounts equal to 1 1/2% on those accounts on which the annual service fee is 1/2%; and 1 1/8% on those accounts on which the annual service fee is 3/8%. These adjustment percentages shall apply only to the differences between servicing accounts at the time of closing and servicing149 account balances reflected in Exhibit A. It is understood and agreed that payment for loans in process is to be made by PURCHASER only if said loans in process have been closed, delivered to the investor, paid for by the investor, and are being serviced under contract for the investor under the terms of the servicing contracts herein purchased.7. The purchase price hereunder shall be paid to SELLER by PURCHASER in sixty equal monthly installments, together with interest upon unpaid balances of 5% per annum, the first such monthly installment to be paid upon the date of delivery hereunder and based upon the purchase figure established at that time. Subsequent monthly installments shall be increased when, and if as a result of increase in purchase price from loans in process, such increase is finally 1089 determined to be due and owing. All such monthly installments shall be first applied to the payment of the aforesaid interest and then applied to principal.8. For and in consideration of the additional sum of $ 4,000.00 to be paid by PURCHASER to SELLER at the time PURCHASER takes over hereunder SELLER hereby grants, bargains, sells, transfers, and delivers unto PURCHASER150 all of the personal property of SELLER now being and situated in Suite 400 Henry Building, Portland, Oregon, with the exception of certain items which have heretofore been marked. * * ** * * 10. This agreement in its entirety is expressly conditioned upon the written consent and approval of the transfer of the mortgage servicing portfolios and mortgage servicing contracts with which this agreement is concerned, both by Mutual Trust Life and Bankers Life Company. * Exhibit A attached to the bill of sale showed balances of active loans of $ 8,840,784.08 and of loans in process of $ 614,634.34.The assignments of the Mutual Trust and Bankers Life servicing agreements to S & R were executed by petitioner and consented to by Mutual Trust and Bankers Life on September 28, 1962. S & R agreed to assume all of the duties and obligations that petitioner had under the agreements with Mutual Trust and Bankers Life.The principal purpose of S & R's purchase of petitioner's mortgage-servicing business was to obtain its mortgage-servicing contracts in the amount of approximately $ 9.4 million. A $ 9.4 million mortgage-servicing business is considered in the industry as a small mortgage-servicing151 business.A secondary purpose of S & R's purchase of petitioner's mortgage-servicing business was to obtain a connection with Bankers Life with which S & R had never dealt and the right to represent Mutual Trust in the Portland, Oreg., area. Since S & R had represented Mutual Trust in the State of Washington it considered the obtaining of an additional connection with that company less valuable than the obtaining of its first connection with Bankers Life. In addition to obtaining the services of Holmes which S & R considered to be valuable, the employment of Holmes enabled S & R to maintain relationships with builders and realtors with whom Holmes had dealt for a number of years as well as to obtain the benefit of the good relationship of Holmes to Mutual Trust and Bankers Life.The contract of employment between S & R and Holmes provided that the $ 60,000 was to be paid to Holmes at the rate of $ 1,000 a month for 60 months and that the total amount was to be paid even though the services of Holmes should for any reason no longer be needed by S & R. The contract further provided as additional compensation to Holmes for the retention by him of origination fees on loans he procured152 for S & R, the payment to him of one-third of new insurance business produced by him for S & R, the payment to him of one-half 1090 the commission on new bonds procured for S & R by him, and the payment to him of one-quarter of S & R's commissions on renewal premiums on insurance he had procured. It was specifically provided in the contract that Holmes could for his own account continue in the pursuit of new mortgage, insurance, and bond business provided that during the term of the agreement "the same shall never in any form or manner be competitive and contrary to the best interests" of S & R.The final total amount paid by S & R for the "package deal" was as follows:Contract price for petitioner's mortgage service business$ 86,500.00Less:Adjustment for loans in process not purchased: (1 1/2% of$ 136,820.79)2,052.31Petitioner's expense paid by S & R for petitioner'semployee's vacation salary accrued at time of transaction128.75Overhead cost for processing and shipping loans in process($ 326,080.75 x 1/2%)1,630.40Net price82,688.54Personal property of petitioner4,000.00Employment contract with Holmes60,000.00Contract price for Ladd Insurance Co.25,000.00Furniture and equipment of Ladd1,000.00Premium for Holmes Life Insurance1,000.00Total173,688.54153 Following the formal transfer of the mortgage-servicing business by petitioner to S & R in September 1962, S & R moved into petitioner's offices but placed its name on the door. S & R used petitioner's name only once thereafter. Three of petitioner's employees were retained by S & R. Petitioner remained in existence as a corporate entity but did not continue to engage in the mortgage-servicing business.National statistics show the average annual cost of servicing a mortgage contract to be approximately 0.3 percent of the remaining principal and that most mortgages are serviced at an annual fee of 0.5 percent of the remaining principal giving an average annual profit of approximately 0.2 percent of the remaining balance. In the mortgage-servicing business in the early part of 1962 it was customary to consider the average life of a long-term mortgage loan to be 8 to 12 years. The loans which petitioner was servicing at the date of the sale of this portion of its business to S & R were long-term loans of 20 to 30 years. After S & R had been servicing the $ 9.4 million of mortgages for 2 years it estimated that there would remain unpaid balances of not less than $ 7.5 million. 154 For the year 1962 up until September 28, when the final transfer of its mortgage-servicing business to S & R was made, petitioner reported mortgage loan servicing fees in the amount of 1091 $ 34,044.89. For an unspecified period after S & R took over the servicing of the mortgages which had been procured by petitioner prior to September 28, 1962, it grossed approximately $ 40,000 a year in servicing fees from those mortgages.On January 1, 1959, petitioner and Frank Grimsdell entered into an agreement pertaining to the acquisition and sale of certain loans originated by Grimsdell. This agreement provided for certain payments to be made by petitioner to Grimsdell on mortgages it serviced and that in "case the servicing is sold by us or cancelled by the company we represent," Crimsdell was to receive a percentage of the payment received by petitioner. At the time of petitioner's transfer of its mortgage-servicing business to S & R, an unpaid balance of $ 802,931 remained outstanding on loans originated by Grimsdell. On its 1962 income tax return petitioner did not deduct any amount for an accrual of the remaining balance owed Grimsdell. In a letter to Grimsdell dated January155 2, 1968, Holmes computed the amount due Grimsdell as follows:The total price received from Sherwood & Roberts, including salary paid to me, was $ 142,688.54 for servicing of $ 9,318,517, or 1.531%. This percentage multiplied by the $ 802,931 equals $ 12,287.67; when divided by one-quarter, $ 3,071.42 would be your share of the sales price. You have already received $ 1,100 from the G. H. Jeremiah loan, leaving a balance due of $ 1,971.42 when and if I ever break even on the Tabor Hill transaction.During 1962 Grimsdell collected a $ 2,200 loan fee, one-half of which was for the account of petitioner but was not paid to it in 1962. In reporting its 1962 income petitioner did not include in accrued income the $ 1,100 due it from Grimsdell.On its 1962 Federal corporate income tax return petitioner reported the transfer of its mortgage-servicing business to S & R as an installment sale of a capital asset. Petitioner reported the total gain on the transaction as $ 83,559. Petitioner reported payments under the installment method on its income tax returns for the years 1962 through 1967, reporting receipts for the following years in the amounts indicated:YearAmount1962$ 4,197.11196315,840.59196416,651.03196517,502.93196618,437.22196713,871.12156 Respondent in his notice of deficiency determined that the $ 83,559 reported as capital gain was ordinary income and that petitioner was not entitled to report this income on the installment method with the following explanation:(a) and (c) It has been determined that the gain of $ 83,559.00 in 1962 from the sale of your mortgage servicing business was an ordinary gain instead of a long-term capital gain, as reported.1092 Moreover, it has been determined that this gain of $ 83,559.00 may not be reported by the installment method. Such gain is not from the sale of property as within the scope and meaning of Section 453.Accordingly, the gain of $ 83,559.00 is reportable in full as ordinary income in 1962, and the long-term capital gains reported on the installment basis in your returns for the years 1962 and 1963 in the respective amounts of $ 4,054.41 and $ 15,302.01 have been eliminated.OPINIONPetitioner contends that the primary assets of its mortgage-servicing business which it sold to S & R were its mortgage portfolio, its name, its going-concern value, and its contracts with Mutual Trust and Bankers Life. Petitioner argues that these intangible assets are capital 157 assets in the nature of goodwill. Respondent contends that the only asset of any value which petitioner sold to S & R for the $ 86,500 was the right to receive the future service fees from mortgages which petitioner was servicing at the time of the sale. Respondent contends that petitioner had no intangible assets in the nature of goodwill or going concern value aside from Holmes' relationship with builders and realtors and with Mutual Trust and Bankers Life. It is respondent's position that the employment contract of S & R with Holmes was the consideration for these assets.Both parties recognize that if all petitioner sold to S & R was its right to receive future service fees from Bankers Life and Mutual Trust the entire gain realized from the sale is ordinary income and that if a substantial portion of the sales price was paid for the right to receive income, the gain applicable to such portion would be ordinary income and not capital gain. Nelson Weaver Realty Co., 35 T.C. 937 (1961), revd. 307 F. 2d 897 (C.A. 5, 1962), the holding of which was specifically rejected and the dissenting opinion of Judge Rives of the Court158 of Appeals followed in Bisbee-Baldwin Corporation v. Tomlinson, 320 F. 2d 929, 930, 934 (C.A. 5, 1963); Bankers Guarantee Title & Trust Co. v. United States, 418 F. 2d 1084 (C.A. 6, 1969); General Guaranty Mortgage Co. v. Tomlinson, 335 F. 2d 518 (C.A. 5, 1964); and United States v. Eidson, 310 F. 2d 111 (C.A. 5, 1962).In Bisbee-Baldwin Corporation v. Tomlinson, supra, a case dealing with mortgage-servicing contracts, the court stated at 934-935:Still, some parts of the "bundle" of contractual rights transferred by Bisbee-Baldwin were capital assets. The mortgage correspondent relationships have value in addition to the rights to servicing commissions. It acts as a "feeder" for related businesses, such as insurance and real estate, frequently engaged in by mortgage bankers. The monthly escrow deposits made by the mortgagors considerably enhance the servicing agent's credit standing. Moreover, as the dissenting opinion in Nelson Weaver recognized, there is a sale of "good will". The mortgage portfolio159 of the mortgage banker tends to increase each year as both the mortgagors and the investors look to the mortgaging servicing agent for further funds and further outlets for investment. * *1093 * * The consideration received for the right to earn future servicing commissions must be regarded as a substitute for such future ordinary income. This important part of the bundle of rights sold or exchanged can be separated from the other parts and should be taxed for what it is * * See also Hugh H. Hodges, 50 T.C. 428 (1968), in which we allocated a composite price of an insurance business between the amount paid for commissions on renewal premiums on 5-year policies which constituted ordinary income to the seller and the amount paid for the intangible assets which constituted capital gain.Although S & R was primarily interested in the purchase of the servicing fees to be obtained on mortgages which petitioner was servicing, the evidence shows that it was also desirous of obtaining petitioner's contacts with Mutual Trust and Bankers Life and the goodwill which petitioner had with individual builders and realtors, and the files relating to 160 mortgages procured through such builders and realtors. The bill of sale as well as the other evidence of record supports the conclusion that S & R was primarily interested in the income that would be generated from the mortgage-servicing business and the major portion of the $ 86,500 was paid for the mortgage-servicing income. The bill of sale provided that if for any reason except S & R's fault, any of the contracts which petitioner was servicing at the date of sale were lost or not transferred to S & R within 2 years of the date of purchase of the mortgage-servicing business, petitioner would pay to S & R 1 percent of the principal balance of such accounts lost or not transferred. Since the remaining balance of the mortgages transferred to S & R at the end of the 2 years would not be less than $ 7 1/2 million, S & R was granted a protection up to approximately $ 75,000 on the amount of the $ 86,500 which is allocable to future income from servicing fees.S & R purchased petitioner's name but used it only once in connection with a loan in process at the time of purchase. Obviously, therefore the name was of little value to S & R. Included in the assets purchased were petitioner's161 mortgage files, documents, records, and licenses. These assets had some value to S & R.On the basis of this record it is difficult to allocate the $ 86,500 payment between the purchase of future income and the purchase of capital assets. However, since we are of the view that such an allocation is necessary, we will make that allocation on the basis of all the evidence of record.S & R, for an unspecified number of years after the purchase, received gross servicing fees from the mortgages it took over from petitioner of $ 40,000. Approximately two-fifths of this amount or $ 16,000 a year would constitute net income according to the estimate of the officer of S & R who negotiated the purchase. The evidence shows that as the 1094 mortgages are paid off and the balances decline the servicing fees and net income from such fees decline. It would not be expected that a person would pay the full price of the income it expected to receive over the lives of the mortgages. Upon consideration of all the evidence, we conclude that S & R paid petitioner $ 10,000 for its intangible assets and the portion of the gain from the transaction applicable to this $ 10,000 is capital gain and162 the remaining portion of the gain is ordinary income.Respondent takes the position that petitioner is not entitled to report the portion of the gain from the sale applicable to its sale of its future servicing fees on the installment method. 3Petitioner contends that section 453 applies to all sales except for inventory items. Petitioner points out that section 453, dealing with installment sales, does not require that "property" be a capital asset for a taxpayer to be permitted to elect to use the installment method of reporting income. Petitioner argues that its right to future income from servicing the mortgages under its contracts with the owners, primarily Mutual Trust and Bankers Life, was "personal property" as the term is used in section 453.In Ann Edwards Trust, 20 T.C. 615">20 T.C. 615 (1953),163 affd. 217 F. 2d 952 (C.A. 5, 1955), certiorari denied 349 U.S. 905">349 U.S. 905 (1955), we held that the taxpayer's gain on the sale of fruit on the trees at the time it sold its citrus grove was ordinary income and not capital gain because the fruit was held primarily for sale to customers in the ordinary course of business. We further held that even though the gain was ordinary income petitioner was entitled to report the gain on the installment method, stating at page 618:The other issue relates only to the trust petitioners who contend that they may return such ordinary income on the installment basis under section 44 of the Internal Revenue Code. [Footnote omitted. Sec. 453, I.R.C. 1954, is substantially the same provision.]On this issue, we think that the petitioners have met the requirements of the statute. If the fruit be regarded as personal property, the facts show that the sales in question were casual sales and not sales in the ordinary course of the petitioners' trade or business, even though the fruit on the trees at the time of the sale was held primarily for sale to customers in the ordinary course of such trade or business. 164 Furthermore, there can be no question, we think, that a growing crop of citrus fruit would not be "property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year." * In Ann Edwards Trust, supra, respondent made no contention that the fruit on the trees was not "property." In the instant case respondent 1095 apparently does contend that petitioner's contractual right to the income from the servicing fees on the mortgages was not "property" within the meaning of section 453.Many of the cases holding the gain from the sale of future income to be taxable as ordinary income recognize that the sale is of "property" but hold such "property" not to be a capital asset on the ground that the capital gains provisions should be narrowly construed so as not to apply to a sum which is "essentially a substitute for what would otherwise be received at a future time as ordinary income." Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260, 265 (1958). In that case the Court stated that it would proceed on the basis which had been the premise of the Court of Appeals165 that the oil payments transferred were "interests in land." See also United States v. Woolsey, 326 F. 2d 287 (C.A. 5, 1963), in which a right to future income from commissions under an insurance contract is referred to as "property" but the gain from the sale is held to be ordinary income.In Commissioner v. Gillette Motor Transport, Inc., 364 U.S. 130">364 U.S. 130 (1960), the Court held that an amount received by the taxpayer as compensation for the temporary taking of its facilities by the Government during World War II was ordinary income and not capital gain. The taxpayer took the position that the amount was received upon an involuntary conversion of property used in its trade or business and therefore was taxable as capital gain. The Court made the following statement with respect to the contention of the taxpayer at pages 134 and 135:While a capital asset is defined in § 117(a)(1) as "property held by the taxpayer," it is evident that not everything which can be called property in the ordinary sense and which is outside the statutory exclusions qualifies as a capital asset. This Court has long held that the term "capital166 asset" is to be construed narrowly in accordance with the purpose of Congress to afford capital-gains treatment only in situations typically involving the realization of appreciation in value accrued over a substantial period of time, and thus, to ameliorate the hardship of taxation of the entire gain in one year. Burnet v. Harmel, 287 U.S. 103">287 U.S. 103, 106. Thus the Court has held that an unexpired lease, Hort v. Commissioner, 313 U.S. 28">313 U.S. 28, corn futures, Corn Products Refining Co. v. Commissioner, 350 U.S. 46">350 U.S. 46, and oil payment rights, Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260, are not capital assets even though they are concededly "property" interests in the ordinary sense. And see Surrey, Definitional Problems in Capital Gains Taxations, 69 Harv. L. Rev. 985">69 Harv. L. Rev. 985, 987-989 and Note 7.In Hollywood Baseball Association, 42 T.C. 234">42 T.C. 234, 265 (1964), affd. 352 F. 2d 350 (C.A. 9, 1965), remanded on another issue 383 U.S. 824">383 U.S. 824 (1966), we held that the167 intangible contract and property rights which flowed from the exclusive privilege of playing baseball in certain locations as a member of an established league were "property" within the meaning of section 337.1096 In our view the rights of petitioner to the servicing fees under its contracts with the various insurance companies and particularly its rights under its contracts with Mutual Trust and Bankers Life was "property" in the "ordinary sense" even though these rights were not "capital assets" and the gain received from their sale was not capital gain. The fact that petitioner's rights to servicing fees under its various contracts was a form of property is apparent when these rights are compared to the "life memberships" which we held not to be "personal property" within the meaning of section 453(a) in Town & Country Food Co., 51 T.C. 1049 (1969). In that case we stated at page 1055:We agree with the respondent that the sales of life memberships did not constitute sales of personal property within the meaning of the statute. A life membership granted the purchaser a number of rights, principally the right to purchase food from the petitioner168 at competitive prices and have it delivered, the right to the services of the petitioner under a 3-year service warranty on the customer's own freezer, and the right, if he should at any time purchase a freezer from the petitioner, to have the purchase price of the membership applied on the purchase price of the freezer. Thus, a life membership amounted principally to an agreement by the petitioner to render services to the purchaser in the future and to sell property to the purchaser in the future at the purchaser's election. The sale of a life membership did not itself effect the sale by the petitioner of any property whatsoever. And clearly the statute does not relate to the reporting of income arising from an agreement to render services. * Whereas the taxpayer in Town & Country Food Co., supra, was paid by a "purchaser" for agreeing to render services to that "purchaser" in the future, the petitioner in the instant case transferred to S & R for a price its right to receive future income under a contract.If petitioner's right to receive income from the servicing fees had not been conditional upon the rendition of certain services, which169 obligation was assumed by S & R, the fact that the right was "property" would be more readily apparent. However, the fact that the income was conditional upon the rendition of services does not cause the contractual right to receive the income for rendering the services not to be a type of "property." The issue we must resolve is whether this right is "personal property" within the meaning of section 453(b).Respondent does not contend that the transaction here involved was not a "casual sale" and the facts clearly support the conclusion that it was a "casual sale." Each party discusses cases claimed to be comparable to the instant case, stating that no case involving the precise issue has been found. 4 Respondent relies primarily on our holding in 1097 Charles E. Sorensen, 22 T.C. 321 (1954). In that case we held that certain options to purchase stock received by the taxpayer as compensation had no ascertainable value when received and therefore when they were subsequently sold the proceeds of the sale constituted ordinary income as a substitute for the compensation which would have been realized of the difference in the price paid for the 170 stock and its fair market value at the date the options would have been exercised, had they not been sold. The taxpayer had contended that the receipts from the sale of the options constituted long-term capital gain. The taxpayer contended that even if the receipts constituted ordinary income, he was entitled to use the installment method of reporting the income since it was from a "casual sale" of "personal property." We stated in this respect at page 342:171 The petitioner contends that even if the proceeds from the sale of the options are held not to be gain from the sale of capital assets held for more than 6 months, he, nevertheless, is entitled to report the income from the sales on the basis provided in section 44 of the Code [sec. 44 of the 1939 Code is the predecessor of sec. 453 of the 1954 Code] for reporting income from sales of property made on the installment plan. Since the sales of the options operated to compensate petitioner for his services, what he received in the form of both cash and notes was income by way of compensation. The provisions of section 44 relate only to the reporting of income arising from the sale of property on the installment basis. Those provisions do not in anywise purport to relate to the reporting of income arising by way of compensation for services. Petitioner is not entitled to have them applied here.The instant case is factually different from Charles E. Sorenson, supra.Had the taxpayer in the Sorensen case exercised his options, the entire difference in the price he paid for the stock and its fair market value would have been income to him at that172 time as compensation for services. When he sold the options he received in effect this same difference in the option price of the stock and its fair market value as compensation. The sale could not change the nature of either that for which it substituted or the time at which the amount was includable in income. In the instant case had petitioner not sold its mortgage-servicing business, it would have received income from the mortgages 1098 it was servicing at the date of the sale over a period of approximately 8 years and during these 8 years would have serviced the mortgages. The property petitioner sold to S & R was a substitute for its income or profits over a period of years after the sale to S & R. The income petitioner sold was not "compensation for services" as in Sorensen but rather the future profit to be realized from the rendition of services, which services after the sale were rendered by another. In Commissioner v. P. G. Lake, Inc., supra, the Supreme Court held that the payments received for the transfer of oil payments, although not "capital gain," were subject to the depletion allowance as the oil payments would have173 been had they not been transferred. Similarly, in the instant case even though the amount received is ordinary income, it is a substitute for income which would have been received over a period of years and there is no reason for prohibiting the use of the installment method of reporting that income.Considering the purpose of section 453(b) which is to permit income from certain sales of personal property to be taxed as it is realized and the facts of the instant case, we conclude that petitioner is entitled to report its entire gain from the sale of its mortgage-servicing business on the installment method even though we have allocated all but $ 10,000 of the sales price to the sale of future income and hold that the portion of the gain allocable to the sale of future income is ordinary income. In our view the right to future income sold in the instant case was "property" and the sale was a casual one which also complied with the other requirements of section 453(b).Since we hold that petitioner is entitled to use the installment method it elected in its return, we need not decide whether the entire gain accrued in 1962.The final issue is whether petitioner is entitled to a 174 deduction or to reduce the gross amount received from S & R by an amount owing to Grimsdell in 1962 as a result of the transfer. The parties stipulated as follows:The parties agree that the amount actually due and owing to Grimsdell at the time of the transfer of the mortgage servicing business by Realty Loan, to the extent it resulted from that transfer, should reduce the gross amount received by Realty Loan from Sherwood & Roberts.From the facts stipulated by the parties, we are unable to determine what amount, if any, was actually owing by petitioner to Grimsdell after the sale in 1962 except to the extent that Grimsdell was to retain petitioner's $ 1,100 share of the loan fee collected by Grimsdell in 1962 as a part payment of the amount owed to him by petitioner as a result of the sale by petitioner of its mortgage-servicing business. Other than the letter of January 2, 1968, there is nothing in the record to indicate what amount of the payment to petitioner by S & R was to be 1099 used as a base for computing the amount owed by petitioner to Grimsdell. The statements in the letter give a fair inference that Grimsdell and petitioner might not have been in agreement*175 on this factor. Also, the fair inference from the 1968 letter is that Grimsdell was to be paid no portion of the $ 1,971.42 remaining after offsetting the $ 1,100 unless petitioner were to "break even on the Tabor Hill transactions." The record is barren of information as to the nature of the Tabor Hill transactions. We therefore hold that the record is insufficient to show that petitioner actually owed to Grimsdell in 1962 any amount in excess of the $ 1,100 due petitioner on a loan collected in 1962 for it by Grimsdell.Petitioner did not report the $ 1,100 as income in 1962 and did not accrue any amount as due to Grimsdell. This record does not support making any change in petitioner's method of handling the two items on its 1962 income tax return.Decision will be entered under Rule 50. Footnotes1. All references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩2. This issue is not specifically raised by the pleadings but is raised in a supplemental stipulation of facts filed by the parties. Respondent concedes that any amount due under the agreement which was accrued in 1962 is deductible by petitioner and the facts as to the issues are all contained in the supplemental stipulation.↩3. Respondent apparently does not contend that the gain applicable to the sale of the capital assets may not be reported on the installment method. We therefore assume that the parties are in agreement in this respect.↩4. In Hugh H. Hodges, 50 T.C. 428">50 T.C. 428 (1968), the taxpayer had reported gain from the sale of an insurance business on the installment method and the respondent did not challenge his right to so report the part of the gain which constituted ordinary income. In United States v. Woolsey, 326 F. 2d 287 (C.A. 5, 1963), the right to use the installment method for reporting gain that was taxable as ordinary income was likewise not challenged by the Government. In Nelson Weaver Realty Co., 35 T.C. 937">35 T.C. 937 (1961), revd. 307 F. 2d 897 (C.A. 5, 1962), and Lozoff v. United States, 266 F. Supp. 966">266 F. Supp. 966 (E.D. Wis. 1967), affirmed per curiam 392 F. 2d 895 (C.A. 7, 1968), the taxpayers apparently did not contend that they were entitled to use the installment method of reporting if the gain was ordinary income and not capital gain. In the latter case the Court held there had been no sale, so in any event this holding would have disposed of the issue had it been raised. In Leonard Hyatt, T.C. Memo 1961-318">T.C. Memo. 1961-318, affirmed per curiam without discussion of this issue 325 F. 2d 715↩ (C.A. 5, 1963), a statement is made to the effect that the installment sale provisions are inapplicable to the amount of $ 52,375 which was a substitute for compensation. However, the facts show that the entire amount of $ 52,375 was paid to the taxpayer in the year there in issue and loaned back to the payer. The payment was of an amount assigned to the taxpayer by a company of which he was a director as consideration for his assignment to the company of his management contract of a Texas insurance company. The statement in this case with its complicated factual situation is of little help in disposing of the issue in the instant case.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619150/	Estate of Charles M. Jacoby, Deceased, Billie Jean Hawkinson, Administratrix, W.W.A. v. Commissioner.Estate of Jacoby v. CommissionerDocket No. 2907-69.United States Tax CourtT.C. Memo 1970-165; 1970 Tax Ct. Memo LEXIS 196; 29 T.C.M. (CCH) 737; T.C.M. (RIA) 70165; June 22, 1970, Filed Thomas E. King and Larry G. Shulz, 1200 City National Bank Bldg.,Kansas City, Mo., for the petitioner. Wayne A. Smith, for the respondent. 197 TANNENWALDMemorandum Findings of Fact and Opinion TANNENWALD, Judge: Respondent determined a deficiency of $5,953.84 in petitioner's estate tax. The sole issue remaining for our determination is the includability in the decedent's estate, pursuant to sections 2035 and 2038, 1 of shares of a closely held corporation and a bank account which the decedent transferred to himself as custodian for his minor grandson, pursuant to the Missouri Uniform Gifts to Minors Act. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner is the daughter of Charles M. Jacoby, who died on June 7, 1965, and the administratrix, W.W.A., of his estate. Her legal residence at the time of filing the petition herein was Kansas City, Missouri. The estate tax return was filed with the district director of internal revenue, St. Louis, Missouri. The decedent was survived by his third wife; one daughter by his second marriage, Billie Jean Hawkinson; and one grandson, Bruce Randall Hawkinson, born on May 16, 1948. There were no other surviving descendants. 198 Prior to July 29, 1963, the decedent owned 133 of the 135 outstanding shares of common stock of David Copperfield Apartments, Inc., located in Kansas City, Missouri. Billie Jean Hawkinson owned one share, and the remaining share was held in the name of Bruce Randall Hawkinson. On July 29, 1963, the decedent made a transfer of 33 shares of his common stock of David Copperfield Apartments, Inc., to himself as sole custodian for his grandson, pursuant to the Missouri Uniform Gifts to Minors Act. The decedent filed a United States Gift Tax Return for the year 1963 on account of this transfer. The decedent remained sole custodian of the stock and all income accruing therefrom (consisting of dividends) until his death on June 7, 1965. 738 This income was deposited in an account at the Park National Bank of Kansas City, Missouri, entitled, "Charles M. Jacoby as Custodian for Bruce Randy Hawkinson Under Missouri Uniform Gifts to Minors Act." The ledger sheets reflect expenditures from this account during the period February 1964 through May 1965 in the amount of $1,860.99. At the time of the decedent's death the account contained $1,709.01. The value of the 33 shares of stock of199 David Copperfield Apartments, Inc., held by decedent as custodian for his grandson, was $30,426 at the time of his death. Opinion The issue herein is the includability in the decedent's estate of stock and a bank account, consisting of funds accumulated from dividends on that stock, held by the decedent at the time of his death as custodian for the benefit of his minor grandson pursuant to the Missouri Uniform Gifts to Minors Act. Respondent relies upon both sections 2035 and 20382 with respect to the inclusion of stock, and solely upon section 2038 with respect to the inclusion of the bank account. 200 We have recently faced this legal question with respect to section 2038 in Dorothy Stuit, Transferee, 54 T.C. 580">54 T.C. 580 (March 24, 1970), which involved the application of the Illinois Uniform Gifts to Minors Act, identical in relevant part to the Missouri statute involved in this case. 3 In Stuit, we held that the value of stock transferred by the decedent to herself as custodian for each of her grandsons, pursuant to the Illinois Uniform Gifts to Minors Act, was includable in her gross estate pursuant to section 2038(a). She maintained a separate custodianship for each grandson, so that there was no possibility of shifting benefit from one minor to another. In so holding, we affirmed our view articulated in Estate of Jack F. Chrysler, 44 T.C. 55">44 T.C. 55 (1965), reversed on other grounds, 361 F. 2d 508 (C.A. 2, 1966), and in Estate of Russell Harrison Varian, 47 T.C. 34">47 T.C. 34, 40-44 (1966), affirmed per curiam, 396 F. 2d 753 (C.A. 9, 1968), involving essentially the same powers held by a trustee-transferor, both of which relied upon Lober v. United States, 346 U.S. 335">346 U.S. 335 (1953), and Commissioner v. Estate of Holmes, 326 U.S. 480">326 U.S. 480 (1946).201 202 Petitioner contends that the decedent's power, as custodian, was limited by an ascertainable standard and that the decedent had no power to affect the enjoyment of the assets in question. All of petitioner's contentions with respect to the presence of an ascertainable standard, namely, that the doctrine of ejusdem generis should be applied to the words "support, maintenance, education, and benefit" of section 404.040, Missouri Revised Statutes (see footnote 3, supra), or that the word "benefit," in any event, provides an independent ascertainable standard, were fully discussed in the Stuit opinion, supra, and we must reject petitioner's arguments on the basis of that opinion. Petitioner's second contention is that the decedent could affect only the time of 739 enjoyment and not the identity of the person enjoying the property, and that such a limited power of "pure acceleration" does not fall within the ambit of section 2038. But this situation also obtained in Dorothy Stuit, Transferee, Estate of Russell Harrison Varian, and Estate of Jack F. Chrysler, all supra. Petitioner attempts to distinguish the Lober and Holmes decisions, supra, on the basis that, in those cases, the203 trustee-grantor had the power to "affect" the actual enjoyment of the gift property, whereas under the Uniform Gifts to Minors Act, the custodian may be required by court order to expend assets for the minor's support, maintenance, and education. Mo. Rev. Stat. sec. 404.040(3) (footnote 3, supra.) From this, petitioner concludes that decedent's powers were more restricted. The significant factor, however, is not that a Missouri court might have ordered the decedent to make distributions from the accumulated income or the stock for the support, maintenance, and education of his minor grandson, but rather that there was vested in the decedent an additional and significant retained discretionary power to distribute the accumulated income or the stock to his grandson, or to utilize them for the benefit of his grandson. The facts of this case bear witness to such discretionary power in that the ledger sheets for the custodial account at the Park National Bank reflect payments by the decedent between February 1964 and May 1965 in the amount of $1,860.99, which, according to the testimony of Bruce Randall Hawkinson, reflected checks which he had written against the custodial account, but204 which were of necessity signed by the decedent. While section 404.040(3) may at times serve to prevent a custodian from retaining funds, neither that, nor any other section of the Uniform Gifts to Minors Act, serves to impede the custodian from expending funds for the benefit of or distributing assets to the minor. Cf. Dorothy Stuit, Transferee, supra; Estate of Russell Harrison Varian, supra, 47 T.C. at 43. Finally, petitioner argues that termination of the custodial arrangement while the beneficiary remains a minor is a meaningless act under Missouri law because of sections 475.030 and 475.125, Missouri Revised Statutes, 4 which pertain to guardianship. Petitioner maintains that a custodian who is not a parent, in the event that he desires to terminate the custodianship, must transfer the subject property to a court-appointed guardian who will, in effect, act as a successor custodian. We do not think that such a limitation on the power to terminate, even if it is assumed that the Missouri statutes operate as petitioner contends, would preclude the applicability205 of section 2038, since it obviously would not annul the power of the decedent to affect enjoyment through discretionary use or non-use from time to time of the bulk of the funds for the benefit of the minor.5 Moreover, we note that the plain language of the statute is permissive and not mandatory, for section 475.030, Missouri Revised Statutes (footnote 4, supra), provides that a guardian shall be appointed, "if the court finds the interest of the minor so requires." At the very least, petitioner has failed, in terms of meeting her burden of proof, to demonstrate that in the event of a complete termination of the custodianship by the decedent by means of a distribution of the stock of the David Copperfield Apartments, Inc., to Bruce Randall Hawkinson, the Missouri courts would have appointed a guardian to administer the stock on the latter's behalf. 206 Finally, we note that there can be no question with respect to the includability of the balance of the bank account at decedent's death derived from the dividend income from the David Copperfield stock. Indeed, petitioner makes no separate 740 contention with regard to such balance. As our findings of fact show, the account was also held by decedent as custodian. Such being the case and given the fact that the funds were derived from the custodian arrangement with respect to the stock, the balance in the account is also includable in decedent's gross estate under section 2038. United States v. O'Malley 383 U.S. 627">383 U.S. 627 (1966); Estate of Russell Harrison Varian, supra, 47 T.C. at 45-46. Because of our decision in favor of respondent with respect to the applicability of section 2038, we need not reach the section 2035 issue presented to us. In order to reflect petitioner's concession with respect to another issue, Decision will be entered under Rule 50. Footnotes1. All references, unless otherwise specified, are to the Internal Revenue Code of 1954, as amended.↩2. SEC. 2035. TRANSACTIONS IN CONTEMPLATION OF DEATH. (a) General Rule. - The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, in contemplation of his death. SEC. 2038. REVOCABLE TRANSFERS. (a) In General. - The value of the gross estate shall include the value of all property - (1) Transfers after June 22, 1936. - To the extent of any interest therein of which the decedent has at any time made a transfer * * , by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person * * to alter, amend, revoke, or terminate * * .↩3. Missouri Revised Statutes, section 404.040 (Vernon's Mo. Stat. Ann. (Supp. 1969)), which reads as follows: 404.040. Duties and powers of custodian * * 2. The custodian shall pay over to the minor for expenditure by him, or expend for the minor's benefit, so much of or all the custodial property as the custodian deems advisable for the support, maintenance, education and benefit of the minor in the manner, at the time or times and to the extent the custodian in his discretion deems suitable and proper, with or without court order, with or without regard to the duty of himself or of any other person to support the minor or his ability to do so, and with or without regard to any other income or property of the minor which may be applicable or available for any such purpose. 3. The circuit court, on the petition of a parent or guardian of the minor or of the minor, if he has attained the age of fourteen years, may order the custodian to pay over to the minor for expenditure by him or to expend so much of or all the custodial property as is necessary for the minor's support, maintenance or education.↩4. 475.030 Letters of guardianship issued, when 2. Letters of guardianship of the estate of a minor shall be granted whenever the estate of the minor is not derived from his parents or whenever such estate is derived from one parent, if the court finds the interests of the minor so requires. 475.125 Support and education of ward and dependents The probate court may make orders for the management of the estate of the ward, for the support and education of the ward, if a minor, for the restraint, maintenance and safekeeping of the ward and for the maintenance of his family and education of his children, if an incompetent, according to his means and obligations, if any, out of the proceeds of his estate, and may direct that payments for such purposes shall be made weekly, monthly, quarterly, semiannually or annually. * * * ↩5. We also note that a court appointed guardian would have been restricted by section 475.125↩ (footnote 4, supra) to expenditures for the "restraint, maintenance and safekeeping" of the minor, a standard more limited than the "support, maintenance, education, and benefit" provided by the Uniform Gifts to Minors Act. But, even under petitioner's interpretation, decedent retained the power to terminate. Consequently, a termination coupled with the appointment of a guardian might well significantly affect the minor's enjoyment of the transferred property.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619152/	RICHARD K. AND MARILYN J. PHILLIPS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPhillips v. CommissionerNo. 9354-96United States Tax Court114 T.C. 115; 2000 U.S. Tax Ct. LEXIS 13; 114 T.C. No. 7; February 29, 2000, Filed River City Ranches No. 4 v. Commissioner, T.C. Memo 1999-209">T.C. Memo 1999-209, 1999 Tax Ct. Memo LEXIS 243">1999 Tax Ct. Memo LEXIS 243 (T.C., 1999)13 A decision based on the stipulation of the parties will be entered. Ps were limited partners in several partnerships with the same designated tax matters partner (TMP). At the request of the Internal Revenue Service (IRS), the TMP executed Forms 872, Consent to Extend the Time to Assess Tax, extending the periods of limitations for the years in issue. Before executing the extensions, the TMP had been the subject of criminal tax investigations by the IRS. The tax investigations ended before the TMP executed most of the extensions. Ps alternatively contend: (1) That the second and third sentences of sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), are invalid and that the initiation of a criminal tax investigation of the TMP converted his partnership items into nonpartnership items as a matter of law; (2) that the criminal tax investigation of the TMP created a conflict of interest between the TMP's duties as a fiduciary of the partnerships and his self-interest as the subject of a criminal14 tax investigation and that such a conflict necessitated his removal as TMP based on the rationale of Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221">147 F.3d 221 (2d Cir. 1998), revg. and remanding Transpac Drilling Venture 1982-16 v. Commissioner, T.C. Memo 1994-26">T.C. Memo. 1994-26; or (3) that respondent abused his discretion by not issuing a written notice informing the TMP that his partnership items would be treated as nonpartnership items. HELD: Sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. HELD, FURTHER: The criminal tax investigation did not create a disabling conflict of interest and therefore did not terminate the TMP's designation. HELD, FURTHER: Ps have not established that respondent abused his discretion by not notifying the TMP that his partnership items would be treated as nonpartnership items. Curtis W. Berner, for petitioners.Margaret A. Martin, Neal O. Abreu, Steven Mopsick, and Ronald L. Buch, Jr., for respondent. Dawson, Howard A., Jr.;Goldberg, Stanley J.DAWSON; GOLDBERG116 OPINIONDAWSON, 15 JUDGE: This case was assigned to Special Trial Judge Stanley J. Goldberg pursuant to Rules 180, 181, and 183. All Rule references are to the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGEGOLDBERG, SPECIAL TRIAL JUDGE: Respondent determined deficiencies in petitioners' Federal income taxes, additions to taxes, and penalties for the taxable years and in the amounts set forth below:117 Additions to Tax __________________________________ Sec. Sec. Sec. Year Deficiency 6651(a) 6653(a) 6653(a)(1)(B) ________________________________________________________ 1980 $ 3,917 -- -- -- 1981 17 -- -- -- 1982 1,24816 -- -- -- 1983 11,334 $ 1,043 -- -- 1984 1,196 -- -- -- 1985 4,662 -- -- -- 1986 8,068 139 -- -- 1987 54,708 7,402 $ 2,760 2 1988 52,048 8,981 2,670 -- [table continued] Additions to Tax Additional _________________ Interest Sec. Sec. ___________ Year 6659 6661 Sec. 6621(c) ________________________________________________ 1980 -- -- 1 1981 -- -- -- 1982 -- -- 1 1983 -- -- 1 1984 -- -- 1 1985 -- -- 1 1986 -- -- 1 1987 $16,412 $13 ,677 1 1988 15,614 13,012 1 [table continued] Additions to tax Penalties _________ ______________________________________17 Sec. Sec. Sec. Sec. Sec.Year Deficiency 6651(a) 6662(h) 6662(e) 6662(d) 6662(c)_____________________________________________________________________1989 $ 43,986 $ 4,008 $ 17,594 $ 8,797 $ 8,797 $ 8,7971990 25,515 4,697 6,593 3,296 5,103 5,1031991 41,240 7,435 16,238 8,119 8,248 8,2481992 222,282 10,792 88,913 44,456 44,456 44,456After concessions, the sole issue to be decided is18 whether the periods of limitations for the years in issue expired before the issuance of the final partnership administrative adjustments (FPAA's). The resolution of this issue depends upon whether Walter J. Hoyt III, as tax matters partner for the partnerships involved herein, validly executed various Forms 872, Consent to Extend the Time to Assess Tax.This case was submitted fully stipulated pursuant to Rule 122. The stipulations of facts and the attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioners lived in Shell Beach, California.In 1983, petitioners became limited partners in the Shorthorn Genetic Engineering 1983-2 partnership (SGE 83-2) and claimed losses and investment tax carrybacks to the 1980, 1981, and 1982 taxable years. Petitioners subsequently became limited partners in both the Durham Shorthorn Breed Syndicate 1987-E partnership (DSBS 87-E) and the Timeshare Breeding Service Joint Venture partnership (TBS J.V.). These three partnerships, hereinafter collectively referred to as the Hoyt partnerships, are TEFRA 1 partnerships subject to the provisions of sections 6221 through 6233 118 for all post- 1982 taxable years19 in issue. Petitioners claimed losses from the Hoyt partnerships through 1992.Walter J. Hoyt III (Mr. Hoyt) was designated the tax matters partner (TMP) on the Hoyt partnership returns for the years in issue, with the sole exception of SGE 83-2, which did not list a designated TMP on its partnership return for the 1983 tax year. 2As TMP, Mr. Hoyt executed extensions of the periods of limitations, extending the periods for20 assessment and collection for the Hoyt partnerships as set forth below: Date of Form Date Extension Date FPAAPartnership Year 1 Signed Signed Expiration Was Issued____________________________________________________________________SGE 83-2 1983 872-0 9/25/86 Indefinite 9/19/89SGE 83-2 1984 872-0 8/01/87 Indefinite 9/19/89SGE 83-2 1985 None - -- 9/19/89SGE 83-2 1986 None - -- 6/25/90SGE 83-2 1987 872-P 2/15/91 12/31/92 -- 872 4/06/91 12/31/92 - 872 7/25/92 06/30/93 -- 872-P 7/25/92 06/30/93 - 872-P 3/06/93 12/31/93 11/22/93SGE 83-2 1988 872-P 2/14/91 21 12/31/92 - 872 4/06/91 12/31/92 - 872 7/25/92 06/30/93 - 872-P 7/25/92 06/30/93 - 872-P 3/06/93 12/31/93 11/22/93SGE 83-2 1989 872 7/25/92 06/30/93 - 872-P 7/25/92 06/30/93 - 872-P 3/06/93 12/31/93 11/22/93SGE 83-2 1990 None - - 9/12/94SGE 83-2 1991 None - - 3/27/95SGE 83-2 1992 None - - 6/25/95DSBS 87-E 1988 872-P 2/14/91 12/31/92 - 872 4/06/91 12/31/92 - 872 7/25/92 06/30/93 - 872-P 7/25/92 22 06/30/93 - 872-P 3/06/93 12/31/93 10/25/93DSBS 87-E 1989 872 7/25/92 06/30/93 - 872-P 7/25/92 06/30/93 - 872-P 3/06/93 12/31/93 10/18/93DSBS 87-E 1990 None - - 7/15/94DSBS 87-E 1991 None - - 4/24/95TBS J.V. 1987 872-P 2/22/91 12/31/92 -- 872 7/25/92 06/30/93 -- 872-P 7/25/92 06/30/93 -- 872-P 3/06/93 12/31/93 12/30/93 872 7/25/92 06/30/93 -- 872-P 7/25/92 06/30/93 -- 872-P 3/06/93 23 12/31/93 12/30/93TBS J.V. 2 1989 872 7/25/92 06/30/93 -- 872-P 7/25/92 06/30/93 -- 872-P 3/06/93 12/31/93 None 3TBS J.V. 2 1990 None -- -- None 3TBS J.V. 2 1991 None -- -- None 3TBS J.V. 2 1992 None -- -- None 3119 Pursuant to the stipulations of the parties, 3 the periods of limitations for the following years are still in issue: (1) The 1983, 1987, 1988, and 1989 taxable years for SGE 83-2; (2) the 1988 and 1989 taxable years24 for DSBS 87-E; and (3) the 1988, 1989, and 1990 taxable years for TBS J.V.On April 23, 1984, the Examination Division of the Internal Revenue Service25 (Examination Division) requested that the Criminal Investigation Division (CID) of the Internal Revenue Service (IRS) investigate Mr. Hoyt for allegedly preparing false and fraudulent individual income tax returns for 12 individuals. 4 Mr. Hoyt allegedly advised the 12 individuals that although they did not join certain Hoyt-managed partnerships until 1984, they could deduct partnership losses on their 1983 Federal income tax returns.CID assigned a special agent to the investigation on April 24, 1984, and by June 3, 1985, the agent had deposed over 60 partners of various Hoyt-managed partnerships. 5On April 21, 1986, CID26 recommended that Mr. Hoyt be prosecuted under section 7206(2) for aiding and assisting in the preparation of false and fraudulent individual income tax returns for 12 individuals and referred the matter to the Sacramento IRS District Counsel. On July 31, 1986, District Counsel referred the matter to the United States Department of Justice 120 (Justice Department) for criminal prosecution. The Justice Department declined prosecution on August 12, 1987. 6In addition to the earlier referral, the Examination Division referred a criminal fraud case involving Mr. Hoyt to CID on July 28, 1989. The criminal fraud referral was unrelated to the earlier criminal tax investigation for which the Justice Department had already declined criminal prosecution. CID accepted the criminal fraud referral and began a fraud investigation of Mr. Hoyt on October 17, 1989.On October 13, 1989, the27 U.S. Attorney's Office asked CID to join an ongoing grand jury investigation of Mr. Hoyt. CID joined the grand jury investigation after receiving permission from the IRS Regional Commissioner.CID finished working on both the criminal fraud referral and the grand jury investigation no later than October 1, 1990. The U.S. Attorney's Office ended the grand jury investigation of Mr. Hoyt on October 2, 1990, without an indictment. The record before us does not refer to subsequent criminal investigations of Mr. Hoyt.On April 17, 1995, petitioners filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Eastern District of California (bankruptcy court). 7 Petitioners' partnership items in the Hoyt partnerships were converted to nonpartnership items on that date. 828 Respondent mailed notices of deficiency to petitioners on January 30, 1996. Respondent's determinations, set forth above, are based solely on petitioners' involvement in the Hoyt partnerships.On April 29, 1996, the bankruptcy court entered an order granting petitioners' Motion for Relief from the Automatic Stay for the sole purpose of permitting them to file a petition with the Tax Court in this case.1. GENERAL DISCUSSIONThe TMP is the central figure of partnership proceedings, and, consequently, his status is of critical importance to the 121 proper functioning of the partnership audit and litigation procedures. He serves as the focal point for service of all notices, documents, and orders for the partnership in both administrative and judicial proceedings. See Computer Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198">89 T.C. 198, 205-206 (1987). As the result of his statutory responsibilities, the TMP acts as a fiduciary, and, as a fiduciary, his actions affect the rights of all partners in the partnership. See id. at 205-206.The TMP may extend the period of limitations with respect to all partners in a partnership by an agreement between the IRS and the TMP, 29 or the period may be extended by an agreement between the IRS and any other person authorized by the partnership in writing. 9 See sec. 6229(b)(1)(B).A TMP is generally designated at the time the partnership return is filed. See sec. 301.6231(a)(7)-1(c), Proced. & Admin. Regs. 10The designation of a TMP remains effective until the termination of the30 designation pursuant to section 301.6231(a)(7)- 1(l)(1), Proced. & Admin. Regs., 11which provides in pertinent part: (l) Termination of designation -- (1) In general. A designation of a tax matters partner for a taxable year under this section shall remain in effect until -- * * * * * * * (iv) The partnership items of the tax matters partner become nonpartnership items under section 6231(c)(relating to special enforcement areas); * * In turn, section 6231(c), relating to special enforcement areas, applies to criminal investigations and other areas that the Secretary determines by regulation to present special enforcement considerations.Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), 31 12 was promulgated 122 by the Secretary pursuant to section 6231(c)(2) and (3) and provides for the treatment of partnership items of a partner who is the subject of a criminal tax investigation as follows: The treatment of items as partnership items with respect to a partner under criminal investigation for violation of the internal revenue laws relating to income tax will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner to which the criminal investigation relates shall be treated as nonpartnership items as of the date on which the partner is notified that he or she is the subject of a criminal32 investigation and receives written notification from the Service that his or her partnership items shall be treated as nonpartnership items. The partnership items of a partner who is notified that he or she is the subject of a criminal investigation shall not be treated as nonpartnership items under this section unless and until such partner receives written notification from the Service of such treatment.Generally, there is a 3-year period of limitations on the assessment of a tax attributable to any partnership item. And, generally, the issuance of an FPAA will suspend the period of limitations. See, e.g., sec. 6229(d).2. PETITIONERS' POSITIONPetitioners contend that Mr. Hoyt's extensions of the period of limitations are invalid because at the time he executed the appropriate Forms 872 he no longer was the TMP of the Hoyt partnerships because he had been the subject of a criminal tax investigation. Therefore, they contend that since the extension agreements were invalidly executed, the periods of limitations for the years in issue expired before the FPAA's were issued.Petitioners base their contentions on three alternative arguments: 33 (1) That the second and third sentences of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, are invalid and that the initiation of a criminal tax investigation of Mr. Hoyt converted his partnership items in the Hoyt partnerships into nonpartnership items as a matter of law; (2) that the criminal tax investigation of Mr. Hoyt created a conflict of interest between Mr. Hoyt's duties as a fiduciary of the Hoyt partnerships and his self- interest as the subject of a criminal tax investigation and that such a conflict necessitated his removal as TMP on the basis of the rationale of 123 Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221">147 F.3d 221 (2d Cir. 1998), revg. and remanding Transpac Drilling Venture 1982-16 v. Commissioner, T.C. Memo 1994-26">T.C. Memo. 1994-26; or (3) that the Commissioner abused his discretion by not issuing a written notice informing Mr. Hoyt that his partnership items would be treated as nonpartnership items.3. RESPONDENT'S POSITIONRespondent contends that Mr. Hoyt was TMP at all times when he executed extensions of the periods of limitations for the Hoyt partnerships. Respondent contends that section 301.6231(c)-5T, Temporary Proced. 34 & Admin. Regs., supra, is a valid regulation and that, in accordance with the regulation, a taxpayer's partnership items are not treated as nonpartnership items until the Commissioner notifies the taxpayer that: (1) He is the subject of a criminal tax investigation; and (2) his partnership items will be treated as nonpartnership items. In addition, respondent contends that the facts of Transpac Drilling Venture 1982-12 v. Commissioner, supra, are distinguishable from the facts in this case and that the criminal tax investigation of Mr. Hoyt did not create a conflict of interest affecting Mr. Hoyt's duties as a fiduciary of the Hoyt partnerships. 4. MR. HOYT'S STATUS AS TMP FOR SGE 83-2's 1983 TAXABLE YEARAs an initial matter, we must decide whether Mr. Hoyt was validly designated TMP of SGE 83-2 for the 1983 taxable year. Petitioners contend that Mr. Hoyt could not have served as SGE 83-2's TMP for 1983 because he was not a general partner of SGE 83-2 for that year and was not validly designated TMP on SGE 83-2's 1983 partnership return.Section 6231(a)(7) defines a TMP as either: (1) A general partner designated TMP as provided in regulations; or (2) if no general partner has been35 so designated, the general partner having the largest profits interest in the partnership at the close of the tax year.With the exception of SGE 83-2's 1983 partnership return, Mr. Hoyt was designated TMP on the returns for the Hoyt partnerships for all of their post-1982 taxable years pursuant to section 6231(a)(7)(A). See sec. 301.6231(a)(7)-1(c), Proced. 124 & Admin. Regs. Though no partner was designated TMP on SGE 83-2's 1983 return, Mr. Hoyt signed SGE 83-2's 1983 tax return as a general partner.It is clear from the record that Mr. Hoyt was the sole general partner of SGE 83-2 in 1983 and therefore was the general partner having the largest profits interest in the partnership at the close of the 1983 taxable year pursuant to section 6231(a)(7)(B). On the basis of the record, we find that Mr. Hoyt was TMP of SGE 83-2 for the 1983 taxable year pursuant to section 6231(a)(7)(B).We will now examine each of petitioners' arguments in turn.5. VALIDITY OF SECTION 301.6231(C)-5T, TEMPORARY PROCED. & ADMIN. REGS.Petitioners contend that the second and third sentences of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, are invalid and that the initiation of the criminal36 tax investigation of Mr. Hoyt resulted in the conversion of his partnership items in the Hoyt partnerships into nonpartnership items as a matter of law. Therefore, Mr. Hoyt's TMP designation was terminated and any extensions he signed on behalf of the Hoyt partnerships were invalid.Petitioners base their position on the interrelationship of section 6231(c), section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), and section 301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin. Regs.Our understanding of petitioners' argument is as follows: (1) The Secretary may determine in situations enumerated in section 6231(c)(1) that "to treat items as partnership items will interfere with the effective and efficient enforcement of * * * [the internal revenue laws]", sec. 6231(c)(2)125 (emphasis added); (2) once such a determination is made by the Secretary, such partner's partnership items "shall be treated as nonpartnership items", id. (emphasis added); (3) by regulation, the Secretary has determined that "The treatment of items as partnership items with respect to a partner under criminal investigation for violation of the internal revenue laws relating37 to income tax will interfere with the effective and efficient enforcement of the internal revenue laws", sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra (emphasis added); and (4) therefore, at the initiation of a criminal tax investigation, the partner's items become nonpartnership items pursuant to section 6231(c)(2), and the partner is removed as TMP pursuant to section 301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin. Regs.In sum, petitioners conclude that once a partner is removed as TMP upon the initiation of a criminal tax investigation, the partner so removed cannot serve as TMP as long as he remains the subject of a criminal tax investigation and that any previous designation of that partner as TMP will cease. Petitioners, however, concede that a partner subject to a criminal tax investigation could serve as TMP upon completion of that investigation but would probably have to be redesignated TMP.On the basis of the above argument, petitioners argue that Mr. Hoyt could not have served as TMP after the initial criminal tax investigation which began on April 24, 1984.In addressing petitioners' argument, we turn first to the interpretation of the language of section38 6231(c).When interpreting statutes, the function of courts is to construe the language of the statute to give effect to the intent of Congress. See Cramer v. Commissioner, 101 T.C. 225">101 T.C. 225, 247 (1993), affd. 64 F.3d 1406">64 F.3d 1406 (9th Cir. 1995). Where possible, statutes should be interpreted in their ordinary everyday sense. See Crane v. Commissioner, 331 U.S. 1">331 U.S. 1, 6, 91 L. Ed. 1301">91 L. Ed. 1301, 67 S. Ct. 1047">67 S. Ct. 1047 (1947). A statute is to be construed so that each of its provisions is given full effect and not to render parts of the statute inoperative or superfluous. See Duke v. University of Texas, 663 F.2d 522">663 F.2d 522, 526 (5th Cir. 1981).Accordingly, section 6231(c) should be read in its entirety, as part of a single statutory scheme, and not so as to render parts of the statute inoperative. Section 6231(c), in pertinent part, provides as follows: SEC. 6231(c). Regulations With Respect to Certain Special Enforcement Areas. -- (1) Applicability of Subsection. -- This subsection applies in case of * * * * * * (B) criminal investigations, 39 * * * * * * (E) other areas that the Secretary determines by regulation to present special enforcement considerations.126 (2) Items May Be Treated As Nonpartnership Items. -- TO THE EXTENT THAT THE SECRETARY DETERMINES AND PROVIDES BY REGULATIONS that to treat items as partnership items will interfere with the effective and efficient enforcement of this title in any case described in paragraph (1), such items shall be treated as non- partnership items for purposes of this subchapter. [Emphasis added.] (3) Special Rules. -- THE SECRETARY MAY PRESCRIBE BY REGULATION SUCH SPECIAL RULES AS THE SECRETARY DETERMINES TO BE NECESSARY TO ACHIEVE THE PURPOSES OF THIS SUBCHAPTER IN ANY CASE DESCRIBED IN PARAGRAPH (1). [Emphasis added.]From the plain language of the statute, it is clear that the Secretary has authority to promulgate regulations in order to "achieve the purposes of this subchapter" in cases involving section 6231(c), concerning, among other areas, criminal investigations.Section 301.6231(c)-5T, Temporary40 Proced. & Admin. Regs., supra, promulgated pursuant to the grant of authority in section 6231(c), is a legislative regulation because Congress explicitly left a gap for the agency to fill. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837">467 U.S. 837, 843-844, 81 L. Ed. 2d 694">81 L. Ed. 2d 694, 104 S. Ct. 2778">104 S. Ct. 2778 (1984). A legislative regulation is given controlling weight unless the regulation is arbitrary, capricious, or manifestly contrary to the statute. See id.In addition, courts are to interpret a regulation as a whole, in light of the overall statutory scheme, and not to give force to one phrase in isolation. See Norfolk Energy, Inc. v. Hodel, 898 F.2d 1435">898 F.2d 1435, 1442 (9th Cir. 1990). Courts have a duty to give effect to every part of a regulation and construe each part in connection with every other part so as to produce a harmonious whole. See Miami Heart Inst. v. Sullivan, 868 F.2d 410">868 F.2d 410, 413 (11th Cir. 1989).It is clear that section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, concerning the treatment of partnership items of partners under criminal tax investigation, differs from regulations promulgated to address other special enforcement areas. For example, 41 the Secretary did not explicitly require that a taxpayer receive written notification in every special enforcement situation. Rather, each special enforcement regulation begins with language similar to the language of section 6231(c)(2):127 The treatment of items as partnership items with respect to a partner * * * [in a specifically described circumstance] will interfere with the effective and efficient enforcement of the internal revenue laws.Sec. 301.6231(c)-6T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987) (providing that the partnership items of a partner whose taxable income is determined by use of an indirect method of proof shall be treated as nonpartnership items on the date of the mailing of the deficiency notice); see also sec. 301.6231(c)- 7T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987) (providing that the partnership items of a partner named as debtor in a bankruptcy proceeding become nonpartnership items as of the filing of the bankruptcy petition).After this introductory language, each special enforcement regulation specifically sets forth what circumstances will42 interfere with the effective and efficient enforcement of the internal revenue laws and when partnership items in that situation will be treated as nonpartnership items.For example, in the case of criminal tax investigations, partnership items would not be treated as nonpartnership items unless a partner: (1) Was notified that he was the subject of a criminal tax investigation; and (2) received written notification that his partnership items would be treated as nonpartnership items. See sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987). Therefore, the timing of the treatment of a partner's partnership items as nonpartnership items is specified in each regulation.Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, consists of three sentences. Petitioners dispute respondent's interpretation of the regulation and contend that the second and third sentences solely address: (1) Which partnership items become nonpartnership items; and (2) when partnership items are converted to nonpartnership items. Petitioners also contend that the last two sentences of the regulation conflict with the first sentence and with the language43 of section 6231(c). In sum, petitioners urge this Court to read the first sentence of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, in isolation, divorced from the regulation as a whole. 128 Petitioners' interpretation of the interaction between section 6231(c) and section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, would negate the two notification requirements listed in the regulation.In Transpac Drilling Venture 1982-16 v. Commissioner, T.C. Memo. 1994-26, revd. Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221">147 F.3d 221 (2d Cir. 1998), this Court specifically noted that section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, requires that a taxpayer receive two different notices from the IRS; specifically, (1) Notify the taxpayer that he is the subject of a criminal tax investigation; and (2) notify the taxpayer in writing that the IRS will treat his partnership items as nonpartnership items. We further note that the Court of Appeals for the Second Circuit in Transpac Drilling Venture 1982-12 v. Commissioner, supra, in reversing this Court, did not hold section 301.6231(c)-5T, Temporary Proced. & Admin. Regs. 44 , supra, invalid, nor did the Court of Appeals attempt to construe the regulation in the manner in which petitioners urge. Rather, the Court of Appeals held, on the basis of the facts therein, that where a serious conflict of interest precludes the faithful exercise of the TMP's fiduciary duties to the limited partners and partnerships, the regulation does not prescribe the sole grounds under which a TMP will be removed following the commencement of a criminal investigation. See id. at 225-227.Finally, we note that case law in the Ninth Circuit, in which this case would be appealable, supports our decision as to the validity of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra. In In re Leland, 160 B.R. 834">160 B.R. 834, 836 (E.D. Cal. 1993), the bankruptcy court stated: The debtors [sic] argument that Hoyt's partnership items became nonpartnership items as of the date his criminal investigation began is simply unsupported and ignores the entirety of * * * [section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra.]Though we agree with petitioners that the bankruptcy court's reliance on language from Chef's Choice Produce, Ltd. v. Commissioner, 95 T.C. 388">95 T.C. 388 (1990),45 is misplaced, the bankruptcy court cited the plain and unequivocal language of the regulation in sustaining its dual requirements. 129 Additionally, the bankruptcy court in In re Miller, 13174 B.R. 791">174 B.R. 791, 796 (E.D. Cal. 1994), affd. 81 F.3d 169">81 F.3d 169 (9th Cir. 1996), stated: Miller also argues that the regulations are in conflict with the Internal Revenue Code and by merely showing that Hoyt was under criminal investigation, Hoyt's status as a TMP was terminated. We disagree. If this were true, no party with any certainty would know when a criminal investigation began in order to terminate a TMP's status. This uncertainty would undermine one of the main goals in enacting TEFRA.46 * * * * * * The regulations promulgated by the Secretary are not manifestly contrary to the statute as Miller suggests. Rather, the Secretary enacted Temporary Treasury Regulation Section 301.6231(c)-5T to carry out the provisions of 26 U.S.C. section 6231(c)(2) and its purpose. Hoyt's authority as the designated TMP could not be terminated based on the criminal investigation until he received written notification from the IRS of the conversion of items to nonpartnership. In summary, it is both the regulations and the Internal Revenue Code which provides that the TMP designation shall be terminated upon the criminal investigation and the written notification that partnership items shall be treated as nonpartnership items. Therefore, we hold that the TMP had authority to enter into consents with the IRS to extend the time for assessments and bind Miller to the extensions. [Fn. ref. omitted.]We conclude that the Secretary's regulatory treatment of the partnership items of partners under criminal47 tax investigation comports with the language of section 6231(c) and hold section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. In this case the record clearly reflects that the IRS did not notify Mr. Hoyt that his partnership items would be treated as nonpartnership items. Pursuant to the provisions of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, the commencement of a criminal tax investigation of a partner in a TEFRA partnership does not necessarily or immediately interfere with the effective and efficient enforcement of the internal revenue laws and require the treatment of partnership items as nonpartnership items in every situation. 130 6. REMOVAL OF TMP FOR VIOLATING A FIDUCIARY DUTYPetitioners contend that Mr. Hoyt should have been removed as TMP by the IRS because of a conflict of interest between Mr. Hoyt's fiduciary duty to petitioners, as partners of the Hoyt partnerships, and his self-interest as the subject of several criminal tax investigations.Petitioners rely on Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221">147 F.3d 221 (2d Cir. 1998), contending that Transpac holds that the Commissioner has no48 discretion and must remove a TMP who is under criminal tax investigation.However, the Transpac decision involved distinguishable facts. In Transpac, the IRS began a civil tax audit of the Transpac partnerships in the latter part of 1983. By November 1985, however, the civil audit had uncovered issues which were referred to CID for criminal investigation. See id. at 223.While the criminal investigation was proceeding, the IRS approached limited partners of the Transpac partnerships and asked them to sign extension agreements for the 1982 taxable year. Most of the limited partners refused, so the IRS then approached the partnership's TMP's and made the same extension requests. The TMP's acquiesced and executed the extension agreements and thereafter continued to execute extension agreements through March 1988. 14 See id. at 224.The TMP's approached49 by the IRS were themselves under criminal tax investigation, as was the primary promoter of the Transpac partnerships, who was already a convicted tax felon. Sometime during the course of the criminal tax investigations, the TMP's became cooperating Government witnesses whose own sentencing, or grants of immunity, depended on their cooperation with the Government. See id. at 223.In addition, the Court of Appeals for the Second Circuit found that when the limited partners in the Transpac partnerships inquired about the status of the civil audits, the IRS misled the limited partners by telling them to ask for information from the TMP's, who in turn had been expressly ordered not to disclose any information about the existence of the criminal investigation. See id. at 227.131 In Transpac, the Court of Appeals reasoned that "where serious conflicts exist, a TMP may be barred from acting on behalf of the partnership, quite apart from the issuance of a government letter under current Regulation 301.6231(c)-5T". Id. The Court of Appeals proceeded to hold that the TMP's in that case had a serious conflict of interest which voided their consents to the extensions of50 the periods of limitations. The Court of Appeals found it "especially disquieting" that the IRS knew the extensions were unwanted by the limited partners on whose behalf the TMP's purported to act. See id. The Court of Appeals noted that the IRS, before seeking extensions of the periods of limitations from the TMP's, had already transformed its civil audits of the partnerships into criminal investigations of the TMP's. The Court of Appeals reasoned that the conversion of the civil audits into criminal investigations created a powerful incentive on the part of the TMP's to ingratiate themselves with the Government and to ignore their fiduciary duties to the limited partners. See id.We emphasize that in Transpac the TMP's executed the extension agreements near the time the TMP's were cooperating with the Government in anticipation of either grants of immunity or sentencing agreements. See id. at 223-224. The TMP's in Transpac became Government witnesses, owing to their cooperation with Government investigators. 15 The Court of Appeals essentially found therefore that the TMP's had a disabling conflict of interest that prevented them from faithfully discharging their51 fiduciary duties to the limited partners.Unlike Transpac, there is no evidence in this case that: (1) The IRS approached limited partners to execute any extension agreements or that they refused to sign such agreements; (2) the promoter/TMP of the Hoyt partnerships was, before or during the relevant period, indicted or convicted of a tax felony or cooperating with the Government as a witness; or (3) the IRS misled partners of the Hoyt partnerships about the existence of criminal investigations or ever instructed Mr. Hoyt to say nothing about such criminal tax investigations. 132 In addition, the record reflects that the criminal investigations of Mr. Hoyt ended prior to Mr. Hoyt's execution of every one of the extension agreements in issue except one. Only one of the extension agreements for the years in issue, concerning the 1983 taxable year of SGE 83-2, was executed by Mr. 52 Hoyt while he was under criminal tax investigation.In Olcsvary v. United States, 240 B.R. 264">240 B.R. 264, 266-267 (E.D. Tenn. 1999), the United States Bankruptcy Court for the Eastern District of Tennessee stated: There is no evidence that Hoyt had any contact with the investigators at all, much less that he executed the extensions under pressure for leniency. Indeed, since these tax investigations never resulted in prosecution, it is possible that Hoyt viewed them with contempt or haughty disdain rather than fear. * * * * * * * * * The [Court of Appeals] in Transpac did not assume that the mere existence of an investigation would subvert a tax matters partner's judgment and bend him to the government's will in dereliction of his fiduciary duties to his partners. * * Mr. Hoyt continued to promote the existing Hoyt partnerships after the initiation of the criminal tax investigations. Mr. Hoyt continued to defend his legal position throughout the criminal tax investigations and continued to maintain that all partnership items were legitimate, 53 a legal position which was consistent with that of his partners.Mr. Hoyt also encouraged the limited partners to refuse to cooperate with Government investigators. W.J. Hoyt & Sons sent letters to some limited partners telling them that they could refuse to be deposed by the IRS, and, if already deposed, that they could refuse to sign the interview transcript.In sum, we are not persuaded that Mr. Hoyt had a disabling conflict of interest in this case or violated his fiduciary duty to petitioners. On the basis of the record, we find and hold that Mr. Hoyt did not have a conflict of interest which required the removal of his TMP designation or invalidated the extensions of the periods of limitations.7. ABUSE OF DISCRETION BY RESPONDENTPetitioners contend that respondent's failure to send a written notice to Mr. Hoyt, informing him that his partnership 133 items would be treated as nonpartnership items pursuant to section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), was an abuse of discretion. Petitioners assert that, because Mr. Hoyt was the subject of criminal investigations and because certain IRS officials countersigning the54 extension agreements knew of the criminal tax investigations of Mr. Hoyt, the failure of the IRS to notify Mr. Hoyt that his partnership items would be treated as nonpartnership items was arbitrary and unreasonable.Petitioners once again rely on Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221">147 F.3d 221 (2d Cir. 1998), in which the Court of Appeals disagreed with this Court's conclusion that the Commissioner had not abused his discretion by failing to terminate a TMP's status.The taxpayer has the burden of proof when alleging an abuse of discretion. See Capitol Fed. Sav. & Loan Association v. Commissioner, 96 T.C. 204">96 T.C. 204, 210 (1991).The parties have stipulated that the IRS has no formal criteria to determine when, or whether, a written notice notifying a partner that his partnership items will be treated as nonpartnership items is to be sent to a taxpayer who is the subject of a criminal tax investigation. The IRS makes each determination upon the particular facts of each case.As previously indicated, the Transpac decision involved distinguishable facts, and petitioners have not alleged the facts that the Court of Appeals for the Second Circuit found55 so disquieting. Here, petitioners are unable to show that respondent's actions in continuing to recognize Mr. Hoyt as TMP were unlawful or arbitrary. Accordingly, we find that petitioners have not established that respondent abused his discretion by not notifying Mr. Hoyt that his partnership items would be treated as nonpartnership items pursuant to section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra.8. EXPIRATION OF PERIOD OF LIMITATIONS WITH REGARD TO TBS J.V.As a supplemental matter, we address the parties' contentions regarding TBS J.V.'s 1989 and 1990 taxable years. Respondent contends that TBS J.V. failed to file partnership returns for both the 1989 and 1990 taxable years and that 134 therefore the period of limitations for 1989 and 1990 did not expire before April 17, 1995. Petitioners contend that TBS J.V. filed both a 1989 and a 1990 partnership return and that the existence of an extension agreement executed by Mr. Hoyt for TBS J.V.'s 1989 taxable year is evidence of the timely filing of the underlying 1989 tax return. Petitioners argue that since Mr. Hoyt was not the TMP for the years in issue, he was not authorized to sign the extension for TBS J.V.'s 198956 tax year and the period of limitations for 1989 has therefore expired.The period for assessing tax attributable to a partnership item shall not expire before 3 years after the later of: (1) The date that the partnership return was filed for the taxable year; or (2) the last date for filing the return for the year (without regard to any extensions). See sec. 6229(a). When no partnership return is filed, adjustments attributable to partnership items may be assessed at any time. See sec. 6229(c)(3).Respondent has submitted a certified transcript of TBS J.V.'s account for the 1989 and 1990 taxable years showing that the IRS has no record of TBS J.V.'s filing a partnership return for either taxable year through September 23, 1998. Petitioner, however, has been unable to adduce any evidence establishing that TBS J.V. filed a partnership return for either the 1989 or the 1990 taxable year.The existence of an extension agreement executed by Mr. Hoyt for TBS J.V.'s 1989 taxable year is not evidence of the timely filing of the underlying 1989 tax return. However, since we have held that Mr. Hoyt was the valid TMP of the Hoyt partnerships for the years in issue, and since petitioners concede57 that Mr. Hoyt signed an extension agreement for TBS J.V.'s 1989 taxable year, even if a 1989 return had been filed, the period of limitations for the 1989 taxable year would not have expired before April 17, 1995.Upon the basis of the record, we find that TBS J.V. failed to file partnership returns for both the 1989 and 1990 taxable years and hold that the period of limitations for TBS J.V.'s 1989 and 1990 taxable years did not expire before April 17, 1995. 135 9. CONCLUSIONThe parties have stipulated that if this Court finds that the respective periods of limitations had not expired before the mailing of the FPAA's, then the FPAA's were timely and properly sent to the TMP of the Hoyt Partnerships for each of the partnership years in issue.Upon the basis of the record, we find that Mr. Hoyt was the TMP when he executed extension agreements with respect to the years in issue and, therefore, hold that the periods of limitations with respect to years in issue had not expired pursuant to section 6229(b)(1)(B) as of April 17, 1995.Because we find that Mr. Hoyt was TMP of the Hoyt partnerships when he executed extension agreements for the years in issue, we need not, and do not, address58 other issues raised by the parties.The parties stipulated that if we hold that the extension agreements are valid, which we have, the amounts set forth below are the correct amounts 16 of the deficiencies in petitioners' Federal income taxes and additions to taxes for the years involved herein:Year Deficiency Sec. 6651(a) Sec. 6621(c)______________________________________________________________1980 $ 3,917 -0- Applies1981 17 -0- Applies1982 1,248 -0- Applies1983 11,334 $ 1,043 Applies1984 1,196 -0- Applies1985 4,662 -0- Applies1986 8,068 139 Applies1987 3,337 -0- None1988 11,831 1,562 None198959 4,776 87 None1990 8,319 1,258 None1991 8,243 836 None1992 6,619 9 None136 To reflect the foregoing,A decision based on the stipulation of the parties will be entered. Footnotes2. Respondent determined that an additional amount is to be computed equal to 50 percent of the interest attributable to the entire 1987 underpayment pursuant to sec. 6653(a)(1)(B).↩1. Respondent determined that interest is to be computed at 120 percent of the interest payable under sec. 6601 with respect to any substantial underpayment attributable to tax-motivated transactions.↩1. Congress enacted the TEFRA partnership procedures as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324, 648.↩2. Though Mr. Hoyt was not designated TMP on SGE 83-2's 1983 return, he signed the 1983 tax return for SGE 83-2 as general partner. Mr. Hoyt also executed an extension of the period of limitations for SGE 83-2's 1983 tax year on Sept. 26, 1986.↩1. Before 1989, the correct taxable year for both SGE 83-2 and DSBS 87-E was the calendar year. Beginning with the short taxable year ending Sept. 30, 1989, the correct taxable year for both SGE 83-2 and DSBS 87-E was the year ending Sept. 30, as the result of respondent's acceptance of Forms 1128, Application for Change in Accounting Period, filed for those partnerships. The correct taxable year of TBS J.V. was the calendar year for all years in issue.↩2. The parties do not agree as to whether a return was filed for this taxable year at any time through Sept. 23, 1998.↩3. No FPAA had been issued as of Apr. 17, 1995, the date petitioners filed a petition in bankruptcy. ↩3. The parties have stipulated that the periods of limitations for the assessment and collection of any deficiency in income tax due from petitioners with respect to: (1) Shorthorn Genetic Engineering 83-2 partnership for the 1984, 1985, and 1986 calendar years and for its fiscal years ending Sept. 30, 1990 and 1991; and (2) Durham Shorthorn Breed Syndicate 87-E partnership for the fiscal years ending Sept. 30, 1990 and 1991, have not expired.Petitioners concede that the statute of limitations does not bar assessment and collection of any income tax deficiency from the Timeshare Breeding Service Joint Venture partnership for its 1991 calendar year or any partnership in this case whose taxable year ended with, or within, petitioners' 1992 calendar year. Partnership items of each of those partnerships for those years became nonpartnership items as of Apr. 17, 1995.↩4. None of the 12 individuals are petitioners in the present case.↩5. In turn, these partners apparently learned of the IRS criminal tax investigation of Mr. Hoyt because of the depositions requested by the special agent.↩6. From the record, it is clear that the latest that Mr. Hoyt knew that the Justice Department had declined prosecution was on or about Nov. 6, 1987.↩7. Petitioners' bankruptcy case, No. 95-23293-A-13, was still pending at the time the petition was filed.↩8. Sec. 301.6231(c)-7T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793↩ (Mar. 5, 1987), provides that the partnership items of a partner named as a debtor in a bankruptcy proceeding become nonpartnership items as of the date the bankruptcy petition is filed.9. The period of limitations for a specific partner may also be extended by an agreement between the IRS and that partner. See sec. 6229(b)(1)(A)↩.10. The temporary regulation, sec. 301.6231(a)(7)-1T(c), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6791 (Mar. 5, 1987), contained the same provision. Sec. 301.6231(a)(7)-1↩, Proced. & Admin. Regs. is the final regulation effective for all designations, selections, and terminations of a TMP occurring on or after Dec. 23, 1996.11. The temporary regulation, sec. 301.6231(a)(7)-1T(l)(4), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792↩ (Mar. 5, 1987), was identical.12. These temporary regulations apply to partnership taxable years beginning after Sept. 3, 1982. See 52 Fed. Reg. 6779↩ (Mar. 5, 1987).13. Counsel for petitioners also served as counsel for the taxpayers in In re Leland, 160 B.R. 834">160 B.R. 834 (E.D. Cal. 1993), and in In re Miller, 174 B.R. 791">174 B.R. 791 (E.D. Cal. 1994), affd. 81 F.3d 169">81 F.3d 169↩ (9th Cir. 1996).14. As the IRS did not issue FPAA's until November 1989, the 3-year period of limitations would have expired but for the signed extensions.↩15. Two of the TMP's were granted immunity from prosecution, while the third entered into a plea bargain resulting in a suspended sentence.↩16. These amounts do not include interest, payments made after the mailing of the notices of deficiency, frozen refunds, or the applicability of any penalty for substantial underpayment of tax.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/6113485/	In The Court of Appeals Ninth District of Texas at Beaumont ________________ NO. 09-20-00028-CV ________________ FRANCES MORENO LEBLANC, Appellant V. LARRY JULES LEBLANC JR., Appellee ________________________________________________________________________ On Appeal from the 317th District Court Jefferson County, Texas Trial Cause No. C-233,639 ________________________________________________________________________ MEMORANDUM OPINION Frances Moreno LeBlanc appeals from a judgment entitled Agreed Final Divorce signed on January 14, 2020, in her divorce from Larry Jules LeBlanc Jr.1 Frances and Larry have two minor children. In one issue on appeal, Frances argues the trial court erred in rendering a decree of divorce that does not strictly comply 1 As both parties have the last name LeBlanc, we will refer to them by their first names. 1 with the Meditated Settlement Agreement (MSA) they reached in settling the terms of their divorce. 2 Specifically, Frances complains the trial court’s order “adds terms and incorporates an entirely different holiday visitation schedule than in the MSA and violates the ‘Holidays Every Year’ MSA provision that ‘[m]other has possession at all times not specifically awarded to father.’” As explained below, we reverse the order of the trial court and remand. Background Both Frances and Larry were represented by counsel during their divorce. Frances filed for divorce in 2018. Temporary orders were issued in the divorce in February 2019. In October 2019, Frances asked the trial court to order the parties to mediation. On October 23, 2019, the parties filed an Irrevocable Mediated Settlement Agreement with the clerk’s office. The MSA is signed and initialed on each page by the parties, and their counsel signed the agreement’s last page. The MSA contains the following information on holiday visitation. Holidays Every Year: Thanksgiving: Father 3:00 pm – 8:00 pm on Thanksgiving Day Mother 8:00 am – 3:00 pm on Thanksgiving Day Christmas: Father December 24 8:00 am – 10:00 pm Mother [December 24] 10:00 pm – [December 26] 8:00 am Father’s Day, Mother’s Day, Child’s Birthday: Per Family Code 2 Larry was not represented by counsel on appeal and did not file a pro se brief. 2 Easter Sunday: Mother every year Mother has possession at all times not specifically awarded to father. On January 14, 2020, the trial court held a hearing to consider signing a final decree. Frances and Larry filed different versions of the decree and the holiday schedule. After hearing the arguments of counsel, the trial court announced he was changing the decree as follows: Well, I will note Easter Sunday mother -- every year mother has possession at all times not specifically awarded to the father. There is no statement like that having to do with Christmas. Usually the Easter holidays are longer. The ones that are -- say per the Family Code are usually one day or shorter. It’s Father’s Day, Mother’s Day, and child’s birthday. Those are very short holidays. The other holidays are longer. Like I said, Easter says, mother shall have possession at all times specifically awarded; and Christmas holiday says specific times and doesn’t – for the mother it’s 12-24, 10:00 p.m., to 12-26 at 8:00 a.m. It doesn’t have the clause, mother has possession at all times not specifically awarded to the father. It would appear that he should have – that each one of them would have -- other than this carved out time, which gives basically every Christmas Day and -- 10:00 p.m. Christmas Eve through Christmas Day to the next morning to mother. But it doesn’t, as I said, contain language that says, mother shall have possession at all times not specifically awarded to the father. Therefore, I believe that [Larry’s] decree is correct; and I’m going to sign it. That’s my interpretation of the decree -- I mean, of the settlement agreement. … It doesn’t make any difference what she thought or was doing. I mean, that’s my interpretation of it and I -- like I said, [Frances’s attorney] says it doesn’t say standard. Well, it can’t say standard. It’s not standard because there’s specific times cut out. 3 But it also doesn’t say, mother gets all times that the father doesn’t get which is a specific statement that will cut him out of the time that he might ordinarily have. The trial court signed the version of the decree Larry filed with the court. As to the holiday schedule, it provides: (e) Holiday Schedule Notwithstanding the above ordered periods of possession for LARRY JULES LEBLANC, JR., FRANCES MORENO LEBLANC and LARRY JULES LEBLANC, JR. shall have the right to possession of the child as follows: 1. Christmas Holidays in Even-Numbered Years–In even-numbered years, LARRY JULES LEBLANC, JR. shall have the right to possession of the child beginning at the time the child’s school is dismissed for the Christmas school vacation and ending at noon on December 28, and FRANCES MORENO LEBLANC shall have the right to possession of the child beginning at noon on December 28 and ending at 6:00 P.M. on the day before school resumes after that Christmas school vacation. Notwithstanding the above ordered Christmas holiday period of possession for LARRY JULES LEBLANC, JR., in even-numbered years FRANCES MORENO LEBLANC shall have the right to possession of the child beginning at 10:00 P.M. on December 24 and ending at 8:00 A.M. on December 26, provided that FRANCES MORENO LEBLANC picks up the child from LARRY JULES LEBLANC, JR.’s residence and returns the child to that same place. 2. Christmas Holidays in Odd-Numbered Years–In odd- numbered years, FRANCES MORENO LEBLANC shall have the right to possession of the child beginning at the time the child’s school is dismissed for the Christmas school vacation and ending at noon on December 28, and LARRY JULES LEBLANC, JR. shall have the right to possession of the child beginning at noon on December 28 and ending at 6:00 P.M. on the day before school resumes after that Christmas school vacation. 4 Notwithstanding the above ordered Christmas holiday visitation for FRANCES MORENO LEBLANC, in odd-numbered years LARRY JULES LEBLANC[, Jr.] shall have the right to possession of the child beginning at 8:00 A.M. on December 24 and ending at 10:00 P.M. on that day, provided that LARRY JULES LEBLANC, JR. picks up the child from FRANCES MORENO LEBLANC’s residence and returns the child to that same place. 3. Thanksgiving in Odd-Numbered Years–In odd-numbered years, LARRY JULES LEBLANC, JR. shall have the right to possession of the child beginning at the time the child’s school is dismissed for the Thanksgiving holiday and ending at 6:00 P.M. on the Sunday following Thanksgiving, except that FRANCES MORENO LEBLANC shall have the right to possession of the child on Thanksgiving Day beginning at 8:00 A.M. and ending at 3:00 P.M. on that day, provided that FRANCES MORENO LEBLANC picks up the child from LARRY JULES LEBLANC, JR.’s residence and returns the child to that same place. 4. Thanksgiving in Even-Numbered Years–In even-numbered years, FRANCES MORENO LEBLANC shall have the right to possession of the child beginning at the time the child’s school is dismissed for the Thanksgiving holiday and ending at 6:00 P.M. on the Sunday following Thanksgiving, except that LARRY JULES LEBLANC, JR. shall have the right to possession of the child on Thanksgiving Day beginning at 3:00 P.M. and ending at 8:00 P.M. on that day, provided that LARRY JULES LEBLANC, JR. picks up the child from FRANCES MORENO LEBLANCs residence and returns the child to that same place. 5. Child’s Birthday–If a conservator is not otherwise entitled under this Possession Order to present possession of a child on the child’s birthday, that conservator shall have possession of the child and the child’s minor siblings beginning at 6:00 P.M. and ending at 8:00 P.M. on that day, provided that that conservator picks up the children from the other conservator’s residence and returns the children to that same place. 6. Father’s Day–Father shall have the right to possession of the child each year, beginning at 6:00 P.M. on the Friday preceding 5 Father’s Day and ending at 6:00 P.M. on Father’s Day, provided that if Father is not otherwise entitled under this Possession Order to present possession of the child, he shall pick up the child from the other conservator's residence and return the child to that same place. 7. Mother’s Day–Mother shall have the right to possession of the child each year, beginning at the time the child’s school is regularly dismissed on the Friday preceding Mother’s Day and ending at 6:00 P.M. on Mother’s Day, provided that if Mother is not otherwise entitled under this Possession Order to present possession of the child, she shall pick up the child from the other conservator's residence and return the child to that same place. 8. Easter Sunday Every Year–FRANCES MORENO LEBLANC shall have the superior right to possession of the child beginning at 8:00 A.M. on Easter Sunday and ending at 6:00 P.M. that same day. (f) Undesignated Periods of Possession FRANCES MORENO LEBLANC shall have the right of possession of the child at all other times not specifically designated in this Possession Order for LARRY JULES LEBLANC, JR. Frances timely filed this appeal. Issue One In her sole issue, Frances argues that the trial court erred when it signed Larry’s version of the proposed divorce decree, complaining that it does not comply with the MSA. She contends the decree the trial court signed adds terms and incorporates schedules for holidays that differ from those in the MSA and complains it violates the parties’ settlement agreement by changing the holidays Frances bargained for in the MSA, an agreement that provides she is to have all time in the holidays the MSA addresses unless that time is specifically awarded to Larry. 6 Standard of Review A. Law Pertaining to MSAs An MSA meeting the statutory requirements in the Texas Family Code “is binding on the parties and requires the rendition of a divorce decree that adopts the parties’ agreement.” Milner v. Milner, 361 S.W.3d 615, 618 (Tex. 2012) (citing Tex. Fam. Code Ann. § 6.602(b)–(c)). The relevant section of the Family Code provides: (b) A mediated settlement agreement is binding on the parties if the agreement: (1) provides, in a prominently displayed statement that is in boldfaced type or capital letters or underlined, that the agreement is not subject to revocation; (2) is signed by each party to the agreement; and (3) is signed by the party’s attorney, if any, who is present at the time the agreement is signed. (c) If a mediated settlement agreement meets the requirements of this section, a party is entitled to judgment on the mediated settlement agreement notwithstanding Rule 11, Texas Rules of Civil Procedure, or another rule of law. Tex. Fam. Code Ann. § 6.602(b)–(c). Several of our sister courts of appeals have interpreted these provisions to mean that a trial court is not required to enforce an MSA if it is illegal or procured by fraud, duress, coercion, or other unlawful means. See Morse v. Morse, 349 S.W.3d 55, 56 (Tex. App.—El Paso 2010, no pet.); Spiegel v. KLRU Endowment Fund, 228 S.W.3d 237, 242 (Tex. App.—Austin 2007, pet. denied); In re Marriage of Joyner, 196 S.W.3d 883, 890 (Tex. App.—Texarkana 2006, pet. denied); Boyd v. Boyd, 67 S.W.3d 398, 403–05 (Tex. App.—Fort Worth 7 2002, no pet.); In re Kasschau, 11 S.W.3d 305, 312 (Tex. App.—Houston [14th Dist.] 1999, orig. proceeding). That said, the Texas Supreme Court has not addressed whether the exceptions recognized by these intermediate courts in cases where the MSA has been procured by duress, fraud, coercion or by unlawful means renders an otherwise statutorily compliant MSA unenforceable. See Milner, 361 S.W.3d at 619 (noting in an MSA case, the Court would “leave the applicability of those defenses for another case”); see also Highsmith v. Highsmith, 587 S.W.3d 771, 777 n.5 (Tex. 2019) (“As in Milner, we need not and do not address whether an MSA that complies with the statutory formalities may nevertheless be set aside on the ground that it is illegal or was procured by fraud, duress, or coercion.”). We further note that section 153.0071(b) does not give trial courts the authority to reject an MSA on the grounds that the settlement is not in the best interest of the child. See In re Lee, 411 S.W.3d 445, 455 (Tex. 2013) (holding that section 153.0071(e) “encourages parents to peaceably resolve their child-related disputes through mediation by foreclosing a broad best interest inquiry with respect to entry of judgment on properly executed MSAs”). [S]ection 153.0071(e) reflects the Legislature’s determination that it is appropriate for parents to determine what is best for their children within the context of the parents’ collaborative effort to reach and properly execute an MSA. This makes sense not only because parents are in a position to know what is best for their children, but also because successful mediation of child-custody disputes, conducted within statutory parameters, furthers a child’s best interest by putting a halt to potentially lengthy and destructive custody litigation. 8 Id. at 454. In Lee, the Texas Supreme Court determined that the MSA statute was written for parents to determine their children’s best interest and the trial court must defer to the parents and their agreement. See id. at 455; see also In re Marriage of Harrison, 557 S.W.3d 99, 138 (Tex. App.—Houston [14th Dist.] 2018, pet. denied) (“[A] trial judge has no discretion to refuse to enter judgment on an MSA based solely on the court’s determination that the agreed custody terms are not in the child's best interest because Family Code section 153.0071 does not grant trial courts the option to deny judgment on that basis.”). Since an MSA is a contract, general contract-interpretation principles determine its meaning. Loya v. Loya, 526 S.W.3d 448, 451 (Tex. 2017). The question of whether a contract is ambiguous is one of law for the court. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). “A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation.” See Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996) (citing Coker, 650 S.W.2d at 393). The Court’s task is to “‘ascertain the true intentions of the parties as expressed in the writing itself.’” Loya, 526 S.W.3d at 451 (quoting Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011)). We begin with the contract’s express language, and “‘examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none 9 will be rendered meaningless.’” Murphy Expl. & Prod. Co.—USA v. Adams, 560 S.W.3d 105, 108 (Tex. 2018) (quoting Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006)). In our analysis, “[w]e give terms their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or different sense.” Loya, 526 S.W.3d at 451 (quoting Heritage, 939 S.W.2d at 121). Our presumption is that “the parties to a contract intend every clause to have some effect.” Heritage, 939 S.W.2d. at 121, (quoting Ogden v. Dickinson State Bank, 662 S.W.2d 330, 331 (Tex.1983)). An unambiguous contract will be enforced as written. Id. (citations omitted). Analysis No party has asserted that the MSA was procured by “fraud, duress, coercion, or other dishonest means.” See Morse, 349 S.W.3d at 56. The MSA is signed by both parties and their attorneys, and it has a prominently displayed statement, in boldface and capitalized letters, stating the MSA is “an AGREEMENT NOT SUBJECT TO REVOCATION” and is a “BINDING Mediated Settlement Agreement.” See In re Lee, 411 S.W.3d at 458-59 (explaining the trial court abused its discretion by not complying with the MSA because the MSA was signed by the parties, contained bold, capitalized, underlined language it was irrevocable, and no testimony showed there was family violence); see also Tex. Fam Code Ann. § 153.0071. 10 Larry did not file a brief in the appeal, and while he was in the trial court, he never claimed the MSA is ambiguous. While the MSA could have been more detailed than it is as to the holiday schedule, its terms are not ambiguous. The MSA is a combination of changes the parties placed in the agreement by writing on a document someone prepared as a draft, which the parties then finalized without retyping it and by placing their initials by the language they changed in the draft. The parties then approved the document by signing the last page. Counsel signed that page too. Exhibit B to the MSA is the section of the agreement at issue here. It sets out possession and access the parties bargained for in a hand-written schedule, which is unlike standard visitation schedules typically contained in final decrees. Exhibit B is written by using brief descriptive fragmented sentences. The various holidays, including summers and spring breaks, provide periods of visitation inconsistent with the holiday schedule suggested when a trial court orders standard visitation schedules to be followed in regard to the parent’s right to their children under the Texas Family Code. Each holiday is underlined and indented from the left margin, setting it apart as a different period of possession. At the end of the holiday period and in marginalia the left margin of the agreement, the agreement states: “Mother has possession at all times not specifically awarded to father.” 11 The trial court interpreted the last provision in Schedule B of the MSA to apply to Easter only and not to any of the other holidays. However, a plain reading of the document indicates the parties intended the “not specifically awarded to father” provision in the holiday schedule to apply to all holidays. Thus, under the terms of the MSA, the bargain Mother and Father struck gave Mother greater rights than those the trial court gave her in the final decree. See In re C.W.W., No. 05-15- 00960-CV, 2016 WL 3548036, at *3 (Tex. App.—Dallas June 28, 2016, no pet.) (mem. op.) (analyzing a handwritten provision of MSA emphasis and meaning in regard to the other terms of the MSA); see also Nassar v. Liberty Mut. Fire Ins. Co., 508 S.W.3d 254, 258 (Tex. 2017) (citations omitted) (explaining that in contract interpretation “‘[n]o one phrase, sentence, or section [of a contract] should be isolated from its setting and considered apart from the other provisions’”). Because the Agreed Final Decree of Divorce rendered by the trial court does not track the terms of the MSA, we hold the trial court abused its discretion by signing a final decree that is inconsistent with terms of the MSA. We sustain Frances’s sole issue. Conclusion Having sustained Frances’s argument, we reverse the trial court’s judgment as it relates to the Holiday Schedule, and remand the case to the trial court with instructions that it issue a final decree that complies with the parties’ MSA as to the Holiday Schedule in Exhibit B to the MSA the parties signed on October 21, 2019. 12 REVERSED AND REMANDED. ________________________________ CHARLES KREGER Justice Submitted on April 13, 2021 Opinion Delivered January 27, 2022 Before Golemon, C.J., Kreger and Johnson, JJ. 13	01-04-2023	01-28-2022
https://www.courtlistener.com/api/rest/v3/opinions/4619159/	LEOPOLD ACKERMAN, EXECUTOR, ESTATE OF MELVILLE E. ACKERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ackerman v. CommissionerDocket No. 17910.United States Board of Tax Appeals15 B.T.A. 635; 1929 BTA LEXIS 2813; February 27, 1929, Promulgated 2813 Amounts received on account of accidental death under certain accident policies and under the double indemnity provisions of certain life insurance policies, held to represent amounts received "under policies taken out by the decedent upon his own life" and therefore includable in the gross estate of the decedent under the provisions of section 302(g), Revenue Act of 1924. Herbert N. Arnstein, Esq., for the petitioner. L. S. Pendleton, Esq., for the respondent. LITTLETON635 The Commissioner determined a deficiency in estate tax of petitioner for 1924 in the amount of $410.18. The question is whether 636 amounts received under certain accident policies and also under certain life insurance policies which provided for double indemnity in case of death from accident should be included in the gross estate of the decedent. The facts are stipulated. FINDINGS OF FACT. In 1924 Melville E. Ackerman died as the result of an accident, and at the time of his death he was a resident of St. Louis, Mo.The following amounts were received by his widow as beneficiary under the several policies of insurance listed below, which amounts2814 were included by the Commissioner as a part of the decedent's gross estate: (1) Policy # 3,437.134 issued by the Equitable Life Assurance Society$4,250.00(2) Policy # 2,802,221 issued by the Equitable Life Assurance Society9,079.40(3) Policy # 381,411 issued by The Columbian National Life InsuranceCompany of Boston, Massachusetts6,375.00(4) Policy # 150,515 issued by The Equitable Life Insurance Company of Iowa4,250.00(5) Policy # 139,758 issued by the Columbian National Life InsuranceCompany of Boston, Massachusetts12,750.00(6) Policy # XD 259,854 issued by The Travelers Insurance Company of Hartford, Connecticut7,500.00Total44,204.40The amounts included under (1), (2), and (4) above were the commuted values of the additional indemnity features of the policies on account of accidental death. The amounts included under (3), (5), and (6) were the amounts received under policies insuring against loss resulting from death by accidental means. The total amount received by the widow under said policies was in excess of $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent2815 upon his own life. OPINION. LITTLETON: The petitioner contends that since the amounts received by the widow as beneficiary were receivable only be reason of the accident which resulted in the decedent's death, these amounts were not receivable "under policies taken out by decedent upon his own life" and therefore should not be included in the value of his gross estate for estate-tax purposes. Section 302(g) of the Revenue Act of 1924 provides as follows: 637 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 - * * * (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. As we understand the executor, the interpretation which he would have us place upon the foregoing provision is that the words "policies taken out by the decedent upon his own life" refers to "life insurance" in the2816 ordinary meaning of that term, and can not include "accident insurance" and insurance receivable under the double indemnity provision of ordinary life policies. With this we can not agree. It is well recognized that there is a distinction between life insurance and accident insurance, the former insuring against death in any event and the latter (where accidental death policies are involved) against death under certain contingencies, but we fail to see why one is not taken out upon the life of the policyholder as much as the other. In each case the risk assumed by the insurer is the loss of the insured's life, and the payment of the insurance money is contingent upon the loss of life. A general statement as to the relationship between life and accident insurance is found in 1 Corpus Juris 404, as follows: It has been considered that accident insurance is akin to life insurance; and essentially the same principles underlie, and the same rules govern both kinds of insurance, and indeed, where an accident policy, in addition to the usual provision for indemnity against loss by reason of bodily injury by accidental causes, stipulates for the payment of a certain sum to a person2817 named in case of the death of the insured by accident, it would seem clear that it is, in that aspect, a "life insurance policy" or "policy of insurance of life" as those terms are used in statutes relating to such policies. * * * In support of the foregoing statement, ; , is cited, wherein the court said: * * * The calling of a contract of insurance an "accident," "tontine," or "regular" life policy, or, for that matter, by any other appellation that may be adopted for business or conventional uses or calssification, cannot make a policy containing an agreement to pay to another a sum of money designated upon the happening of an unknown or contingent event, depending upon the existence of life, less a policy of insurance on life. Insurance on life includes all policies of insurance in which the payment of the insurance money is contingent upon the loss of life. * * * The argument advanced that, since prior rulings of the Commissioner recognize a distinction between life and causalty insurance, 638 the enactment of this provision must be presumed to have been made in the light2818 of this distinction, overlooks the fact that the interpretations to which we are referred were in connection with section 503 of the Revenue Act of 1918, where the statute itself makes a distinction between life and casualty insurance, as well as marine insurance. Section 503, supra, provided for a tax on insurance companies upon the issuance of insurance policies and stated specifically the rates applicable in the cases of the different types of policies. The same Act, however, contained the identical provision which we are now considering under the 1924 Act with respect to estate tax, and used the general term "insurance upon his own life." The more reasonable view would seem to be that, since we have in one part of the Act a distinction made between the different types of insurance policies and in another a general term which would well include two of these types, Congress would not have used the general term had it intended that it should be applicable to only one class. The provisions of section 302(g) are broad enough to include both classes of insurance and we find nothing which would permit us, even under the general rule of resolving doubts in the construction of taxing*2819 statutes against the Government and in favor of the taxpayer, to exclude amounts received as accident insurance from its application. Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619171/	C. A. Happold v. Commissioner.Happold v. CommissionerDocket Nos. 106124, 109132.United States Tax Court1942 Tax Ct. Memo LEXIS 63; 1 T.C.M. (CCH) 163; T.C.M. (RIA) 42625; December 1, 194263 Harry C. Weeks, Esq., 911 Sinclair Bldg., Fort Worth, Tex., for the petitioner. Wilford H. Payne, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, J.: These consolidated proceedings challenge respondent's determination of income tax deficiencies in the amounts of $1,475.36, $1,453.08, $1,360.36 and $26,229.78 for the years 1936, 1937, 1938, and 1939, respectively. In issue is whether petitioner realized a taxable capital gain on a formal oil and gas lease assignment on May 18, 1939, which issue must be decided by a determination of the character of petitioner's interests in the oil and gas leases. That determination will settle the additional questions of whether petitioner is entitled to depletion, and whether income from the oil and gas interest was separate or community property of petitioner for the years 1936, 1937, 1938, and 1939. There is another question of whether petitioner is entitled to depreciation. The parties have agreed that respondent's valuation of the properties on May 18, 1939, was excessive by 15 per cent and that the correct valuation is $144,322.25. The parties have stipulated further that should the Board hold the 1939 assignment64 to be taxable petitioner is entitled to an increased depreciation allowance for the remainder of 1939 in the amount of $480.55. Findings of Fact Petitioner in 1929 moved to Texas where he married Edna Happold on March 3, 1932. They lived together until June 26, 1937, when they were divorced, and on December 22, 1937, petitioner married Adele J. Happold, and has lived with her until the present time. Petitioner's income tax returns for the periods in question were filed with the collector of internal revenue for Dallas, Texas. In the fall of 1930 landowners in Gregg County, Texas, urged petitioner to take oil and gas leases on approximately 3,200 acres of land for the purpose of development of the mineral resources. Petitioner being without funds consulted D. H. Byrd and Jack Frost of Dallas, Texas, operating as a partnership, who agreed to take the responsibility of financing the purchase of the leases. Before taking leases it was orally agreed among the three that Byrd and Frost would have a nine-tenths interest and petitioner a one-tenth interest in the lease acquired. By December 20, 1930, petitioner by his own efforts, acquired at the rate of $2.50 per acre leases carrying65 an obligation to drill on about 3,200 acres in Gregg County. Petitioner took the leases in the name of D. H. Byrd only; when they were assembled petitioner drew 15-days drafts on himself and attached the drafts to the leases and sent them to the First National Bank, Dallas. Before the end of the 15-day period Byrd and Frost arranged sales of part of these properties to the Magnolia Petroleum Company, and the drafts were paid out of receipts from the Magnolia Petroleum Company. Soon after the 15-day period one-half of a block of leases, hereafter referred to as the West Block, was sold to Gulf Production Company, hereafter referred to as Gulf, and one-fourth was sold to the Humble Oil & Refining Company. From these receipts petitioner and Byrd and Frost acquired additional leases or properties near the original area. Gulf acquired the one-fourth interest of the Humble Oil & Refining Company so that it held a three-fourths interest in the West Block while the petitioner and Byrd and Frost held a one-fourth interest in the West Block. During 1930 and the first two months of 1931 petitioner expended between $1,900 and $2,000 of his own funds for living expenses and in assembling and clearing66 title to the acquired leases. On March 18, 1931, the partnership of Byrd and Frost transferred to a newly-organized corporation of Byrd-Frost, Inc., all its assets, liabilities and business interests. By May or June of that year Gulf was producing oil on the West Block under an oral agreement between Gulf and Byrd-Frost, Inc. That agreement was not reduced to writing until December 4, 1931. The agreement provided that Byrd-Frost, Inc., held an undivided one-fourth interest in the West Block and was to bear one-fourth of the principal costs of exploration, development, production and treating of oil and gas and the payment or rentals, royalties, taxes and other charges. In addition, Byrd-Frost, Inc. was to bear established percentages of overhead costs. Gulf was to take possession of the entire West Block and have charge of all development, production and sales of gas and oil. Gulf was to maintain a joint account with Byrd-Frost, Inc. and charge to the joint account the above expenses, and Byrd-Frost, Inc. was to have a one-fourth interest in all oil and gas produced on the property. To secure payment of amounts advanced by Gulf, Byrd-Frost, Inc. gave Gulf a lien on all its interest67 in the leases, production therefrom, and improvements thereon. Neither petitioner's name nor interest was mentioned in the agreement, although petitioner knew of the contract arrangement between Gulf and Byrd-Frost, Inc. and Gulf was informed that petitioner had an interest in the West Block. Prior to August 15, 1931, petitioner's interest in the West Block had not been reduced to writing. D. H. Byrd, prior to acquisition of the leases, had offered to give the petitioner an undivided one-tenth interest therein or give him a separated one-tenth interest in the properties. Petitioner indicated he desired that his one-tenth interest remain undivided and that it be handled along with that of Byrd and Frost. In the summer of 1931 petitioner planned to take a trip and requested D. H. Byrd to assign to him formally his interest, indicating that he desired his interest to remain as an undivided one-tenth with that of Byrd-Frost, Inc. An employee of Byrd-Frost, Inc. advised D. H. Byrd it would be unwise to make the assignment as there was pending litigation contesting Byrd-Frost, Inc.'s interest in the leases. It was decided between Byrd-Frost, Inc., and petitioner that pending settlement68 of the litigation petitioner would accept a letter which would formally acknowledge his interest, as follows: August 15, 1931. Dear Mr. Happold, "In accordance with our agreement of December 20, 1930, we hand you this letter defining your interest in the West Block. "In consideration of the services you have heretofore rendered in the taking of the block of leases in Gregg County, Texas, known as the Byrd-Frost Gulf & Humble West Block, we agree to give you one-tenth of the net profits received by us from the sale of this block, and one-tenth of all the net earnings accruing to the interest of the Byrd-Frost, Inc., by reason the one-fourth working interest we still have in this block. We agree to keep an accurate account of all money received by us from the Gulf Production, the operator of this lease, and will deposit to your credit. First National Bank at Dallas, Texas, one-tenth of all such money if as and when received by us. Our books will be open at all reasonable times for your inspection. "It is expressly understood, however, that the Willie Holt 229-acre lease is excepted from this agreement, notwithstanding the fact that it is a part of the West Block. If this agreement69 meets with your approval, please sign the same over the word "accepted' here below. "This agreement shall be binding upon each of the parties hereto, their heirs, successors, assigns, and legal representatives. "Yours truly, "BYRD-FROST, INC. "(Signed) D. H. Byrd "President. "(Signed) Jack Frost, "Vice-President. "(Signed) C. A. Happold "Accepted" About two months after settlement of the litigation which continued approximately 2 1/2 years, petitioner requested D. H. Byrd to give him a formal assignment; D. H. Byrd, however, appeared reluctant to comply with petitioner's request at that time, and petitioner did not then press the matter further. In 1939, as the result of petitioner's divorce, Byrd-Frost, Inc. was made a party to a suit by petitioner's first wife, who claimed among other things a community interest in petitioner's interest in the leases. This suit was settled on April 24, 1939, by the payment of the sum of $3,500 to petitioner's divorced wife in settlement of all her claims to her community property. After this suit the secretary-treasurer of Byrd-Frost, Inc. recommended that petitioner be assigned his interest and on May 18, 1939, Byrd-Frost, Inc. and petitioner70 executed a written instrument, the pertinent portions of which are as follows: This Contract and Agreement this day made and entered into by and between Byrd-Frost, Inc., a Colorado corporation, with a permit to do business in Texas, First Party, and C. A. Happold, of Dallas County, Texas, Second Party, Witnesseth: That Whereas, Second Party is the owner of an interest in certain leases held in the name of Byrd-Frost, Inc. in the East Texas Field, Gregg County, Texas, known as "Gulf-Byrd-Frost Block", which interest is not of record; and Whereas, it is the desire of both parties that this interest be assigned to Second Party and be recorded in the name of Second Party on the records of Gregg County, Texas; Now, Therefore, it is agreed as follows: First: First Party for and in consideration of One Dollar ($1.00) and other valuable consideration, receipt of which is hereby acknowledged, does hereby bargain, sell, transfer, assign and convey to Second Party an undivided 1/40th interest in and to those certain oil and gas leases and all rights thereunder and the land covered thereby as listed and described in Exhibit 'A' which is hereto attached and made a part71 hereof as fully and completely as if set out herein. Second: It is agreed by the parties hereto that this assignment is made subject to any and all operating agreements between Byrd-Frost, Inc. and Gulf Oil Corporation in force at this time, and Second Party agrees to all conditions and assumes all obligations contained in said contracts in so far but only in so far as his interest is concerned. Third: For the same consideration, Second Party hereby agrees that should he desire to sell all or any part of the interest conveyed to him by this assignment that First Party here-to shall have a preferential right to purchase same as follows: in the event Second Party shall receive a bona fide offer to purchase said interest or any part thereof, he agrees to notify First Party promptly in writing of such offer, together with the name and address of such prospective purchaser, and First Party shall have an option for a period of fifteen days after the receipt of said notice to purchase said interest, which option must be exercised in writing. Failure of First Party to exercise such option in writing shall be construed as a waiver of said First Party to purchase such interest. 72 Fourth: Second Party further agrees to pay to First Party the sum of One Hundred Twenty-five ($125.00) Dollars per month for various services rendered by First Party in supervision of said properties. Fifth: Second Party hereby agrees that in the event the First Party shall sell its interest in the property covered by this contract and request him to do so, that he will join First Party in such sale and sell his 1/40th interest under the same terms and conditions that First Party sells its interest provided the sale proposed by First Party is in the regular course of business of First Party at the going price for similar properties in the East Texas Field. Sixth: Second Party also hereby grants to First Party an option to purchase his part of the oil produced from the property covered by this contract provided that the price to be paid by Second Party for such oil shall not be less than the price paid from time to time in the East Texas Field for oil of like gravity and quality by the Humble Oil and Refining Company. This option may be exercised by First Party's giving to Second Party thirty days written notice that it desires to purchase said oil. Seventh: 73 This contract is binding on the parties hereto, their heirs, successors and assigns. Eighth: This contract is effective as of May first, 1939. From November, 1930, to May 18, 1939, Byrd-Frost as a partnership and Byrd-Frost, Inc. maintained an account on its books with petitioner. That account was charged with one-tenth of the company's cost of development of the West Block, and was credited with one-tenth of the company's income from the sales of oil and gas leases and royalties. Also during this period petitioner's account was charged with one-tenth the cost of drilling a dry well which the leases obligated Byrd-Frost, Inc. to drill, one-tenth of additional block purchases, one-tenth of royalty purchases, and one-tenth of the overhead costs charged to Byrd-Frost, Inc. by Gulf. Petitioner requested money from Byrd-Frost, Inc. as needed up until about March, 1936. His account with Byrd and Frost showed a substantial credit balance from January 10, 1931, up until February 27, 1932, after which it showed a debit balance for the most part until November, 1935. During the period between January, 1931, and January, 1934, Gulf expended large sums in development of the leases and74 finally on December 31, 1933, Gulf and Byrd-Frost, Inc. cleared their accounts by Byrd-Frost, Inc.'s paying Gulf for its one-fourth of expenses of development and Gulf's paying Byrd-Frost, Inc. its one-fourth of oil and gas sales to that date. Byrd-Frost, Inc. debited and credited their account with petitioner for one-tenth of these amounts as received and expended. Between February, 1934, and March, 1936, petitioner drew approximately $1,000 per month from Byrd-Frost, Inc., and in March, 1936, petitioner and Byrd-Frost, Inc. cleared their accounts so that instead of petitioner's drawing a round sum each month he was paid each month exactly one-tenth of Byrd-Frost, Inc.'s net income from the oil and gas leases. This practice continued until May, 1939, the date of the above document, after which Gulf accounted directly to petitioner for his one-fortieth of income and expenses and to Byrd-Frost, Inc. for its nine-fortieths of the income and expenses from operation of the West Block. During the years 1936, 1937, 1938, 1939, Byrd-Frost, Inc. filed income tax returns on a cash basis for its fiscal year. In those returns the equipment costs charged by Gulf to Byrd-Frost, Inc., including75 the equipment cost charged by Byrd-Frost, Inc. to petitioner were treated as the basis for Byrd-Frost, Inc.'s depreciation expense, and Byrd-Frost, Inc. took depletion on all income from Gulf, including that paid petitioner. In addition, the amounts paid petitioner were deducted as an expense of Byrd-Frost, Inc.'s business. Petitioner filed income tax returns for the above years as an individual on a cash basis and took no depreciation or depletion until 1939. In the 1934, 1936, 1937, and 1938 returns petitioner designated the income received from Byrd-Frost, Inc. as income from a profit-sharing contract while in petitioner's 1931, 1932, and 1933 returns the same income was reported as commissions earned and in the 1935 return it was designated as income from an oil contract. All income received from Byrd-Frost, Inc. was treated as community property, the petitioner returning one-half and his wife returning one-half, save between June 26, 1937, and December 22, 1937, when he was unmarried. If petitioner's account with Byrd-Frost, Inc. had been maintained in accordance with petitioner's present theory, the credits and charges to that account and the depletion taken by Byrd-Frost, Inc. 76 on the oil and gas revenues credited to that account for the years 1936, 1937, and 1938 would be as follows: 193619371938Oil and gas sales$35,775.60$41,450.95$37,322.14Expenses-5,629.78-5,189.08-4,543.41Depreciation-1,585.77-1,715.47-1,842.30$28,560.05$34,546.40$30,936.43Depletion (27 1/2% of oil and gas sales)taken by Byrd-Frost, Inc9,838.2911,399.0110,263.59Balance$18,721.76$23,147.39$20,672.84Opinion The parties differ on what is basically a factual issue, petitioner contending that his status from the beginning was that of a joint venturer, so that he was entitled to deduct depletion upon the oil payments received and to treat the income as that of a marital community, and so that no substantial change in his rights took place in 1939, when he received and recorded the evidence of his interest; respondent, on the other hand, taking the position that up to 1939 all that petitioner had was a profit-sharing agreement which in 1939 was converted into an interest in property giving rise to taxable gain upon the exchange. For reasons which we are about to state, it is our view that petitioner's ultimate position is sound77 in the main, but on a ground which he advances as an alternative rather than as the principal contention. It seems to us that the preponderance of the evidence indicates that petitioner was from the beginning a tenant in common in the income-producing property, and that what he received in 1939 was no more than the formal evidence of property rights obtained at the inception of the transaction. On the one hand, there is the testimony of the petitioner that when he undertook to assemble leases, to be financed by the other participants in the transaction, it was orally agreed, as ultimately modified, that he would be granted a one-tenth interest in the leases acquired; and there are the recitals of the document executed in 1939 to the effect that petitioner has been the owner of an interest in the leases which it was the purpose of that document to assign formally and of record. Opposed to this is the language of a letter executed in 1931 purporting to define petitioner's interest and referring to it as a fraction of the net profits received on sale and the net earnings accruing from the working interest; and the treatment accorded by the parties on their tax returns, principally the78 description by petitioner of the income as proceeding from a profit-sharing agreement, and, although this is by no means clear, the deduction by the other participants, as expense, of the payments made to petitioner. It may be noted in passing that this latter treatment would be equally unsupportable even on respondent's theory since the payments should then have been capitalized. . Respondent having expressly renounced any claim of estoppel, the conduct of the parties is helpful here only in so far as it may contribute evidence of what the contract actually was. See . We are hence presented with a problem in the relative values of various items of evidence. While it may be that petitioner's testimony as to his oral agreement is somewhat weakened by the 1931 letter and the tax treatment, we have been persuaded in arriving at the conclusion previously stated most forcefully by the 1939 assignment. It is not alone the language of that instrument, to which reference has already been made, that has influenced our conclusion, but rather the79 difficulty of explaining the entire transaction on any other grounds. If something new and valuable, an additional ownership of real substance, was given petitioner for the first time by that instrument, the only contribution made by petitioner in exchange was the service of assembling the leases, performed eight years before. No new development occurred, even on respondent's theory, in 1939. The proportion of the total payments which petitioner received and the computation of their amounts was unchanged. Nothing was altered as a practical matter, save that the payments which petitioner had formerly received through his co-owners were thereafter made to him directly by the operating company, - a result to be expected from the formal recording of the evidence of his interest. What, then, was the reason or occasion for the parties to enter into a new arrangement? As between the conclusion on the one hand that it was the intention to give petitioner gratuitously a valuable interest for no apparent reason, or on the other merely to make formal acknowledgment of rights which petitioner had previously possessed, we see no escape from the latter view. It will be seen that all of this reasoning80 is acceptable and consistent only on the assumption that what petitioner obtained was a direct participation in the ownership of the property. If from the beginning the arrangement was a joint venture, with the consequence that the leases were no more than partnership property, the 1939 document would have constituted a change in the relationship of the parties and in the title to the property, and it could not be said that thereby it was intended merely to formalize a situation already existing. Such a conclusion is inconsistent with the recitals to which we have already referred that the second party was the owner prior to the execution of that document of an interest in the leases, and the assumption that this was the same interest as that which the document conferred upon him formally. And the remaining characteristics of a joint venture which one would normally expect to find, such as participation in liabilities and a voice in management, do not appear from this record. , modified ; . The 81 foregoing conclusion disposes of the questions relating to depletion, community income, and gain on the 1939 transaction. Petitioner also claims the right to deduct depreciation on his share of the tangible property used in the operation of the leases. Of this, however, we take a different view. Petitioner had no direct investment in this property and the nearest approach that can be made to ascribing a basis to them for depreciation purposes is his argument that a pro rata share of the amount expended for the equipment was charged to his account on the books of his associates. These charges were never paid in cash but were eventually absorbed by credits made to his account as a result of oil payments received from time to time. To the extent, however, that these payments offset the debits by reason of the cost of equipment, that were never reported as income by petitioner. Under these circumstances he acquired no basis either for gain or loss, or for depreciation, which is identically defined by statute, section 114(a), Revenue Acts of 1934, 1936, 1938. The ultimate effect of this manner of treatment is the absence of any showing of an actual cost to petitioner for the equipment in82 question. It may be that if he had included the payments in his taxable income that would have resulted in conferring a basis in an equivalent amount. But that was not done, and whether the equipment be regarded as received indirectly in compensation for services previously rendered or directly as the proceeds of the ownership of property, it acquired no basis in petitioner's hands in the absence of prior inclusion in taxable income. Commissioner v. Farren (C.C.A., 10th Cir.), 82 Fed. (2d); , affirmed (C.C.A., 5th Cir.), ; [Dec. 10,505]. We are accordingly of the opinion that petitioner's claim for depreciation deductions should be denied. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619172/	THOMAS W. AND MARGARET J. McDOUGAL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcDougal v. CommissionerDocket No. 10309-77.United States Tax CourtT.C. Memo 1980-289; 1980 Tax Ct. Memo LEXIS 292; 40 T.C.M. (CCH) 841; T.C.M. (RIA) 80289; August 4, 1980, Filed 292 Petitioner-husband was an outside salesman for an automotive parts seller whose only office was in Rochester, New York. Petitioners' residence was in Corning, New York. Held: (1) Petitioners are not entitled to deduct petitioner-husband's expenses as traveling expenses while away from home in the pursuit of a trade or business. Sec. 162(a)(2), I.R.C. 1954. (2) Petitioner-husband's deductible automobile expenses determined. Sec. 162(a), I.R.C. 1954. Robert M. Tyle, for the petitioners. David R. Smith, for the respondent. CHABOTMEMORANDUM FINDINGS OF FACT AND OPINION CHABOT, Judge: Respondent determined a deficiency in Federal individual income tax against petitioners for 1975 in the amount of $2,486.68. After settlement of many issues, the issues for decision are: (1) whether petitioners are entitled to deductions for "away from home" expenses under section 162(a)(2), 1 and (2) whether petitioners are entitled to deduct automobile expenses under section 162(a). FINDINGS OF FACT Some of the facts have been stipulated; the stipulation 293 and the stipulated exhibits are incorporated herein by this reference. When the petition in this case was filed, petitioners Thomas W. McDougal (hereinafter sometimes referred to as "McDougal") and Margaret J. McDougal, husband and wife, resided in Corning, New York. Since 1961, at least through the time of the trial in this case, McDougal has been employed by Fasino's Power Brake, Inc. (hereinafter sometimes referred to as "Fasino's"), a company that sells automotive heavy-duty truck parts and contractors' supplies. In 1964, McDougal became a sales manager for Fasino's, a position which he still held at the time of the trial in this case. During 1975, McDougal was employed as a sales representative/area sales manager for Fasino's, whose only business office was in Rochester, New York. In 1961, when McDougal first began to work for Fasino's, he lived in Rochester. In 1964, petitioners moved to Corning and bought their home there. Petitioners moved to Corning because (1) they had just gotten married and there had been riots in Rochester and (2) McDougal had just been assigned the "southern tier" (the New York State counties bordering on Pennsylvania) as his sales territory and 294 Fasino's had asked him to move into that area. Petitioners have maintained their residence in Corning from 1964, at least through the time of the trial in this case. Corning is approximately 115 miles from Rochester. During 1975, McDougal's sales territory consisted of the New York State area between Rochester and Red Creek (along Lake Ontario), and Hornell and Binghamton (in the southern tier). The territory was smaller than the area covered by McDougal when he moved to Corning, in 1964. In maintaining this territory, McDougal personally called on customers, took orders, made deliveries, and performed service work on parts that he had sold. Sometimes McDougal found it necessary to take parts into Fasino's office for evaluation, repairs, or exchange. During 1975, McDougal delivered his orders to Fasino's office, in Rochester, every workday, either in the evening after finishing his daily sales route, or in the morning before proceeding to service his area for that day. He also checked in to the office to pick up messages or to bring in parts. McDougal's routine in 1975 was to leave his residence in Corning on Monday morning, service his sales territory during the week, and 295 return to Corning on Friday evening. McDougal stayed overnight at his parents' home, in Rochester, on Monday, Tuesday, Wednesday, and Thursday nights, during the work week. McDougal incurred no expenses for lodging while staying overnight at his parents' home. He rarely ate his meals at his parents' home, but generally purchased his meals at restaurants. On a typical Monday, McDougal left his residence in Corning in the morning and followed a route eastward to Elmira and Binghamton, thence northwest to Ithaca, Seneca Falls, Geneva, and Waterloo. His last stop on Monday was usually in the Geneva-Waterloo area, which is somewhat closer to Rochester than to Corning. McDougal took his orders to Fasino's office on Monday evening if he could arrive there in sufficient time to do so. McDougal went to his parents' home on Monday evening. On a typical Tuesday, McDougal left his parents' home, took Monday's orders to Fasino's office if he had not done so the prior evening, and proceeded to service an area including Lyons, Newark, Phelps, Clifton Springs, and Palmyra. This is the area immediately north and northwest of the Waterloo-Geneva area. McDougal's Tuesday area is closer to Rochester 296 than is the Waterloo-Geneva area. McDougal's last stop on Tuesday was usually in Palmyra. McDougal returned to his parents' home on Tuesday evening. On a typical Wednesday, McDougal took his Tuesday orders to Fasino's office, and proceeded to service an area along New York State route 104 to the northeast of Rochester, as far as Red Creek. McDougal's Wednesday area is immediately north and northeast of his Tuesday area; it is between his Tuesday area and Lake Ontario.He serviced the area in a crisscrossing fashion so as to make his last stop near Rochester. McDougal returned to his parents' home on Wednesday evening. On a typical Thursday, McDougal primarily serviced his accounts in the Rochester metropolitan area. This generally included Henrietta, Pittsford, and Webster, as well as any customers in the Rochester area that he may have missed earlier in the week. He often conferred on Thursdays with the salesmen he supervised. He returned to his parents' home on Thursday evening. On a typical Friday, after any conference in Rochester, McDougal proceeded south by way of Hornell, servicing that area and returning to Corning. During 1975, about 35 percent of McDougal's total sales 297 were to customers in the Rochester metropolitan area, about 35 percent to customers in the southern tier, and the remaining 30 percent in the outlying areas to the east and south of Rochester. During 1975, McDougal also supervised the activities of two outside salesmen who serviced the area of upstate New York between Buffalo (in the west) and Malone (in the east), that was not in McDougal's sales territory. This supervision entailed McDougal occasionally accompanying the salesmen on calls to their customers, transferring orders, and giving them sales help. Once or twice in almost every week, McDougal held a sales meeting with the two outside salesmen. These meetings were usually held in Rochester over breakfast or lunch, often at a diner around the corner from Fasino's office. Occasionally, McDougal met the salesmen at Batavia (in the west) or Syracuse (in the east). About eight times during 1975 McDougal drove to Plattsburgh, Malone, Watertown, or other localities in northeast New York State in connection with his supervisory duties. During 1975, McDougal maintained an expense journal in which he recorded for each day amounts for parking, breakfast, lunch, dinner, tips on meals, 298 car washes, phone calls, and road tolls, and daily total automobile mileage. Except for entertainment expenses (most of the time involving meetings with the outside salesmen McDougal supervised), the journal includes no information as to customers, locations, dates or purposes of business trips, mileage between business stops, order of business stops, or odometer readings. McDougal was not reimbursed by Fasino's for his expenses, nor did he submit expense reports to Fasino's. On their 1975 Federal individual income tax return, petitioners claimed deductions totaling $10,542.39 2 "above the line" in connection with McDougal's employment as a sales representative/area sales manager for Fasino's. All of these deductions were disallowed in the notice of deficiency. The amount and current status of each of these claimed deductions is shown on table 1. Table 1 ItemAmountStatusBusiness Mileage - AutoIn dispute15,000 mi. at.15/mi.$ 2,250.0039,451 mi. at.10/mi.3,945.10Meals2,321.35In disputeBusiness Entertainment525.30Resp. concedesParking116.20Resp. concedesCar Hosting237.85Pet. concedeTelephone Enroute342.80Resp. concedesHighway Tolls79.65Resp. concedesTelephone Tolls - Home155.69Resp. concedesTelephone - 1/2 Business Use72.30Resp. concedesTips on Meals493.15In disputeExpense Book3.00Resp. concedesTOTAL$10,542.39299 OPINION 1. "Away From Home" Expenses--Section 162(a)(2)Petitioners maintain that McDougal was away from their Corning, New York, home during the work week, and so they should be allowed to deduct his meal (and meal tips) expenses and his automobile expenses (computed on a mileage basis). Respondent asserts that McDougal was not away from hime in pursuit of business. We agree with respondent. Personal expenses are not deductible, unless the contrary is "expressly provided" in chapter 1 of the Internal Revenue Code of 1954 (sec. 262). 3Section 162(a)(2)4300 expressly permits a taxpayer to deduct what might otherwise be personal expenses if all the following requirements are met ( Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, 470 (1946)): (1) The expense is a traveling expense (this includes such items as transportation fares and food and lodging expenses incurred while traveling); (2) The expense is incurred while "away from home"; and (3) The expense is an ordinary and necessary expense incurred in pursuit of a trade or business.The parties disagree as to whether McDougal was away from home, and, if he was, whether he was away from home in pursuit of a trade or business. Respondent does not dispute the amounts of the meals and meal tips expenses; he concedes that they were "reasonable and necessary". This Court has held that as a general rule "home" as used in section 162(a)(2) means the vicinity of the taxpayer's principal place of employment and not where his or her personal residence is located. E.g., Daly v. Commissioner, 72 T.C. 190">72 T.C. 190, 195 (1979), on appeal (CA4 Aug. 15, 1979); Foote v. Commissioner, 67 T.C. 1">67 T.C. 1, 4 (1976); Garlock v. Commissioner, 34 T.C. 611">34 T.C. 611, 614 (1960). McDougal's weekly routine required regular traveling over an area covering about 301 eleven counties in west central New York State. He resided in Corning, near the southern border of this area. His employer's only office was in Rochester, near the northwest corner of this area. Once the work week started, McDougal went to his employer's office, in Rochester, every day. He slept at his parents' home, in Rochester, every night except Friday. His daily routine was established so as to focus on Rochester. We conclude that Rochester was McDougal's tax home. Except for McDougal's weekends at his residence in Corning, he was not away from home overnight (or on a trip requiring him to sleep or rest) on any of his daily travels. On these daily travels, McDougal was not away from home, within the meaning of section 162(a)(2). United States v. Correll, 389 U.S. 299">389 U.S. 299 (1967). McDougal's weekend trips also did not give rise to deductions under section 162(a)(2), since these trips ended at his residence. Mazzotta v. Commissioner, 465 F.2d 1399">465 F.2d 1399 (CA2 1972), affg. per curiam 57 T.C. 427">57 T.C. 427 (1971). As a result, under this Court's precedents, petitioners are not entitled to take any of the disputed deductions under section 162(a)(2). The Court of Appeals for the Second Circuit 302 approaches these questions somewhat differently, but we conclude that it would reach the same result in the instant case. In Rosenspan v. United States, 438 F.2d 905">438 F.2d 905 (CA2 1971), the Court of Appeals reviewed the law in this area and concluded that "home" does not mean "business headquarters", but rather "that 'home' means 'home'". 438 F.2d at 912. In Commissioner v. Flowers, supra, Mr. Flowers resided in Jackson, Mississippi, but had his principal place of business in Mobile, Alabama. As the Court of Appeals in Rosenspan (438 F.2d at 911) analyzed the Flowers situation, Mr. Flowers would get no deduction for his lodging and meals while in Mobile even if he was "away from home" while there. The deduction would not have been available to his fellow workers living in that city who obtained similar amenities in their homes or even in the very restaurants that Flowers patronized, and Flowers was no more compelled by business to be away from his home while in Mobile than were other employees of the railroad who lived there. The Court of Appeals in Rosenspan concluded that Mr. Rosenspan was not away from home, within the meaning of section 162(a)(2), because he had no home to be away 303 from. In Six v. United States, 450 F.2d 66">450 F.2d 66 (CA2 1971), the Court of Appeals reaffirmed its Rosenspan position. In Six, the Court of Appeals remanded to the district court for a determination as to whether Mrs. Six's home was in New York, New York, or in Englewood, Colorado. If Mrs. Six's home were to be determined to be in Colorado, then the question would arise as to whether her New York expenses were directly connected with her carrying on her trade or business, taking into account the principles of Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59, 60 (1958), as to temporariness or indefiniteness of her stay away from Colorado. 450 F.2d at 69. A place of business is a "temporary" place of business under the principles of Peurifoy if the employment is such that "termination within a short period could be foreseen." Albert v. Commissioner, 13 T.C. 129">13 T.C. 129, 131 (1949). See Michaels v. Commissioner, 53 T.C. 269">53 T.C. 269, 273 (1969). Or, viewed from the other side of the coin, an employment is for an "indefinite", "substantial", or "indeterminate" period of time if "its termination cannot be foreseen within a fixed or reasonably short period of time." Stricker v. Commissioner, 54 T.C. 355">54 T.C. 355, 361 (1970), affd. 304 438 F.2d 1216">438 F.2d 1216 (CA6 1971). "Further, if the employment while away from home, even if temporary in its inception, becomes substantial, indefinite, or indeterminate in duration, the situs of such employment for purposes of the statute becomes the taxpayer's home." Kroll v. Commissioner, 49 T.C. 557">49 T.C. 557, 562 (1968). These are questions of fact ( Peurifoy v. Commissioner, 358 U.S. at 60-61), as to which petitioners have the burden of proof ( Daly v. Commissioner, 72 T.C. at 197). Applying these concepts, we see that if one of McDougal's fellow workers had lived in Rochester but otherwise followed McDougal's routine, then that fellow worker would not have been entitled to deduct expenses under section 162(a)(2), because he or she would not have been away from home overnight. Also, the Peurifoy rule does not help petitioners herein because there has been no showing that the Rochester focus of McDougal's work in 1975 was "temporary", or that McDougal expected it to be of short duration. See Six v. United States, 450 F.2d at 70. In addition, when we examine McDougal's daily routine, we see that (1) he reported to Fasino's Rochester office every weekday (except from time to time on Monday), (2) 305 most of his business contacts were closer to Rochester than to Corning, 5306 and (3) although he did some business closer to Corning than to Rochester, the bulk of his Corning time was on the weekends when he was not working. McDougal testified as to mixed personal and business reasons for moving to Corning in 1964. As his sales pattern had developed by 1975, however, it is difficult to see any significant 1975 business purpose for keeping his residence so far from Rochester. We conclude that (as the Court of Appeals suggested would occur "in the overwhelming bulk of cases arising under § 162(a)(2)," ( Rosenspan v. United States, 438 F.2d at 911)) even if McDougal were treated as being away from home when he was away from his Corning residence, his expenses would not be deductible under the Second Circuit's analysis of the third requirement of section 162(a)(2)--because there is not a direct connection between the expenses and the requirements of the trade or business, as distinguished from the requirements of McDougal's preference for residing in Corning. Respondent asks us to apply the rule of Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (CA10 1971), because of the opinions of the Courts of Appeals for the Second Circuit in Rosenspan v. United States, supra, and Six v. United States, supra. We hold for respondent on the section 162(a)(2) issue because of our analysis of the statute and the decided cases, as applied to the facts as we find them. Since we conclude that the results are the same under our precedents as under the Second Circuit precedents, reliance on the rule in Golsen would not change the result and so is inappropriate in this case. Because of our conclusion that petitioners have failed to meet the requirements of section 162(a)(2), we do not consider respondent's argument that petitioners have failed to meet the substantiation requirements of section 274(d) as to McDougal's automobile expenses.On this issue we hold for respondent. 2. Automobile Expenses--Section 162(a)Petitioners 307 maintain that they are entitled to deduct McDougal's automobile expenses under the general rule of the lead-in language of section 162(a) (see n. 4, supra) in the amount claimed, because all the expenses were incurred in McDougal's employment as an outside salesman. 6 Respondent asserts that (1) petitioners have failed to substantiate the claimed expenses (or business mileage) and are entitled to no deduction therefor and, alternatively, that (2) petitioners are entitled to no deduction for the driving from McDougal's abode for the night to his first business stop for the day and from his last business stop for the day to his abode for the night. We agree with respondent that petitioners have failed to substantiate their claimed expenses and are not entitled to deduct the cost of McDougal's driving to his first and from his last business stop. However, we agree that 308 petitioners are entitled to deduct the expenses of McDougal's driving between his business stops each day. The portion of automobile expenses attributable to travel from a taxpayer's home to the place of business at which he or she first stops, and from the place of business where he or she makes the last stop to home, is nondeductible, whereas the portion of automobile expenses attributable to travel beween places of business is deductible. E.g., Steinhort v. Commissioner,335 F.2d 496">335 F.2d 496, 504-505 (CA5 1964), affg. and remanding a Memorandum Opinion of this Court; 7 see Coombs v. Commissioner,608 F.2d 1269">608 F.2d 1269, 1277-1278 (CA9 1979), affg. on this point 67 T.C. 426">67 T.C. 426 (1976). This principle is applied even if the home is a secondary place of business ( Mazzotta v. Commissioner,supra) or if the taxpayer does some work at home ( Daly v. Commissioner,supra). 8309 The burden is on petitioners to prove the amount of automobile mileage incurred by McDougal between his first and last business stops. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners rely on McDougal's expense journal for 1975 as the only direct evidence that he drove the business mileage claimed on the return. The parties have stipulated that McDougal maintained the journal during 1975. McDougal testified that the entries were made onto the expense journal every day, "the last thing in the evening, or maybe having coffee in the morning". However, the journal is in excellent condition, with each sheet (one week per sheet) unwrinkled and neat. The ink is uniform in color and intensity. The handwriting is remarkably uniform for large portions of the journal. 9310 After examining this exhibit we conclude that there is little basis for relying upon it as an accurate, reasonably contemporaneous record of McDougal's automobile mileage. The journal's usefulness is further diminished because it did not list daily odometer readings, mileage between stops (or even where stops were made), or distance between Rochester or Corning and the first or last stop of the day. On brief, petitioners assert that McDougal "did not record each stop made for two reasons: (1) his sales book records provided that information to him and (2) since his route primarily followed the same paths, he could at any time recreate the ininerary." The trouble with this explanation is that the record herein does not include any information as to what McDougal's sales book records would show and the record herein includes only general information about McDougal's itinerary. The only other evidence in the record bearing this matter is McDougal's testimony as to his typical daily routes. From this testimony, we estimate that petitioners are entitled to deductions for 20,000 miles of automobile expenses. Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (CA2 1930), revg. 11 B.T.A. 743">11 B.T.A. 743 (1928). To reflect the foregoing and concessions by the parties, 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 taxable year in issue.↩2. On line 14 of their Form 1040, petitioners deducted $10,542.49. The ten cents difference is not explained by the parties; it appears to be a transcription error.↩3. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES. Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses. ↩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 amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; * *5. All parts of McDougal's Tuesday, Wednesday, and Thursday routes were closer to Rochester than to Corning. Portions of his Monday and Friday routes were closer to Rochester than to Corning. All his testimony as to locations of meetings with the salesmen he supervised was as to meetings in Rochester or in cities closer to Rochester than to Corning.6. Petitioners do not specifically assert this or any other alternative to their "away from home" position. However, the nature of McDougal's employment points to a conclusion that some deductible automobile expenses were incurred, and respondent's counsel appears to have acknowledged as much in his opening statement.↩7. T.C. Memo. 1962-233↩. 8. Curphey v. Commissioner,73 T.C. 766">73 T.C. 766, 777 (1980) and Dancer v. Commissioner,73 T.C. 1103">73 T.C. 1103 (1980) are distinguishable because in those cases the taxpayers' homes (or the immediate property around them) were principal places of business, while in the instant case the record does not disclose any such business use of petitioners' residence.9. We note with interest the similarities between the journal in the instant case and the notebooks described in Rennie v. Commissioner,T.C. Memo. 1979-2 (especially note 5).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619173/	Estate of Allen Clyde Street, also known as Clyde Street, Deceased, Lottie Jane Street, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentStreet v. CommissionerDocket No. 51267United States Tax Court25 T.C. 673; 1955 U.S. Tax Ct. LEXIS 3; December 30, 1955, Filed 3 Decision will be entered under Rule 50. Held, no marital deduction under section 812 (e) (1) (A) (1939 Code) when will gave property to widow and in next paragraph provided the property was to go to others if widow "predecease distribution to her." W. W. Wallace, Esq., for the petitioner.Arthur Clark, Jr., Esq., for the respondent. Mulroney, Judge. MULRONEY 674 OPINION.The Commissioner refused to allow the marital deduction in petitioner estate and determined a deficiency in estate tax in the sum of $ 25,275.34.Lottie Jane Street, executrix of the Estate of Allen Clyde Street, and deceased's widow, filed an estate tax return with the collector of internal revenue for the sixth collection district of California. In this return the executrix took a marital deduction, stating therein "Decedent by his Last Will devised all of his estate to his wife, Lottie Jane Street." The facts are all stipulated and are found accordingly. The parties are agreed the only issue concerns the marital deduction claimed in the estate tax return.The first paragraph of the will of Allen Clyde Street appoints his wife executrix, and the next two provide, as follows:SECOND: All4 the property which I possess or to which my estate may become entitled, I give, devise and bequeath to my beloved wife, LOTTIE JANE STREET.THIRD: In the event that my wife, LOTTIE JANE STREET, predeceases me, or predecease [sic] distribution to her, then I give, devise, and bequeath to my niece MARJORIE STREET, daughter of my brother FAY STREET, the following:Then follow a number of paragraphs disposing of specific property to named persons, some of them containing further disposition directions in the event the first named persons "predecease distribution to them."The will was admitted to probate in the Superior Court of the State of California, in and for the County of Los Angeles, on September 13, 1949. Lottie Jane Street did survive her husband, and distribution of his estate. She was appointed executrix and the probate court entered a final decree of distribution to her of the assets of the estate on March 30, 1951.Section 812 (e) (1) (A) of the 1939 Code provides for a deduction from the value of the gross estate of a decedent for estate tax purposes "An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving5 spouse * * ." However, the next subsection, (B), makes the foregoing deduction inapplicable when the interest passing to the spouse is terminable, the subsection stating, in part:(B) Life Estate or Other Terminable Interest. -- Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest --675 Subsection (D) states certain exceptions to the operation of subsection (B) quoted above. The material portion of subsection (D) is as follows:(D) Interest of Spouse Conditional on Survival for Limited Period. -- For the purposes of subparagraph (B) an interest passing to the surviving spouse shall not be considered as an interest which will terminate or fail upon the death of such spouse if -- (i) such death will cause a termination or failure of such interest only if it occurs within a period not exceeding six months after the decedent's death, or only if it ocurs as a result of a common disaster resulting in the death of the decedent and the surviving spouse, or only if it6 occurs in the case of either such event; and(ii) such termination or failure does not in fact occur.The argument of respondent is that the interest taken by the widow under the will is a terminable interest within the provisions of section 812 (e) (1) (B) for she had to survive for an undetermined period -- until distribution -- in order to take. He argues section 812 (e) (1) (D) does not apply here for the condition (her death) that could cause her interest to terminate was not of such a nature that it could only occur within 6 months following decedent's death.The identical question presented here was decided favorably to the Commissioner in . There the widow's share in the residuary estate was bequeathed to other named persons "if * * my wife * * * dies prior to the distribution of my estate * * ." The widow survived and distribution to her actually occurred within 6 months after the decedent's death. The opinion holds the provision of the will deprived the estate of the marital deduction for there was no certainty that the spouse's interest would become absolute within 6 months of decedent's death, 7 as required by the statute. The opinion states:There can be no question as to the right of Congress to make any contingency, legal or testamentary, to which the transmitting of a decedent's property is subject, the basis of a difference in estate-tax liability. Such a contingency, therefore, can as properly be made to consist of an existing legal possibility as of an existing fact condition. Whatever the selected contingency may be, it necessarily may be made admeasurable for tax purposes as of the time of the decedent's death. See . And when the contingency is so admeasurable and then exists, whether it has been made one of legal possibility or of fact certainty, it will not alter the situation that the contingency has thereafter ceased to exist, even though this occurs before the estate tax itself is payable.Petitioner makes a general argument to the effect that under the will decedent gave all of his property to his wife and she received it under ordinary probate proceedings, and nothing more is required for a marital deduction. He does8 not argue the invalidity of the clauses making provision for disposition in the event of the wife's death before distribution, or that they might be void for repugnancy 676 in view of the earlier clause making an apparently unqualified devise and bequest of all of his property to his wife. That there is a split of authority on this question, see note in . However, , indicates the California courts would uphold the validity of such a clause making a gift over if the first named legatee should die prior to distribution.Petitioner makes some argument that the decree of distribution of March 1951 operates as an interpretation of the will binding upon the Commissioner. The decree recites: "that in pursuance of and according to the provisions of the last will * * * [all property] is hereby distributed to Lottie Jane Street, widow of said decedent." Petitioner argues the above operates as an interpretation of the will, construing it to give all of decedent's property to the widow. It is not an interpretation of the will. It is merely *9 an order carrying out the second paragraph, which all would concede is the only paragraph applicable if the widow is alive at the time of distribution.Upon the authority of , we hold for the Commissioner.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619174/	VICTOR BIGIO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBigio v. CommissionerDocket No. 2211-89United States Tax CourtT.C. Memo 1991-319; 1991 Tax Ct. Memo LEXIS 351; 62 T.C.M. (CCH) 119; T.C.M. (RIA) 91319; July 10, 1991, Filed 351 Decision will be entered for the respondent. Alan L. Weisberg and Dennis G. Kainen, for the petitioner. Sergio Garcia-Pages and Gary F. Walker, for the respondent. SWIFT, JudgeSWIFTMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in petitioner's Federal income tax liability and additions to tax as follows: Additions to Tax, Secs. 1YearDeficiency 6651(a)(1)6653(a)(1)6653(a)(2)66541981$ 5,166,461$ 1,291,615$ 258,323$ 2,927,821$ 395,8771982961,773240,44348,089376,71593,6361983 1,946,137486,53497,307565,117119,0901984667,829166,95733,391136,33741,986The primary issue to be decided is whether petitioner was a resident of the United States during the years in issue. FINDINGS OF FACT Some352 of the facts have been stipulated and are so found. Petitioner was born in England in 1920. Petitioner moved with his parents to New York in 1925 and became a naturalized U.S. citizen. In 1930, petitioner moved with his parents to Colombia, South America, where he remained with his parents through his childhood. In 1965, petitioner officially renounced his U.S. citizenship. From 1965 through the time of trial, petitioner traveled on a British passport. Prior to the years in issue, petitioner married in Colombia and three children were born in Colombia to petitioner and his wife. Petitioner and his wife raised their children in Colombia. The family frequently vacationed in Florida. Petitioner speaks English fluently, although he usually converses in Spanish with his family. From 1977 to 1986, petitioner did not own a house in his name in Colombia. During those same years, a house that petitioner's wife owned in Bogota, Colombia, was leased to tenants. The house was sold in 1986. During 1981 through 1984, petitioner maintained a substantial presence in and contacts with the United States. When in the United States, petitioner and his wife lived in a large, fully furnished353 condominium petitioner owned and maintained at 5500 Collins Avenue, Miami Beach, Florida. This condominium was purchased by petitioner in 1973 for $ 250,000. When petitioner and his wife were traveling out of the United States, this Collins Avenue condominium was not rented nor occupied by other individuals. It was maintained full time for petitioner's use. 2In addition to the Collins Avenue condominium, petitioner purchased for approximately $ 170,000 a condominium354 at 2333 Brickell Avenue, Miami, Florida. Petitioner's son, Alan Bigio, used this condominium. Petitioner also purchased a townhouse located at 20225 Northeast 34th Court Miami, Florida, which townhouse was used by petitioner's daughter, Doris, and her husband. At some point before 1981, petitioner had purchased and sold a condominium in Hallandale, Florida. At least two of petitioner's three children were living in the Miami area throughout the years in issue, and petitioner frequently spent time with his children and grandchildren. Petitioner visited and socialized frequently with his two sisters and with other Colombian friends who also were living in the Miami area. At least two of petitioner's children attended and graduated from colleges in the United States, both before and during the years in issue. Throughout the years in issue, petitioner maintained for his and his wife's use two automobiles at the Collins Avenue condominium. One of the automobiles was a white 1979 Cadillac that, for convenience, was titled in the name of petitioner's son, Alan Bigio. Throughout the years in issue, petitioner regularly consulted several medical doctors in the Miami area relating 355 to a series of continuing personal health problems. Petitioner carried medical health insurance through a U.S. company that apparently had a policy of not issuing health insurance policies to nonresident aliens. During the years in issue, through Financiera Asociada S.A. (Asociada), a Panamanian corporation wholly owned by petitioner, petitioner invested in, among other things, U.S. Government securities and U.S. based securities and commodities. These investments, which totaled several million dollars, were apparently made through stockbrokers in the Miami area, with whom petitioner frequently met. Petitioner maintained a personal computer equipped with a modem at the Collins Avenue condominium that petitioner used for communicating with and retrieving investment related information from various computer data bases and services such as Compu Trac. Each Sunday a copy of "Commodity Perspective" was delivered in petitioner's name by special delivery to the Collins Avenue condominium. Petitioner relied on this publication to give him up-to-date investment information. The record does not indicate that petitioner maintained any bank accounts in Colombia. Petitioner and his various356 wholly owned corporations, however, maintained several bank accounts in the United States and in Switzerland. Regular bank statements with respect to at least some of the Swiss bank accounts were mailed to petitioner at the Collins Avenue condominium. During 1981, 1982, and until October 13, 1983, petitioner's British passport identified petitioner's residence as "U.S.A." On October 13, 1983, petitioner's British passport was changed to identify his residence as the "United Kingdom." At all relevant times, petitioner's British passport identified his occupation as "retired." During the years in issue petitioner and his wife traveled extensively all over the world. When petitioner entered the United States, petitioner generally was granted a 6-month visa. Petitioner never stayed in the United States beyond the period specified in the visas without taking another trip overseas. Petitioner's most frequent and regular trips were between Miami, Florida, on the one hand, and London, Puerto Rico, and Barranquilla, Colombia, on the other. The records of the U.S. Immigration and Naturalization Service and of various airlines that are in evidence indicate that petitioner entered and 357 left the United States during the years in issue at least as follows. In each instance, petitioner departed the United States from Miami, Florida, and entered the United States in Miami, Florida. Where known, the other destination and departure cities are indicated. 1981January 5Entered United StatesSeptember 14Departed United States to LondonOctober 30Entered United States1982January 18Departed United StatesMarch 27Entered United StatesMay 3Departed United States to BarranquillaMay 8Entered United StatesMay 10Departed United States to LondonJune 27Entered United StatesJuly 12Departed United StatesJuly 17Entered United StatesSeptember 28Departed United StatesOctober 10Entered United StatesOctober 12Departed United StatesOctober 18Entered United StatesOctober 29Departed United States to LondonNovember 8Entered United StatesDecember 8Departed United States to Barranquilla1983AprilDeparted United States to LondonMayEntered United StatesJune 8Entered United StatesJuly 8Entered United StatesNovember 11Entered United StatesDecember 12Departed United States to San Juan1984January 3Entered United StatesJanuary 26Entered United States from BarranquillaFebruary 26Departed United States to BarranquillaMarch 1Entered United States from BarranquillaMarch 28Entered United States from BarranquillaAugust 12Departed United States to BarranquillaAugust 16Entered United States from BarranquillaSeptember 9Departed United States to BarranquillaSeptember 13Entered United States from BarranquillaOctober 14Departed United States to BarranquillaOctober 18Entered United States from BarranquillaNovember 3Entered United StatesNovember 25Departed United States to BarranquillaNovember 28Entered United States from BarranquillaDecember 19Departed United States to San Juan358 Analysis of information in evidence concerning charges made with petitioner's credit card during 1981 through 1984 indicates that petitioner was in the Miami area for significant periods of time during the years in issue. For example, during 1983, many purchases were made in the Miami area in petitioner's name in each of the months of January, February, April, July, August, September, November, and December. Beginning in 1947 through the present time, petitioner has been affiliated with the textile industry in Colombia. In 1977, while working with a textile company named Vanytex, and while involved in a labor dispute at Vanytex's plant in Bogota, Colombia, petitioner suffered five gunshot wounds. Petitioner sought medical attention in Florida. After recuperating from the gunshot wounds in Florida, petitioner curtailed his work for Vanytex and was somewhat reluctant to return to Bogota. During 1981 through 1984, however, petitioner maintained strong business ties to Colombia, and petitioner frequently traveled to Colombia, usually staying for a few days each trip. Petitioner held an ownership interest in one-third of Fabrica De Hilazas Vanylon S.A. (Vanylon), a Colombian corporation359 that operated a large textile manufacturing plant in Barranquilla, Colombia. Petitioner held his ownership interest in Vanylon through a Colombian corporation called Financiera Canal S.A. (Canal), that was wholly owned by petitioner. Petitioner was not paid a salary by Vanylon. During each year in issue, Canal received dividends from Vanylon. Petitioner's work for Vanylon included frequent trips throughout the world to identify and research new fabrics. Petitioner was instrumental in establishing at Vanylon computerized systems and controls for its financial analysis. On his various trips into Colombia, petitioner used a tourist visa to gain admission into Colombia. Petitioner was not a resident of Colombia at any time during the years in issue. When in Barranquilla, petitioner stayed at a house owned by his brother. All utility bills for the house where petitioner stayed in Barranquilla were allegedly paid by Vanylon. During the years in issue, it was not uncommon for wealthy individuals in Colombia to be kidnapped and held for large ransoms. After the incident in 1977 in which petitioner was shot, petitioner feared assassination and kidnapping, and petitioner thereafter360 often traveled in an armored car when in Colombia. Title to the car was in the name of the Vanylon plant manager. For the years in issue, neither petitioner, Asociada, nor Alderside Corp. filed tax returns in the United States, in the United Kingdom, in Colombia, nor in any other country. Canal filed tax returns in Colombia for each year in issue. OPINION In general, individuals who are resident aliens of the United States are taxed the same as U.S. citizens. Individuals, however, who are nonresident aliens are taxed only on income derived from sources within the United States. Secs. 871 and 872; secs. 1.1-1(b) and 1.871-1(a), Income Tax Regs. A determination of residence is a fact question that is based on the facts and circumstances of each case. Park v. Commissioner, 79 T.C. 252">79 T.C. 252, 286 (1982), affd. without opinion 755 F.2d 181">755 F.2d 181 (D.C. Cir. 1985); Jellinek v. Commissioner, 36 T.C. 826">36 T.C. 826, 834 (1961). The nature and degree of permanence of an individual's presence in and contacts with a country with respect to which the individual is an alien determines, for Federal income tax purposes, whether or not the individual is a361 resident thereof. Jellinek v. Commissioner, supra at 834. Some permanence of living within a country is necessary to establish residence in a country. Park v. Commissioner, supra at 287; De la Begassiere v. Commissioner, 31 T.C. 1031">31 T.C. 1031, 1036 (1959), affd. per curiam 272 F.2d 709">272 F.2d 709 (5th Cir. 1959). One may be a resident of more than one country ( Marsh v. Commissioner, 68">68 T.C. 68 (1977), affd. without opinion 588 F.2d 1350">588 F.2d 1350 (4th Cir. 1978)), and neither termination nor abandonment of a residence in another country is considered a prerequisite to a finding of a residence in the United States. Marsh v. Commissioner, supra at 72; Dillin v. Commissioner, 56 T.C. 228">56 T.C. 228, 242 (1971); Adams v. Commissioner, 46 T.C. 352">46 T.C. 352, 358 (1966). Treasury regulations define residence in the context of section 871 as follows: 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 362 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 this section, in the absence of exceptional circumstances. [Sec. 1.871-2(b), Income Tax Regs.]For Federal income tax purposes, an alien is presumed to be a nonresident alien. Sec. 1.871-4(b), Income Tax Regs. This presumption of nonresidency, however, does not place the363 burden of persuasion on respondent. Park v. Commissioner, supra at 288 n.13; Adams v. Commissioner, supra at 361 n.8. Petitioner contends that he was a resident of Colombia during the years in issue. He claims that every trip he made into the United States was for definite purposes (namely, vacations, family visits, medical appointments, and product development for Vanylon) that could be and that were accomplished within a limited period of time. Referring to the last sentence of the above-quoted regulation and because the duration of each of his trips into the United States was limited by the visas issued to him, petitioner contends that he should not be considered a resident of the United States. Petitioner contends further that there were no exceptional circumstances that would justify a finding that he was a resident of the United States. Respondent contends that petitioner maintained a strong degree of permanent attachment to the United States and that petitioner was not in the United States as a mere transient or sojourner. Respondent argues further that petitioner did not spend a significant amount of time in Colombia, 364 that petitioner was not a resident of Colombia during the years in issue, and that these circumstances overcome the presumption of nonresidence to which petitioner as an alien is entitled. In Park v. Commissioner, supra, we addressed a factual setting similar to the instant case and found that the taxpayer was a U.S. resident despite extensive business and family ties to Korea. We said: It is true that petitioner came to the United States on visas that technically limited his stays, and he was frequently absent from the United States. Because of the international character of some of his business activities, however, he did not stay continuously in any country. We think the duration and nature of his presence in this country, as evidenced by his deep and continuing involvement in business, personal, social, and political affairs, were sufficient to establish the kind of attachment and relationship to this country that constitutes residency within the meaning of the regulations under section 871. * * * [79 T.C. at 289.]In the instant case, petitioner did not engage in extensive political activities in the United States. Petitioner, 365 however, purchased a number of condominiums in the Miami area, one of which petitioner lived in and occupied with his wife and occasionally with other family members on a regular basis during the years in issue. Petitioner made many business investments in the United States relating to U.S. based securities and commodities. Petitioner frequently socialized with his family and with other Colombian immigrants in Miami. A large percentage of petitioner's immediate family, including all of his children and grandchildren, lived in the Miami area. As was the situation in Park v. Commissioner, supra, because petitioner traveled extensively outside the United States, the visa restrictions on petitioner's stays in the United States are not a meaningful indication of petitioner's residency. See Schoneberger v. Commissioner, 74 T.C. 1016">74 T.C. 1016, 1027 (1980). Petitioner argues that his situation is analogous to that of the taxpayer in Adams v. Commissioner, supra. In Adams, the taxpayers were Canadian citizens who maintained a family home and extensive business and investments in Canada. For several years, the wife and children366 lived most of each year in Florida so that the children could attend school in Florida. The husband continued living and working in Canada most of each year, visiting his family in Florida an average of 70 days each year. The taxpayers filed tax returns in Canada for all 3 years in issue, and they filed Federal income tax returns in the United States as nonresident aliens for 2 of the 3 years in issue. On those facts, among others, the husband in Adams was found to be a nonresident alien, and the wife was found to be a resident alien. Adams v. Commissioner, supra, is distinguishable from the instant case because, among other things, the taxpayer-husband in Adams continued living most of each year in the family home in Canada where he owned several businesses, and he spent only an average of 70 days each year in the United States. In the instant case, the evidence suggests that petitioner spent more time each year in the United States than he spent in other countries, and petitioner did not maintain an abode in Colombia or in any other country. Furthermore, the time petitioner spent outside the United States was divided among several countries. *367 It appears that the Collins Avenue condominium was petitioner's home base and residence from which petitioner departed and to which petitioner returned on his numerous trips overseas. Although not without doubt, based on the facts and circumstances before us in this case, we conclude that petitioner was a resident of the United States during the years 1981 through 1984. We so hold. Additions to TaxPetitioner made no specific additional arguments concerning the additions to tax. Petitioner has the burden of proof with regard thereto. Rule 142(a). We sustain the additions to tax as determined by respondent. Decision will be entered for the respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The nominal purchaser of the 5500 Collins Avenue condominium, and of other real property in Florida discussed elsewhere in this opinion, apparently was Alderside Corp., a Panamanian corporation wholly owned by petitioner. Alderside Corp. had no written lease with petitioner with respect to the real property, nor is there any evidence of a loan transaction between Alderside Corp. and petitioner. We treat petitioner as the beneficial owner of the Collins Avenue condominium and of the other real property located in Florida that is mentioned herein.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619175/	THRASH LEASE TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Thrash Lease Trust v. CommissionerDocket No. 82904.United States Board of Tax Appeals36 B.T.A. 444; 1937 BTA LEXIS 712; August 10, 1937, Promulgated 712 An organization of individuals holding transferable shares in a common business enterprise managed by one or two of their number who distributed the profits proportionately with interests, held an association. A. Calder Mackay, Esq., for the petitioner. Edward A. Tonjes, Esq., for the respondent. STERNHAGEN 445 The Commissioner determined deficiencies of $1,548.44 and $1,398.20 in petitioner's income taxes for the fiscal years ended July 31, 1932 and 1933, respectively. Petitioner assails the determination that it is taxable as an association. FINDINGS OF FACT. On October 17, 1930, a tract of 12 acres in Smith County, Texas, was leased by J. E. Thrash to J. S. Rushing for three years and as long thereafter as oil or gas should be produced, the lessor to receive one-eighth of the oil produced and payment of the market value of one-eighth of the gas. On May 25, 1931, this lease was assigned by Rushing to "Gordon Macmillan, Trustee, his heirs, successors and assigns" for $48,000, payable out of seven thirty-seconds of the first oil or gas produced and marketed from the property. Herbert R. Macmillan, Gordon's father, was at this713 time acquiring oil leases and distinguishing them by various designations, and it was at his direction that the aforesaid name of the assignee was used. Herbert R. Macmillan, in June 1931, put up between $2,500 and $3,000 for the drilling of a well, and sent Gordon to Texas to take charge of operations. Gordon received a monthly salary and had an interest in the venture. Oil was struck in commercial quantities on July 31, 1931. Percentage interests were assigned to many persons, sometimes of interests in the oil and gas and sometimes of interests in the lease. The total of the former was 24+ percent, and of the latter, 42+ percent. For such interests assigned before production began the aggregate consideration was $8,000, and for those later assigned the aggregate consideration was $18,000. There were some variations in the terms of the different assignments of interests. All were transferable, and some have been transferred. Distributions have been made among the percentage assignees, after the 12 1/2 percent went to the original lessor, the remaining 20+ percent being equally divided between Herbert R. and Gordon Macmillan. No meeting of the owners of percentage interests714 has ever occurred. Herbert R. Macmillan directed the business from Los Angeles and Gordon Macmillan directed the operation of the well and distributed the profits among the percentage owners, after paying expenses out of the proceeds of sales of interests and of the oil. For the fiscal year ended July 31, 1932, the net income of the venture was $13,044.03, and for the fiscal year ended July 31, 1933, the net income was $10,168.72. Fiduciary income tax returns were filed in the name of Gordon Macmillan, trustee. OPINION. STERNHAGEN: After the filing of fiduciary returns as a trust, the Commissioner determined that the petitioner was an association 446 within section 1111(a)(2) of the Revenue Act of 1932, taxable as if it were a corporation. The petition is filed in the name of Thrash Lease Trust, the name to which the deficiency notice is addressed, and alleges that it received the deficiency notice; files the petition "to protect its rights", but "does not admit that it is a taxable entity"; that Gordon Macmillan acquired the Thrash lease; that "petitioner at no time has had any form of organization", at no time has been engaged in business as an association. All715 of these allegations are denied. It is difficult now to know what the position is as to the identity or nature of the taxpayer under the revenue act. Not only is the existence of petitioner seemingly denied, but also the fiduciary returns are repudiated. Both Herbert R. Macmillan, while a witness, and petitioner's counsel assert that there was no trust; and from this petitioner's counsel argues that there is no foundation for recognizing a statutory "association." Who is to be regarded as the taxpayer in respect of the undisputed income or what his or its character is under the tax law, the petitioner does not say. It is suggested that a tenancy in common existed and its taxable character as a partnership is intimated. Although, from the evidence, the organization is amorphous indeed, there is little doubt that there was an organization of individuals holding transferable shares in a common business enterprise managed by one or two of their number, who distributed the profits proportionately with interests. This is enough to give prima facie substance to the Commissioner's treatment of it as an association, *716 ; ; ; ; , and to require an affirmative showing by the petitioner of attributes and circumstances indicating a different taxable character under the revenue statute. No such showing is in this record, and the determination must stand. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619176/	OREN A. KAFFENBARGER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKaffenbarger v. CommissionerDocket No. 5373-76.United States Tax CourtT.C. Memo 1978-128; 1978 Tax Ct. Memo LEXIS 387; 37 T.C.M. (CCH) 566; T.C.M. (RIA) 780128; March 30, 1978, Filed Oren A. Kaffenbarger, pro se. Donald W. Mosser, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined deficiencies in petitioner's income taxes as follows: Addition to tax 1 YearIncome tax(Sec. 6651(a)(1))1972$2,105.79$319.6019732,265.36566.34Petitioner resided in Springfield, Ohio, at the time he filed his petition herein. In each of the taxable years involved herein, he filed a Form 1040, to which he attached a Form W-4E (exemption from withholding), on which he listed only his name and address388 and did not list any data relating to his income and deductions. He claimed on the face of each form that he was not required to file or pay income taxes, citing the "Law of the Land" and various provisions of the United States Constitution. Petitioner had income as follows: 19721973Salary$ 9,000.00$ 9,431.25Net rental income2,449.242,449.24$11,449.24$11,880.49In computing the deficiencies herein, respondent allowed, for each year, the standard deduction of $1,000 and a $750 exemption. Petitioner is a tax protester who advances a variety of constitutional, legal, economic, and moral arguments in support of his assertion that respondent's determination is invalid and should not be sustained. Petitioner's contentions are totally without merit and frivolous. They have been frequently considered and rejected by the courts. Petitioner, at trial, was specifically invited to present evidence as to the substantive issues regarding his income and deductions for the taxable years in question but declined to do so.As a consequence and as a result of the granting of a motion by respondent to deem certain facts as stipulated, it is clear389 beyond a shadow of a doubt that respondent's determination should be sustained. Such conclusion can be supported either because of the failure of petitioner (a) properly to prosecute or (b) to satisfy his burden of proof both as to the underlying deficiencies in tax and additions to tax under section 6651(a)(1). See Rule 142, Tax Court Rules of Practice and Procedure.Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619178/	Appeal of W. C. BRADLEY.Bradley v. CommissionerDocket No. 47.United States Board of Tax Appeals1 B.T.A. 111; 1924 BTA LEXIS 242; November 29, 1924, decided Submitted October 29, 1924. 242 The transfer in 1919 by a corporation of stock or other property to a stockholder, in common with other stockholders and in proportion to stock held in the corporation, for one-eighth of its value and under other circumstances revealed by the evidence is not a sale in good faith but is a taxable dividend, when received by the stockholder, as defined by section 201(a) of the Revenue Act of 1918, and must be included in his net income subject to surtax for the year in question. H. H. Swift, Esq., and John E. McClure, Esq., for the taxpayer. John D. Foley, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. JAMES112 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL. This appeal, involving additional personal income tax for the year 1919, was heard upon a stipulation of facts. The case relates to the sale of the stock of the Coca-Cola Co. of Georgia, the reorganization of that business as the Coca-Cola Co. of Delaware, and certain profits alleged to have grown out of this transaction. FINDINGS OF FACT. The taxpayer, W. C. Bradley, was during the year 1919 a stockholder of the Trust Co. of Georgia, a banking243 corporation having its principal office and place of business in the city of Atlanta. He owned 50 shares of stock of the said corporation of a total of 10,000 shares issued and outstanding. During the month of July, 1919, Ernest Woodruff, president of the Trust Co. of Georgia, hereinafter called the Trust Co., engaged Robert C. Alston to negotiate an option with each of the stockholders of the Coca-Cola Co. of Georgia, hereinafter called the Georgia Co., for the purchase of their stock in that company. At the same time Mr. Woodruff arranged with certain interests in New York for the formation of a syndicate, hereinafter called the Bankers' Syndicate, to cause to be incorporated under the laws of Delaware a corporation to be known as the Coca-Cola Co. of Delawere, hereinafter called the Delaware Co., to underwrite the purchase price of the stock of the Georgia Co., to cause the property and assets of the latter company to be transferred to the former and to cause to be issued by the Delaware Co. $10,000,000 of preferred stock and 500,000 shares of no par value common stock, from the proceeds of the sale of which should be realized the sums necessary for the purchase of the stock244 of the Georgia Co. Mr. Woodruff agreed, on behalf of the Trust Co., that that company should have a 30 per cent interest in this syndicate and assume 30 per cent of the "responsibilities incurred in connection with the exercise of the said option." On August 2, 1919, the board of directors of the Trust Co. adopted a resolution, the material portion of which is as follows: Be it resolved, That this company do enter into the purchase of said participation certificates or of the assets of the Coca-Cola Co. through a syndicate or syndicates, provided the unanimous opinion of attorneys representing this company, the Guaranty Trust Co., the Chase Securities Co., and the Coca-Cola Co. is favorable; and further provided that one-half of the amount for which this company will be called upon to obligate itself in this behalf be underwritten by solvent persons, firms or corporations. On or before August 8, 1919, Mr. Alston secured from all the stockholders of the Georgia Co. options to purchase their respective interests in that corporation. These options carried no obligation unless exercised, but if exercised required payments in the agregate to the stockholders of the Georgia245 Co. of $10,000,000 preferred stock of the Delaware Co. and of $15,000,000 in cash. The options expired on August 29, 1919, and if exercised required payment of the purchase price 30 days after the acceptance of the option. On August 8, 1919, Mr. Alston assigned the said options to the Trust Co. On August 13, 1919, the directors of the Trust Co. adopted a resolution authorizing the company to enter into the Bankers' Syndicate 113 to purchase the stock of the Georgia Co. to the extent of $4,500,000 and providing further as follows: Be it therefore resolved, That the executive committee is authorized to propose to each of the stockholders of this company, that if he will deposit with this company, in cash, one hundred and ninety-five ( $195) dollars for each share of stock owned by him in this company, to be used in assisting this company in financing said transaction, this company will divide with him the stock of the Coca-Cola Co., the Delaware corporation, retained by it under the original Bankers' Syndicate in proportion to his holdings, not to exceed one share of stock in the Coca-Cola Co. for each share of stock held by the stockholder in this company on the same246 basis at which this company acquired said stock, returning to said stockholders, upon the termination of said syndicate, the amount of money deposited by him, less the cost of the stock on the basis that this company acquired same. Be it further resolved, That upon the assumption by him of a proportionate part of the liability of this company in committing itself to to a participation in the syndicate hereinbefore referred to, an interest in said syndicate to the extent of twenty thousand (20,000) shares of the stock of the Coca-Cola Co., the Delaware corporation, be transferred to Ernest Woodruff, in consideration of the time and services given by him in connection with this transaction. On August 21, 1919, the Trust Co., the Newmont Co. of New York, the Shermar Investing Corporation and Charles H. Sabin, comprising the Bankers' Syndicate, formally executed a syndicate agreement whereby the parties obligated themselves to carry out the plan theretofore contemplated; to share the expenses, obligations, and profits in proportions therein named, the proportion of the Trust Co. being 30 per cent; to cause the Delaware Co. to be incorporated; to issue its stock as above set forth247 and to cause that company to sell to the syndicate 83,000 shares of its common stock at $5 per share and 417,000 shares to a separate syndicate, hereinafter called the Common Stock Syndicate, at $35 per share. On the same date the options theretofore secured to purchase the stock of the Georgia Co. were exercised, and the Common Stock Syndicate was organized by the Trust Co. to purchase 417,000 shares of the Delaware Co., with the Trust Co. acting as syndicate manager. On August 22, 1919, the Trust Co. transmitted to the taxpayer and to all other stockholders of the company a letter reading, except as to name and amounts, as follows: Mr. WILLIAM C. BRADLEY, Columbus, Ga.,DEAR SIR: STRICTLY CONFIDENTIAL. As you are probably aware, we, associated with strong New York interests, will share in the profits to be derived from the acquirement of the Coca-Cola Co. assets and business. This is a large transaction, involving a large sum of money, and we have made a large commitment in connection with the financing of the enterprise. We made this commitment expecting to offer to our stockholders the privilege of participating in the profits of the enterprise on the same248 basis that the Trust Co. will share in such profits, provided such stockholders will contribute to the financing of the enterprise in proportion to the number of shares which they hold in the Trust Co. It is impossible, at this time, to explain to the details of the transaction, since they have not yet been definitely agreed upon and are subject to change, but it will be necessary to make the financial arrangements immediately and before the details can be worked out. You hold 50 shares of stock in the Trust Co., and, to enable you to participate in this transaction the amount of money it is necessary for you to place with us is $9,750. On the dissolution of the syndicate, which we anticipate 114 will not be later than October 1, you will be advised regarding its operation and a distribution promptly made. We think it is to your interest to take advantage of this offer, and we recommend it to you. If we do not receive your check, however, for the amount above stated on or before 12 o'clock noon the 27th day of August, 1919, we will assume that you do not desire to participate. The rights you acquire hereunder, if accepted, are not transferable before the dissolution249 of the syndicate. Please sign the acceptance below, on the inclosed duplicate, and return with your check. Yours very truly, GEO. B. PENDLETON, Treasurer.On August 23, 1919, the taxpayer by one J. D. Massey accepted the foregoing and forwarded his check for $9,750, being $195 per share on each of his 50 shares in the company, forwarding at the same time a letter reading as follows: EAGLE & PHENIX MILLS, Columbus, Ga., August 23, 1919.TRUST CO. OF GEORGIA, Atlanta, Ga.GENTLEMEN: Your circular letter of August 22, to Mr. W. C. Bradley, concerning the underwriting syndicate for handling the purchase of the Coca-Cola Co., has been received in the absence of Mr. Bradley on a business trip to New York. Before leaving, Mr. Bradley went into this matter fully with me, and, anticipating that a call for funds might be made prior to his return, he instructed and fully empowered me to handle the matter for him in his absence. You will accordingly find inclosed, as requested, the carbon copy of the above-mentioned letter from you, dated August 22, 1919, to which, by authority, I have signed Mr. Bradley's name, accepting for Mr. Bradley the offer of participation250 made in said letter. Also further acting for Mr. Bradley, I attach hereto check of the W. C. Bradley Co., No. 1739, dated August 23, 1919, drawn upon the National City Bank, of New York, in favor of the Trust Co. of Georgia, for $9,750, same being the amount specified in the above-mentioned letter of August 22. I know that it is Mr. Bradley's desire and intention to participate in this matter fully in all respects, and if there is anything else necessary to be done by him or for his account to that end, kindly communicate promptly by telegraph, telephone, or letter. Yours, very truly, J. D. MASSEY. Immediately after August 21, and prior to August 26, 1919, the Trust Co., as syndicate manager of the Common Stock Syndicate, offered 417,000 shares of the Delaware Co. to the public on an "if, as, and when issued" basis at $40 per share, and on August 26, 1919, closed the subscription lists on account of such syndicate, the offer then being oversubscribed by 143,000 shares. On August 29, notices of the allotment of shares were sent common stock syndicate subscribers by the Trust Co. as syndicate manager, and on or before September 5, 1919, payments were received on the entire251 allotment of 417,000 shares. On the same date the Delaware Co. was duly organized. On September 8, 1919, the Delaware Co., by resolution of its board of directors, authorized the sale, to persons not named, of 83,000 shares at $5 per share. On September 9, 1919, by resolution of the board of directors of the same company 417,000 shares of stock were sold to the Trust Co. as manager of the Common Stock Syndicate at $35 per share, payment therefor to be made on or before September 16, 1919. 115 On October 1, 1919, the taxpayer received from the Trust Co. its check for $9,500, 50 shares of common stock of the Delaware Co. of the value of $40 per share, and a letter reading as follows: TRUST CO. OF GEORGIA, Atlanta, Ga., October 1, 1919.Mr. WILLIAM C. BRADLEY, Columbus, Ga.DEAR SIR: Under date of August 22, 1919, we extended you an invitation to join us in the financing of the purchase of the Coca-Cola Co. of Atlanta. You availed yourself of this invitation by placing with us $9,750. The deal has now been consummated and we are inclosing you treasurer's check for $9,500, covering the amount to be returned to you. We are inclosing you herewith252 50 shares Coca-Cola common stock, represented by Voting Trust Certificate No. TWO-34 Voting Trust Certificate No. TWO-34 issued in your name which, as the result of your participation, we are able to sell you at $5 per share and we have deducted $250 from the funds mentioned above to cover the purchase price of the shares. Please sign and return to us the carbon copy accompanying this letter, also our participation receipt which was issued to you when you made this payment. We are glad to have had you with us in this transaction. The result has been gratifying to us and we trust that it is equally so to you. And now may we add a personal word to you as a shareholder? Our company is doing well and forging ahead steadily. It is the ambition of the officers to make the Trust Co. of Georgia the greatest financial institution in the South, and with your help we can do it. Considering our strength and the liberal interest we pay, our deposits are not large and we need your assistance in building them up. Let us have the benefit of any funds for which you have no immediate use. Open with us an inactive account. We will pay you 3 per cent thereupon. On certificates253 of deposit, payable on demand, we will pay the same rate, and on time certificates, running for a period of three months or longer, 4 per cent. On savings deposits we allow 4 per cent. If you already have funds on deposit with us, be assured of our appreciation. Speak to your friends regarding us and invite them to make use of the services we offer in our various departments. Yours very truly, GEO. B. PENDLETON, Treasurer.On July 9, 1924, the Commissioner advised the taxpayer that he had determined a deficiency of income tax to be due from him amounting to $1,921.78, of which the sum of $1,016.84 was due to the inclusion in taxable income of the taxpayer of the sum of $1,750 alleged gain, profit, or income derived from the transaction above set forth. From that determination the taxpayer brings this appeal. DECISION. The determination of the Commissioner is approved, provided that the deficiency determined and computed by the Commissioner does not include normal tax upon the above sum of $1,750; otherwise the sum so computed, if any, as normal tax is disallowed and the balance of such deficiency is affirmed. Final decision of the Board will be settled on consent254 or on seven days' notice. OPINION. JAMES: The taxpayer in this case contends that, stripped of all but the essential elements, the series of transactions whereby he acquired 50 shares of the stock of the Delaware Co. represented a mere 116 purchase by him of such shares from the Trust Co. for $250. The Commissioner contends that the taxpayer acquired such stock by virtue of participation in the Bankers' Syndicate, and since the stock was worth $40 per share he thereby realized a gain of the difference between the value of the stock so acquired and the cost of such stock to him. In our view of the case neither position as actually presented to the Board is sound. The chronological analysis of the steps taken in the flotation of the stock of the Delaware Co. as set forth in the foregoing findings of fact, discloses the following situation at the time Bradley received his letter from the Trust Co. on August 22d and sent his remittance on the 23d: 1. The Bankers' Syndicate had been formed and the sale of stock by the Delaware Co. in two lots, one of 83,000 shares at $5 and one of 417,000 shares at $35, had already been determined upon. 2. The option to complete255 the purchase of the stock of the Georgia Co. did not expire until September 20 and no present obligation to pay therefor existed either on the part of the Bankers' Syndicate or the Trust Co. 3. The purchase of 417,000 shares at $35 by the Common Stock Syndicate was arranged for with the Trust Co. as syndicate manager. 4. It was apparent that: (a) The Trust Co. would receive 24,900 shares of the $5 stock; (b) the stockholders of the Trust Co. would participate in the profit of the Trust Co. either directly or indirectly; (c) a distribution in kind of the syndicate stock would not require the registering on the books of the Trust Co. of a profit on the syndicate stock measured by the difference between its cost and its selling price. Within five days after the Trust Co. sent its letter to Bradley and the other stockholders, it announced that the public had purchased at $40 a share all the shares of stock allotted to it at $35 a share, and hence the Bankers' Syndicate was definitely assured that its entire liability under its original commitments was limited to $5 a share on 83,000 shares of stock which was readily salable at $40 per share, as shown by the oversubscription256 in the Common Stock Syndicate. It seems to us that we are dealing here, then, not with a purchase and sale of stock but with a plan arranged to avoid, if possible, two taxable profits under the Revenue Act of 1918, one to the Trust Co. on the sale of its Bankers' Syndicate stock, and the other to Bradley, if and when a dividend was declared of the extraordinary profit realized by such sale if made. This result was sought to be avoided by a distribution in kind. We are to inquire whether this plan meets the legal tests of avoidance or is merely ineffective evasion. It is important to note that the Trust Co. on August 2 provided for participation by other parties in the risks and profits of the Bankers' Syndicate but that the resolution on August 13 and the letter to the stockholders dated August 22, after the allotment of the $5 stock, read together, do not in fact call for syndicate participants but set out quite another and a more attractive proposal. It was then known that the stock of the Bankers' Syndicate would cost $5 per share. It was proposed to the stockholders that they 117 deposit $195 for each share of stock held in the Trust Co., but "this company will257 divide with him the stock of the Coco-Cola Co. * * * in proportion to his holdings * * * returning to said stockholders, upon the termination of said syndicate, the amount of money deposited by him, less the cost of the stock on the basis that this company acquired same." (Italics ours.) This offer was dated August 22d; Bradley accepted it August 23d. Three days later the Common Stock Syndicate reported through this same Trust Co. as syndicate manager that the public subscription at $40 per share had been oversubscribed 143,000 shares. The absolute agreement to return the stockholders' money proffered in the resolution of the 13th and the letter of the 22d, read together, was clearly no empty promise; it was based upon a not surprising foreknowledge of events soon to happen. Not only by specific agreement of the Trust Co. but by the facts surrounding the flotation of the public stock it is clear that Bradley did not place any funds at the risk of the venture and that the deposit of $9,750 was the merest shadow cast in front of the real transaction, which was a distribution in kind of the common stock of the Delaware Co. to the stockholders of the Trust Co. By this plan, 258 if success crowned the effort to avoid the tax, the Trust Co. would escape tax on the sale of the proceeds of its Bankers' Syndicate operation, and the stockholders could assert the claim made here that they were merely purchasers of securities and had made no profit at all. The stockholders were all offered participation - a natural and significant precaution - since if any were excluded those so excluded could properly and effectively, by virtue of their rights as stockholders to participate pro rata in the profits of the corporation, prevent the successful carrying out of the plan. To make assurance doubly sure the offer was held open until August 27, the day after the Common Stock Syndicate reported on the sale of the 417,000 shares It is clear also that, since the payment for the stock of the Georgia Co. was not required to be made until September 20, and the Common Stock Syndicate would receive the proceeds of the sale of the 417,000 shares long before that time, the Trust Co. was aware on August 22 (and, judging from the resolution, apparently also knew on August 13), that no funds of its own except $5 per share on 24,900 shares would be required for advances or for259 any other purpose in connection with its participation in the Bankers' Syndicate. But, even if the above be so, is the transaction none the less beyond the reach of the tax collector by reason of the fact that Bradley did pay $5 to the Trust Co. on account of each share of Delaware Co. stock received by him? If it be true that this plan is adequate to this purpose, then all income taxation upon corporate dividends or distribution is at an end, for it is only necessary in order to avoid the tax upon the stockholder that the corporation contemplating a dividend purchase a suitable security, susceptible of division among its stockholders, and "sell" it to them for an inadequate price. The law is not so easily defeated. It deals not alone with the form but with the substance of transactions, looks if necessary through the form to the substance, and predicates its findings upon realities rather than upon fictions. 118 Tax evasion is as old as the taxgatherer, and the would-be evader has not infrequently tested in the courts the product of his fertile brain. If his plan really avoids the tax, if he actually conducts his operations outside the scope of its effectiveness, 260 his device is said to be avoidance and succeeds; if on the contrary he merely screens an operation by making it seem the thing it is not then he fails and suffers the consequences of failure. To this effect are many cases In the case of , the bank invested its available funds in United States Government bonds shortly before the assessment date and reconverted the bonds into cash shortly after that date. In deciding that such a plan although perfectly legal in itself was an evasion of tax and therefore ineffective, the court said: * * * We declare that when the capital of a banking institution, used throughout the year in the conduct of its business, is converted for a few days into Government securities for the express purpose of defeating the imposition of any or all taxes, such investment is colorable and fraudulent, and its capital remains taxable to the same extent and in the same manner as if such conversion had never taken place. In such case the tenure by which they are held, being a fraud and a cheat, will be disregarded, and the bankers will be cons dered as still261 the owners of that property which for the moment they have attempted to hide beneath the protection of the General Government. Under like circumstances and under similar facts, the Supreme Court of the State of Illinois in , said: While such institutions have the right to invest in such securities, and courts are bound to recognize that right, when it becomes a question between them and the State, and that question relates to the purpose of the purchase, and the facts tend to show that such purpose was the evasion of taxation, then the courts may look upon such transaction as none other than fraudulent in law and of such character that the beneficiaries can not be allowed, under the cloak of an apparent legitimate transaction, to thus avoid their duty and responsibility to the State. In , the supreme court of that State held that where a banking corporation transferred $40,000 of its surplus to stockholders' account by a resolution in form declaring a dividend, but in fact providing a mere allocation of surplus by reason of the262 fact that the so-called dividend was required to be retained in the hands of the bank, it was held that the transaction was a subterfuge to avoid taxation and that an assessment in which was included the said value of $40,000 as part of the capital and surplus of the bank was valid. Many cases might be cited to the same general effect of which particular note may be made of , and . A case of more than ordinary interest is . This case arose in the State of Indiana, action having been begun in the name of the State against Durham to recover a penalty for evading taxation of personal property. It appears that Durham temporarily converted a portion of an open deposit account in the First National Bank of Crawfordsville into United States currency just prior to April 1, 1888, and reconverted it into the bank deposit just subsequent to that date. The property 119 was assessable inIndiana as of April 1 of each year, the penalty sought to be recovered being one imposed under the following263 provision of Indiana law (section 6339, Rev. St. 1881): If any person or corporation shall * * * temporarily convert any part of his personal property into property not taxable, for the fraudulent purpose of preventing such property from being listed, and of evading the payment of taxes thereon, he or it shall be liable to a penalty of not less than $50, nor more than $5,000, to be recovered in any proper form of action, in the name of the State of Indiana, on the relation of the prosecuting attorney. In upholding the imposition of the penalty the court says: It seems to be sufficiently clear that the complaint sets forth a state of facts constituting a fraudulent attempt against the collection of the public revenue provided for by law, and shows conduct on the part of the appellant punishable by penalty, as prescribed by the statute. Three significant cases of tax evasion have been passed upon by the Supreme Court of the United States. In , there was involved the question of a temporary conversion of a bank deposit into United States currency. The taxing officers264 assessed the amount so converted nothwithstanding the fact of conversion, and the taxpayer, Mitchell, filed a bill of equity seeking to restrain collection of the tax. Being defeated in the Supreme Court of Kansas he sued out a writ of error to the Supreme Court of the United States. The court in sustaining the decree of the Supreme Court of Kansas said: We think the decision in this case was correct. United States notes are exempt from taxation by or under State or municipal authority; but a court of equity will not knowingly use its extraordinary powers to promote any such scheme as this plaintiff devised to escape his proportionate share of the burdens of taxation. His remedy, if he has any, is in a court of law. In , the same state of facts was before the court as in the case of The taxpayer instead of being assessed, was sued for the tax in the courts of the State of Ohio and was therefore in a court of law and not in a court of equity in bringing this case to the Supreme Court. The case is decided primarily under the provisions of the265 Ohio statute which imposed the tax on personal property on the basis of the average amount held during the year rather than upon the amount on any particular day. The device adopted by the taxpayer was here ineffective for the reason that he converted the securities only for a short period. It appears, however, that the court was fully prepared to dispose of the case merely upon the question of evasion, if necessary, and in indicating that conclusion said: * * * the courts look upon this transaction as indefensible, and consider it an improper evasion of the duty of the citizen to pay his share of the taxes necessary to support the Government which is justly due on his property. In , Horning was convicted of carrying on the busines of a pawnbroker in the District of Columbia without a license. It appears from the testimony that Horning, with intent to evade the laws of the District, opened an office at the south end of one of the bridges across the 120 Potomac River where he conducted negotiations respecting loans and received pledges on account of loans made. He maintained an office and storehouse266 in Washington where pledges were stored and redelivered to pledgors upon the payment of the loans and from which free automobile transportation was provided to the office in Virginia. In holding that that was an unsuccessful attempt to evade the District laws, Mr. Justice Holmes says: It is said with reference to the charge of the judge, to which we shall advert, that there was a question for the jury as to the defendant's intent. But we perceive none. There is no question that the defendant intentionally maintained his storehouse and managed his business in the way described. It may be assumed that he intended not to break the law, but only to get as near to the line as he could, which he had a right to do; but if the conduct described crossed the line, the fact that he desired to keep within it will not help him. It means only that he misconceived the law. The evidence in this case shows that the Trust Co. was boh a member of the Bankers' Syndicate and manager of the Common Stock Syndicate; that on August 21 the Bankers' Syndicate became assured of the ultimate possession of 83,000 shares of $5 stock of which the Trust Co. would secure 24,900; that on August 22 the Trust267 Co. proposed to all its stockholders the deposit with it $195of for each share of its stock held by them with a promise in effect to return $190 and one share of common stock of the Delaware Co.; that that offer was held open to the stockholders until August 27; that the taxpayer did deposit $9,750 under this arrangement on August 23; that on August 26 the Trust Co., as manager of the Common Stock Syndicate, revealed to all the world that the common stock of the Delaware Co. was oversubscribed at $40 per share to the extent of 143,000 shares and no syndicate funds except $5 per share on 83,000 shares would be required to finance the acquisition of the stock of the Georgia Co.; that on or before September 5 all the common stock subscriptions allotted were paid for; that the Delaware Co. duly carried out the syndicate arrangements and that payment on account of the purchase of the stock of the Georgia Co. was not required under the options theretofore taken until September 20. Under these circumstances the alleged purchase of 50 shares of Delaware Co. stock at $5 by the taxpayer from the Trust Co. was no purchase at all, but a mere distribution of the assets of that company to him268 as a stockholder therein, he sharing with all the others as was his right as a stockholder. The stock so received by the stockholder was income and is defined by section 201(a) of the Revenue Act of 1918 as a dividend as follows: That the term "dividend" when used in this title * * * means * * * any distribution made by a corporation * * * to its shareholders or members, whether in cash or in other property * * *. The determination of the Commissioner that there is a deficiency in income tax of this taxpayer for the year 1919 must be approved unless in the computation of such deficiency he has subjected the sum of $1,750 income to normal tax for the said year, in which event the computation must be modified by subjecting the said sum to surtax alone.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619180/	Sid Neschis v. Commissioner.Neschis v. CommissionerDocket No. 92022.United States Tax CourtT.C. Memo 1963-191; 1963 Tax Ct. Memo LEXIS 154; 22 T.C.M. (CCH) 927; T.C.M. (RIA) 63191; July 16, 1963154 Held, under the facts, that 50 percent of the expenditures which petitioner expended for travel, meals and lodging on a European tour which he took in 1959 under the auspices of Temple University, Philadelphia, Pennsylvania, is attributable to maintaining and improving his skills required by him as a school teacher in the elementary grades of the public schools of Yonkers, New York, and is deductible. Held, further, that 50 percent of petitioner's expenditures for travel, meals and lodging on the tour is attributable to mere sightseeing in the countries visited and is not deductible under the applicable statute and regulations. Held, further, that $97.50 which petitioner expended for books and similar materials which he bought while on the tour and brought back home with him and placed in his classroom and used in teaching his classes is deductible under the applicable statute and regulations. Sidney Meyers for the petitioner. Rudolph J. Korbel for the respondent. BLACK Memorandum Findings of Fact and Opinion The Commissioner has determined a deficiency in petitioner's income tax for the year 1959 of $424.18. The deficiency notice states: The above deficiency is based on adjustments and explanations as disclosed in the report of examination, a copy of which was forwarded to you on December 14, 1960. The petitioner assigned several errors to the deficiency determined by respondent but at the hearing only one of the issues was tried and it is stated in the petition as follows: FOURTH: In the determination of the aforesaid deficiency the respondent committed the following errors: (A) In disallowing education expenses in the sum of $1,813.00 for the year ended December 31, 1959. Findings of Fact A stipulation of facts, together with exhibits attached thereto, was filed at the hearing and is incorporated herein by this reference. From the stipulated facts and exhibits attached thereto and from the oral testimony we make the following findings of fact: Petitioner is156 an elementary school teacher in the employ of the Board of Education of the City of Yonkers, New York, and has been employed there as a teacher for approximately 10 years. He filed his income tax return for the year 1959 with the district director of internal revenue, Manhattan District, New York. Petitioner received his masters degree from New York University in 1950. Subsequent thereto he took additional courses and received additional credits therefor which aggregated 41 credits. The subjects taken and for which additional credits were received are enumerated in the stipulation of facts which has been filed and which has been incorporated herein by reference. During the year here involved petitioner taught the fourth and fifth grades. The curriculum taught in these grades included arithmetic, spelling, penmanship, geography, social studies, history, physical education, music, art, science, and other subjects. The school at which petitioner taught was located in the heart of the industrial area of Yonkers where there was a conglomeration of ethnic groups. In the early part of 1959 petitioner applied to Temple University, Philadelphia, to take the trip sponsored by that university, 157 termed "European Travel Courses in Comparative Education." Petitioner was not required, nor requested, to take the credits acquired from said European trip sponsored by Temple University by his employer, the board of education of the City of Yonkers, nor was such trip necessary for the retention of his position or promotion to a higher one. The trip was composed of three programs - Program "A", Program "B" and Program "C" - and petitioner took Program "C" which encompassed about nine weeks. Two professors from Temple University were in charge of this trip and they accompanied the tour throughout the entire trip and attended all lectures. It was mandatory that petitioner, in order to take the tour and receive academic credit therefor, attend all the lectures called for by the itinerary. The tour first touched England where petitioner attended residential classes at Oxford University as required by the curriculum and as referred to in Exhibit 5-E "Residential Course on Education in England for Members of Temple University, Philadelphia, U.S.A. 5-16 July 1959, Balliol College - Oxford." The instruction given petitioner at Oxford included instruction in the administrative end of education158 and education from the primary grade through adult education. Supplementary to the courses taken at Oxford, petitioner visited English public schools which were then in operation. After the courses at Oxford, the tour then took petitioner to Paris where courses at the Sorbonne had been scheduled. However, the Temple University professors in charge of the tour decided to cancel these courses due to the fact that they determined that the group would not be given sufficient participation in the lectures. From Paris the tour proceeded to Switzerland, Germany, Austria, Czechoslovakia, Poland, Moscow, Leningrad, Helsinki, Stockholm, and Copenhagen and returned to New York on August 24, 1959. Petitioner attended the required lectures at the University of Munich, Germany, during the stay there from July 25 to July 31. These lectures, at which the two guide professors from Temple University were also in attendance, dealt with the primary, junior high, and grammar schools of Germany. Petitioner also visited the schools there. Petitioner attended required lectures at the University of Austria during his stay there from August 1 to August 4. He also attended lectures in Russia. In Finland159 and Sweden petitioner visited the schools there. In addition, at each of the countries visited, petitioner visited the museums, art centers, and other historical places of interest. No lectures were provided in Prague or Warsaw. The itinerary provided for departure from Warsaw on August 9 and a flight to Moscow where three days were spent in sightseeing, visiting places of historical interest, attending the Bolshoi or other theatre, then on to Leningrad for three more days of sightseeing and visiting. Three hours on August 15 were provided for visiting schools while in Leningrad. From Leningrad, on August 16 through August 24, the itinerary provided for visits to places of historical interest in Helsinki, Finland, Stockholm, Sweden, and Copenhagen, Denmark. During the period August 16 through August 24 one conference on "Education in Denmark" was provided in Copenhagen on August 21. The itinerary provided for a flight from Amsterdam to Idlewild Airport in New York on August 24, 1959. In the countries visited petitioner bought and collected books and other material which he brought back with him for use in his teaching assignment. The books and other material that petitioner160 collected in the various countries were placed in his classroom in the school where he taught and were utilized by him and his pupils in and as part of the courses being given. The cost of these articles to petitioner was at least $97.50. Petitioner utilized and put into application much of the knowledge and techniques he had obtained and observed on this tour in his teaching of the curriculum assigned to him in the public schools of Yonkers. In addition to his teaching duties, petitioner has also served on various teachers' committees for the superintendent of schools of Yonkers, among them being the science committee, mathematics, and others. Petitioner has put on reading demonstrations and engaged in other activities of varied nature in assisting the aim to uplift the school system. Petitioner deducted the sum of $1,813 on his 1959 return as constituting the expense for the tour taken. The deduction was broken down as follows: Travel, meals and lodging$1,715.50Miscellaneous97.50$1,813.00 This amount was disallowed entirely by the respondent. Petitioner spent the aforesaid amount of $1,813 on the indicated tour. We find, after a careful consideration161 of all the evidence in the case, that 50 percent of the foregoing amount of $1,715.50 paid for travel, meals and lodging was expended by petitioner in order to maintain or improve his skills required by him in his employment as teacher in the elementary grades in the public schools of Yonkers and is deductible as a business expense. We find that the remaining 50 percent of the expenditures which made up the total amount deducted on his return for travel, meals and lodging was for sightseeing on the trip which he took and is not deductible as a business expense. We further find that the $97.50 expended for books and other similar material was actually spent by petitioner and that the books and similar material were put into use by petitioner in the public school at Yonkers where he taught and this $97.50 is deductible as a business expense. By taking the tour and adhering to its curriculum petitioner received six academic credits. Opinion BLACK, Judge: The question involved concerns the deductibility of the sum of $1,813 which petitioner maintains he expended in 1959 for a European tour sponsored by Temple University of Philadelphia. The tour which petitioner took was labeled162 in some of the exhibits attached to the stipulation of facts as "European Travel Courses in Comparative Education." Respondent concedes that petitioner expended the amount of $1,813 which he took as a deduction for business expenses in the income tax return which he filed for the year 1959. We have no issue as to the amount which petitioner expended on the tour. But respondent has disallowed the claimed deduction in its entirety on the ground that it does not come within the applicable statute and regulations. Both parties are agreed that the applicable statute is section 162, I.R.C. 1954, which reads: 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, * * * Petitioner contends that the expenditures incurred on the tour clearly come within section 1.162-5(a), Income Tax Regs.1 Petitioner does not claim that subparagraph (2) of the applicable regulations printed in the margin is applicable. Clearly it is not applicable because it has been stipulated that - 5. Petitioner163 was not required, nor requested to take the credits acquired from taking the European trip sponsored by Temple University, by his employer, the Board of Education of the City of Yonkers, New York, nor was such trip necessary to the retention of his position or promotion to a higher one. 164 But petitioner does maintain that subparagraph (1) of the regulations printed in the margin is applicable because his tour was primarily taken for the purpose of "maintaining or improving skills" required by him in teaching the elementary grades of the Yonkers public schools at Yonkers, New York. Respondent relies principally upon section 1.162-5(b) and (c) of Income Tax Regs.2 as the basis for his disallowance of the claimed deduction in its entirety. Respondent relies especially upon (c) of the regulations which reads: (c) In general, a taxpayer's expenditures for travel (including travel while on sabbatical leave) as a form of education shall be considered as primarily personal in nature and therefore not deductible. 165 There can be no doubt that the testimony of petitioner in this case and the exhibits which are attached to the stipulation of facts show that the European tour which petitioner took in the summer of 1959 was in part a sightseeing tour similar to the tours which many tourists take and, while such a tour is a form of education, the expenses of it are not deductible as business expenses; they are personal expenses. On the other hand, we think that the facts in this case also show that a part of the tour which petitioner took was more than mere sightseeing. It was taken by petitioner for the purpose of maintaining or improving his skills required in his employment of teaching in the elementary grades of the public schools of Yonkers, New York. Petitioner testified at length at the hearing and we are convinced from his testimony and other evidence in the case that this is true. The tour was not taken to secure a higher position in the school. Petitioner testified on cross-examination: I seek no reward. I have turned down nothing. I have sought nothing. I have been offered positions as an administrator. I have refused them. I want to be a classroom teacher. I am proud of being known166 just as a classroom teacher. To sum up, it seems to us that a substantial part of petitioner's European tour was mere sightseeing and the expenditures incurred in making that part of the tour are not deductible. On the other hand, we think it is equally clear that a substantial part of petitioner's tour was more than mere sightseeing. His visit to Oxford, England, for example, and his taking the lecture courses there and visiting the English public schools and learning about the methods of teaching used there; also his trip to Munich, Germany, and attending the lectures there which lasted several days and his study about the methods used in the German public schools. Petitioner attributes all of the deductions claimed on the return as having been incurred in expenditures of the type mentioned above, whereas the record shows that they were not so incurred but that a very substantial part of them was incurred in mere sightseeing. Respondent, on his part, has denied the deductions in their entirety on the ground that they were incurred in a mere sightseeing trip which many tourists take and no part of the expenditures is deductible. We think this position of the respondent cannot*167 be sustained in the face of the record we have before us. We think that under the facts of this case the doctrine of Cohan v. Commissioner, 39 F. 2d 540, is applicable here. We have made a finding of fact based on the oral testimony and the stipulated facts that 50 percent of petitioner's expenditures which he deducted as having been incurred on the European tour for travel, meals and lodging was expended by him in maintaining and improving skills required by him in his employment as a teacher in the elementary schools of the public schools at Yonkers and is deductible. We further made a finding of fact that the remaining part of the expenditures which made up the total amount deducted on his 1959 return for travel, meals and lodging was for sightseeing expenditures on the European tour and is personal expense and not deductible. We also made a further finding of fact that the $97.50 expended for books and other similar material was actually spent by petitioner and was put to use in his teaching at Yonkers. This $97.50 we hold to be a deductible expense under the applicable statute and regulations. Decision will be entered under Rule 50. Footnotes1. Sec. 1.162-5 EXPENSES FOR EDUCATION. (a) Expenditures made by a taxpayer for his education are deductible if they are for education (including research activities) undertaken primarily for the purpose of: (1) Maintaining or improving skills required by the taxpayer in his employment or other trade or business, or (2) Meeting the express requirements of a taxpayer's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the taxpayer of his salary, status or employment. Whether or not education is of the type referred to in subparagraph (1) of this paragraph shall be determined upon the basis of all the facts of each case. If it is customary for other established members of the taxpayer's trade or business to undertake such education, the taxpayer will ordinarily be considered to have undertaken this education for the purposes described in subparagraph (1) of this paragraph. Expenditures for education of the type described in subparagraph (2) of this paragraph are deductible under subparagraph (2) only to the extent that they are for the minimum education required by the taxpayer's employer, or by applicable law or regulations, as a condition to the retention of the taxpayer's salary, status, or employment. Expenditures for education other than those so required may be deductible under subparagraph (1) of this paragraph if the education meets the qualifications of subparagraph (1) of this paragraph. A taxpayer is considered to have made expenditures for education to meet the express requirements of his employer only if the requirement is imposed primarily for a bona fide business purpose of the taxpayer's employer and not primarily for the taxpayer's benefit. Except as provided in the last sentence of paragraph (b) of this section, in the case of teachers, a written statement from an authorized official or school officer to the effect that the education was required as a condition to the retention of the taxpayer's salary, status, or employment will be accepted for the purpose of meeting the requirements of this paragraph.↩2. (b) Expenditures made by a taxpayer for his education are not deductible if they are for education undertaken primarily for the purpose of obtaining a new position or substantial advancement in position, or primarily for the purpose of fulfilling the general educational aspirations or other personal purposes of the taxpayer. The fact that the education undertaken meets express requirements for the new position or substantial advancement in position will be an important factor indicating that the education is undertaken primarily for the purpose of obtaining such position or advancement, unless such education is required as a condition to the retention by the taxpayer of his present employment. In any event, if education is required of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business or specialty therein, the expense of such education is personal in nature and therefore is not deductible. (c) In general, a taxpayer's expenditures for travel (including travel while on sabbatical leave) as a form of education shall be considered as primarily personal in nature and therefore not deductible.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619182/	APPEAL OF SOUTHERN MANUFACTURING CO.Southern Mfg. Co. v. CommissionerDocket No. 4155.United States Board of Tax Appeals4 B.T.A. 279; 1926 BTA LEXIS 2327; July 20, 1926, Decided 2327 Claude A. Hope, Esq., for the petitioner. Ward Loveless, Esq., for the Commissioner. 279 Before MARQUETTE and LOVE. This appeal is from the determination of a deficiency in income and profits taxes for the year 1920, in the amount of $5,889.55, arising from the disallowance of a deduction of $25,100 claimed by the taxpayer on account of a loss alleged to have been sustained by it in that year. FINDINGS OF FACT. The taxpayer is an Alabama corporation with its principal office at Gadsden, and is engaged in manufacturing lumber and building materials. The capital stock of the corporation was closely held, all of it being owned by members of the Gwin family. For many years prior to April, 1920 H. L. Gwin was secretary, treasurer and general manager of the corporation, and as such he had authority to draw checks against its funds. On or about February 1, 1920, H. L. Gwin, while on his way to Florida to attend a trade convention, met on the train two men who represented themselves to be George V. Holt and John F. Davis. On account of a washout further along the line, the train was detained for about two days at St. Augustine, Fla. While at St. 2328 Augustine, Gwin again met Holt and Davis. They rode about the town, visiting the places of interest, and later went to the room of Holt and Davis to discuss a certain timber deal about which they had spoken to Gwin. This deal, Holt and Davis explained, 280 consisted of the purchase of a very valuable piece of timber land which they had an option to purchase for $75,000. They exhibited to Gwin certain papers purporting to be said option and a contract for the resale of the property for $150,000, which papers, to Gwin, appeared to be genuine. They also exhibited testimonial letters from banks in New York and Philadelphia and credentials showing membership in certain fraternal orders to which Gwin belonged. They stated to Gwin that the owner of the land would sell only for cash; that they already had $50,000, and if Gwin would contribute the remaining $25,000 the deal could be put through in a few days, and that they would give him one-third of the profit realized on the transaction. Gwin agreed to put $25,000 into the deal, but stated that he would have to go back to Gadsden, Ala., to procure the money. He returned to Gadsden and there drew from the funds of the taxpayer2329 $25,000, by two checks dated February 6, 1920, and payable to cash, one check being for $15,000 and the other for $10,000. On February 2, 1920, he also drew from the taxpayer's funds $100 to cover expenses of the trip referred to. On his way back from Gadsden to St. Augustine, Gwin stopped at Jacksonville, Fla. At the depot restaurant he met Davis and they took the train to St. Augustine together. On the train Davis showed Gwin his $25,000. At St. Augustine, Holt met Davis and Gwin and the three men went to the Granada Hotel. Holt there informed both Gwin and Davis that he had made arrangements with a St. Augustine bank to get his $25,000 in cash. Thereupon, Davis turned his money over to Holt and Gwin did likewise. No receipt was given to Gwin for his $25,000, nor was a memorandum in writing executed and signed covering the transaction and the participation of each party therein. Holt then stated that he was going down to the bank and that at three o'clock the other parties interested in the transaction would also be there and the deal would be closed. Shortly after Holt left to go to the bank, and while Gwin and Davis were still in the room, someone called over the telephone. 2330 Davis answered the telephone and then said to Gwin that it was Holt calling, asking him, Davis, to go down to the bank to identify Holt. Davis left the room but returned shortly and stated that the bank had refused to cash a draft which Holt had for the amount of his contribution to the deal, and that Holt had gone to Philadelphia to get the money. Davis also stated to Gwin that arrangements had been made to close the deal at the Grand Hotel in Cincinnati, Ohio, and asked Gwin to meet him there the next day. Gwin went to Cincinnati and, after waiting there for several days, discovered that he had been swindled. He thereupon returned to Gadsden. 281 As soon as he arrived at Gadsden, Gwin called his father and brothers together and told them of his experience with Holt and Davis and of his loss of the $25,000. After a discussion of the whole affair, the family finally said to him, "Well, what are you going to do?" Gwin replied, "I am going to do this; if Find they have swindled me and you have lost the money, I will make it good but I want you to give me time to see of I cannot recover it and find some trace of these men." The family said "All right, that will be all2331 right." On or about March 2, 1920, T. B. Gwin, the father of H. L. Gwin, without the knowledge of H. L. Gwin, instructed the taxpayer's bookkeeper to transfer to him, T. B. Gwin, as trustee for the benefit of the other stockholders of the taxpayer, a certificate for 80 shares of the capital stock of the taxpayer which belonged to H. L. Gwin and which was kept among various corporate papers. This certificate had some time previously, on the occasion of certain loan transactions with one of the local banks, had been endorsed in blank by H. L. Gwin. The taxpayer's bookkeeper, in accordance with the instructions of T. B. Gwin, wrote above H. L. Gwin's signature the following words - "To T. B. Gwin, Trustee for the benefit of Southern Manufacturing Company." At or about the same time, T. B. Gwin, as president of the taxpayer, requested the local banks not to honor the signature of H. L. Gwin as secretary and treasurer and general manager of the taxpayer. This precipitated the resignation of H. L. Gwin from all of these offices, which resignation became effective immediately. Since then H. L. Gwin has had no connection whatever with the taxpayer. When H. L. Gwin found out that his2332 certificate for the stock owned by him in the taxpayer had been endorsed to T. B. Gwin as aforesaid, he characterized the endorsement as irregular and not binding upon him. His remark soon came to the knowledge of the family, and thereupon repeated efforts were made by various members thereof to get him to sign some sort of an agreement ratifying the endorsement, which he refused to do. This matter stood until March, 1923. At that time, T. B. Gwin suffered a severe heart attack, which nearly caused his death, and at his insistence H. L. Gwin signed an agreement which had been prepared by direction of T. B. Gwin. This agreement, date March 15, 1923, was as follows: In order to secure a claim of the SOUTHERN MANUFACTURING COMPANY, a corporation, in the amount of TWENTY FIVE THOUSAND ONE HUNDRED ($25,100) DOLLARS with interest thereon from February 10th, 1920, and to that end I did agree to turn over to T. B. Gwin eighty (80) shares of the capital stock of said Southern Manufacturing Company owned by me to be held by him as Trustee to secure said claim, I do now hereby ratify said transfer to said T. B. Gwin as such Trustee as security for such claim and the payment thereof, until2333 February 10th, 1926. In the event of 282 the death of T. B. Gwin, said stock shall be held by A. L. Gwin as such Trustee with the same powers and for the same purposes. If the said amount and interest thereon from February 10, 1920, is paid at any time prior to said date, said stock shall be restored to the undersigned free from said trust. If said amount is not paid by said date, said stock shall be transferred by my said Trustee to the Southern Manufacturing Company, in settlement of said claim and interest thereon, and said claim of Southern Manufacturing Company shall be thereby entirely settled and I shall have no further claims on said stock, and my said Trustee shall have authority to execute any transfer or sign any papers to carry out this purpose. IN WITNESS WHEREOF I have hereunto set my hand on this day above named. (Signed) H. L. Gwin. Attest A. W. McDougall. At the time of the transaction herein set forth, H. L. Gwin owned 80 shares of the capital stock of the taxpayer of a value of $200 per share, and a house of a value of about $6,500. On December 31, 1920, the taxpayer charged off on its books as a loss the amount of $25,100, herein referred2334 to, the following entry being made in connection therewith: Amount Posted.Detail.Charges.Credits.12/31 Loss and GainTo H. L. Gwin special$25,100.00$25,100.00ck 2/5/1920 unnumbered on Etawah Tr. & Savings Bank$10,000.00ck 2/5/1920 unnumbered on Gadsden National Bank15,000.00These amounts drawn from banks in cash by H. L. Gwin for the alleged purpose of purchasing timber or timber lands somewhere in Fla. without the knowledge or consent of any other official of this company. No detailed or satisfactory accounting of this cash has been made nor has any of the same been returned. No deeds or bills of sale for alleged timber or timber lands have been delivered to this Company.Also ck. #3880 on Etawah Tr. & Sav. Bank dated 2/2/20 for alleged expense on trip for above100.00No value received for any of above and the whole is a distinct loss to this Company and H. L. Gwin is no longer connected with this Company on account of said acts.The amount of $25,100 so charged off of the taxpayer's books on December 31, 1920, was deducted in computing its net income for the year 1920. The Commissioner, upon audit of the taxpayer's return, *2335 disallowed the deduction and determined that there is a deficiency in tax for the year 1920 of $5,889.55. The deficiency for the year 1920 is $5,889.55. Order of redetermination will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619184/	Faber Cement Block Co., Inc., Petitioner v. Commissioner of Internal Revenue, RespondentFaber Cement Block Co. v. CommissionerDocket No. 4636-66United States Tax Court50 T.C. 317; 1968 U.S. Tax Ct. LEXIS 124; May 20, 1968, Filed 124 Decision will be entered for the petitioner. Petitioner's liquid assets were fully committed to the reasonable needs of its business, as reflected in sufficiently definite plans for expansion and working capital requirements, to justify the retention of its entire accumulation of earnings and profits during 1961, 1962, and 1963. Consequently, petitioner was not liable for the surtax imposed by sec. 531, I.R.C. 1954. Samuel J. Foosaner, for the petitioner.Gerald Backer, for the respondent. Tannenwald, Judge. TANNENWALD317 Respondent determined deficiencies in accumulated earnings taxes for the taxable years 1961, 1962, and 1963 in the respective amounts of $ 50,928.91, $ 34,317.22, and $ 55,824.07. The sole question for our consideration is whether petitioner was availed of for the purpose of avoiding Federal income taxes with respect to its shareholders.318 FINDINGS OF FACTSome of the facts have been stipulated. Those facts and the exhibits attached thereto are hereby incorporated by this reference.Petitioner, Faber Cement Block Co., Inc. (hereinafter referred to as Faber Block), is a New Jersey corporation engaged in the business of manufacturing and selling cement and cinder blocks. 125 It had its principal place of business at the time the petition herein was filed at Paramus, N.J. Petitioner's books and tax returns are kept and filed on the calendar year, accrual basis. Timely Federal corporate income tax returns were filed for 1961, 1962, and 1963 with the district director of internal revenue, Newark, N.J.Beginning sometime around 1920, Albert J. Faber and Gerhardt P. Faber operated the business as a partnership with their father. In 1928, the partnership was incorporated. Since 1938, Faber Block has been located on Route 17, Paramus, N.J., approximately a mile and a half from its location prior to that time.At all times material herein, Gerhardt P. Faber was petitioner's president, his wife, Elsie, vice president, and Albert J. Faber, secretary-treasurer, the latter being the chief administrative officer of the company. These three parties also made up petitioner's board of directors. Board meetings were sometimes attended by Emil M. Wulster and Samuel J. Foosaner, respectively, general and special tax counsel to petitioner before and during the years in issue. Foosaner prepared certain corporate minutes for board meetings held during such years.Prior to 126 1958, the outstanding stock of Faber Block was held as follows:Number ofStockholdersharesPercentAlbert J. Faber52.550 Gerhardt P. Faber35 33 1/3Elsie Faber17.516 2/3In 1958, a recapitalization of Faber Block was effected, resulting in three classes of authorized stock, as follows: 1,000 shares $ 100 par 6 percent cumulative preferred stock; 5,000 shares no-par class A common stock (voting); 4,000 shares no-par class B common stock (nonvoting). Under the new plan, voting privileges were vested exclusively in the class A stockholders. Preferred shareholders were to have preference upon liquidation to the extent of the par value of the stock plus any unpaid dividends. Thereafter, class A and class B shareholders would share ratably in the distribution. After payment of a 6-percent dividend on a cumulative basis to preferred shareholders, class A and class B holders were to be entitled on an equal basis to such dividends as the board of directors might declare. Pursuant to such plan, each share of old stock was exchanged for 10 shares of class A and 20 319 shares of class B. No preferred stock was ever issued. Immediately following the recapitalization, the issued and outstanding 127 stock of petitioner stood as follows:Class A commonClass B common(voting)(nonvoting)StockholdersharessharesAlbert J. Faber5251,050Gerhardt P. Faber350700Elsie Faber1753501,0502,100At the stated dates during the years in issue, the outstanding class B stock was held by the following individuals in the following amounts:Dec. 1,Dec. 24,Individuals 1128 19611962Gerhardt P. Faber520490Elsie Faber350365Alan Faber180195Albert J. Faber330195Jesse Douglas7287Marilyn G. Douglas7287Jesse and Marilyn Douglas in trust for Calvin Douglas7287Jesse and Marilyn Douglas in trust for Dana LynnDouglas7287Jesse and Marilyn Douglas in trust for Debra AnnDouglas7287Doris Farrell7287Christopher W. Farrell7287Christopher W. and Doris Farrell in trust for StephenFarrell108123Christopher W. and Doris Farrell in trust for DonaldFarrell108123Total class B stock outstanding2,1002,100The Faber brothers had started in the cement and cinder block business on a part-time basis with very limited facilities. The business prospered, but, until late 1957, petitioner operated with hand machinery and increasingly inadequate facilities. Moreover, its equipment over the years, including the taxable periods involved herein, had been subjected to heavy use. In 1957, Faber Block opened expanded facilities at the same location in Paramus in order to meet the increasing demand for its products and to provide safer working conditions for its employees. Prior to such expansion, petitioner had been required to, and did, obtain a variance from the Paramus Zoning Board because of a local ordinance passed in 1956 which prohibited cement and cinder 320 block manufacture, thus constituting petitioner's plant a nonconforming use.Faber Block did a substantial amount of business in Rockland County, N.Y. In 1957, 129 it decided to build a plant in Monsey, N.Y. Initially, the cost of such plant was estimated at approximately $ 500,000. Construction was commenced in 1959 and completed in 1960 at an approximate total cost of $ 450,000. Such construction was financed in part by an $ 85,000 mortgage, the entire amount of which was paid off within 2 years.Beginning in 1961 and throughout the years in issue, plans for further expansion were discussed by the officers and directors of petitioner. The minutes of a board meeting held March 1, 1961, read:Mr. Albert J. Faber stated, at the outset of the meeting, that the Company's expansion needs were such that consideration should be given to other possible sites on Route 17 for plant facilities if neighbors objections or other problems prevented new construction on the present site of the Company. The other Directors were in agreement with this thought and it was concluded that such investigation should be conducted.The results of such "investigation" were enunciated in the minutes of a December 14, 1961, board meeting, where Albert Faber reported that he could find no property on Route 17 adequate to serve petitioner's needs unless it was willing to 130 spend in excess of $ 400,000 for such land. The directors thereupon resolved to "make a further study of the possibility of expanding its plant facilities in either Monsey, N.Y., or Paramus, N.J., or in both locations, rather than seek new land at prohibitive costs at this time." The minutes of a board meeting on December 20, 1962, reflect further consideration of expansion plans with particular reference to the cost thereof based upon the statement of Albert Faber that "in his opinion, to provide the expansion of the plant facilities and the necessary new machinery and equipment could require somewhere between $ 500,000 and $ 750,000."The minutes of a board meeting held December 19, 1963, contained a resolution to the effect that Faber Block proceed "to engage such expert assistance as might be necessary to prepare plans for expanding the plant facilities in Paramus, it appearing that Paramus was the most logical location." Petitioner had been somewhat skeptical about expanding the existing Paramus plant, mainly because it was a nonconforming use under the local zoning ordinance and, consequently, a variance had to be secured before any expansion could be undertaken. Despite the 131 objections and resistance displayed by neighboring residents, Albert Faber was convinced that the necessary variance could eventually be obtained. He had discussed petitioner's proposed expansion at various times since 1961 with the Mayor of Paramus, who had recommended deferring application for a variance until local opposition had toned down.321 In addition to plans for expansion of petitioner's plant, there was recognition of the need to acquire more modern equipment for existing facilities, as reflected in the minutes of meetings of petitioner's board of directors as follows:Mar. 1, 1961Four trucks plus ancillary equipment -- no cost stated.Mar. 28, 1962Loader, cement bin and conveyor, trucks and trailers --estimated cost $ 85,100.Oct. 3, 1962Grinding machine and trucks -- estimated cost $ 29,500.Dec. 19, 1963Review of acquisitions made during 1963 having anaggregate cost of $ 130,000. Upon advice of its general counsel, petitioner embarked on a program of building up the commercial character of the property contiguous to the existing plantsite. It was hoped that such program would provide a "buffer zone" of friendly neighbors around petitioner's plant to counteract the pressure 132 of complaining neighbors and thus help to change the tides of local opposition to the dust and noise emanating from petitioner's operations. Pursuant to this plan, additional land was purchased and developed for commercial tenants by Faber Bros., Inc. (hereinafter referred to as Faber Bros.), a New Jersey corporation whose stock was held 50 percent by Albert Faber and 50 percent by Gerhardt and Elsie Faber. The land acquired by Faber Bros. had a large potential future increase in value. Faber Bros. also owned the land upon which petitioner's plant was located and received rent therefor from petitioner. The "buffer zone" acquisitions were financed in part by interest-bearing loans from petitioner to Faber Bros. The outstanding principal balance on such loans at December 31, 1961, 1962, and 1963, was $ 155,000, $ 180,000, and $ 165,000, respectively. By December 31, 1966, the principal balance had been reduced to $ 80,000.The following shows comparative balance sheets of Faber Bros. at December 31, 1961, 1962, and 1963 (rounded to the nearest thousand):12/31/6112/31/6212/31/63Cash$ 11 $ 34 $ 18 Notes and accounts receivable1 3 8 Buildings674 786 864 (Reserve)(189)(211)(239)Land86 86 86 Other assets5 6 9 Total assets589 704 746 Accounts payable$ 2 Federal income tax$ 16 $ 18 22 Mortgages, notes, and bonds297 380 390 Other liabilities6 11 6 Capital stock32 32 32 Earned surplus238 263 294 Total liabilities589 704 746 322 133 The existence of local opposition to petitioner's facilities made it advisable for petitioner to move quietly and carefully in terms of obtaining permission of the zoning authorities for its expansion plans. In 1963, a beautification committee was formed in Paramus, the existence and operation of which helped pave the way for an easing of such opposition, since the proposed expansion would modernize and provide a better appearance and cleaner operation of petitioner's facilities on Route 17. In 1965, the local situation had clarified sufficiently, with the result that petitioner engaged architects to prepare plans for the expansion. The plans were completed in February 1966, at which time the desired variance was successfully obtained. Petitioner promptly proceeded to obtain a building permit and immediately thereafter initiated construction.The cement and cinder block industry in the northern New Jersey area is highly competitive. Faber Block has enjoyed a most respected position in the industry. Architects on large jobs such as school construction often specified "Faber Cement Blocks or equal," and, in cases where petitioner has been the unsuccessful bidder for a particular 134 job, the builder awarded the contract has on occasion come to petitioner to buy the particular type of block specified.The building and construction industry requires a great number and variety of blocks. In 1957, when petitioner's expansion program first began, its production was limited to 20 types of blocks; now over 100 different types are produced. To meet the increasing demands of its customers, petitioner has attempted to acquire and utilize modern and efficient plant facilities, machinery, and equipment, consequently spending large sums annually towards such purpose. The following indicates capital acquisitions for the 10-year period 1957 through 1966:TotalMachinery andYearacquisitionsequipmentParamusMonsey1957$ 53,182$ 12,2381958111,86571,3791959124,37985,7301960433,01826,414$ 211,758196185,2939,819196289,26726,8801963154,345108,46112,4621964218,90937,356124,3411965227,96771,75212,7501966370,385237,4616,0801,868,610687,490367,391YearTrucks and autosExtraordinary items(nonrecurring)ParamusMonsey1957$ 33,51719587,308$ 32,793(Bldg. -- East Paterson)195933,965196011,200$ 30,106145,849(Plant bldg. -- Monsey)196164,857196256,4622,760196313,83210,7617,603(Plant bldg. -- Monsey)196438,69810,194(Plant bldg. -- Monsey)196595,36311,10612,498(Furn. and fix. --Paramus)19668,5933,195109,171(New plant -- Paramus)363,79557,928318,108Note: 135 The difference of $ 73,898 between the amount of total acquisitions and the total of the other columnar amounts reflects other miscellaneous capital acquisitions during the years specified.323 Total capital expenditures for January through May 16 and 17, 1967 (when the trial herein took place), were approximately $ 295,000. As of the latter date, petitioner had expended approximately $ 567,000 on its Paramus expansion program, which was scheduled for completion by the end of 1967 at a total final cost of between $ 650,000 and $ 700,000.Throughout their experience in the block business, Albert and Gerhardt Faber have striven to maintain a "no-borrowing" policy, and, with limited exceptions, have managed to finance the business internally through earnings. In addition to the $ 85,000 mortgage secured in connection with the Monsey plant in 1960, petitioner in 1967, because of a shortage of cash, borrowed $ 200,000 in connection with the completion of the Paramus expansion program.It has also been the policy of petitioner to pay its raw materials bills promptly in order to take advantage of cash discounts available upon early payment. The following reflects the data relevant to such practice 136 during the years in issue:InventoryTrade accounts receivableYearPurchasesDiscountsJan. 1Dec. 31Jan. 1Dec. 311961$ 1,748,735$ 123,326$ 102,739$ 135,044NA $ 412,53419621,337,17145,267135,044144,846$ 412,534365,54619631,363,58749,005144,846141,132365,546445,213 For several years, including those in issue, petitioner has maintained for its employees a program of financial aid, pursuant to which loans (typically non-interest-bearing) are made to help employees through difficult periods or to enable them to purchase homes. Over the years, Faber Block has enjoyed a good relationship with its labor force and has experienced only a minimal amount of turnover.Petitioner has also found it necessary to finance some of its customers for extended periods, sometimes as long as 120 to 150 days. A substantial portion of petitioner's accounts receivable is typically over 90 days old. Loans made by petitioner to customers were reflected by outstanding notes receivable totaling $ 63,781.65, $ 78,854.62, and $ 86,253.87 at December 31, 1961, 1962, and 1963, respectively. On infrequent occasions, petitioner has charged interest of 3 to 3 1/2 percent on such loans.In May 1960, following a trip to Germany137 by Albert Faber to investigate the cement-block truss industry, the Faber brothers and others connected with the block and building industries formed the United Filigree Truss Corp. (hereinafter referred to as United Filigree). United Filigree manufactured steel trusses which are used with cement blocks for roofing and flooring. Effective use of the truss serves to reduce the time and costs of construction. Petitioner, during the 324 years in issue, advanced substantial sums to United Filigree, which sums appeared as "Loans Receivable" on its balance sheet in the following amounts at the dates indicated:December31 --Amount1961$ 30,000.001962104,000.00196384,564.30Prior to 1966, petitioner owned no equity interest in United Filigree.Beginning in 1959, petitioner started negotiations for the purchase of Hy-Way Cinder Block Co., Inc. (hereinafter referred to as Hy-Way Block). One James Swales, the owner of another New Jersey block company, agreed to join petitioner in the purchase of Hy-Way Block on a 50-50 basis. In late 1959, contracts for this proposed acquisition were prepared by petitioner's attorney. It was contemplated that the total purchase price would be $ 1 million, with 138 $ 150,000 payable in cash and the remaining $ 850,000 payable over a period of 8 years with annual interest of 5 percent. Consummation of such agreement, however, was prevented because of internal strife between the related owners of Hy-Way Block -- an uncle and his nephew. Throughout the years in issue, periodic discussions were held between the interested parties, but the uncle would not agree to sell. In 1964, the nephew began legal proceedings to force him to sell, but by this time Swales' interest in the venture had waned. Petitioner, however, did remain interested and continued negotiations in the hope that the family differences could be resolved. Counsel for Hy-Way Block last contacted petitioner with regard to the sale in 1967.During the years in issue, the possible death of Albert Faber, petitioner's chief administrator, was of great concern. Albert suffered from recurring heart trouble, underwent major surgery as well as two minor operations which resulted in further complications and, between 1960 and 1963, was forced to spend a good deal of time in the hospital. On May 14, 1959, petitioner entered into a "Stock Retirement Agreement," the effect of which was to 139 obligate the company, upon Albert's death, to purchase from his estate that portion of his interest in the corporation necessary to pay various death taxes. It was estimated that such agreement would ultimately cost Faber Block somewhere between $ 200,000 and $ 300,000. At least in part, the agreement was to be funded by a $ 20,000 insurance policy held by the corporation on Albert's life. The agreement was terminated pursuant to a corporate resolution on December 19, 1963. 2 On the same date, it was decided that steps should be taken to secure as much as $ 500,000 insurance on the lives of Albert 325 and Gerhardt in order to indemnify petitioner for financial loss upon the death of either and assist the survivor in the continued operation of the business. After investigating the matter, however, petitioner was unable to obtain the desired insurance.The following schedule, compiled from petitioner's stipulated tax returns and other 140 stipulated material, sets forth petitioner's pretax net income, Federal income tax liability, earned surplus account balance, and dividends declared and paid for the years indicated:Pretax netFederalEarned surplusDividendsYearincome 1income tax 1Dec. 31 1Class AClass B1957$ 255,400$ 126,000$ 1,136,400$ 35,1751958185,00090,7001,210,00020,0001959281,200140,8001,346,400$ 10,5001960175,90086,0001,426,30010,5001961346,700174,5001,598,20010,5001962265,300127,9001,716,50010,5001963351,200167,1001,889,10010,5001964255,800107,3002,015,6005,25015,7501965348,700149,6002,197,90015,7501966362,200158,0002,385,20015,750Prior to 1957, no dividends were paid by petitioner.Comparative abbreviated balance sheets and income statements per petitioner's books (in thousands of dollars) for the years in issue were as follows:Balance Sheets at December 31 --196119621963Cash$ 219.2$ 300.6$ 319.6Trade accounts receivable412.5365.5445.2Notes receivable63.878.886.3Loans receivable190.3294.7264.2U.S. Treasury notes65.275.8Inventories135.0144.8141.1Other current assets27.315.819.5Total current assets1,113.31,200.21,351.7Cash surrender value lifeinsurance11.612.413.2Mortgages receivable23.925.425.9Fixed assets$ 1,580.2$ 1,639.1 $ 1,730.6 Accumulated depreciation(794.9) 785.3(897.4)741.7(975.5)755.1Total assets1,934.11,979.72,145.9Current liabilities325.4252.8246.3Capital stock10.510.510.5Earned surplus1,598.21,716.41,889.1Total liabilitiesand capital1,934.11,979.72,145.9141 326 Income statements196119621963Net sales$ 3,048.3$ 2,707.7$ 2,933.5Cost of sales2,570.82,214.52,339.4Gross profit477.5493.2594.1General and administrative expense272.1293.7312.9Net profit -- operations205.4199.5281.2Other income140.564.969.0Net profit -- pretax345.9264.4350.2Provision for income tax174.5127.9167.1Net profit to surplus171.4136.5183.1Petitioner's needs for working capital were $ 432,000 at the end of 1961, $ 473,000 at the end of 1962, and $ 503,000 at the end of 1963. See page 331, infra.Prior to mailing the notice of deficiency on May 27, 1966, respondent sent, by certified mail on July 8, 1965, a notification under section 534(b) of the Internal Revenue Code, informing petitioner that the proposed notice of deficiency included an amount with respect to the accumulated earnings tax imposed by section 531. Petitioner did not respond to this request within 60 days thereafter, and no response was received prior to the issuance of the statutory notice. In the statutory notice herein, respondent computed the deficiencies in accumulated earnings tax on the basis of petitioner's entire undistributed earnings and profits for the years 1961, 1962, and 1963 in the respective 142 amounts of $ 160,854.22, $ 117,707.07, and $ 173,569.Joint Federal income tax returns filed by Gerhardt and Elsie Faber for the years in issue showed net taxable income for the taxable years 1961, 1962, and 1963 of $ 52,751.78, $ 68,206.79, and $ 62,386.96, respectively.Joint Federal income tax returns filed by Albert and Marion Faber for the years in issue showed net taxable income for the taxable years 1961, 1962, and 1963 of $ 37,754.69, $ 60,156.88, and $ 58,616.87, respectively.OPINIONOnce again we are called upon to determine whether a closely held corporation has been availed of by its shareholders for the purpose of avoiding personal income tax via improper accumulations of earnings 327 and profits. 3 While the proscribed purpose of tax avoidance must be found in every such case, section 533(a) provides that, unless petitioner can prove to the contrary by a preponderance of the evidence, the very fact that its earnings and profits were permitted to accumulate "beyond the reasonable needs of the business" will be determinative of such purpose. Section 537 defines the term "reasonable needs of the business" to include the reasonably anticipated needs of such business. By complying 143 with certain statutory conditions prescribed in section 534, the petitioner in an accumulated earnings case may shift the burden of proof regarding reasonable needs to respondent. But petitioner herein has not attempted to meet these requirements and must thus bear the burden.Before analyzing whether petitioner was justified in retaining its earnings and profits during the years involved herein to meet the reasonable needs of its business, we consider one of the two main arguments advanced by respondent, namely, his suggestion that, through various devices allowable under the tax laws, petitioner could have declared a taxable dividend to its shareholders without disturbing 144 its "quick asset" position. In this connection, it is urged that (1) the indebtedness of Faber Bros. could either have been distributed in kind to its shareholders or canceled by petitioner and thus contributed to the capital of Faber Bros.; (2) the indebtedness to United Filigree could similarly have been distributed; and (3) authorized, but unissued, preferred stock could have been issued as taxable dividends. In view of such possibilities, respondent, relying heavily upon Nemours Corporation, 38 T.C. 585 (1962), affirmed per curiam 325 F. 2d 559 (C.A. 3, 1963), and Whitney Chain & Mfg. Co., 3 T.C. 1109">3 T.C. 1109 (1944), affirmed per curiam 149 F. 2d 936 (C.A. 2, 1945), concludes that the needs of petitioner's business did not require an accumulation of earnings and profits and the proposed deficiencies should be sustained.We think the focus of respondent's view of an unreasonable accumulation of earnings and profits situation is distorted. Under the applicable statute, the central issue is the reasonable needs of the business. If available assets are required to meet such needs, the mere fact that some of those assets could be used for dividends without impairing current business operations 145 is beside the point. In short, the presence of such assets is not in and of itself determinative of an unreasonable 328 accumulation of earnings and profits and neither Nemours nor Whitney Chain holds or implies otherwise. In both of those cases, this Court, after a careful analysis of all the elements involved, decided that the challenged accumulated earnings and profits were in fact not needed for the reasonable needs of the business. Against this background, we looked to potential sources for dividends and concluded that, even though it may have been necessary for the taxpayers to retain assets normally characterized as "liquid assets" (e.g., cash), other non-liquid assets not needed in the business -- in the form of non-interest-bearing loans to shareholders -- were readily available for dividend distributions. Essentially, what we did in Nemours and Whitney Chain was to treat the loans to shareholders as "liquid assets" in the course of determining whether a taxpayer whose accumulated earnings and profits had been found to be beyond its business needs had the necessary wherewithal to pay dividends. Such an approach is entirely consistent with the rationale of the decided cases 146 in this area to the effect that it is the nature of assets to which the accumulated earnings and profits are committed, rather than the mere monetary size of such accumulations, which controls. Smoot Sand & Gravel Corporation v. Commissioner, 274 F. 2d 495, 500-501 (C.A. 4, 1960), affirming a Memorandum Opinion of this Court; John P. Scripps Newspapers, 44 T.C. 453">44 T.C. 453, 467 (1965).In this context, the significance of the outstanding loans receivable from Faber Bros. and United Filigree lies exclusively in the realm of considering their relationship to the needs of petitioner's business or, if such relationship does not exist, their treatment as part of the "liquid assets" whose retention must be justified in terms of the total needs of the business -- considerations to which we shall return later in this opinion. 4 With respect to the argument that petitioner's authorized but unissued preferred stock could have been used to pay a taxable stock dividend under section 305, to the extent of petitioner's accumulated earnings and profits, we think that respondent has clearly overreached himself. Here again, his initial focus is erroneously on the availability of a means for distributing 147 dividends rather than the reasonable needs of the business. Beyond this, if we were to accept his argument, we doubt that there would ever be a case where, either within its existing capital structure or through appropriate amendment to its charter, a corporate taxpayer would not be able to declare a taxable stock dividend within the specifications of section 305. We 329 are not prepared to accord respondent such an antimissile missile to overcome proof by taxpayers that accumulated earnings and profits were required by the reasonable needs of the business.We now turn to the critical question involved herein, namely, whether petitioner's accumulated earnings and profits were sufficiently committed to assets currently tied up in its business and required to meet the reasonably anticipated needs of its business so as to justify the conclusion that the surtax on such earnings and profits should not be imposed. 148 Noting that the question of whether accumulations go beyond the reasonable needs of a business (including reasonably anticipated needs) involves essentially a factual determination ( Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282 (1938); Estate of Goodall v. Commissioner, 391 F.2d 775">391 F.2d 775 (C.A. 8, Mar. 5, 1968), modifying a Memorandum Opinion of this Court), we think the accumulations herein did not exceed such needs during the years involved.We are not unmindful that, in the first instance, it is for the corporate officers and directors to determine the reasonable needs of a particular business. Consequently, we are reluctant to substitute our business judgment for that of corporate management unless the facts and circumstances, buttressed (in the absence of a proper statement under section 534) by the presumptive correctness of respondent's determination, dictate that we should do so. Bremerton Sun Publishing Co., 44 T.C. 566">44 T.C. 566, 583 (1965); F. E. Watkins Motor Co., 31 T.C. 288">31 T.C. 288, 300 (1958).There is little doubt but that, through consistently successful operations, petitioner had accumulated a substantial surplus and continued to prosper during, and subsequent to, the years involved 149 herein. For the years here relevant, its net income after taxes was $ 172,197 (1961), $ 137,419 (1962), and $ 184,069 (1963), and its earned surplus account showed beginning balances of $ 1,426,259 (1961), $ 1,598,186 (1962), and $ 1,716,486 (1963). As we have previously pointed out, however, the critical factor is not the monetary size of the accumulated earnings and profits but the liquid position of the tax payer and the relation of that position to current and anticipated needs. See page 327, supra.In this vein, as to the outstanding loans receivable from Faber Bros. and United Filigree, the evidence in support of their relationship to the business requirements of petitioner is far from clear. With respect to the loans to Faber Bros., while there was some general testimony about the hoped-for benefit to petitioner from a "buffer zone" of friendly tenants, it seems clear that the potential future increase in the value of the land acquired was large and that the benefit from such increase to Albert, Gerhardt, and Elsie as the shareholders of Faber Bros. was, in all likelihood, a strong motivating factor for the acquisitions. 5330 With respect to the loans to United Filigree, Albert 150 testified that they were made "more or less not for ourselves (petitioner) as much as * * for the association (members of the cement block and building industries)." Moreover, even if these loans were business related at the time they were made, it does not necessarily follow that they can never be considered as liquid assets available to meet the reasonable needs of the business. In this connection, we note that petitioner itself considered them as current assets. In any event, for purposes of decision, we will assume that these loans were liquid assets. 6Because it will similarly not affect our conclusion herein, we will make the further assumptions against 151 petitioner that, as reflected on its balance sheets, all of the items listed as current assets, the cash surrender of life insurance, and the mortgages receivable should be considered as part of petitioner's liquid position for the purpose of determining availabilities for meeting business needs. On this basis, petitioner's liquidity position as of December 31 of each of the years involved herein was as follows (in thousands):196119621963Current assets$ 1,101.7$ 1,200.2$ 1,351.7Cash value-life insurance11.612.413.2Mortgages receivable23.925.425.9Total1,137.21,238.01,390.8Less: Current liabilities325.4252.8246.3Total availabilities811.8985.21,144.5 Having thus determined availabilities, we now turn our attention to the offsetting reasonable needs of petitioner's business. While petitioner claimed a variety of factors as giving rise to such needs, as we view the situation, it will suffice to concentrate on only some of them:1. Working-Capital Needs. -- Respondent's regulations specifically provide that earnings may be retained to provide for working capital requirements. Sec. 1.537-2(b)(4), Income Tax Regs. While neither of the parties directed their attention at the trial to the 152 question of petitioner's working-capital requirements, we think it obvious that such requirements existed during the taxable years at issue. On brief, respondent calculated petitioner's need for working capital at $ 513,957 at the end of 1961, $ 462,384 at the end of 1962, and $ 490,957 at the end of 331 1963. Our own calculations, in terms of expected costs for a single "operating cycle" under the so-called Bardahl formula are approximately the same 7153 -- $ 432,000 (1961), $ 473,000 (1962), and $ 503,000 (1963). Bardahl Manufacturing Corp., T.C. Memo. 1965-200; cf. United States v. McNally Pittsburg Manufacturing Corp., 342 F.2d 198 (C.A. 10, 1965). See generally, Luria, "The Accumulated Earnings Tax," 76 Yale L. J. 793 (1967); Ziegler, "'New' Accumulations Earnings Tax: A Survey of Recent Developments," 22 Tax L. Rev. 77">22 Tax L. Rev. 77, 91 (1966).2. Proposed Plant Expansion. -- Respondent contends that, during the years here relevant, petitioner did not have adequate plans for plant expansion in the claimed amounts of $ 500,000 to $ 750,000 so as to fall within the scope of section 537 and the regulations thereunder. We disagree.Section 537 was designed to enable a corporation to accumulate earnings and profits without investing them immediately, "so long as there is an indication that future needs of the business require such accumulation." See S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 317-318 (1954). The committee reports also state that "where the future needs of the business are uncertain or vague, or the plans for the future use of the accumulations are indefinite, the amendment does not prevent application of the accumulated earnings tax." See S. Rept. No. 1622, supra at 69; H. Rept. No. 1337, 83d Cong., 2d Sess., p. 53 (1954). Such plans, according to respondent's regulations, must be "specific, definite and feasible." Sec. 1.537-1(b)(1), Income Tax Regs. Under the particular circumstances herein, we think that petitioner has met these requirements.332 Because its operations constituted a nonconforming 154 use under the local zoning ordinance, petitioner was faced with practical difficulties regarding expansion at the existing site in Paramus. Such difficulties, however, were not insurmountable, as is indeed attested to by the fact that in 1957 a variance to build a new plant had been secured under the same ordinance. By proceeding patiently and by carefully timing their application for a variance, the Fabers had good reason to believe that they would ultimately secure permission again to expand. In point of fact, this is precisely what happened, for in 1966 the desired variance was granted. Admittedly, such variance might not have been granted. Yet, the mere fact that expansion plans are contingent upon the outcome of certain local political action will not result in a blanket bar of accumulations made pursuant to such plans. Cf. Sterling Distributors, Inc. v. United States, 313 F. 2d 803 (C.A. 5, 1963). Taking note of the fact that local zoning matters typically abound with political nuances, we do not think it our province to second-guess the optimism of the Fabers, especially when we are not even in a position to claim the benefit of hindsight. Concededly, a finding that 155 petitioner reasonably expected to secure a variance does not of itself guarantee that the expansion would in fact take place. Thus, respondent suggests that the variance obstacle was set up as a convenient smokescreen behind which petitioner could accumulate substantial earnings without ever having any fixed intention to use such accumulations when and if the smoke cleared.Unquestionably, as respondent points out, the minutes relating to the proposed plans for expansion are flavored with tax planning; they were concededly prepared by petitioner's tax counsel and are replete with boilerplate statements which exude concern over the possible assertion of an unreasonable accumulation challenge. But the aura of tax consciousness does not destroy the fact that the minutes contain evidence of plans to expand. Contrariwise, these minutes in and of themselves will not serve to immunize petitioner. Mere words in corporate minutes, if unsupported by further evidence of actual implementation, or the likelihood thereof, will carry little weight.We also recognize that petitioner's plans for expansion were not set forth in the minutes or other documentary material with precision or in detail. 156 But the requirement of "specific, definite, and feasible" plans does not demand that the taxpayer produce meticulously drawn, formal blueprints for action. 8John P. Scripps Newspapers, supra at 469. The test is a practical one, namely, that the contemplated expansion appears to have been "a real consideration during 333 the taxable year, and not simply an afterthought to justify challenged accumulations." See Smoot Sand & Gravel Corporation v. Commissioner, supra at 499. The decided cases, which admittedly cover a variety of factual situations, indicate that in applying this test the courts primarily take into account evidence of actual implementation in evaluating the specificity of plans as they existed during the critical period, provided that some evidence of plans is adduced. Compare and contrast F. E. Watkins Motor Co., 31 T.C. 288">31 T.C. 288 (1958), and Breitfeller Sales, Inc., 28 T.C. 1164">28 T.C. 1164 (1957), with Barrow Manufacturing Co. v. Commissioner, 294 F. 2d 79 (C.A. 5, 1961), affirming a Memorandum Opinion of this Court, Dixie, Inc. v. Commissioner, 277 F. 2d 526 (C.A. 2, 1960), affirming 31 T.C. 415">31 T.C. 415 (1958), I. A. Dress Co. v. Commissioner, 273 F. 2d 543 (C.A. 2, 1960), affirming 32 T.C. 93">32 T.C. 93 (1959), 157 and American Metal Products Corporation v. Commissioner, 287 F. 2d 860 (C.A. 8, 1961), affirming 34 T.C. 89">34 T.C. 89 (1960).We are satisfied on the basis of the record herein that (1) petitioner had plans to expand well before the end of 1961, the first taxable year involved herein; (2) the prospective cost of such expansion was between $ 500,000 to $ 750,000; (3) a reasonable need for such expansion did in fact exist; and (4) active steps were in fact intended to be taken 9158 during the years in issue to implement the announced objectives.Further, we are satisfied that sufficient steps were in fact taken by petitioner towards implementing the proposed expansion. Most significant in this regard is the fact that petitioner actively sought out alternatives to expanding the existing Paramus plant, fully aware that the zoning board might not act favorably. For various reasons, such alternatives were rejected, but it was not until they had been exhausted that petitioner finally designated the existing plant site in Paramus as the locus for expansion. Under the circumstances, the fact that the exact location of the proposed expansion was temporarily unknown has little significance.Finally, we cannot and will not ignore the ultimate fruition of petitioner's expansion plans -- accomplished within a reasonable time after the years in question at a cost closely in line with the amount originally estimated. While not controlling, evidence of what petitioner in fact did in subsequent years certainly affects the weight to be given its declared intention during the years in issue. See Dixie, Inc. v. Commissioner, 277 F. 2d 526159 (C.A. 2, 1960), affirming 31 T.C. 415">31 T.C. 415 (1958); 334 sec. 1.537-1(b)(2), Income Tax Regs.; cf. S. Rept. No. 1622, supra at 70; H. Rept. No. 1337, supra at 53.3. Machinery and Equipment. -- Clearly petitioner had continuing need for funds to cover substantial annual outlays for additional and replacement machinery and equipment. Upon the basis of the amounts of these items as contemplated to be and in fact purchased, we think it reasonable to allocate $ 100,000 annually out of availabilities for this purpose.At this point, if we compare petitioner's availabilities (p. 330, supra) with the indicated needs heretofore discussed, the following picture results:196119621963Availabilities$ 811.8 $ 985.2 $ 1,144.5 NeedsWorking capital 10$ 432$ 462$ 490Plant expansion750750750Machinery and equipment100100100Totals$ 1,282.0 $ 1,312.0 $ 1,340.0 Deficiency in availabilities($ 470.2)($ 326.8)($ 195.5)Thus, petitioner had far less availabilities than were required to meet the current and future reasonable needs of its business as they existed during the years at issue. The deficit in these availabilities 160 was sufficiently large that our conclusion would not be changed even if we were to take into account petitioner's bright financial future at the close of each year, confirmed by a continuing high level of profits -- a procedure which might well be open to question. 11 Cf. Sterling Distributors, Inc. v. United States, 313 F. 2d 803 (C.A. 5, 1963); see sec. 1.537-1(b)(2), Income Tax Regs.The substantial deficits in availabilities make it unnecessary for us to consider other items for which petitioner claimed the necessity of retaining earnings and profits. We note in passing, however, the following:(a) Although, by our method of determining availabilities herein, we have largely discounted petitioner's claimed need for funds to make short-term loans to employees, finance customers, and obtain purchase discounts, the fact is that petitioner needed modest, continuing 161 cash reserves for these purposes.335 (b) Throughout the years in question, petitioner was considering the acquisition of Hy-Way Block Co., which would have required an initial cash outlay of $ 75,000 plus an additional amount of $ 425,000 payable over an 8-year period with interest at 5 percent. The record is unclear whether this acquisition was considered by petitioner as being in addition to, or in substitution for, the expansion of its own facilities at Paramus, although the disparities in dates and in the potential amount involved possibly point in the former direction.(c) As to the possibility that funds would be required to redeem petitioner's shares in the event of Albert's death, we recognize that the courts tend to look askance at such claimed need for the purposes of the accumulated earnings tax, particularly where, as is the case herein, there is no evidence that there were dissenting or competing shareholder factions which threatened the corporate health. Kirlin Corporation, 361 F. 2d 818 (C.A. 6, 1966), affirming per curiam a Memorandum Opinion of this Court; Youngs Rubber Corporation v. Commissioner, 331 F. 2d 12 (C.A. 2, 1964), affirming a Memorandum Opinion of this Court; 162 Gazette Pub. Co. v. Self, 103 F. Supp. 779">103 F. Supp. 779 (E.D. Ark. 1952); Dill Manufacturing Co., 39 B.T.A. 1023">39 B.T.A. 1023 (1939). Compare Pelton Steel Casting Co. v. Commissioner, 278">251 F. 2d 278 (C.A. 7, 1958), affirming 28 T.C. 153">28 T.C. 153 (1957), with Mountain State Steel Foundries, Inc. v. Commissioner, 284 F. 2d 737 (C.A. 4, 1960), reversing a Memorandum Opinion of this Court. See generally, Maxfield, "Recent Cases Forecast More Liberal Trend in Allowing Accumulations to Redeem Stock," 25 J. Taxation 43 (1966); Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders 230, 231 fn. 44 (2d ed. 1966); (1966 ed.); Herwitz, "Stock Redemptions and the Accumulated Earnings Tax," 74 Harv. L. Rev. 866">74 Harv. L. Rev. 866 (1961). Moreover, the testimony herein reflects no more than the vaguest sort of estimates as the amounts involved. Similar considerations apply to the claimed need for keyman insurance on the lives of Albert and Gerhardt, which was in fact never procured and, in light of Albert's poor health, was unlikely ever to be procurable as far as he was concerned. Emeloid Co. v. Commissioner, 189 F. 2d 230 (C.A. 3, 1951), reversing 14 T.C. 1295">14 T.C. 1295 (1950).While the record herein is not as neat and tidy as it might 163 have been, we are left with the firm conviction that, during the taxable years involved herein, petitioner had proven business needs and that it had the requisite plans to meet those needs. Our conviction is reinforced by the critical fact that both the needs and the plans therefor were actually implemented to a very large degree. 12 Under these circumstances, 336 even if there are residual doubts, we would not be justified in substituting our business judgment for that of petitioner's officers and directors. We thus conclude that petitioner has fully sustained its burden that the accumulation of all its earnings and profits during 1961, 1962, and 1963 was required by the reasonable needs of its business. 13164 Such being the case, we have no need, in light of the credit provided for in section 535(c)(1), to consider whether the proscribed purpose of avoiding income tax may have existed. John P. Scripps Newspapers, supra at 474.Decision will be entered for the petitioner. Footnotes1. Gerhardt Faber, Elsie Faber, and Albert J. Faber are the individuals described above. Alan Faber is the son of Gerhardt Faber. Jesse Douglas and Marilyn G. Douglas, respectively, are the son-in-law and step-daughter of Albert J. Faber. Calvin Douglas, Dana Lynn Douglas, and Debra Ann Douglas are grandchildren of Albert J. Faber and children of Jesse and Marilyn G. Douglas, Christopher W. Farrell and Doris Farrell, respectively, are the son-in-law and daughter of Albert J. Faber. Stephen Farrell and Donald Farrell are the grandchildren of Albert J. Faber and the children of Christopher W. and Doris Farrell.2. There are indications in the record that a similar agreement existed between petitioner and Gerhardt and that this agreement was also terminated pursuant to the Dec. 19, 1963, resolution. But neither the agreement nor any of the details were submitted.↩1. Rounded to the nearest hundred.↩3. SEC. 532. CORPORATIONS SUBJECT TO ACCUMULATED EARNINGS TAX.(a) General Rule. -- The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.All future references hereinafter are to the Internal Revenue Code of 1954.↩4. See p. 334, infra↩. As a matter of logic, if respondent's theory were correct, the fact that such loans were fully justified by business considerations would realistically be immaterial, since, even under such circumstances, they could readily be utilized for dividend distributions.5. The making of these loans suggests "constructive dividend" overtones, but neither that issue nor the proper taxpayers, against whom such a contention could be asserted, are involved herein.↩6. Cf. Bardahl Manufacturing Corp., T.C. Memo 1965-200">T.C. Memo. 1965-200. The rationale for such treatment is to equate the loans receivable with cash and accord the petitioner no better or worse treatment than it would encounter if it actually had an equal amount in cash. Cf. Sterling Distributors, Inc. v. United States, 313 F. 2d 803, 808↩ (C.A. 5, 1963).7. See the following table:196119621963Average inventory$ 119$ 140$ 143Cost of goods sold (less depreciation)2,4422,0872,215Inventory turnover20.5 times14.8 times15.5 timesOperating cycle Based on a 360-day year.1↩17.5 days24.3 days23.2 daysAverage accounts receivable348389405Net sales3,0482,7072,933Receivables turnover8.8 times7.5 times7.2 timesOperating cycle 140.9 days48.0 days50.0 daysTotal operating cycle 158.4 days72.3 days73.2 daysCost of goods sold (as above)2,4422,0872,215Other operating expenses (less bad debts)259277298Total expenses2,7012,3642,513Operating cycle percent of 1 year 116 percent20 percent20 percentWorking capital needs$ 432$ 473$ 5038. For petitioner to have prepared blueprints and detailed budgets before the granting of the variance appeared imminent could well have entailed unnecessary time and expense. Cf. Sterling Distributors, Inc. v. United States, 313 F. 2d 803, 807↩ (C.A. 5, 1963).9. We are unimpressed with respondent's argument that Albert Faber was petitioner's "most valuable asset" and that the possibility of his death, because of admittedly poor health, made expansion unlikely. Aside from the macabre and speculative nature of his argument, we are satisfied that Gerhardt Faber had a sufficient degree of knowledge and capability to carry on the business, especially when the increased demand for petitioner's product and the bright prospects for the future, as they existed during the years in issue, are considered.10. On the basis of the lower of the requirements according to our calculations and those of respondent.↩11. It is not clear whether the injunction against taking post-taxable-year events into account is limited to the determination of actual needs of a business without regard to availabilities to meet those needs or extends as well to the evaluation of such availabilities. See S. Rept. No. 1622, p. 69; H. Rept. No. 1337, p. 53.↩12. We note also that petitioner's total expenditures for capital acquisition during the 10-year period, 1957-66, exceeded the aggregate amount of its net income after taxes during the same period.↩13. Our conclusion obviously has no bearing on petitioner's possible vulnerability in subsequent years -- a question which will have to be determined in light of the facts and circumstances as they exist in those years and with due regard to the fact that, to the extent which we have indicated herein, certain expenditures in those years have already been earmarked against accumulated earnings and profits as of the close of 1963.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619186/	Eitel-McCullough, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentEitel-McCullough, Inc. v. CommissionerDocket No. 10001United States Tax Court9 T.C. 1132; 1947 U.S. Tax Ct. LEXIS 10; December 17, 1947, Promulgated 10 Decision will be entered under Rule 50. Petitioner was organized September 12, 1934, to manufacture and sell high frequency vacuum tubes. In 1934 it built and sold two tube types. Changes were made from time to time in tube types in production and new tube types were produced for sale every year from 1934 to 1942, inclusive, until by the end of 1942, it had made and sold 64 tube types, a few of which had become obsolete, having been replaced by new tube types. All tubes, although built in different sizes, shapes, and arrangements of parts to satisfy different uses, possessed certain distinctive characteristics of the first tubes made and sold in 1934. Some changes or improvements in tubes and some tube types were made or built in less than a year's time, and the time required for other improvements or tube types was not shown. Petitioner claimed that all of its gross income for 1941 and 1942 was section 721 (a) (2) (C) class of income abnormal in amount and that its net income for 1941 and 1942, less 125 per centum of the average net income of the base period years, was net abnormal income under section 721 (a) (3) attributable under section 721 (b) on a monthly basis, to11 the period from September 1934 to 1940, inclusive. Held, because of failure to show that the improvements in tubes and production of new tube types from year to year constituted section 721 (a) (2) (C) developments and the amount of such class of income includible in gross income in the taxable years and the base period years, without which abnormal income under section 721 (a) (1) or net abnormal income under section 721 (a) (3) can not be determined, petitioner is not entitled to relief under section 721.2. Reasonable compensation for officers of petitioner determined. Edward Hale Julien, Esq., for the petitioner.W. J. McFarland, Esq., and Ralph A. Gilchrist, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 1132 The Commissioner determined deficiencies in excess profits tax of $ 132,190.90 and 12 $ 191,695.64 for 1941 and 1942. The questions involved are: (1) Whether the petitioner is entitled to relief under section 721 because of abnormal net income of the class described in section 721 (a) (2) (C) attributable to prior years, and (2) whether the amounts paid as certain officers' salaries in 1941 and 1942 were excessive.FINDINGS OF FACT.The petitioner was incorporated under the laws of California on September 12, 1934. It filed its returns with the collector for the first district of California.The petitioner was caused to be formed by William W. Eitel and Jack A. McCullough, for the purpose of manufacturing and improving vacuum tubes in the high frequency field. In 1934 there was relatively 1133 little commercial activity in the high frequency field. Eitel and McCullough were primarily interested in tubes generating power at high frequencies. Tubes generating power at lower frequencies were being manufactured in large volume on a production line basis by well established tube manufacturers.Both Eitel and McCullough had been radio amateurs, actively interested in radio since their early youth.In about 1929, when he was 21 years of age, Eitel was employed by13 Heintz & Kaufman, Ltd., of San Francisco, California, which company manufactured vacuum transmitting tubes almost exclusively for Globe Wireless, of which it was a subsidiary. In 1930 McCullough, then about 22 years of age, entered the employ of the same company. During the period of their employment with Heintz & Kaufman, Ltd., which ended shortly prior to the organization of petitioner, Eitel and/or McCullough developed at least fifteen inventions relating to anode structure, electrode supporting structure, amplifier, metal-to-glass seal, vacuum tube grid, electrode mounting, method of making thermionic tube grids, electrode support, method of forming electrodes, V-shaped filament support, thermionic tube stem machine, glass working apparatus, cathode, induction heating of enclosed elements, and support for multiple filaments.A few months before Eitel and McCullough left the employ of Heintz & Kaufman, Ltd., that company advertised for sale a new transmitting tube with 100 watt output, designated the "354 Gammatron" and featuring (a) no getter to impede heat radiation, (b) no plate supporting collar on stem, (c) no internal insulators, (d) grid and plate of tantalum, and (e) 14 thoriated tungsten filament.Upon the organization of petitioner, Eitel and McCullough, together with one employee, immediately began to design and build a vacuum transmitting tube in a small shop located in San Bruno, California. Eitel and McCullough naturally relied to a large extent upon the knowledge and experience acquired by them during their employment with Heintz & Kaufman, Ltd. It was their intent to build for petitioner a better tube than any made by that firm or any other tube manufacturer and, in doing so, to avoid infringement upon any patent held by Heintz & Kaufman, Ltd., or any one else in the industry.Petitioner did not manufacture any equipment in which its tubes could be used. Hence, its sales outlet was limited. Up to 1940 about 75 per cent of sales were made to individuals or organizations interested in developing equipment in the high frequency field, in which tubes of other manufacture had not given the service required or had failed. It also made sales to amateur operators. By 1940 petitioner was selling tubes to airlines and commercial users.The first tube completed and sold in 1934 was the 150T, meaning 150 watts dissipation on the plate in a triode15 or three-element tube. 1134 The three-element tube, consisting of the filament, grid, and plate, was discovered in 1907 and the basic patents relating to it had expired.The 150T was built with bulb-shaped glass envelope, metal base, tantalum plate having leads sealed to upper stem and connected to cemented cap, tantalum grid supported on glass flare of lower stem with a lead sealed to side wall and connected to cemented cap, and a pair of hairpin filaments of thoriated tungsten connected to leads sealed to lower stem.In advertisements announcing the 150T type tube, the following points of superiority were stated: High degree of vacuum, gas-free metals, tantalum grid and plate, absence of getter, and thoriated tungsten filament. Although this tube and the 50T, the second tube type built and sold in 1934, had features similar to those of the 354 Gammatron made by Heintz & Kaufman, Ltd., they were different in appearance and construction. Structural changes were made to overcome some of the difficulties encountered in the use of the 354 Gammatron. The general design of the 150T was not common in the industry.The 150T and 50T type tubes were not entirely satisfactory. It16 was found that the manufacturing technique and processes previously known and used were inadequate. Experimental work continued as tubes were built, not only in the various structural parts and design of the tubes, but also in the processing and treatment of the elements or parts used and in assembling them. Each tube was made by hand. It was necessary to design and make tools and other equipment for use in the manufacture of the tubes. Equipment necessary to produce tubes on a mass scale was made beginning in about the latter part of 1940. To eliminate as much as possible the failure and break-down of tubes, a testing method or procedure was developed which was unique with petitioner. During this procedure each tube was submitted to very exacting conditions which disclosed defects, if any. As changes were made to improve a tube in order to correct its irregularities or defects, new problems were encountered which had to be solved so as to produce a properly functioning tube.To improve the 150T and to overcome some of the difficulties and faults disclosed by its use, the plate leads were connected to a terminal button, the grid lead cap was eliminated, and a filament tensioning17 device was added. The filament tensioning device was a problem upon which Eitel and McCullough had worked at Heintz & Kaufman, Ltd., but which had not been solved satisfactorily at the time they left that concern. The petitioner later, prior to 1941, obtained a patent (No. 2,240,557) on the device. In July 1942, in settlement of certain litigation instituted by Heintz & Kaufman, Ltd., against petitioner involving patents owned by petitioner, the latter granted to Heintz & Kaufman, Ltd., a royalty-free, nonexclusive, noncancelable license under the 1135 above patent for its life. Under the agreement similar license was granted to Heintz & Kaufman, Ltd., under patent No. 2,134,710, covering a method and apparatus for exhausting tubes for which patent application was filed June 1, 1936, as well as patents Des. 127,757 and Des. 127,758, all of which patents had been obtained prior to 1941.The tube 150T so changed was rerated and named the 250T. It was rerated because it had more capabilities than the original tube and because it would be easier to sell at the same price at the higher rating. The tube was made with a high MU and with a low MU and named 250TH and 250TL, respectively. 18 MU is a designation used in describing the control exercised by the grid on the plate. The essential difference was in the grid design. Certain transmitting radio equipment worked better with a high MU tube and certain other such equipment worked better with a low MU tube. Petitioner built both so as to cover all applications or uses of the tube of its size.In 1936 the 250T contributed substantially to the art of transmitting tubes. There was nothing like it available and, therefore, petitioner had no competitors as to this tube. It was used in communication equipment, both civilian and later in high priority equipment used by the Army and Navy during the war.During 1938 the 250T was changed by having the grid supported on a side lead instead of on the stem, which improved its high frequency capabilities by lowering the interelectrode capacity between the grid and filament and allowing more grid voltage to be used. This particular feature was important in radar work and was unique with petitioner. During the same year the filament tensioning device was improved by using a pusher sleeve instead of rods, which made a more reliable filament structure, preventing it from warping19 after many hours of use. This improvement was new with petitioner. During 1939 a shield was added to the filament stem to keep the radiant heat off the filament stem and prevent it from cracking, which had occurred in many of the tubes. This change prolonged the life of the tube. During 1941 a single plate lead was used, a plate hat was added, and a shield on grid lead included. The single plate lead and plate hat were used to prevent stray electrons from bombarding the seals, bulb, and outside of plate. They increased the efficiency of the tube at high frequencies and also prolonged its life by overcoming punctures due to the bombardment by electrons in the envelope which allowed air to enter.The second tube built and sold in 1934 by petitioner was the 50T. It was a triode built with bulb-shaped envelope, metal base, tantalum plate having leads sealed to upper stem and connected to cemented cap, tantalum grid supported on lower tripod stem with a lead sealed to side wall and connected to cemented cap, and a M-shaped thoriated tungsten filament with leads sealed to lower stem. The bulb-shaped 1136 envelope and the metal base were typical in the industry. Having leads20 sealed to upper stem and connected to cemented cap was not a common method of fabrication of this type of tube in the industry in 1934, nor were the other remaining features common in the industry.At some time after 1934 the M-shaped filament was changed to a spiral filament, of a short heavy construction on which the diameter of the wire was larger than had been used in the industry up to that time in a tube of this type. The use of this larger diameter wire required a new method of processing to activate it, which method was developed by Eitel and McCullough. Petitioner was not a pioneer in the use of a spiral filament, nor was it the first tube manufacturer to use a thoriated tungsten filament. The metal base was changed to a ceramic base. Both were used in the industry. The change had no effect upon the efficiency of the tube. The plate leads were connected to a terminal button. Experience with the tube disclosed that the heat developed at high frequency melted the solder at the connections of the leads and overheated the cement basing. To eliminate such difficulties, the improved type connector was developed. Connecting the plate leads to a terminal button was not a21 common practice in the industry and contributed substantially to the efficiency of the tube at high frequency, which was the end sought. The grid lead cap caused overheating in the operation of the tube at high frequency and was eliminated. The industry generally used metal caps and the elimination of the grid lead cap was a departure from the common practice in the industry. Sometime during 1936 the tube as changed was rerated and named the 100T, as experience indicated that the tube would handle more power. It was made with a high MU and with a low MU.After 1936 the envelope of the 100TL was changed to one with a straight side with annular bulge; twin lateral leads were provided for plate and grid and the filament stem was simplified. Later a second spiral was added to the filament, the base removed and solid filament leads extended, and plate and grid supports and seals improved. The tube so changed was designated in 1938 the 100TS.Experimental use of the 100T in radar development disclosed that it had the necessary stamina and characteristics to give satisfactory results. The changes from which the 100TS evolved were logical improvements to meet the requirements of operation22 at very high frequencies and very high voltages in radar equipment. The 100TS was sold to the Army Signal Corps laboratories. At that time radar was a secret and petitioner did not know that the tubes were used in the development of radar, being given merely a rough idea of what was wanted and what was sought to be accomplished.To prevent cracking of the stem due to excessive heat, which had occurred after continued operation, a stem shield was added in 1940. Late in 1940 the Signal Corps designated the tube as the "VT127." 1137 To prevent puncturing of the envelope by the bombardment of stray electrons, a plate hat was added in 1940. The same type tube with a platinum grid was designated "VT127A" by the Signal Corps.In 1940 petitioner was also working with the Naval Research Laboratory. As more power from a small tube was required for Navy search radar, changes were made in the 100T to meet such requirements. This included the incorporation of a heavier filament by using a series double spiral of larger wire and using a high MU grid. This tube was first named the "VT127 Hi-1941", but later in 1941 it was named the "227." Same type tube with a platinum grid was designated23 "227A."After experimenting with single vertical plate leads late in 1940 or early 1941, its use became practical in 1941. The tube in which such lead was incorporated was named the "327." The change made it possible to obtain more power and to use more plate voltage. It was not operated in the same manner as the 227. Its end use was shipborne search radar and it was developed for the Naval Research Laboratories. The same type with platinum grid was called "327A."In 1936 an experimental tube was built along the lines of the 100T but of smaller size to fit in smaller installations or equipment. Work continued on this type tube from time to time until the early part of 1939, when the tube was considered ready to be put into production for practical use and sale. It was named the 75T and was used in amateur stations and low power radio transmitters. Except that the plate lead came out of the top and the grid lead out the side near the bottom, its other characteristics were identical with the UH51, first sold in 1938.The 152T and the 304T, the first embodying two 75T units in a single envelope and the second embodying four 75T units in a single envelope, were completed for practical24 use before the end of 1940.The 152T was used chiefly in amateur radio transmitters and in some commercial radio installations with both telephone and telegraph.The 304T resulted from the efforts of petitioner to make a better tube which would operate at low plate voltage and give high power outputs. Experiments showed that the 304T had four times the power at the same plate voltage used in the 75T. It was a tube of very high current-handling capacity and for that reason was of considerable aid in the radar development program. Although not designed for that purpose, its chief use later was in Signal Corps and Navy radar equipment. It was used in submarine radar after 1941. The tube was unique with petitioner.In 1941 a shield was added to prevent both heat and electrons from bombarding the filament stem, which impaired the efficiency of the tube and caused cracking of the stem. In 1942 the grids were unitarily 1138 supported on a single lead to better the tube electrically and made it more dependable for radar use, to which the tube was being applied in great numbers at that time. The same change was made in the 152T in 1942.The sales in number and value of the tube25 types heretofore mentioned were as follows:TubeType19341935193619371938150TQuantity611,0329269Value$ 1,179$ 19,259$ 16,666$ 173250TLQuantity29597374Value$ 53910,441$ 7,261250THQuantity241,1801,441Value$ 441$ 20,460$ 20,32050TQuantity29371,27551Value$ 18$ 9,478$ 12,827$ 47$ 10100TLQuantity85479304Value$ 871$ 4,869$ 3,522100THQuantity1232,1191,859Value$ 1,252$ 21,222$ 18,310VT127QuantityValue227QuantityValue327QuantityValue75TLQuantityValue75THQuantityValue304TLQuantityValue304THQuantityValue152TLQuantityValue152THQuantityValueTubeType1939194019411942150TQuantityValue250TLQuantity4945982,5354,644Value$ 8,733$ 10,485$ 46,355$ 120,169250THQuantity1,0701,3461,70211,587Value$ 18,645$ 23,317$ 30,474$ 212,95350TQuantityValue100TLQuantity346435304650Value$ 5,475$ 7,841$ 3,582$ 6,662100THQuantity1,5801,4932,44917,432Value$ 15,069$ 14,142$ 24,375$ 179,179VT127Quantity50429,022163,532Value$ 13,866$ 744,891$ 3,405,643227Quantity3,12216,735Value$ 93,703$ 471,993327Quantity20517,560Value$ 6,200$ 429,57675TLQuantity44660064836Value$ 4,109$ 3,966$ 4,309$ 24375THQuantity41Value$ 27$ 9304TLQuantity22310,82828,282Value$ 10,931$ 511,159$ 1,185,267304THQuantity226424,838Value$ 1,076$ 33,314$ 216,724152TLQuantity827636Value$ 1,256$ 1,108$ 564152THQuantity314Value$ 777$ 6726 The following schedule shows the various tubes developed and produced for sale by petitioner, listed in the year in which sales thereof were first made:19341935193619371938193919401941194250T50TD35T450TL750TH15E15R15A15F150T150TD100TL450THVC635TG125TH15B6C21300T100TH750TLVC1275TL127VT15C53B500T250TL1000UHFVC251500T152RA15D250R250THVC502000T152TL53A300TDKY21304TL53CRX21304TH53DUH35570A53EUH50125M53FUH51VS175THTwin 30VC40100R152TH158VT186VT227VT327VTSpecialPetitioner's tubes were designated as "Eimac" tubes.The 15E was first used about 1941 in Navy airborne radar equipment. Its performance was phenomenal. It was the smallest and most compact high frequency radar tube which had been designed up to that 1139 time and was unique with petitioner. Its sales in number and in value from the time it was first offered for sale through 1942 were as follows:YearNumberValue193916$ 21419402193,8961941561,006194220,667326,698The 15R is a small rectifier and was developed with the 27 15E. It was used in both Navy airborne and shipborne radar. Its sales in number and in value from the time it was first offered for sale through 1942 were as follows:YearNumberValue194017$ 27519413138819423,55945,877The 158VT, a high frequency power radar tube, was developed in conjunction with the Army Signal Corps. Its sales in number and value were as follows:YearNumberValue194117$ 8,49019423415,410The 53A was used in some form of radar equipment. Its sales in number and value were as follows:YearNumberValue194198$ 1,96219423,29165,833The UH50 was used in some naval ground plane landing equipment for blind-landing aircraft. Its sales were as follows:YearNumberValue193832$ 29919396963619405147819415164,83819421,34312,588One of the uses of the 300T was in hospital diathermy machines. It was replaced by the 450T. By 1940 the 450T was standard in nearly all airline ground stations throughout the United States. It was also used in broadcast stations, in police radio systems, and in Army radar equipment.1140 The sales of the 300T, 450TL, and 450TH 28 were as follows:300T450TL450THYearNumberValueNumberValueNumberValue19357$ 30019361718,1611937632,92151$ 2,52624$ 1,40619381451468,257794,313193933017,8741387,424194069138,65335319,705194171740,2661,03057,45619423,213166,7538,829452,713The tube 500T was replaced by the 750T, which was used in naval communication equipment and broadcast transmitters and for other purposes. The sales of such tubes were as follows:500T750TL750THYearNumberValueNumberValueNumberValue19357$ 1,1031936233,3331937273,70946$ 6,4351938415,7991$ 1491939243,582117519407110,226194126337,174194217124,737The Naval Research Laboratory also used the 35T type tube in its radar experiments. The sales of that tube were as follows:YearNumberValue19361,723$ 10,28919373,01717,14419382,55311,85019392,58611,90419401,152$ 5,03419414,59722,81819429,93941,381The 1000UHF was used in certain modulation experiments and also by the Army29 Signal Corps. The sales thereof were as follows:YearNumberValue19375$ 7001938111,7151939213,194194022$ 3,0881941213,098194215523,152The total number of tubes sold each year from 1934 to 1942, inclusive, was as follows:YearTubes sold19346319352,08619364,48319377,62419387,77019398,162194010,107194170,0531942346,1121141 All of petitioner's triodes are traceable to the fundamental structure embodied in the original 50T and 150T built in 1934. While subsequent tube types were built in different sizes, shapes, and arrangements of the parts to satisfy different kinds of services or use, all of the tubes possessed the distinctive cylindrical plate and cage type grid structure characterizing the first tubes designed and built by petitioner. As changes or improvements were made in one tube type, they were promptly introduced whenever applicable to the other types. Petitioner endeavored at all times after its organization to improve its products and experimented to that end. Some changes were made in tubes to overcome limitations or defects disclosed by their use by customers. New tube types were30 built to meet and satisfy the needs and demands of customers, to meet or excel products of petitioner's competitors, and to establish and complete a comprehensive line of tubes for sale.Early in 1934 the Naval Research Laboratory began its experimental work on radar. By 1936 equipment had been built which would operate at a frequency of 28 megacycles. This equipment was too large for use on ships. In addition to reduction in size, operation of the equipment at a frequency of a minimum of 200 megacycles was required. In June 1936 work was begun on 200 megacycles for radar. The major part of the time until about January 1938 was spent in trying to find a vacuum tube that would stand up under the necessary voltage and deliver the necessary power at 200 megacycles or higher. Every tube available, including the 354 Gammatron, was tried out. The Naval Laboratory worked with laboratories of well established tube and equipment manufacturers, but it was unable to obtain any tube which would stand up under the required voltage or provide the power. All tubes used had power limitations of a few hundred watts per tube in radar application. The minimum required was about 10 kilowatts. 31 The first of petitioner's tubes, the 100T, was used in about January 1938. This tube, which had been built for commercial purposes, gave power of 3 kilowatts per tube. With the use of six 100TH tubes in an oscillator, power of 20 kilowatts operating at 200 megacycles was obtained. The radar set built around that tube was completed and tested in about February 1938 and all performance requirements were met. A subsequent test on a ship was successful and 20 sets were immediately ordered. Nineteen of these sets had been installed on ships at the time of the Pearl Harbor attack and played a prominent role in the early months of the war.The next tube used by the Naval Laboratory was the 227 in a type of Navy search radar. The tube was capable of giving about 75 kilowatts per tube.1142 There were no tubes manufactured at that time comparable to the 100T or 227. A well established manufacturer of equipment attempted to duplicate these tubes in order to sell its own tubes with its equipment manufactured by it for Navy use, but none of the tubes developed by it were successful. Most of them would not stand the required voltage and failed prematurely. Later other equipment32 manufacturers attempted to do likewise, with similar results.The Army was experimenting and developing radar equipment during the same period, but used petitioner's 100TS and 127 type tubes.Petitioner differed from other manufacturers of tubes in that it never produced tubes on a conventional assembly line or production line basis. It used skilled workers, required strict tolerances and accurate alignment of the elements or parts, and was unusually exacting in testing its products and rejecting defective tubes. Petitioner insisted on a very high standard of workmanship.The superiority of petitioner's tubes resulted not only from its high standard of workmanship, but also, among other things, from its improved manufacturing technique, its improvement in processing and treating the various elements or parts used, its improved tools, machinery and equipment, and its method of assembling and structure of its tubes. All of these factors substantially contributed to the art of making high power frequency tubes and resulted in some of the most efficient tubes of their kind produced.On May 22, 1942, petitioner contracted with the Government to make all of petitioner's processes and33 methods of manufacturing of tubes in the fields of communication, signaling, remote control, navigation, and direction and position finding available license-free to other manufacturers. Other manufacturers had their agents investigate in detail petitioner's methods and technique of manufacture and the structure of its products. Petitioner fully cooperated with such investigations both by giving information and by furnishing samples of its tube parts.Thereafter, the Government had other tube manufacturers make some of petitioner's types of tubes, but they never manufactured as satisfactory a tube as did petitioner. Although similar in appearance to petitioner's tubes, petitioner's competitors did not produce tubes equal in power, performance, or life to those manufactured by petitioner.From the time of petitioner's organization to 1941, Eitel and McCullough filed about ten applications for patents, of which patents the petitioner became owner by assignment, including patents numbered 1143 2,134,710, 2,240,557, Des. 127,757, and Des. 127,758, heretofore mentioned. Petitioner is the owner of other patents, all but two of which cover inventions of Eitel and McCullough, as34 follows:ApplicationPatent No.filedRelating to --2,352,522Feb. 14, 1941Improved multiple-unit tube and improved methodof making same2,355,717Feb. 14, 1941Improved anode structure for thermionic tubes2,355,718Oct. 10, 1941Improved multiple-unit tube and improved meansof making sameDes. 143,904Oct. 10, 1941Design for vacuum tube (VT 127)Des. 143,905Oct. 10, 1941Design for vacuum tube (327)2,400,081Oct. 10, 1941Improved vacuum tube constructionDes. 143,906Oct. 10, 1941Design for vacuum tube2,400,080Oct. 10, 1941Improved multiple-unit tube and improved meansof making sameDes. 143,907Feb. 2, 1942Design for vacuum tubeDes. 143,908May 11, 1942Design for vacuum tube (400X)2,335,587May 19, 1942Electronic tube having a plurality of electronicunits, and mounted in the same envelopeDes. 136,732May 19, 1942Design for vacuum tube (experimental)2,401,059May 23, 1942Tube with a plurality of triode units (400Xand VT 158)Des. 143,909June 5, 1942Design for vacuum tube (15D)2,400,082June 5, 1942Tube of small physical size having improvedstructure of, arrangement for, and mounting ofelectrodes and leads in envelope (15E)Des. 143,910June 5, 1942Design for tube (15E)2,402,319June 5, 1942Rectifier tube of small physical size, havingimproved structure of, arrangement for, andmounting of the electrodes and leadsin envelope (15R)Des. 143,911June 5, 1942Design for vacuum tube (15R)2,371,683June 30, 1942Small tube particularly adapted for highfrequency work (15C)Des. 143,912June 30, 1942Design for vacuum tube2,400,635July 13, 1942Improved method of making triode tube, includingimproved method of coating a plate electrode witha material having desired electrode surfacingcharacteristics, such as zirconium, etc.2,401,040Oct. 5, 1942Method of making tube in which grid emission issubstantially wholly and permanently eliminatedand emission from cathode is materially increased2,395,313Aug. 9, 1943Improved electrode, such as grid, having lowprimary and high secondary emission andcharacterized by sufficient mechanical rigidity tomaintain its position of alignment in tube35 In the latter part of 1940 petitioner received its first large order, it being for 10,685 127VT, 3,892 304TL, and 865 250TL, aggregating approximately $ 500,000, which order represented a subcontract in connection with the defense program of the Government. About 550 tubes were shipped on this order in 1940 and the remainder in 1941. Prior to that time an order of 40 tubes was considered a large order.The bulk of petitioner's production for 1941 and 1942 was for the Army and Navy.The increased sale in 1941 and 1942 of radar tubes was due to the demand for tubes in radar sets used in the war program.In 1939 amateur business began to decline.The following schedule shows the net sales, total manufacturing costs, including compensation paid to Eitel and McCullough, sales expenses, 1144 administration expenses, and net profit or loss as shown by petitioner's books for the years 1936 to 1942, inclusive:1936193719381939REVENUENet sales$ 54,339.37$ 88,389.99$ 85,916.95 $ 110,709.21Less Governmentcontract renegotiationCOST AND EXPENSESManufacturing costs,including Eitel &McCulloughcompensation38,014.0264,054.4567,457.98 78,296.09Sales expenses4,905.818,834.5612,663.96 16,875.05Administration expenses6,661.487,376.908,373.83 12,025.67Total costs and expenses49,581.3180,265.9188,495.77 107,196.81Net profit (or loss)before income taxes4,758.068,124.08(2,578.82)3,512.4036 194019411942REVENUENet sales$ 200,197.54$ 1,827,687.04$ 7,756,183.02Less Governmentcontract renegotiation2,523,390.415,232,792.61COST AND EXPENSESManufacturing costs,including Eitel &McCulloughcompensation132,572.53772,522.844,024,871.34Sales expenses23,692.2297,035.5959,824.18Administration expenses32,308.4896,734.18287,231.17Total costs and expenses188,573.23966,292.614,371,926.69Net profit (or loss)before income taxes11,624.31861,394.43860,865.92Exhibit 3, which contains profit and loss statements in detail for each year from the organization of petitioner in 1934 to 1942, inclusive, is incorporated herein by reference.The inclusion of the salary and other compensation paid to Eitel and McCullough under manufacturing costs was a consistent practice of petitioner from its organization to 1942, inclusive.Prior to 1941 some laboratory expenses, difficult of identification, were commingled with other expenses. In 1941 an account "Laboratory Expense" was set up and the account "Experimental Work, Miscl. Chgs." discontinued. In addition to development expenses, the account "Laboratory Expense" 37 contained expenses not ordinarily in the production line, such as expenses of testing and proving the product.In 1943 and 1944 petitioner reported gross sales in the amount of $ 17,188,257.94 and $ 13,079,250.67, respectively.Exhibit 1, containing balance sheets of petitioner for each year ended December 31, 1934, to December 31, 1942, inclusive, is incorporated herein by reference.The only distribution by petitioner to its stockholders charged against earned surplus was a cash dividend of $ 4,000 in 1937.Compensation paid by petitioner to its officers during 1935 to 1942, inclusive, was as follows:YearW. W. EitelJ. A. McCulloughB. HarrisonW. G. Preddy1935$ 4,500.00$ 4,500.00$ 1,200.00$ 1,200.0019364,200.004,200.001,200.001,200.0019374,800.004,800.001,200.001,200.0019384,800.004,800.001,200.001,200.0019395,678.105,678.102,078.102,078.1019406,858.766,858.762,871.272,871.26194140,000.0040,000.0020,000.00194224,000.0024,000.006,450.001145 During 1941 and 1942 Eitel was president and director of petitioner, McCullough was vice president, treasurer and director, and Harrison was secretary38 and director. Each of them owned one-third of the outstanding stock of petitioner. The reduction in officers' salaries in 1942 was made to conserve finances. In 1943 Eitel and McCullough each received compensation of $ 40,000.Eitel and McCullough devoted their entire time to the affairs of petitioner, not only in 1941 and 1942, but also in prior years, and were primarily responsible for its operation and success. Harrison devoted only part time to the affairs of the petitioner. He was familiar with the building and insurance business and took care of the building expansion and insurance, including the erecting of a large plant at Salt Lake City.The number of employees of petitioner was approximately 22 by the end of 1939 and approximately 60 at the end of 1940, and it increased to 300 by the end of 1941 and to 1,125 by the end of 1942.By the end of 1935 the area of the San Bruno plant covered 4,850 square feet. Beginning in 1940, this area was expanded until by the end of 1942 the plant covered an area of 38,791 square feet. By March 31, 1943, an additional area of 11,352 square feet had been added.The construction of a second plant was begun in Salt Lake City in the spring39 of 1942. It became an operating unit during the summer of 1942. Whatever advances petitioner had made to build the Salt Lake City plant were reimbursed to it by the Defense Plant Corporation. Both Harrison and Eitel moved to Salt Lake City. Harrison was largely responsible for the construction of the plant. Eitel operated the plant, which was as large as the San Bruno plant. During their absence, McCullough operated the San Bruno plant.The Commissioner disallowed, as excessive, $ 16,000 of the salary paid to Eitel and McCullough in 1941 and $ 17,000 and $ 4,575 of the salary paid to Harrison in 1941 and 1942, respectively.Petitioner's 1942 return discloses the following relation between its original facilities and its emergency (defense and war) facilities subject to special amortization, for which certificates of necessity had been obtained or applied for:Capital assetReserve forJan. 1, 1942accountdepreciationOriginal facilities$ 46,548.34$ 19,149.48Emergency facilities244,217.9630,784.60Dec. 31, 1942Original facilities52,642.3425,245.62Emergency facilities, San Bruno plant577,736.4290,400.53Emergency facilities, Salt Lake City plant20,925.8740 1146 The amount of $ 40,000 paid by petitioner to Eitel and McCullough, respectively, in 1941 was reasonable compensation for their services rendered to it.The amounts of $ 10,000 for 1941 and $ 6,450 for 1942 constitute reasonable compensation for services rendered by Harrison.OPINION.In proving a case under section 721, petitioner has both an affirmative and a negative burden. That these burdens are onerous may be admitted, but the burdens are fixed and the proof must be made. Petitioner must show that it had abnormal income of the designated class (here research and development of tangible property, sec. 721 (a) (2) (C)) 1 in excess of 125 per centum of the average amount of the gross income of the same class for the four previous years. "Once the amount of the income of the class for the [taxable] years and the base period is shown then the abnormal amount of the tax years is merely a matter of mathematics under section 721 (a) (1)." Soabar Co., 7 T. C. 89, 94. But it does not suffice to do as petitioner suggests, merely take the income tax net income or loss figures for the base period and one of the two taxable years and apply the 41 formula. This is to prove your case by false assumptions. 1147 As said in Producers Crop Improvement Association, 7 T. C. 562, 566:* * * But such a theory is unsound. The "class of income" described in (2) (C) and in (1) is a "class includible in the gross income." Those provisions and (a) (3), relating to the elimination of costs and expenses, show clearly that a "class" is not to consist of income tax net income, net income, net loss, or any combination thereof.42 A taxpayer has "abnormal income" under section 721 (a) (1) only if the income of the taxable years and that of the base period to which the statutory formula is to be applied be "recognized as a separate class." Geyer, Cornell & Newell, Inc., 6 T.C. 96">6 T. C. 96. The statute by its terms requires identification of a "class" of income, either of any class described in subsections (a) (2) (A) to (F), inclusive, or of some other class under the regulations prescribed by the Commissioner with the approval of the Secretary. The petitioner has chosen "research and development in tangible property" (section 721 (a) (2) (C)) as its class. Undoubtedly, some of the petitioner's income in both periods was the product of research and development, just as part of its income in both periods was due to manufacturing. On the record made, however, we can not make even an approximation of an amount of such development income as contrasted with manufacturing income. Throughout the base period, albeit some part of the income was due to development, we also know that much of it was due to sales effort and manufacturing efficiency.In the taxable years the failure of proof is 43 even clearer. Petitioner's development work was carried on throughout those years. Petitioner's gross income was the result of a concatenation of many factors, viz., high standard of workmanship, advertising and other sales efforts, the unique ability of Eitel and McCullough exercised not only in research and development, but in plant operation and management, and, more largely than any other fact, the greatly increased demand for petitioner's product incident to the defense program, with its normal consequence, the improvement of business conditions. As to the existence of these factors, we have no doubt -- no other conclusion is possible on the record. There is no proof, however, from which we can formulate an approximation or even a guess of the amount properly attributable to the vital factors. Thus it is, there is no way on the record made by which to determine in either the base period or the tax years the amount of income attributable to research and development and the amount attributable to manufacturing under improved business conditions, with the consequent inability to determine the amount of petitioner's abnormal income, if any.1148 In consonance with the above, 44 without more, we would be obliged to rule against petitioner, but there are yet other vital defects in the record. One requirement of the statute is that the development extend "over a period of more than 12 months." If it be considered that petitioner's product was various types of vacuum tubes, each tube being a separate product, with but one or two possible exceptions out of the many tube types manufactured, we are unable to hold that the development extended over a period of more than 12 months. The proof is too general to permit specific holdings as to the time required to develop any of the several tubes. Even if the petitioner's premise, that the years 1934 to 1940 were exclusively devoted to development, were accepted and if the periods of development of tubes were tacked together so that petitioner's product could be considered as a series of tubes rather than individual tubes, it would not overcome all the deficiencies of proof in the record. There are still lacking the data on which to allocate the expenses and income attributable to the increased demand for tubes for war end use and consequent improved business conditions.This requirement of the regulations (Regulations45 109, sec. 30.721-3; Regulations 112, sec. 35.721-3) is attacked by petitioner as invalid, it being urged that it imposes an impossible burden and disqualifies all applicants for relief automatically. We are fully conscious of the difficulty of proof under section 721, but we are not persuaded that it imposes an impossible burden or that the regulation is invalid. Precise proof may be difficult, but here the record reveals no attempt at proving even reasonable approximations. There is simply an absence of proof. In W. B. Knight Machinery Co., 6 T. C. 519, the parties were able to agree on a stipulation measuring the effect on income of increased sales due to improved business conditions.We would be obliged to shut our eyes to the obvious were we not to hold that a very large part of the increase in petitioner's sales in 1941 and 1942, and consequently its increase in income, was due to the impact of the war in Europe on American business economy, with the unusual demand of the defense and armament program. Petitioner received its first large contract under that program in 1940. From 1934 through 1939 petitioner's business had a slow but steady 46 growth. It was only with the stimulus of war orders that petitioner's sales mounted to spectacular figures. McCullough testified that the sale of radar tubes in 1941 and 1942 was due to the increased demand for tubes in radar sets. Eitel testified that the bulk of petitioner's production in 1942 was for the Army and Navy and that the same was 1149 probably true in 1941. The sales of the VT127, used in Army radar equipment, in 1940 amounted to $ 13,866, whereas, in 1941 and 1942 the sales were $ 744,891 and $ 3,405,643. The sales of the 304TL, used chiefly in Army and Navy radar equipment, increased from $ 10,931 in 1940 to $ 511,159 in 1941 and $ 1,185,267 in 1942. All of these sales were related to the war program.Thus it is, in sum, that on the issue of applicability of section 721 we find that petitioner has failed to prove certain affirmative factors or disprove certain negative factors basic to granting the relief sought. The clear inference and conclusion from the record made are aptly characterized in Soabar Co., supra, where it is stated: * * Its greater profits in the tax years came to it because of improved business conditions, 47 stimulated, apparently, by the prospect that the war then raging would or might soon involve this country. Congress intended the excess profits tax to apply to such increased or excess profits. See House Rept. No. 146, p. 9, 77th Cong., 1st sess. (1941-1 C. B. 557). The regulation which the Commissioner prescribed, with the approval of the Secretary, carries out this intent by providing that such part of the net abnormal income of a tax year which was due to improved business conditions, resulting in a greater demand for the taxpayer's products, should not be allocated to any other years. It carries out the intent of Congress and is in harmony with the spirit and purpose of the provisions, as well as the wording thereof.The Commissioner also disallowed a part of the salary of $ 40,000 paid each to Eitel and to McCullough in 1941 and a part of the salary of $ 20,000 paid in 1941 and $ 6,450 paid in 1942 to Harrison, on the ground that the amounts represented excessive compensation.The successful production and operation of the business of petitioner were primarily due to the ability and efforts of Eitel and McCullough. Both were highly skilled technical48 men, skilled in the art of making vacuum tubes, and proficient in organization, management, and operation of the company. Sales increased from $ 200,197.54 in 1940 to $ 1,827,687.04 in 1941 and $ 5,232,792.61 in 1942 after war contract renegotiation. These increased sales necessitated expansion in plant, equipment, production, and personnel, in which the three officers carried the burden. The fact that these three men were the only stockholders of petitioner is not important unless the salaries were unreasonable. In the findings of fact we have found that the compensation paid to Eitel and McCullough in 1941 was reasonable in amount for the services rendered by them to or for the petitioner. As to Harrison, we have found the amounts which we deem reasonable. Petitioner is entitled to deduction of the amounts so found.Reviewed by the Special Division as to the 721 issue.Decision will be entered under Rule 50. Footnotes1. SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD.(a) Definitions. -- For the purposes of this section --(1) Abnormal income. -- The term "abnormal income" means income of any class includible in the gross income of the taxpayer for any taxable year under this subchapter * * * if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years * * .(2) Separate classes of income. -- Each of the following subparagraphs shall be held to describe a separate class of income: * * (C) Income resulting from * * discovery, * * * research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; * * ** * * (3) Net abnormal income. -- The term "net abnormal income" means the amount of the abnormal income less, under regulations prescribed by the Commissioner with the approval of the Secretary, (A) 125 per centum of the average amount of the gross income of the same class determined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income.(b) Amount Attributable to Other Years. -- The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. In the case of amounts otherwise attributable to future taxable years, if the taxpayer either transfers substantially all its properties or distributes any property in complete liquidation, then there shall be attributable to the first taxable year in which such transfer or distribution occurs (or if such year is previous to the taxable year in which the abnormal income is includible in gross income, to such latter taxable year) all amounts so attributable to future taxable years not included in the gross income of a previous taxable year. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619187/	Eleanor Josephine Slaughter v. Commissioner. Mary S. Field v. Commissioner.Slaughter v. CommissionerDocket Nos. 111284, 111285.United States Tax Court1943 Tax Ct. Memo LEXIS 186; 2 T.C.M. (CCH) 500; T.C.M. (RIA) 43354; July 23, 1943186 The net income of an estate for the final year of administration, held not taxable to the residuary legatees under section 162(c) of the Internal Revenue Code where neither the will nor the local law directed or authorized the distribution of net income as such. Max Bloomstein, Jr., Esq., 11 S. LaSalle St., Chicago, Ill., for petitioners. C. J. Munz, Esq., for the respondent. ARUNDELLMemorandum Opinion ARUNDELL, Judge: The Commissioner determined income tax deficiencies for the calendar year 1940 in the sum of $17,988.05 in Docket No. 111284 and of $4,530.04 in Docket No. 111285. Three contested adjustments have now been agreed to by the parties: A demolition loss was not sustained by petitioners during 1940; and petitioner in Docket No. 111284 is entitled to a nontrade or nonbusiness deduction of $900 and to three credits for defendants in the aggregate sum of $1,200. The sole remaining issue, which is common to both proceedings, is whether residuary legatees are taxable upon the net income of a decedent's estate for the final year of administration. The facts were stipulated. [The Facts] Petitioner in Docket No. 111284, Eleanor Josephine Slaughter, is the widow of187 Rochester B. Slaughter, who died testate August 30, 1939, a resident of Florida. The widow's income tax return for the year 1940 was filed with the Collector at Jacksonville, Florida. Petitioner in Docket No. 111285, Mary S. Field, is the sister of decedent. Her return for 1940 was filed in the first district of Illinois. Decedent's will was admitted to probate on September 11, 1939, in the County Judge's Court in and for Sarasota County, Florida. His widow duly qualified as executrix. After certain specific devises of real estate, the will left all the rest, residue and remainder of decedent's estate to his wife and sister, petitioners herein, a 70 per cent interest to the former and a 30 per cent interest to the latter. The will contained no provision with respect to the disposition of income during the period of administration. The estate being ready for distribution in accordance with the will and the law of Florida, the County Judge's Court entered an order of distribution on September 2, 1940. The order specified the division to be made of certain securities as between each of the petitioners herein and decreed that all other securities and personal property then in the hands188 of the executrix, including cash on hand or in the bank, "shall be distributed and divided seventy per cent (70%) thereof to,eleanor Josephine Slaughter and thirty per cent (30%) thereof to Mary S. Field." Thereafter attorneys' fees were fixed by the court and paid early in December 1940. The securities were distributed in accordance with the order of the court by December 17, 1940. Estate and inheritance tax returns were filed and taxes paid. The cash then remaining in the estate totaled $238,711.48. On December 17, 1940, the executrix distributed cash of $91,399.66 to herself and $37,311.82 to Mary S. Field, being in the proportion set forth in the will. This completed the entire distribution of the estate with the exception of a sum of $110,000 that was reserved by the executrix in cash as a fund for the payment of any additional estate or inheritance tax that might be assessed. This later sum, together with a refund of estate and inheritance taxes later received, was subsequently distributed to petitioners herein in the proportions set forth in the will, which distribution was completed in January 1942. The fiduciary income and defense tax return of decedent's estate for the189 calendar year 1940 reported income from dividends and interest in the amount of $46,578.55, deductions of $2,462.16, and net income of $44,116.39 upon which an income and defense tax of $11,615.90 was paid by the estate. No deduction was claimed for any amount paid or credited during said year to any legatee or. heir. No distribution was made by the executrix to the petitioners herein except pursuant to the order of distribution dated September 2, 1940. The only cash distribution during 1940 to either of the petitioners herein was the cash distribution made on December 17, 1940. On December 27, 1940, the executrix filed her final account, and on the same day the account was approved by the County Judge's Court and letters of final discharge were issued to the executrix. The Commissioner determined that the net income of the widow and the sister for the taxable year 1940 should be increased in the respective amounts of $29,983.56 and $12,850.10, representing taxable net income of the estate for the year 1940 "which income was included in the distribution made to you [petitioners] on or before December 27, 1940, at which time the estate was closed." Internal Revenue Code, section 190 162 (c). 1[Opinion] The general rule is that income received by an estate during the period of administration shall be taxed to the estate. A deduction is allowed by section 162 (b) for income that is required to be distributed currently 2 and in that event the income is taxed to the person entitled to the distribution. Subsection (c) deals with income that may be distributed or accumulated, and allows a deduction to the estate of so much191 as is "properly paid or credited" during the tax year. The settled construction of the phrase "properly paid or credited" is that it has reference to a payment or crediting of income as such and does not comprehend the distribution of accumulated income. Anderson's Estate v. Commissioner, 126 Fed. (2d) 46, certiorari denied 317 U.S. 653">317 U.S. 653. And the fact that accumulated income distributed as part of the corpus was accumulated in the same taxable year in which the distribution later occurs is immaterial. Spreckels v. Commissioner, 101 Fed. (2d) 721. To ascertain whether income of an estate may be properly distributed "as income" to legatees, resort must be had to the terms of the will and the provisions of state192 law. Ardenghi v. Helvering, 100 Fed. (2d) 406, certiorari denied 307 U.S. 622">307 U.S. 622; Estate of Henry H. Rogers, 1 T.C. 629">1 T.C. 629, 637. On this point respondent is met by the fact that the will under consideration contained no provision for the distribution of income during the period of administration; and his brief makes no reference to the law of Florida or to any requirement or authorization of the laws of that state pertaining to the distribution of income to residuary legatees during the course of settlement of the estate. Our research discloses that specific legatees and devisees are granted the net income or increase in property left to them by will and that general legacies bear interest from the time fixed by court order for distribution until payment is made. Compiled General Laws of Florida, 1934 Cumulative Supplement, section 5477 (19). We find no provision, however, directing or permitting the payment of income or interest to residuary legatees. The settled doctrine in these circumstances is that what the residuary legatees receive on final settlement of the estate are their legacies, exempt193 from tax under section 22 (b) (3) of the Internal Revenue Code. Anderson's Estate v. Commissioner, supra;Roebling v. Commissioner, 78 Fed. (2d) 444; Weigel v. Commissioner, 96 Fed. (2d) 387; Spreckels v. Commissioner, supra;Estate of Henry H. Rogers, supra;S. F. Durkheimer, 41 B.T.A. 585">41 B.T.A. 585; Mabel I. Wilcox, 43 B.T.A. 931">43 B.T.A. 931. Respondent's chief reliance, Estate of John A. McCandless, 42 B.T.A. 1309">42 B.T.A. 1309, affd. sub nom. Commissioner v. Bishop Trust Co., Ltd., et al., 136 Fed. (2d) 390, is not out of line with the general rule prescribed by the above authorities when regard is had of the local law that governed there. As the Circuit Court of Appeals for the Ninth Circuit stated, whether the amount was received as income or corpus depended upon "the effect of the language of the will under the law of the jurisdiction in which the estate is administered." The court adopted the general rule laid down in two Hawaiian cases, 194 which was the controlling local law, to the effect that the beneficiaries of a testamentary trust "are entitled to income from the date of the testator's death, upon residue as subsequently determined, unless the will provides otherwise." Construed in this light the case from which respondent draws his chief support is not at odds with the views here expressed. Respondent's determination is accordingly reversed. Decisions will be entered under Rule 50. Footnotes1. Sec. 162 Net Income [As amended by § 11, 161, 1942 Act]. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary * *.↩2. For later taxable years the phrase "income which is to be distributed currently" is made to include income distributed along with and as a part of corpus. Revenue Act of 1942, section 111 (b), Senate Report 1631, 77th Cong., 2nd Sess., p. 71. But that amendment is not made retroactive to cover the tax year 1940, see section 111 (e), and, consequently, is not applicable here.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619188/	Estate of Lillian Goldstone, Deceased, Sidney Goldstone, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Goldstone v. CommissionerDocket Nos. 8310-78, 8460-78 1United States Tax Court78 T.C. 1143; 1982 U.S. Tax Ct. LEXIS 73; 78 T.C. No. 80; June 28, 1982, Filed 73 Decision will be entered under Rule 155 in docket No. 8310-78.Decision will be entered for the petitioner in docket No. 8460-78. Decedent died in an airplane accident with her husband and three children. There was no sufficient evidence that the deaths were other than simultaneous. Under applicable State law, decedent was presumed to survive her husband. Decedent's husband created an insurance trust that was divided at his death into two separate funds -- trust "A" and trust "B." Decedent owned two insurance policies on her husband's life; one-half of each policy was payable to trust A and one-half of each policy was payable to trust B. Only the transfer to trust B is in issue herein. Held, decedent made a gift of the one-half of the proceeds of each policy payable to trust B at the instant of her husband's death. Goodman v. Commissioner, 156 F.2d 218">156 F.2d 218 (2d Cir. 1946), affg. 4 T.C. 191">4 T.C. 191 (1944). Estate of Chown v. Commissioner, 51 T.C. 140">51 T.C. 140 (1968), revd. 428 F.2d 1395">428 F.2d 1395 (9th Cir. 1970), and Estate of Wien v. Commissioner, 51 T.C. 287">51 T.C. 287 (1968), revd. 441 F.2d 32">441 F.2d 32 (5th Cir. 1971), will no longer be followed. Held, further, the "life" estate decedent retained in trust B when she and 74 her husband died together, having a zero value, is too ephemeral to invoke the provisions of sec. 2036, I.R.C. 1954. See Estate of Lion v. Commissioner, 52 T.C. 601">52 T.C. 601 (1969), affd. 438 F.2d 56">438 F.2d 56 (4th Cir. 1971). Joel Yonover and Stuart J. Friedman, for the petitioner.Tommy F. Thompson, for the respondent. Wilbur, Judge. WILBUR1144 OPINIONRespondent determined a deficiency in petitioner's Federal gift tax for the calendar quarter ended March 31, 1974, in the amount of $ 9,599.72. Respondent further determined a deficiency in petitioner's Federal estate tax in the amount of $ 48,087.52. By way of amended answer, respondent claimed an increase of $ 8,493.46 in the proposed Federal estate tax deficiency, making the overall estate tax deficiency $ 56,580.98.The following issues are presented here for our decision.(1) Whether Lillian Goldstone, who was killed with her husband in an airplane accident, made a taxable gift of one-half of the proceeds of two life insurance policies she owned on the life of her husband, since she is presumed to survive him under the Uniform Simultaneous Death Act.(2) Whether one-half of the proceeds of the two policies, made payable to a trust in which Lillian 75 Goldstone retained a life estate for the theoretical instant of her survival, are also includable in her gross estate pursuant to section 2036. 21145 These cases have been submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and the attached exhibits are incorporated herein by this reference. A brief review of the salient facts is set forth below.Lillian Goldstone (Lillian), her husband Arthur Goldstone (Arthur), and their three minor children, Debra, Mark, and Gerald, all died in the crash of a private airplane on March 24, 1974. Given the circumstances, there was not sufficient evidence to establish that Lillian and Arthur died other than simultaneously. 76 The parties have therefore stipulated that pursuant to applicable State law, Lillian is presumed to have survived her husband. 3 Sidney Goldstone, a resident of Munster, Ind., was appointed executor of Lillian's estate.On May 21, 1965, Arthur established an insurance trust captioned Life Insurance Trust for Arthur Goldstone, Trust Number P-3900 (hereinafter referred to as the insurance trust). After Arthur's death, the trustee was directed to divide the trust property (including any property devised by Arthur to the trustee and any proceeds of insurance on Arthur's life received by the trustee), into two separate funds. Each fund was to be held in a separate trust, denominated respectively trust "A" and trust "B."Trust A, described in article IV of the agreement, was designed to serve as a classic marital deduction trust. It was to consist of a proportionate share of the total trust property as determined pursuant to a modified fractional share formula. 477 Concerning the distribution of trust A, the trustee was instructed to pay all of the net income to Lillian during her 1146 lifetime, provided she survived Arthur, commencing with the date of Arthur's death. 5 Lillian was given an unlimited power to invade the principal at any time and for any reason. Lillian was additionally given a special power to appoint up to $ 3,000 per year to each of Arthur's children or lineal descendants. Finally, Lillian was given a general power exercisable by will by Lillian alone and in all events, to appoint the remaining income and principal to whomever she so desired. Upon failure to exercise this power (or upon disclaimer of any portion of trust A), the residue was to pour over into trust B.Trust 78 B, described in article V, consists of all of the remaining trust property not allocated under the formula to trust A, as well as any interest in trust A which Lillian failed to appoint at her death or which she disclaimed. Generally, all of the net income of trust B was to be paid to Lillian, except that the trustee, in its discretion, could withhold from her so much of the income as the trustee determined not to be required for her reasonable support, maintenance, and welfare, considering all of Lillian's known income from all other sources. The trustee was authorized, at its discretion, to pay to one or more of Arthur's children so much of any withheld current income as the trustees determined to be desirable for their reasonable use, support, maintenance, and welfare, or for any other purpose believed to be in the child's or children's best interest. Any undistributed income was to be added to principal at the trustee's discretion.After all of the principal of trust A was exhausted, Lillian was to have the right (noncumulative) to demand from trust B, up to $ 5,000 or 5 percent of the principal annually, whichever was larger. Lillian's right to income and principal from Trust 79 B continued only as long as she remained Arthur's unmarried widow. In the event of her remarriage, her rights were to cease, and all affected interests were to be treated as if she had died.Article VI gave the trustee the power to invade principal under certain circumstances. If, in the opinion of the trustee, the income payable to Lillian from all sources (including her 1147 power to invade the principal) was not sufficient for her reasonable health, maintenance, welfare, and support, or in the event of her physical or mental disability, the trustee was empowered, in its discretion, to apply as much of the principal of either trust A or trust B as the trustee determined to be necessary for those purposes. The trustee was required to exhaust the principal of trust A before invading trust B.A similar provision allowed the trustee to invade the principal of trust B, at the trustee's discretion, for the benefit of Arthur's children, when the child's or children's overall income, in the trustee's opinion, was insufficient for the reasonable support of the child (and the child's family). The trustee was additionally authorized to invade the corpus of trust A before liquidating trust B for 80 the benefit of the children to the extent that Lillian was required to provide and furnish funds for these purposes, unless to do so would deny the maximum marital deduction. 6Lillian made her last will and testament on March 14, 1966. She devised her residuary estate, specifically excluding any property over which she might possess a power of appointment, to Arthur in the event he survived her, and if he did not, it was to pass to the Gary National Bank as trustee under the aforementioned life insurance trust agreement to be commingled with the property of that trust and held, managed, or distributed in accordance with the provisions of that agreement.Article X of the will concerned survivorship. It provided:If my husband and I shall die simultaneously, or under circumstances which make it difficult to determine which of us died first, or if the order of our deaths cannot be established by proof, I direct 81 that I shall be deemed to have survived for the purposes of this Will and I direct further that the provisions of this Will shall be construed upon that assumption, irrespective of any provisions of law establishing a contrary presumption or requiring survivorship for a fixed period as a condition for taking property by inheritance.At the time of her death, Lillian owned two life insurance policies on the life of her husband. Pursuant to these ownership 1148 rights, she had the right to change the beneficiary, until Arthur's death when the proceeds of these policies became "irrevocably payable" pursuant to her designation of the beneficiary. 7 Upon Arthur's death, one-half of the proceeds of each of the policies was payable to trust A and one-half of the proceeds of each of the policies was payable to trust B. Although 82 a total of $ 101,784.44 was payable to each trust, the dispute before us relates only to the proceeds payable to trust B. In this connection, respondent sent petitioner two deficiency notices. The first asserts a gift tax deficiency on the theory that since Mrs. Goldstone is presumed to survive her husband, she made a taxable gift of the policy proceeds to trust B when her husband predeceased her by a theoretical instant. The second includes the proceeds in Mrs. Goldstone's estate under section 2036, since the inter vivos gift was to a trust in which Mrs. Goldstone retained a life estate for the theoretical instant of her survival. 8We confront still another dispute involving the appropriate transfer tax consequences attending the tragic death of a married couple under circumstances making it impossible to establish the priority of death. The Uniform Simultaneous Death Act, adopted in 46 states and the District of Columbia, provides presumptions as to the priority of death applicable in these circumstances. Where the devolution of property depends on the priority of death, 83 the act provides that the property of each person shall be disposed of as if he or she had survived. However, under a provision made specifically applicable to the payment of insurance proceeds, an insured is presumed to survive the beneficiary. 984 1149 In Estate of Chown v. Commissioner, 51 T.C. 140">51 T.C. 140 (1968), revd. 428 F.2d 1395">428 F.2d 1395 (9th Cir. 1970) (followed in Estate of Wien v. Commissioner, 51 T.C. 287 (1966), revd. 441 F.2d 32">441 F.2d 32 (5th Cir. 1971), and Estate of Meltzer v. Commissioner, T.C. Memo 1970-62">T.C. Memo. 1970-62, revd. 439 F.2d 798">439 F.2d 798 (4th Cir. 1971)), a married couple perished in a plane crash under circumstances making it impossible to establish the priority of death. Harriet Chown owned and was the primary beneficiary of an insurance policy on her husband's life. In sustaining respondent's determination that the proceeds of the policy were includable in her estate, we analyzed both of these presumptions included in the Uniform Simultaneous Death Act.As to the presumption that the insured survives the beneficiary, we stated (51 T.C. at 142):The Oregon Revised Statutes similarly provide by section 112.040 that where the insured and the beneficiary in a policy of life insurance die simultaneously, the proceeds shall be distributed as if the insured had survived the beneficiary. 85 We hold, by virtue of this provision of Oregon law, Harriet's status as beneficiary will not support the inclusion of these proceeds in Harriet's gross estate under section 2033.Concerning the presumption involving devolution of a decedent's property, we stated (51 T.C. at 142):The Oregon Revised Statutes, sec. 112.010, provide that in the event of the simultaneous death of persons, where the devolution of property depends upon priority of death, the property of each person shall be disposed of as if he had survived. We think that Harriet's interest in the policy is "property" to the devolution of which this statute applies. 10Recognizing that Mrs. Chown owned the policy at her death, we focused on the proceeds of the policy "insofar as they may provide a measure of value of Harriet's interest in the policy at the time of her death which occurred simultaneously with the 1150 death of her husband, the insured." 51 T.C. at 142. We gave the following reasons 86 for holding that at the time Harriet died, the policy must be treated as fully matured:The question is simply one of valuing Harriet's property interest in the policy for Federal estate tax purposes. As to this question, no presumption of survivorship under the Oregon statutes has any relevance. We have found as a fact in this case that Harriet and Roger died simultaneously. Section 2033 causes inclusion in Harriet's estate of the value of her interest in this policy at the time of her death. At the exact instant Roger died, the value of the policy ripened into an amount equal to the proceeds that were payable under its terms. Here, this was also the time of Harriet's death. There was no other time at which any other meaningful value could be determined for the purposes of our case. [51 T.C. 142">51 T.C. 142, 143; emphasis in original and added.]Our holding that "no presumption of survivorship under the Oregon statutes has any relevance" was fortified by our reliance on Goodman v. Commissioner, 156 F.2d 218">156 F.2d 218 (2d Cir. 1946), affg. 4 T.C. 191">4 T.C. 191 (1944). In Goodman, the proceeds of a policy owned by a surviving wife on the life of her husband became irrevocably payable to a trust at the husband's 87 death. The Second Circuit agreed with us that the wife made a gift at the instant of her husband's death equal to the policy proceeds plus post mortem dividends.In the case before us, the wife was not a beneficiary of the policy, and the parties have accordingly stipulated that under applicable State law, she is presumed to have survived her husband. If we follow our decision in Estate of Chown, "no presumption of survivorship under the [Indiana] statutes has any relevance," and the policies in issue matured at the time of Lillian's death, which was also the time of Arthur's death. There would be "no other time at which a meaningful value could be determined," and "the policy would be treated as fully matured." Estate of Chown v. Commissioner, supra at 142, 143. However, four Circuit Courts of Appeals have now held that a mechanical application of the applicable presumptions is dispositive of the Federal transfer taxes arising in cases of simultaneous death. These cases hold that since an insured is presumed to survive an owner-beneficiary, at the death of the latter, he or she owns only an interest in an unmatured insurance policy, includable in the owner's estate at its interpolated 88 terminal reserve value under section 20.2031-8(a)(2), 1151 Estate Tax Regs. Estate of Chown v. Commissioner, supra; Old Kent Bank & Trust Co. v. United States, 430 F.2d 392">430 F.2d 392 (6th Cir. 1970), revg. 292 F. Supp. 48">292 F. Supp. 48 (W.D. Mich. 1968); Estate of Wien v. Commissioner, supra; Estate of Melzer v. Commissioner, 439 F.2d 798">439 F.2d 798 (4th Cir. 1971), revg. a Memorandum Opinion of this Court. Respondent has now acquiesced in these decisions, and indeed extended their rationale. See Rev. Rul. 77-181, 1 C.B. 272">1977-1 C.B. 272.If extended analysis would yield a perfect answer, we would long ago have discovered it. There are theoretical problems with any of the myriad solutions that logic provides. The tragic circumstances of simultaneous death call not for more metaphysics, but for a clear answer. Certainly, there are no planning possibilities in any rule that is adopted. We therefore overrule our prior decisions in Chown and Wien, and in the future will follow the mechanical rule embraced by the Courts of Appeals decisions cited above.A mechanical application of the presumptions in this case results in the application of a gift tax on the policy proceeds. The parties have stipulated that, under applicable 89 State law, Mrs. Goldstone survived her husband. Viewed in this light, the case is governed by Goodman v. Commissioner, supra, and Mrs. Goldstone made an inter vivos gift of the matured policy at her husband's death -- a gift equal to the face value of the policy plus post mortem dividends. 1190 Respondent has characterized the transaction in this manner and it will be sufficient to stop here for cases arising after 1976 when a unified transfer tax system was enacted. For under the unified transfer tax there will be one transfer tax imposed at the unified rates, whether the transfer is viewed as occurring inter vivos or at death.We deal here with what is undoubtedly the last case of this kind under the pre-1976 law, and a gift tax on the proceeds 1152 does not satisfy respondent who, in his anxiety to also collect an estate tax, has carried the mechanical argument to its logical extreme and a little beyond. Respondent argues that Mrs. Goldstone possessed, during the theoretical instant of her survival, the right to the income from the trust for "life." Having made an "inter vivos" transfer with a retained "life estate," the policy proceeds transferred are includable in her estate under section 2036. 1291 The parties have diametrically opposed views concerning the nature of any "life estate," and convenience and symmetry suggest that we pause to focus on these differences. Petitioner argues that, if the retained life estate is of significance herein, its value must be deducted from the property transferred in computing the gift tax. (See sec. 25.2512-9(a)(1), Gift Tax Regs., providing that "the value of the gift is the value of the property transferred less the value of the donor's retained interest.") Respondent agrees in principle, but with uncharacteristic realism argues that since Mrs. Goldstone survived for only a "theoretical instant," the valuation of her life estate "does not lend itself to a mere mechanical application of actuarial factors." See Rev. Rul. 77-48, 1 C.B. 292">1977-1 C.B. 292, 294. For this, respondent relies on still another simultaneous death case, Estate of Lion v. Commissioner, 438 F.2d 56">438 F.2d 56 (4th Cir. 1971), 92 affg. 52 T.C. 601">52 T.C. 601 (1969), which denied a credit under section 2013 to the wife's estate for taxes on a prior transfer of property (a life estate) by the husband who was presumed to die first. The court held that any life interest received by the transferee terminated moments after it vested, if it did vest, and was properly determined to be zero. The case clearly holds that any life estate that may have vested a theoretical split second before the death of the "surviving" wife was valueless. 1153 We therefore agree with respondent that any retained life estate is properly described by a zero and should not be deducted from the gift Mrs. Goldstone made.Unfortunately, respondent's summer romance with realism fades with the fall foliage. For as we noted above, he contends that this zero life estate, of no consequence for the gift tax, is sufficient to require inclusion of the entire proceeds in Mrs. Goldstone's estate under section 2036.We disagree. Respondent observes in his published position on this issue, that Mrs. Goldstone is "presumed" to survive her husband by a "theoretical" instant (see Rev. Rul. 77-48, 1 C.B. 292">1977-1 C.B. 292, 293), an infinitesimal fraction of a millisecond, immeasurable 93 even with the assistance of an atomic clock. But it is not the infinitely abbreviated length of the interval that is important -- but its "theoretical" nature. For the presumptions before us are legal constructs, designed to pass each decedent's property in accordance with his or her presumed wishes. Whether it is a will or an insurance policy, a spouse is made the primary beneficiary on the assumption that he or she will be the surviving spouse. When both spouses unexpectedly die at the same instant, the presumptions simply operate as a rule of substantive law to pass the property to secondary beneficiaries. In re Estate of Moran, 77 Ill. 2d 147">77 Ill. 2d 147, 395 N.E.2d 579">395 N.E.2d 579 (1979).Under the mechanical application of this presumption followed by the Courts of Appeals and adopted by this Court today, the presumptions answer the question who takes what and when in the event of simultaneous death. The act is concerned with simultaneous death and the survivors of the decedents; it is wholly foreign to the purpose and structure of the act to assume one of the decedents takes a "life" estate at death. The notion that when two people simultaneously die, one takes a life estate at death from the 94 other extends logic far beyond the substance of what has transpired. Certainly, what has transpired is not even remotely connected with the evil Congress contemplated when it dealt with the generic problem of transfers taking effect at death, or with the specific aspect of that problem addressed in section 2036 (transfers with a retained life estate). The case before us is sui generis, but nevertheless, we believe the result and rationale of Estate of 1154 , support the conclusion we have reached. 13Decision will be entered under Rule 155 in docket No. 8310-78.Decision will be entered for the petitioner in 95 docket No. 8460-78. Footnotes1. These cases were consolidated for purposes of trial, briefing, and opinion.↩2. All references are to the Internal Revenue Code of 1954 as amended. In an amended answer, respondent also claimed an increased deficiency due to a computational error. Petitioner concedes the evidentiary facts underlying the computational error, and does not really contest the matter on the merits in its briefs. Indeed, it would be difficult to imagine what petitioner might have said had it addressed the matter. Accordingly, we decide this issue for respondent.↩3. The applicable statutes are set out at note 9 infra↩.4. The "formula" consists of a fraction which, when applied against the total trust property, is designed to yield the amount to be allocated to the marital trust. The primary purposes of such formulae are to maximize the available marital deduction by taking into account property passing to the surviving spouse outside the will, as well as to minimize the effect of changes in valuation during the administration of the estate.5. The agreement specifically provides that in determining whether Arthur's wife survived him, if the order of their deaths cannot be established by proof, his wife shall be deemed to have been the survivor.↩6. Additionally, the trust instrument included a series of provisions, not here relevant, specifying the interests taken by various successive beneficiaries and indicating the circumstances (including the simultaneous death of prior beneficiaries) giving rise to these interests.↩7. The parties quarrel in one instance about whether the awkward term "irrevocably payable" is the correct phrase, but it is clear from the assumptions they have made, their requested findings of fact, and the legal arguments they did and did not make, that Arthur's death was the event terminating Lillian's ability to provide for an alternative disposition of the proceeds.↩8. Respondent also asserted that the gift was in contemplation of death, but no longer pursues that argument.↩9. Lillian Goldstone was domiciled in Indiana at her death. Indiana has adopted the Uniform Simultaneous Death Act. The applicable presumptions under Indiana law read:"29-2-14-1 [6-251]. Simultaneous death -- Survivorship -- Evidence -- Descent of Property. -- Where the title to property or the devolution thereof depends upon priority of death and there is no sufficient evidence that the persons have died otherwise than simultaneously, the property of each person shall be disposed of as if he had survived, except as provided otherwise in this act. [29-2-14-1 -- 29-2-14-8]. [Acts 1941, ch. 49, § 1, p. 132.]" [Ind. Code Ann. sec. 29-2-14-1 (Burns 1975).]"29-2-14-4 [6-254]. Insurance policies -- Simultaneous death of insured and beneficiary -- Distribution of proceeds. -- Where the insured and the beneficiary in a policy of life or accident insurance have died and there is no sufficient evidence that they have died otherwise than simultaneously the proceeds of the policy shall be distributed as if the insured had survived the beneficiary. [Acts 1941, ch. 49, § 4, p. 132.]" [Ind. Code Ann. sec. 29-2-14-4↩ (Burns 1975).]10. For this reason, we rejected respondent's alternative argument that Roger Chown inherited ownership of the policy from Harriet, requiring inclusion of the proceeds in his estate under sec. 2042, when he died a theoretical moment later.↩11. Admittedly, this produces inconsistent results. When, as here, the decedent is not a beneficiary of the policy, she is presumed to survive and has made a gift to the trust of the face value of the policies. If she were a primary beneficiary, and the trust the secondary beneficiary, she would be presumed to predecease the insured, and an estate tax would then be due on the interpolated terminal reserve. This disparity is odd, for in both cases the property goes to the same beneficiary. But as Emerson advised us, a foolish consistency is the hobgoblin of little minds. And, in any event, without legislation, consistency is hardly obtainable here and must yield to the need for certainty.12. SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.(a) General Rule. -- The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death -- (1) the possession or enjoyment of, or the right to the income from, the property, or(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.↩13. Respondent argues that if an instantaneous life estate is ignored for the purposes of sec. 2036, then the life insurance proceeds passed from Lillian Goldstone at the instant of her death, and they are therefore includable in her gross estate under sec. 2033. But this is simply a restatement of our ruling in Estate of Chown v. Commissioner, 428 F.2d 1395 (9th Cir. 1970), revg. 51 T.C. 140">51 T.C. 140↩ (1968), now rejected in four circuits (with respondent's acquiescence) and abandoned by this Court in this opinion. Accordingly, sec. 2033 does not help respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619189/	NEW YORK ZINC COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.New York Zinc Co. v. CommissionerDocket No. 36189.United States Board of Tax Appeals27 B.T.A. 9; 1932 BTA LEXIS 1143; November 4, 1932, Promulgated 1143 The petitioner's predecessor's ore reserve and its value on March 1, 1913, determined as the basis for depletion in 1924, 1925 and 1926. Hugh Satterlee, Esq., and Albert S. Lisenby, Esq., for the petitioner. Elden McFarland, Esq., and James K. Polk, Esq., for the respondent. STERNHAGEN 9 OPINION. STERNHAGEN: Respondent determined deficiencies of $5,203.21 and $4,808.37 in petitioner's income taxes for 1925 and 1926, respectively, and a statutory net loss of $6,216.74 for 1924. He allowed petitioner a deduction of $28,957.59 for depletion on zinc ore mined in 1924; in 1925 and 1926 he allowed no such deduction, on the ground that petitioner's 250,000 ton ore reserve of March 1, 1913, had been exhausted and the entire amount of $310,000 representing this item of depletable capital had been recovered. Petitioner assails these deductions as inadequate, claiming that on March 1, 1913, its ore reserves were 10 greatly in excess of the 250,000 tons determined, and the value thereof greater than $310,000. Petitioner, a New York corporation, was dissolved in 1930, and the present proceeding is brought by its directors as trustees1144 in dissolution. In December, 1923, it acquired all the property and assumed all the obligations of the Northern Ore Company in a nontaxable exchange of its own shares therefor. Revenue Act of 1926, sec. 204(a). Thereafter and during 1924, 1925 and 1926, Theron I. Crane, who owned all of the Northern Ore Company's shares at the time of the exchange, was petitioner's sole shareholder. Among the properties passing to petitioner by the exchange of 1923 were the Edwards and Balmat mineral properties, located 12 miles apart in St. Lawrence County, New York. The Balmat mine was undeveloped in 1913 and is not here of interest. The Edwards property comprised three tracts, known as the Brown, White and Brodie properties, containing zinc ore, or sphalerite and pyrites. The Ore Company owned the White tract in fee; it held the Brown tract under a lease running for 40 years from 1903, inclusive of an optional renewal period, and providing for a royalty payment not in excess of 50 cents per ton of concentrate. The Brodie property so acquired by petitioner in 1923 was a large tract, only one part of which had in 1913 been held by the Ore Company under a leasehold term beginning in 1906. 1145 This lease ran for 20 years from January 1, 1906, and provided for a royalty of 25 cents per ton of ore extracted, a higher royalty for talc and precious metals, and a minimum annual royalty of $150. This lease was canceled on July 2, 1915, and a new lease covering the same and additional properties of the Brodie tract was made for a period of 20 years and 7 months from June 1, 1915, at an increased minimum annual royalty of $800. The entire Brodie tract, including that covered by the earlier lease as well as that covered by the later lease, was acquired by the Ore Company in fee on March 3, 1920. After the settlement, in 1911, of protracted litigation, the Ore Company began development, and by March 1, 1913, had contracted for the sale of zinc ore and concentrates to the Grasselli Chemical Company and had a mill under construction. At that date three veins of ore on the Brown and White tracts had been worked - Brown No. 1 and No. 2, 350 and 100 feet, respectively; the White vein, 150 feet - and drifting had been done at various levels to these depths. The developed portions of the Brown veins showed 4 to 6 feet of thickness and 150 to 300 feet of width. No. 1 extended 3501146 feet along the slope; No. 2, 100 feet. The White vein was twice as thick and 11 about 200 feet wide; it extended 150 feet along the slope. The Brown and White veins' incline indicated that they would pass at 1,000 and 2,000 feet, respectively, under that portion of the Brodie property not covered by the original lease. On March 1, 1913, 10,000 tons of ore had been extracted for treatment. The mill, shortly after its completion but before operations had fairly begun, burned in 1914. It was immediately reconstructed and operations were begun in March, 1915. The ore contained 17 per cent zinc, about 75 per cent of which was recoverable, and would yield 1 ton of concentrate to 3,834 tons of crude ore. A ton of concentrate yielded 50 per cent zinc, and cost $17.38 to mine, mill and ship. Pyrites yielded 50 cents per ton of crude ore. The market price of zinc in 1913 was 5.7 cents per pound. The price per ton of concentrate under the Grasselli contract was $33.40. The operating profit per ton of crude ore which mathematically resulted from these agreed figures was $4.68. In 1916 William S. Pilling, owner of one-half the outstanding shares of the Ore Company, sold1147 them for $300,000 after the declaration of a cash dividend of $120,000 by the company. In 1923 these shares were repurchased by the Ore Company for $294,000. For the years 1915 to 1917, the Ore Company reported to the Bureau of Internal Revenue its ore reserve of March 1, 1913, as 250,000 tons of the value of $1,000,000. In 1920 it claimed a recomputation of depletion on the ground that the reserves would be exhausted in 1920. In 1920 it reported the 1913 reserve at 250,000 tons and the value thereof at $605,000. New ore was developed between 1920 and 1922 on which the Ore Company claimed discovery value. On one vein the claim was allowed. From 1913 to 1926 the tonnage mined and shipped from the Edwards property was: Tons1913None1914None1915 (March 1 to Sept. 30)9,1131915-1916 (Oct. 1, 1915, to Dec. 31, 1916)47,039191748,871191840,540191951,411192048,564192125,006192245,512192363,659192433,184192546,9651926 (to June 26)20,683Total480,547In 1926 the Edwards mine, mill and plant were sold for $1,427,081.68; in 1928 the Balmat mine was sold for $250,000. In making the finding as to March 1, 1913, ore1148 content and value of the properties, there is no reason to attempt to set forth either the evidence in the record or an exposition of the considerations, both 12 ponderable and imponderable, leading to the conclusion that the respondent has recognized as large a value on March 1, 1913, to be used as a depletion base as the petitioner may properly claim. The facts of that period, as distinguished from the surmises, inferences, and opinions drawn from them, are substantially free from controversy. Upon them as premises, the several witnesses for both parties have reached widely divergent and irreconcilable conclusions as to the known and reasonably prospective ore content of the properties and its value. Their opinions as to value vary not only because of the variance in the estimate of content, but also in the method of evaluating the content estimated. There is no reason to disregard the opinions of any of these witnesses. All compel and have been given respectful and careful consideration. It is in the light of all of their views that the duty is upon the Board to consider the facts in evidence and find the ultimate fact of value; and thus we find no preponderance of*1149 the evidence to justify, let alone compel, the conclusion that the respondent's determination is erroneously based on an inadequate value of the Northern Ore Company's properties on March 1, 1913. The finding of fact therefore is that the known and probable ore reserve of the Northern Ore Company upon the properties here in question was on March 1, 1913, 250,000 tons, all of which was in the Brown and White tracts, and its fair market value on that date was $310,000. In accordance with this finding of fact, the determination of the respondent is sustained. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619190/	Estate of William Everett Thompson, Deceased, Robbie M. Thompson, Executrix, v. Commissioner.Estate of William Everett Thompson v. CommissionerDocket No. 13201.United States Tax Court1948 Tax Ct. Memo LEXIS 233; 7 T.C.M. (CCH) 142; T.C.M. (RIA) 48035; March 17, 1948J. M. Wells, Esq., 501 Masonic Temple, Greenville, S.C., for the petitioner. Newman A. Townsend, Jr., Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: The Commissioner determined a deficiency of $3,381.93 in the estate tax of William Everett Thompson, deceased, in part by including in gross estate the full value of a bank account carried in decedent's name and the full value of a furnished home held in the name of decedent and wife as an estate by the entirety. Petitioner contends that only one-half of the value of the bank account and home should be included in gross estate as his wife owned and paid adequate consideration for the other half. Findings of Fact Robbie M. Thompson, a234 resident of Greenville, S.C., is the widow of William Everett Thompson, deceased, and the executrix of his estate, petitioner herein. As executrix she filed an estate tax return on December 27, 1943, with the collector of internal revenue for the district of South Carolina. Thompson died, a resident of Fort Myers, Florida, on April 25, 1943. By will he devised and bequeathed all his property to his wife. At the time of his death there was a credit balance of $3,394.56 in a checking account carried in his name with the South Carolina National Bank, Greenville, S.C., and he and his wife were occupying a furnished residence at Fort Myers, recorded in their joint names, as husband and wife. The value of this property and its furnishings was $18,000. The decedent and Robbie M. Thompson were married at Greenville, S.C., on July 11, 1917. He was then employed by a retail grocer, and she was working as secretary for a stock brokerage firm; each earned $75 a month and neither had other property or income. Throughout their married life decedent maintained in his individual name a bank account with the South Carolina National Bank of Greenville in which he deposited his salary and against which235 he alone was authorized to draw checks. His wife retained from her salary money which she required for spending and every month turned over the larger part of it to him for deposit in the account. Household bills were paid by decedent's checks against the account, and over the years decedent used it in the purchase and sale of securities. An inheritance of about $500 received by the wife in 1927 was deposited in it. Decedent was employed by a manufacturing company in 1922 and in 1925 became assistant manager of the Coca Cola Bottling Works at Greenville, a position which he held until February 1942. His wife remained steadily employed by the brokerage firm until September 1, 1941. Each received occasional increases in salary. In 1919 decedent purchased for $1,600 a vacant lot in Greenville, and erected on it a home which he and his wife occupied from 1921 until they left Greenville in 1942. In acquiring and improving this property decedent used funds drawn from the account, and on November 20, 1922, conveyed title to it to his wife; she paid no consideration, but assumed liability for a $3,000 debt secured by a mortgage on the property. The debt was discharged with funds drawn from236 the account and the mortgage was released in 1926. Early in 1942 decedent accepted a position as assistant manager of a Coca Cola Bottling Works at Fort Myers, Florida. His wife sold the Greenville home and furnishings for $9,588.02, which she deposited in the account, and both moved to Fort Myers in April 1942. On April 15, 1943, they purchased a furnished home theref or $18,000 paid by a check of $2,000 dated February 9, 1943, and a check of $16,000 dated April, 15, 1943, both drawn by decedent against the Greenville bank account. The seller conveyed title to William E. Thompson and Robbie M. Thompson, husband and wife, "as tenants by the entireties." On April 15, 1943, decedent increased the credit balance of $1,203.10 in the Greenville bank account by a deposit of $4,000 transferred from his personal account with a Florida bank and by the proceeds of a loan of $14,500 for which he gave his individual notes for $5,000, $5,000 and $4,500 to the Greenville bank. He also borrowed $1,000 from the bank evidenced by his note dated March 24, 1943. His wife did not sign these notes. From the time of marriage until death decedent's earnings aggregated $88,017.80; from the time of marriage237 until she ceased work in 1941, his wife's earnings aggregated $37,135.15. Over the years decedent made numerous deposits in and withdrawals from the Greenville bank account, and made numerous loans from the bank. The credit balance of the account fluctuated greatly and on March 23, 1943, was only $25. When he and his wife moved to Fort Myers on February 21, 1942, the balance was $1,495.39. Between that date and April 15, 1943, deposits increased aggregate credits to $104,275.96 and aggregate withdrawals of $100,881.50 during the same period resulted in a credit balance of $3,394.46, which remained at the date of decedent's death. At that time decedent owned stocks in various corporations reported on the estate tax return at an aggregate value of $50,286.75, and life insurance policies, payable to his estate or to his wife, having a reported value of $52,262. His wife owned bank stock worth about $6,600. Decedent's wife furnished one-half of the consideration paid for the Fort Myers home. In determining estate tax, the Commissioner included in the value of decedent's gross estate the $3,394.46 credit balance in the Greenville bank account and $18,000 representing the value of his238 interest in the home at Fort Myers. Opinion Having included the full value of the bank account and of the Fort Myers residence in decedent's gross estate, respondent defends his determination by the argument that the bank account was always in decedent's name; that funds from it were used to pay for the residence, and while the wife contributed unspecified amounts over the years for deposit in the account, no total can be shown, and indeed no part of the accumulations can be deemed as used in the home purchase since the account's balance fluctuated greatly and on March 23, 1943, was only $25. By section 811, Internal Revenue Code, the value of gross estate shall be determined by including the value at death of all property except real estate situated outside the United States: (a) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death; * * * (e) Joint Interests. - To the extent of the interest therein held * * as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except239 such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money's worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: * . Decedent's wife testified vaguely that decedent and she agreed to "pool their assets;" to "live on one salary and save the other" when they were married, and they understood that the bank account was jointly owned. She testified further that while the account was in her husband's name, she had "signed a card" and could draw checks, but never did. We have made no finding that the account was joint, however, as the parties stipulated that "W. E. Thompson was the only person authorized to write checks," and consistent practice over240 the years affirmatively indicates that he exercised control as sole owner. And as we can not find that funds carried were in the spouses' joint names and payable to either, there is no occasion to consider for this purpose what part of the account belonged originally to the wife. Accordingly, we approve the Commissioner's inclusion of the full credit balance in decedent's gross estate. In a second assignment petitioner charges error in the determination that the full value of the Fort Myers home and furnishings ($18,000) was included in gross estate, alleging that "the claimed one-half interest" of the wife was acquired with an accumulation of her separate funds. As this property was held by the entirety, section 811 (e) excepts from decedent's gross estate any part which originally belonged to the wife or was acquired for consideration furnished by her. Respondent contends that no part was, stressing that the price of $18,000 was paid by decedent's checks against the bank account in which the wife had no legal interest; that the account had a meager balance before the purchase, and nearly all of the funds used to meet the checks were provided by loans from the bank evidenced by241 notes which only decedent signed. Respondent's argument is well supported by the actual mechanics of payment but not by the practical tests which have been sanctioned for the determination of similar issues. See Dimock v. Corwin, 306 U.S. 363">306 U.S. 363. While the evidence does not show the total or percentage of deposits made with the wife's earnings, we have no doubt that they were substantial and that the commingled funds were used by the husband in the acquisition of stocks and other property held in his name. The aggregate value of his security portfolio given on the estate tax return is over $50,000 while the only property in the wife's name is bank stock of a value of $6,600. Under such circumstances we should be reluctant to find that the wife had furnished no part of the consideration for property held in the spouses' joint names even if no amount could be computed with precision. Cf. Cohan v. Commissioner (C.C.A., 2nd Cir.), 39 Fed. (2d) 540; Benjamin Abraham, 9 T.C. 222">9 T.C. 222; Maurice P. O'Meara, 8 T.C. 622">8 T.C. 622. But in fact it is established that upon sale of the Greenville home the wife received and deposited in the account $9,588.02242 in 1942. Respondent suggests that as the husband first acquired the Greenville home with account funds and conveyed it to the wife in 1922, she paid no adequate and full consideration because she did not own the account. By this contention he places himself in the position of imputing to the husband ownership of the wife's deposits in the account because they were held in his name while denying that account funds used to buy property held in the wife's name were furnished by her. As the wife held separately only this home and the bank stock worth $6,600 while the husband held separately over $50,000 in securities alone, we feel justified in regarding the two items of property in her name as evidence of a minimum of her contributions to deposits. And while the husband's use of the account between the wife's deposit of the $9,588.02 in 1942 and the joint purchase of the Fort Myers home early in 1943 caused the credit balance to vary, we are not concerned with the tracing of specific dollars in deciding this issue but with ascertaining from the full picture of events disclosed by the evidence whether or not the wife furnished half the consideration for the Fort Myers home, as claimed. *243 We believe and have found that she did. The Greenville home was hers. While not perfectly proved, it is plausible and credible that its undisclosed cost was not more than her contributions to the account even if reduced by the $6,600 in bank stock. Pursuant to custom she deposited the sale proceeds of the Greenville home in the account, and less than a year later petitioner paid for the Fort Myers home by checks against the account. Her contribution covered half the cost of the new home, and we hold that the Commissioner erred in including the half, for which she supplied the funds, in the value of decedent's gross estate. Cf. Richardson v. Helvering (D.C. App.), 80 Fed. (2d) 548. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619191/	CHARLES C. HOOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hood v. CommissionerDocket No. 27466.United States Board of Tax Appeals19 B.T.A. 962; 1930 BTA LEXIS 2289; May 15, 1930, Promulgated 2289 The proper method of reporting income and losses by a member of a partnership determined. Walter A. M. Cooper, C.P.A., for the petitioner. J. L. Backstrom, Esq., and P. A. Sebastian, Esq., for the respondent. MURDOCK 962 The Commissioner determined deficiencies in the petitioner's income taxes for the calendar years 1922 and 1924 in the amounts of $2,806.18 and $7,222.26, respectively. The petitioner has waived all allegations of error except one, that the Commissioner erred in including in income for 1924, $47,899.17, the amount of a debit balance canceled by a partnership upon the petitioner's retirement from the firm. On May 15, 1929, the respondent tendered an amended answer and moved the Board for permission to file the same. On May 23, 1929, this motion was granted. By this amended answer the respondent averred "that the net income as shown by the deficiency letter for 1922 should be increased by $3,108.03, as no deductible loss was sustained by the petitioner during the year 1921 from a regular trade or business in accordance with section 204 of the Revenue Act of 1921," and also "that the net income shown in the deficiency2290 letter for 1924 should be increased by $3,297.09 as the deductible loss sustained by the petitioner in accordance with section 206 of the Revenue Act of 1924 was $148.73." 963 FINDINGS OF FACT. The petitioner is a resident of Ridgewood, N.J. In 1919 he formed a partnership with a man named Bolles and a man named Jelke to conduct a brokerage business in New York City. The petitioner and Bolles had had considerable experience as brokers, dealing in stocks and bonds. Jelke had had no such experience. The petitioner and Bolles desired to engaged in the brokerage business, but they had no capital. Jelke had considerable capital and he furnished all of the original capital of the firm. This firm was not successful, and in 1921 Bolles retired from the business and the partnership was dissolved. At this time a debit balance in Bolles' account was transferred one-half to the account of the petitioner and one-half to the account of Jelke. On October 1, 1921, a new partnership known as Jelke, Hood & Co., was formed by Jelke, A. M. Main, and the petitioner. This firm continued the brokerage business of its predecessor in New York City. By the terms of this partnership2291 agreement Jelke again contributed the necessary capital. He contributed $50,000 in cash and his seat on the New York Stock Exchange, and agreed to provide the firm with the use of additional capital when needed. The Petitioner and Main had no capital to contribute. They agreed to leave one-half of their share of the profits in the firm until their capital contributions amounted to $25,000 and $10,000 respectively. Interest was to be credited on capital contributions of the partners. Jelke was given the sole and absolute right to direct and control the conduct of the business, but was only required to devote such time and attention to the business as in his judgment might be necessary. Main and the petitioner were required to devote their entire time and attention to the business. The agreement also provided that there should be paid and charged to the general expense of the partnership, a sum not in excess of $4,000 which Jelke might use for expenses in aiding the business of the partnership, $12,000 per annum to the petitioner as compensation for his personal services, and $6,000 per annum to Main as compensation for his personal services. Paragraph 7 of the agreement provided2292 as follows: All gains, profits and increase that shall come, grow, or arise from or by means of the said business shall be divided between the parties hereto on the following basis, to wit: Fifty-six per cent (56%) to the party of the first part; Thirty-nine per cent (39%) to the party of the second part; Five per cent (5%) to the party of the third part and all losses happening in the course of said business shall be borne in the same proportions, unless the same shall occur through the wilful neglect or default (and not the mistake or error) of any of the said parties, in which event the loss so incurred shall be made good by the party through whose neglect or default such losses shall arise. 964 Upon dissolution, the assets and property of the partnership remaining after discharge of the liabilities of the partnership and the expenses of liquidating the same were to be applied in payment to each of the parties of (a) any unpaid interest on contributions to capital of the firm; (b) any unpaid installment of drawing account; (c) his share of undistributed profits; and (d) the amount of capital contributed by him to the business of the partnership, and the surplus, 2293 if any, was to be divided between the parties on the same percentage basis as that on which they divided the profits. Under certain circumstances if there was an impairment of capital, Jelke had the right to terminate the partnership on notice. The agreement contained no specific provision in regard to the liability of the petitioner for any debit balance in his account resulting from firm losses which might exist at the time he should withdraw from the firm. It was understood, however, between the petitioner and Jelke that the petitioner was not to be liable for any debit balance in his account in case he withdrew from the firm. The petitioner withdrew from the partnership on January 31, 1924. In the meantime one or two other men had been taken into the firm and one at least had withdrawn from the firm. The percentages of profit sharing were changed at each of these times. An audit of the books of the firm disclosed that there was a debit balance due from the petitioner to the firm as of January 21, 1924, in the amount of $47,899.17. This amount was transferred to the account of Jelke, who never expected or requested the petitioner to pay the amount. The petitioner was2294 not financially able to pay the amount at that time. When the petitioner retired from the firm, he and the other partners exchanged general releases in regard to claims or liabilities resulting from the partnership of which he formerly was a member. They also entered into an agreement whereby the other partners, who were to continue the business, agreed to hold the petitioner harmless from any and all liability in connection with the partnership business, and in which he assigned to the others all of his right, title and interest in and to the partnership business. The Commissioner added the amount of $47,899.17 to the income reported by the petitioner for 1924, and, after making other additions not at issue, thus determined net income for that year to be $55,053.03. The total tax on this amount was determined to be $7,222.26, the amount of the deficiency, no tax having been assessed or paid. In the statement accompanying the deficiency notice, the petitioner was advised as follows: Your corrected net income of $7,130.43 for 1921 * * reflecting proposed deficiencies of $190.63 for 1921 included the disallowance of $10,848 deducted as bad debts. This amount represented the2295 one-half debit charge on the partnership's books against your retired partner, Mr. Boles, which amount you assumed individually in connection with a like individual charge to your 965 partner, Mr. Frazier Jelke. The disallowance of $10,838 was later allowed * * * reflecting no tax due for 1921. Assuming that $13,956.03 (which amount included the individual debit charge of $10,848) was correctly reported as net loss from business in 1921 on your 1922 return, and which latter amount was disallowed in revenue agent's report of April 27, 1926, the difference or $3,108.03 has been allowed as a net loss for 1921, and this amount deducted from the 1922 revised net income of $31,401.60 as shown by the supplemental report of January 13, 1927, making a corrected net income of $28,293.57. During the existence of the partnership, the petitioner received $1,000 per month from the firm, and his percentage of the profits or losses of the firm were credited or debited to his account. Except for the $1,000 withdrawn each month and for one-half of his share of any profits which were credited to his account, the petitioner never withdrew any funds from the partnership. The petitioner2296 always took his share of the partnership losses as a deduction on his income-tax return. A considerable portion of the debit balance in the petitioner's account on January 31, 1924, resulted from the fact that one-half of the losses previously charged to the account of each retiring partner was, after the retirement of each partner, charged to the petitioner's account. When such charges were made in the petitioner's account, he deducted the amount of the losses on his income-tax return. The partnership at times wrote down its securities below cost and the results of such write-downs were reflected by debits in the petitioner's account on the books of the firm. In determining the deficiency for 1924, the Commissioner allowed a deduction of $3,331.35 as a net loss for 1923. If the Commissioner had not deducted, in computing the net loss for 1923, a certain amount representing the petitioner's share of the loss of Jelke, Hood & Co., the petitioner would not have had a net loss for 1923. In determining the deficiency for 1924, the Commissioner allowed the petitioner the benefit of $558.70 representing his share of the loss of Jelke, Hood & Co. for January, 1924, and he also adjusted2297 the petitioner's net income by a deduction of $538.94, which he explained as "to adjustment per partnership report." OPINION. MURDOCK: As long as the petitioner continued with the firm, of course, the debits in his account had an effect upon his share of any profits the firm might have, since, under the agreement, these debits would have to be offset by credits before he would have any capital, and the capital would have to amount to $25,000 before he could withdraw his full share of the profits. But the petitioner testified that in all of their partnerships he and Jelke had an agreement that in case the business was not successful, and the petitioner's account showed a net debit, the ultimate loss would fall 966 upon Jelke, and the petitioner would never be called upon to make good the debit in case he left the firm. Other evidence in the case tends to support the petitioner's testimony that he was never to make good the part of the firm's losses charged to his account. For example, when he began his relations with Jelke, the petitioner had no capital, whereas Jelke appears to have been a man of considerable wealth; the petitioner never contributed any capital to the2298 firm except such as was credited to his capital account when the firm had some profits; and he never had funds from which he could have paid the debit balance standing in his account. When other partners retired, they did not pay the debit balance in their accounts. The petitioner, in reporting his income, and the Commissioner in adjusting that income, have failed to give effect to such an agreement. Probably the latter did not know of its existence. But the evidence here shows that it did exist, and we can not disregard it. The petitioner's income has been improperly reported and adjusted. He was not entitled to deduct any part of the losses of the firm, since he would never have to pay any part of those losses, and he should have reported only one-half of the profits of the firm until such time as his account no longer showed a net debit. The Commissioner erred in including $47,899.17 in the petitioner's income for 1924. The year 1921 is not before us, but the petitioner has been given the benefit of a deduction for 1922 representing a net loss in 1921, when, if his income for 1921 had been properly computed, he would not have had a net loss for 1921. Thus, the Commissioner*2299 erred in allowing him credit for any net loss for 1921 in connection with his 1922 income tax. The year 1923 is not before us, but the petitioner would have had taxable income in 1923 instead of a net loss if his income for that year had been properly computed, and the Commissioner erred in allowing the deduction of a net loss for 1923 in computing the petitioner's income for 1924. Likewise for 1924, the Commissioner erred in reducing the petitioner's income for 1924 on account of losses or adjustments to the income of the partnership for the month of January, 1924. We have been asked to make no other adjustments in the petitioner's income, and from the evidence we can make none. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619192/	Estate of Lillian May Schroeder, Deceased, City Bank Farmers Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentSchroeder v. CommissionerDocket No. 19381United States Tax Court13 T.C. 259; 1949 U.S. Tax Ct. LEXIS 103; August 24, 1949, Promulgated 103 Decision will be entered under Rule 50. 1. Shares of stock in a closely held corporation valued for estate tax purposes.2. Decedent received from the estate of her husband a note which had been taxed as a part of his estate within five years prior to her death. The proceeds from the payment of the note were deposited in decedent's bank account. Held, that the previously taxed property has been identified and the amount thereof is deductible under section 812 (c) of the Internal Revenue Code. Herbert P. Polk, Esq., for the petitioner.Stephen P. Cadden, Esq., for the respondent. Arundell, Judge. ARUNDELL259 This proceeding has been instituted for the purpose of testing the correctness of the respondent's determination of a deficiency in estate tax in the amount of $ 4,327.05.The petition raises two issues: (1) The fair market value of the capital stock of the Heberlein Patent Corporation, and (2) the right of the petitioner to treat the sum of $ 8,460 as previously taxed property.FINDINGS OF FACT.Petitioner is a corporation, organized and existing under the laws of the State of New York, with its principal office in New York, New York. The petitioner was duly appointed sole executor of the last will and testament of Lillian May Schroeder, deceased, and is now 260 acting as such executor. The estate tax return here involved was filed with the collector of internal revenue for the second district of New York.Decedent died January 16, 1946, and her executor has elected105 that the value of decedent's gross estate shall be determined as of the optional valuation date of January 16, 1947.The decedent owned 750 shares of the capital stock of the Heberlein Patent Corporation (hereinafter sometimes called Heberlein) at the date of her death. Petitioner valued these shares at $ 20 per share in decedent's estate tax return. In the notice of deficiency respondent determined the fair market value of the shares on January 16, 1947, to be $ 41.84 per share.Heberlein was organized and is existing under the laws of the State of New York. It exploits textile patents which it acquires from its principal stockholder, a textile finishing company in Switzerland. The yield from a portion of the patents pertaining to the production of fancy print effects on fabrics depends on the trend of fashion. The corporation has 10,000 shares of capital stock outstanding, all closely held and not listed on any securities exchange or traded in over the counter. A Swiss corporation owns 6,775 shares and three Swiss nationals own 1,750 shares. The remaining 1,475 shares are owned by Americans.The Heberlein Patent Corporation derives its income from royalties on patents,106 interest, dividends, and gains on sales of securities listed on the New York Stock Exchange.The net worth and net income (or loss) of Heberlein, according to its books, for the period of five fiscal years beginning with November 30, 1942, were as follows:YearNet worthNet income1942$ 366,144.73($ 5,627.87)1943363,911.709,396.02 1944360,206.62(3,755.08)1945362,353.01(1,874.88)1946361,547.93(706.83)The only dividend paid during this period was $ 1.25 per share in 1943.The net worth of Heberlein according to its books as of November 30, 1946, was $ 396,007.20, after adjustments to reflect the market value of the securities owned by the corporation as of that date. It owned numerous patents as of November 30, 1946, which were carried on its books at cost, less depreciation, in the amount of $ 52,583.72. The Commissioner, in determining the value of the stock, valued these patents at $ 75,000.Income derived by Heberlein from its patents for the period of five fiscal years beginning with November 30, 1942, was as follows: 261 Royalties paidNet royaltiesRoyaltiesto others onfrom patentsYearreceived fromaccount ofretained bypatentspatentsHeberlein1942$ 74,141.57$ 31,497.29$ 42,644.28194346,420.6020,868.0525,552.55194428,343.5312,619.2315,724.30194519,553.288,550.2811,038.00194618,339.787,416.8910,992.89107 The only sale of shares of the capital stock of the Heberlein Patent Corporation in 22 years was the sale by an estate of 100 shares to Max Held, its president, for $ 25 per share in May 1947.Pursuant to the provisions of Presidential Order No. 8389, as amended, and by virtue of the ownership of a majority of the stock of the corporation by Swiss nationals, the Heberlein Patent Corporation was required, on the valuation date, to conduct all of its business under the supervision of the Federal Reserve Bank of New York.On January 16, 1947, there was no reasonable prospect that the future gross income from royalties of Heberlein would be substantially increased over what it had been in the two fiscal years previous to that date.The fair market value of the shares of stock of Heberlein Patent Corporation on January 16, 1947, was $ 25.The decedent, Lillian May Schroeder, died within five years from the date of the death of her husband, F. August Schroeder. Part of the gross estate of F. August Schroeder situated within the United States was a promissory note in the face amount of $ 16,000, signed by 205 East 74th Street, Inc., which note was inherited by this decedent. On the108 date of death of F. August Schroeder, there was due and owing on this note $ 11,500, on which a Federal estate tax was paid.During the period between the date of death of F. August Schroeder on February 9, 1941, to the date of death of this decedent, a total of $ 9,650 was paid to this decedent in reduction of the principal amount of the note, of which total $ 8,460, in monthly installments of $ 150, was deposited by this decedent in a checking account maintained by her in the Lincoln office of the Irving Trust Co. of New York City, as follows:YearDepositedNot depositedTotal1941$ 1,110$ 390$ 1,50019421,8002002,00019431,8002002,00019441,8002002,00019451,8002002,0001946150150Total 8,4601,1909,650Unpaid balance on note on Feb. 9, 1941, date of death of F. AugustSchroeder $ 11,500Deduct total payments9,650Unpaid balance on Jan. 16, 1946, date of death of Lillian M. Schroeder 1,850262 On February 9, 1941, the date of F. August Schroeder's death, there was a balance in this decedent's checking account at the Irving109 Trust Co. of $ 5,976.51. During the period between the dates of the two deaths there was deposited in the checking account, in addition to $ 8,460 of previously taxed cash, $ 12,805.99 from all sources other than previously taxed cash, making a total of $ 21,265.99 in deposits, and there was withdrawn during the same period a total of $ 14,354.76, leaving a balance in the account on the date of this decedent's death of $ 12,887.74, which has been computed as follows:PreviouslyOtherTotalYeartaxed cashdepositsdeposits1941$ 1,110$ 1,670.00$ 2,780.0019421,8002,860.004,660.0019431,8002,810.994,610.9919441,8002,735.004,535.0019451,8002,530.004,330.001946150200.00350.00Total 8,46012,805.9921,265.99Total deposits$ 21,265.99Balance in account on Feb. 9, 19415,976.5127,242.50Total withdrawals Feb. 9, 1941, through Jan. 16, 194614,354.76Balance in account on Jan. 16, 1946 12,887.74The aggregate of withdrawals made by this decedent after the death of her husband was at all times less than the total of the balance110 on the date of her husband's death, plus the deposits from sources other than previously taxed cash made during the period between the two deaths, as shown in the following table:Balance on deposit on date of this decedent's death$ 12,887.74Non-previously taxed cash:Initial deposit $ 5,976.51Interim deposits 12,805.9918,782.50Total interim withdrawals14,354.764,427.74Balance 8,460.00The balance in the bank account of the decedent at the end of each year from 1941 to 1945 was as follows:Dec. 31, 1941$ 6,627.31Dec. 31, 19428,555.53Dec. 31, 194310,361.91Dec. 31, 194411,546.30Dec. 31, 194512,726.95Jan. 194612,887.74The credit balance in the account was not at any time less than the amount of previously taxed cash which had been deposited.Included in the decedent's bank account with the Lincoln branch of the Irving Trust Co. of New York at the time of her death was the sum 263 of $ 8,460 which represented the value of property previously taxed to decedent's husband's estate within five years of decedent's death.OPINION.The valuation111 for estate tax purposes of shares of stock of a closely held corporation imposes at best a difficult question of fact. The matter is made more difficult where, as here, the overwhelming control of the company is in foreigners and the company itself is operating under governmental supervision.The Heberlein Patent Corporation was primarily organized and operated for the purpose of exploiting in this country the use of certain textile patents of Swiss origin on a royalty basis. The corporation's earnings from this source had been steadily going down in the years immediately prior to decedent's death, partly due to the war and partly due to a change in styles. On the effective date of valuation, the Heberlein Corporation had a large portfolio of American securities of companies whose shares were listed on the New York Stock Exchange.The respondent reached his valuation of the shares in question by the simple expedient of taking the value of the securities in the portfolio and adding to that figure his value of the patents and, after deducting outstanding liabilities, dividing the remainder by the number of outstanding shares, thus reaching his figure of $ 41.84 per share. But it112 is obvious that this figure, which would be the liquidating value of the Heberlein Corporation under ideal circumstances and without cost, can not be said to be the fair market value of that corporation's shares. There is no suggestion that Heberlein contemplated liquidation and certainly the shares of the decedent gave no control whatever which could affect the course of action of the corporation. The Heberlein Corporation had incurred losses during four of the past five years and had paid a dividend in only one of those years. There was no market for the stock except among the few individuals interested in the corporation. Only one sale of shares was made in 22 years, and that sale was made in May 1947, a few months after the effective date with which we are concerned. The price received for the 100 shares on that date was $ 25 per share and the stock sold was the stock of a deceased stockholder and the shares were sold to the president of the Heberlein Corporation. A diligent effort resulted in no other prospective purchaser. Admittedly, the sale of one small block of stock can not be said to establish the fair market value of the shares. Nevertheless we think this figure113 more nearly represents what a willing buyer would pay a willing seller than the figure determined by the respondent.After careful consideration of the entire record, it is our opinion that the fair market value of the shares in question was $ 25 per share.264 The remaining issue deals with the right of the petitioner to a deduction from the decedent's gross estate of the sum of $ 8,460 under the provisions of section 812 (c) of the Internal Revenue Code. 1114 Respondent apparently agrees that all of the factors required to entitle petitioner to this deduction with respect to principal payments made by 205 East 74th Street, Inc., on its note inherited from the estate of the prior decedent and deposited in this decedent's checking account have been established, except that respondent has determined that no part of this bank balance has been identified as having been received by this decedent from the prior decedent.Respondent on brief concedes, as well he may, that the commingling in a common bank account of previously taxed cash with non-previously taxed cash does not necessarily make the previously taxed cash unidentifiable. John D. Ankeny, Executor, 9 B. T. A. 1302; Frances Brawner, Executrix, 15 B. T. A. 1122. As will be noted from the facts as found, the aggregate of withdrawals made by this decedent since the death of her husband was at all times less than the total of the balance on the date of her husband's death, plus the deposits from sources other than previously taxed cash made during the period between the two deaths. Of course, if the previously taxed cash had been deposited in this account115 and then withdrawn before additional non-previously taxed cash was deposited, it could not be said that the credit balance on the date of decedent's death was traceable to previously taxed cash. But the credit balance in the account was not at any time less than the amount of previously taxed cash which had been deposited. On facts substantially similar with those appearing in the instant case, we have held the identification sufficient. John F. Archbold, Executor, 8 B. T. A. 919; John D. Ankeny, Executor, supra;Estate of James Miller, 3 T. C. 1180. In Frances Brawner, Executrix, supra, where the facts are on all fours, we stated:* * * Other withdrawals than these mentioned were made during this time from this account by decedent, but inasmuch as the aggregate of such was 265 less than the total deposits, independent of this bequest, made to the same account during the period, it follows that the unexpended balance of this bequest, not withdrawn for investment as hereinbefore noted, remained in said account and formed a part of the assets of the estate of decedent at the time of his death. We have previously116 held, under such circumstances, that funds thus identified are deductible under section 303 (a) (2), supra, John D. Ankeny, Executor, 9 B. T. A. 1302; John F. Archbold, Executor, 8 B. T. A. 919.The respondent, in reliance on Rodenbough v. United States, 25 Fed. (2d) 13, and United Statesv. Rodenbough, on remand (Dist. Ct., E. Dist. Pa.), argues that we should indulge the presumption that all withdrawals from petitioner's bank account for personal purposes came from the previously taxed property and as the amount of her withdrawals during the five years from her husband's death to her own death exceeded the amount of the previously taxed property, there has been no proper identification. As pointed out by Judge Duffy in Horlick v. Kuhl, 62 Fed. Supp. 168, 174, the rule as suggested in the Rodenbough case has never been accepted by the Tax Court and, in fact, has only been followed in one case by the District Court for the Southern District of New York. It is our opinion that the petitioner has identified the sum of $ 8,640 in decedent's bank account at the Irving Trust Co. as previously117 taxed property of the estate of decedent's husband, who died within the period of five years from decedent's death, and, in the circumstances, this sum is properly deductible in determining the value of decedent's estate.Decision will be entered under Rule 50. Footnotes1. 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 -- * * (c) Property Previously Taxed. -- An amount equal to the value of any property (1) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * where such property can be identified as having been received by the decedent * * * from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. Property includible in the gross estate of the prior decedent under section 811 (f)↩ * * * received by the decedent described in this subsection shall, for the purposes of this subsection, be considered a bequest of such prior decedent * * . This deduction shall be allowed only where * * an estate tax imposed under this chapter or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent, * * * and only in the amount finally determined as the value of such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate * * *.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619193/	WILLIAM E. WALTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Walter v. CommissionerDocket Nos. 97537, 99162.United States Board of Tax Appeals42 B.T.A. 941; 1940 BTA LEXIS 932; October 10, 1940, Promulgated 932 In 1928 petitioner's wife brought suit against him for a limited divorce in the State of Pennsylvania, where they both resided, in which she asked for a suitable allowance for alimony. On December 7, 1928, petitioner modified a certain trust agreement which he had executed in 1918 so as to provide out of the income of the trust a monthly payment of $1,000 to his wife, which payment was to be in full for all claims whatsoever for alimony, alimony pendente lite, maintenance, and support. The wife's suit for limited divorce was subsequently changed to a suit for absolute divorce and May 6, 1929, such absolute divorce was granted. In 1933 petitioner brought suit in equity to set aside the agreement aforesaid, alleging several grounds therefor. Issue was joined in this suit, but prior to its hearing a stipulation of settlement was agreed to between the parties, which was approved by the court. By terms of this settlement, one-half of the corpus of the 1918 trust was awarded to petitioner and one-half to petitioner's former wife and the four adult children of such marriage, and the settlement was to be a complete acquitance of all obligations, one to the other, except the obligations933 created by the stipulation and agreement. The part of the corpus awarded to the wife was placed in trust, the income from which was to be paid to her for life, with remainder over to the four children. Held, that, following the stipulation of settlement, there was no continuing obligation either by voluntary agreement or under the laws of the State of Pennsylvania that petitioner should maintain and support his divorced wife, and the income of the trust which was set up with the part of the property awarded to her, which was paid to her in the taxable years, is not taxable to petitioner. It was not paid to discharge any obligation of petitioner. A. Calder Mackay, Esq., for the petitioner. Byron M. Coon, Esq., for the respondent. BLACK941 These proceedings have been consolidated. Docket No. 97537 involves a deficiency for the year 1935 of $319.40 and Docket No. 99162 942 involves a deficiency for the year 1936 of $618.67 and a deficiency for the year 1937 of $473.56. The deficiency for 1935 is due to the following adjustments which the Commissioner made in petitioner's income tax return, filed for that year: Net income as disclosed by return$4,902.33Additional income:(a) Additional income of William E. Walter Trust taxable to you$8,429.03(b) Income of Caroline S. Walter Trust taxable to you3,956.3312,385.36Total17,287.69Additional deductions:(c) Capital loss not claimed$2,000.00(d) Additional trustee's fees164.762,164.76Net income adjusted15,122.93934 The petitioner, by appropriate assignments of error, contests that part of the Commissioner's adjustment shown above by which the Commissioner added to petitioner's income the income of the Caroline S. Walter trust, $3,956.33. Petitioner did not contest the addition to his income for 1935 of "Additional income of William E. Walter Trust taxable to you, $8,429.03." The deficiencies for 1936 and 1937 are due entirely to the addition by the Commissioner to petitioner's net income, as disclosed by his income tax return for each of said years, of certain income of the Caroline S. Walter trust. In each instance the Commissioner explained his adjustment as follows: The income of the Caroline S. Walter Trust, Girard Trust Company, Trustee, having been established by you to provide income for your former wife in lieu of alimony and other personal claims against you, is held to be taxable to you. Sections 22(a) and 167, Revenue Act of 1936; Article 167 - 1, Regulations 94. By appropriate assignments of error, the petitioner contests these adjustments made by the Commissioner. FINDINGS OF FACT. The petitioner, William E. Walter, resides in Beverly Hills, California. The income935 tax returns for the period here involved were filed with the collector for the sixth district of California. The petitioner and his former wife, Caroline S. Walter, were married in the year 1897 and were divorced during the year 1929 under a decree of a Pennsylvania court. Petitioner has since remarried. In the month of March 1928 William E. Walter withdrew from his home and family and expressed an intention henceforth to live separate and apart from his wife. 943 In the month of October 1928 the wife, Caroline S. Walter, brought an action for limited divorce in the Court of Common Pleas of Delaware County, Pennsylvania, in which Caroline Walter was the libelant and Walter the respondent, she alleging that she was entitled to apply to the court for suitable alimony and an allowance for counsel fees. Caroline Walter also claimed that she had become entitled to institute proceedings against Walter in the Desertion Court of Delaware County in order to procure suitable support from him. The alleged grounds for divorce were, inter alia, the statutory grounds of "Cruel and barbarous treatment and indignities to her person." The original petition for divorce asked936 for only a divorce a mensa et thoro, and was amended to ask for an absolute divorce. A plea for absolute divorce was granted by the said Court of Common Pleas of Delaware County, Pennsylvania, on May 6, 1929. Prior thereto, by deed dated September 28, 1918, petitioner had assigned and transferred to Alfred E. Pfahler and Morris Wolf, of Philadelphia, Pennsylvania, certain securities in trust for the benefit of himself for life, and thereafter 95 percent of the principal thereof was to be distributed equally to petitioner's children living at the time of his death. By instrument dated December 7, 1928, petitioner modified the trust created by the said deed of September 28, 1918, by providing for the payment of $12,000 per year, in monthly installments, to Caroline S. Walter out of the income of the trust estate, and upon her death $300,000 was to be paid out of the principal in equal parts to the four children of William E. and Caroline S. Walter then living, subject to certain provisions should any of the children not be living. The trustees under the declaration of trust of December 7, 1928, were authorized, at the election of Caroline S. Walter or any of the four children937 of said Caroline S. Walter and William E. Walter, to assign and transfer to the Girard Trust Co., Philadelphia, the sum of $300,000 in cash or securities, to be held in trust to pay the said annuity of $12,000 to Caroline S. Walter for life, and upon her death to distribute the principal among the children of Caroline S. and William E. Walter then living or their issue per stirpes, if any were deceased. The aforesaid instrument dated December 7, 1928, contains, among other things, the following: * * From and after the signing of this agreement, Walter agrees to pay to Mrs. Walter the sum of one thousand dollars ($1,000.00) per month (which is a sum substantially less than one-third of his present income) during the life of Mrs. Walter, which payment shall be secured in the manner hereinafter set forth; and which monthly payment shall be in full for all claims whatsoever by Mrs. Walter for alimony, alimony pendente lite, maintenance, support, right 944 of dower in real estate and of all financial and property rights and claims of every kind and character which have heretofore accrued or may hereafter accrue to either of them by reason of their marital relations. 938 * * * * * * * Mrs. Walter hereby agrees to and does accept the provisions set forth herein in lieu of dower or contingent right of dower or other right of any kind in the real or personal property of Walter and in lieu of her rights under the intestate laws of Pennsylvania or elsewhere, and her rights to take against his will and in lieu of all claims against Walter for alimony, alimony pendente lite, maintenance and support for herself and our daughter, Helen, whom she agrees to support, and all other claims and demands of every kind and nature except the obligation imposed on Walter by the terms hereof and the exhibits hereto attached. * * * In 1933, the income of the trust in the meantime having greatly decreased, petitioner brought an action in equity in the Court of Common Pleas of Philadelphia, wherein he alleged, among other things, as follows: 1. That the agreement of December 7, 1928, for the support and maintenance of Caroline S. Walter under the laws of Pennsylvania was without consideration and without lawful force and effect. 2. That said agreement for the support and maintenance of Caroline S. Walter, after their absolute divorce, being made and entered939 into under an agreement between petitioner and Caroline S. Walter to obtain an absolute divorce was against public policy and without lawful consideration and, therefore, illegal and void. 3. That the agreement of March 7, 1932, was also null and void. 4. Complainant, William E. Walter, asked the court in equity to declare the agreement of December 7, 1928, which provided for the maintenance and support of Caroline S. Walter, to be null and void, and also asked that the court declare null and void a supplemental agreement of March 7, 1932. Issue was joined in the proceeding and, after negotiations between the attorneys for the parties, a stipulation of settlement was entered into, pursuant to which the court entered its decree adopting the stipulation. Under this stipulation and decree the principal of the trust estate was divided as follows: FIRST: To William E. Walter an equal one-half part thereof, subject to payment of proper costs and counsel fees, which said part he agrees shall be distributed to and/or for the use of The Trustees of the Philadelphia Yearly Meeting of Friends; Judith Scott Walter; The adopted children of William E. Walter, viz., Cornelia Scott940 Fields Walter, Russell James Fields Walter and Margaret Scott Fields Walter; and William E. Walter, in the manner and subject to the provisions set forth in Schedule A hereto attached. 945 SECOND: An equal one-half part thereof, subject to payment of proper counsel fees, shall be distributed to and/or for the use of Caroline S. Walter; David Sargent Walter, Elizabeth Ann Walter Furnas, Henrietta Emley Walter Fricke and Helen Sargent Walter Thomsen, in the manner and subject to the provisions set forth in Schedule B hereto attached. 10. The foregoing distribution of principal into two equal one-half parts shall be made in kind, and shares of the various securities constituting the trust shall be allocated, share and share alike, between said equal one-half parts as nearly as may be, and when so distributed and allocated such shares shall carry with them to the respective distributees any and all dividends accrued, accruing, and unpaid. 11. The distributions of income made to Caroline S. Walter by the Trustees and/or the Girard Trust Company of Philadelphia up to the date hereof are hereby ratified, approved and confirmed, and it is understood and agreed that941 the said Caroline S. Walter shall be entitled to receive income at the rate of Ten thousand dollars ($10,000.) per annum out of any cash income coming into the hands of the Trustees and/or the Girard Trust Company prior to the distribution of principal hereinabove provided. 12. The receipts and releases of the above mentioned parties in interest, or their guardians, upon payment and distribution being made in accordance with the above awards and this Agreement shall be a full discharge and acquittance to the said Trustees without further application to or approval by the Court. 13. In consideration of the settlement and distribution herein set forth, the parties signatory hereto do hereby for themselves, and on behalf of parties represented by them, their heirs, executors, administrator, successors and assigns, mutually remise, release, quitclaim, and forever discharge, each and all of the other parties hereto, of and from all claims, demands and causes of action whatsoever, (except the obligations created by this Stipulation and Agreement, and the Decree entered herewith), arising out of any matter, cause or thing occurring prior to the date hereof. David Sargent Walter, 942 Elizabeth Ann Walter Furnas, Henrietta Emley Walter Fricke, and Helen Sargent Walter Thomsen, who participated with Caroline S. Walter in a division of one-half of the trust corpus, are children of petitioner and Caroline S. Walter and were adults at the time the stipulation of settlement was made in February 1935. Said equal one-half share of principal of the trust which was set apart to Caroline Walter and the four children in the stipulation of settlement was subdivided in Exhibit B as follows: (1) to the four children, adults, one-half thereof was assigned and transferred and paid over absolutely. As to the one-half of the one-half which was to go to Caroline S. Walter, it was provided as follows: (b) One-half thereof shall be assigned, transferred, delivered and paid over to GIRARD TRUST COMPANY and PAUL J. FURNAS, of Philadelphia, IN TRUST, to invest and reinvest the same, and to pay the net income therefrom, from time to time, to CAROLINE S. WALTER for the term of her life, and upon her 946 death the Trustees shall divide the principal of the trust and shall hold the same in trust as follows: [Here follow directions as to how the income should be distributed943 to the four children named above. These provisions are not needed here.] It is the income which was paid to Caroline S. Walter during the taxable years here involved from the so-called Caroline S. Walter trust, of which the Girard Trust Co. and Paul J. Furnas were trustees, set up in 1935 following the stipulation of settlement referred to above, which is the subject of the controversy in these proceedings. OPINION. BLACK: It will be observed from the facts which we have stated in our preliminary statement that part of the deficiency for 1935 is due to an addition by the Commissioner to petitioner's income of $8,429.03 paid to Caroline S. Walter in 1935 from the William E. Walter trust which was set up in 1928 prior to a divorce between the parties in 1929. Petitioner does not contest this part of the Commissioner's determination. The facts show that this William E. Walter trust was terminated by agreement of all the parties approved by the court in 1935 and the corpus of the trust, after the payment of certain costs and expenses, was distributed one-half to William E. Walter and beneficiaries whom he named and the remaining one-half to Caroline S. Walter and the four944 adult children of Caroline S. Walter and William E. Walter. The part distributed to Caroline S. Walter was placed in trust with the Girard Trust Co. and Paul J. Furnas, as trustees, the income from which was to be paid to her for life, with remainder to her children. The respondent in his brief states the issue involved in these proceedings to be: Was the net income of a trust estate, called the Caroline S. Walter Trust, taxable to the petitioner therein during the years, 1935, 1936, and 1937, for the reason that the trust had been created to provide, and was providing, alimony for the petitioner's divorced wife, Caroline S. Walter? The petitioner opposes the contention of respondent on the ground that there is no language in the revenue act which indicates that the "legal obligation theory" of taxation is applicable where the trustor has irrevocably transferred ownership of both the property and the income therefrom. Petitioner contends that he had no dominion or control over the income received by Caroline S. Walter from the Caroline S. Walter trust and he derived no benefit whatsoever from the payment by the trustee to her of this income, and that it was not to discharge945 any continuing obligation of petitioner. Under the laws of the State of Pennsylvania alimony is not generally payable in the case of an absolute divorce. That subject was 947 fully discussed in the recent case of . In that case, the court said, among other things: * * * Provision for alimony on absolute divorce was made in but two cases: first, where the husband divorces the wife for "cruel and barbarous treatment or indignities to his person", 1895 P.L. 308; second, where the divorced spouse, husband or wife, is insane, 1905 P.L. 212. As a consequence the courts were without power to decree alimony in any other circumstance to one freed from the bonds of matrimony. * * * No such circumstances as named above exist in the instant case, However, while it is true that under the laws of the State of Pennsylvania it is clear, except under very limited circumstances, that there is no continuing obligation on the part of a former husband to support and maintain his divorced wife, nevertheless, it is an obligation which he may validly assume by contract. 946 , affirming ; , affirming on this point, ; , affirming . It will be assumed that the trust settlement which petitioner fixed upon his wife by agreement in 1928 at the time a suit for limited divorce was pending, by which she was to be paid $1,000 a month during the period of her natural life in lieu of alimony, etc., and which was subsequently amended by agreement to provide $833.33 per month after income of the trust fell off greatly, comes within the ambit of the above cited cases. Evidently petitioner concedes that this is true, because he does not assign any error attacking the action of the Commissioner in including in his income for 1935 the amount which Caroline S. Walter received from the 1928 William E. Walter trust. The facts show, however, that in 1933 the petitioner brought a suit in equity to set aside this 1928 trust agreement and to return the trust corpus to petitioner. The pleadings in this equity suit947 are in the record and are quite voluminous and need not be set out here. Suffice it to say that a complete agreement of settlement was reached in this suit in February 1935. By the terms of the agreement, which were approved by the court, certain income of the William E. Walter trust accumulated prior to the date of distribution of corpus was to be paid over to Caroline S. Walter. We presume that this is the $8,429.03 which the Commissioner has added to petitioner's income in 1935 from the William E. Walter trust and which he does not contest. The corpus, after the payment of certain charges not here involved, was divided one-half to William E. Walter and the beneficiaries whom he named and one-half to Caroline S. Walter and the four adult children of petitioner and Caroline S. Walter. The part which 948 went to Caroline S. Walter was placed in trust, the income to be paid to her for life, with remainder to her four children. We agree with petitioner that he has no interest in this income and that none of it is taxable to him. The Supreme Court of the United States recently decided three cases dealing with the general subject which we have under discussion. These948 were ; ; and . The facts of the instant case are not on all fours with any of those cases, but we think Helvering v. Fuller comes nearest to the situation we have in the instant case. In the Fuller case, the Supreme Court held that the income from the trust in question was not taxable to the husband, who was the settlor of the trust. Among other things the Court said, in that connection: * * * If respondent had not placed the shares of stock in trust but had transferred them outright to his wife as part of the property settlement, there seems to be no doubt that income subsequently accrued and paid thereon would be taxable to the wife, not to him. Under the present statutory scheme that case would be no different from one where any debtor, voluntarily or under the compulsion of a court decree, transfers securities, a farm, an office building, or the like, to his creditor in whole or partial payment of his debt. Certainly it could not be claimed that income thereafter accruing from the transferred property must949 be included in the debtor's income tax return. If the debtor retained no right or interest in and to the property, he would cease to be the owner for purposes of the federal revenue acts. See . * * The Court concluded: For the reasons we have stated, it seems clear that local law and the trust have given the respondent pro tanto a full discharge from his duty to support his divorced wife and leave no continuing obligation, contingent or otherwise. Hence under , income to the wife from this trust is to be treated the same as income accruing from property after a debtor has transferred that property to his creditor in full satisfaction of his obligation. In the instant case the parties, after a suit had been brought in equity by petitioner to set aside the trust agreement of 1928, had a complete settlement agreement. Petitioner retained no interest whatever in the one-half of the trust corpus which was awarded to Caroline S. Walter and the four children. They in turn had no interest whatever in the one-half which was awarded to petitioner. After the consummation*950 of this agreement there was no continuing obligation whatsoever, either by contract or state law, on the part of petitioner to support and maintain his divorced wife. Thereafter the payments which the Caroline S. Walter trust paid to her in each of the taxable years were not paid to her to discharge any legal obligation which petitioner owed to Caroline S. Walter, and such income is therefore not taxable to him. On this issue, petitioner is sustained. Cf. . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619194/	Robert D. Beard, Petitioner v. Commissioner of Internal Revenue, RespondentBeard v. Comm'rDocket No. 29420-82 United States Tax Court82 T.C. 766; 1984 U.S. Tax Ct. LEXIS 66; 82 T.C. No. 60; May 24, 1984, Filed 66 Petitioner tampered with an official Form 1040 by modifying margin and item captions in order to categorize his wages as "Non-taxable receipts" that he claims are not gross income subject to tax. He purports this tampered form was his return for the 1981 taxable year.1. Held, wages are subject to tax.2. Held, further, the tampered form was not a return within the meaning of secs. 6011, 6012, 6072, and 6651(a)(1), I.R.C. 1954, and an addition to tax is due under sec. 6651(a)(1), I.R.C. 1954.3. Held, further, petitioner willfully failed to file a return for the 1981 year, and an addition to tax under sec. 6653(a), I.R.C. 1954, is due.4. Held, further, this proceeding was instituted in this Court merely for delay so that damages are awarded to the United States in the amount of $ 500.5. Held, further, the burden of proof in this case is on petitioner for determinations made by the statutory notice and on respondent for issues raised in the answer.6. Held, further, petitioner is not entitled to a trial by jury in this proceeding. Robert D. Beard, pro se.Timothy S. Murphy and Joseph Chalhoub, for the respondent. Whitaker, Judge. Dawson, Fay, Simpson, Sterrett, Goffe, Wiles, Wilbur, Nims, Parker, Korner, Shields, Hamblen, Cohen, Clapp, and Jacobs, JJ., agree with the majority opinion. Nims, J., concurring. Sterrett, Wiles, Hamblen, Cohen, and Clapp, JJ., agree with this concurring opinion. Chabot, J., concurring in part and dissenting in part. Swift, J., agrees with this concurring and dissenting opinion. WHITAKER766 This case is before us on respondent's motion for summary judgment. 1 Pursuant to Rule 121, 2 a response to the motion was filed by petitioner on February 13, 1984 (the response). On February 22, 1984, the motion for summary judgment was heard. Respondent was represented by counsel but there was no appearance by or on behalf of petitioner. The motion was taken71 under advisement.In the notice of deficiency issued to petitioner, respondent determined a deficiency in petitioner's 1981 Federal income tax in the amount of $ 6,535. In the answer, respondent alleged 767 that additions to tax were due under section 6651(a)(1) for failure to file a return, and section 6653(a) for negligence or intentional disregard of the rules and regulations. Additionally, damages pursuant to section 6673 for instituting proceedings before the Tax Court merely for delay were requested.The petition alleged as errors in the notice of deficiency that petitioner's wages are not72 taxable income and were wrongfully included in his gross income. He claims that his receipts are a product of the exchange of labor for wages. Since the fair market value of the labor transferred is equivalent to the amount of wages received, there is no excess gain to be reported as taxable income. 3 The "equal exchange" theory was also set forth in a memorandum signed by petitioner and submitted to the Internal Revenue Service as part of the purported "return" for the 1981 year. A copy of the memorandum was attached to his petition.In his reply, petitioner alleges "the petition contains specific justiciable errors of law and/or fact in relation to the recognition by the Respondent of the Petitioner's73 'labor' to be 'property.'" 4 Petitioner asserts that he has arrived at his conclusions by lengthy study and research of the rules and regulations. He contends that no additions to tax are due under sections 6653(a) and 6651(a)(1). Petitioner denies he was required to file a 1981 income tax return on or before April 15, 1982, in that he owed no tax liability for that year. He admits that the document in question in this case is the only submission he made to the Internal Revenue Service for the 1981 year, claiming that it is a return under section 6012 because it contains figures and numbers from which to compute a tax. Furthermore, he requests a trial by jury on all issues raised by the pleadings and alleges respondent has the burden of proof on all issues. Finally, he denies he has begun this proceeding before this Court merely for the purpose of delay.74 768 We must first decide whether any genuine issue of material fact exists to prevent our summary adjudication of the legal issues in controversy. Rule 121. If summary judgment is warranted, we must decide whether (1) petitioner or respondent has the burden of proof as to the issues raised in the pleadings; (2) the wages earned by petitioner are taxable; (3) petitioner is entitled to a trial by jury; (4) the purported "return" filed by petitioner was a return for the purposes of sections 6011, 6012, 6072, and 6651(a)(1); (5) the failure to include these wages in taxable income was due to negligence or intentional disregard of the rules and regulations for section 6653(a) purposes; and (6) under section 6673, an award of damages for instituting a proceeding before this Court merely for the purpose of delay is merited.Certain facts are not disputed by the parties. Pursuant to Rule 121, respondent filed an affidavit with exhibits in connection with the instant motion. 5 Petitioner did not file any affidavits or exhibits. The undisputed documents supplied by respondent and the undisputed facts in the pleadings constitute the facts used for the purposes of this motion. Rule75 121(c).FINDINGS OF FACTPetitioner resided in Carleton, Mich., when the petition was filed in this case. During the 1981 taxable year, petitioner was employed by, and received wages from, Guardian Industries totaling $ 24,401.89. Such amounts were actually received by petitioner during that year. 676 He submitted to the Internal Revenue Service the below-described form and an accompanying memorandum dated February 22, 1982, as his 1981 return, thus indicating his protest to the Federal income tax laws. No other document alleged to be a return for the 1981 year was submitted. 7 This 769 document (the tampered form) was prepared by, or for, petitioner by making changes to an official Treasury Form 1040 in such fashion (by printing or typing) that the changes may not be readily apparent to a casual reader. 8In that part of the first page of the official form intended to reflect income, petitioner deleted the word "income" from the item captions in lines 8a, 11, 18, and 20, and inserted in those spaces the word "gain." On line 21 of the form, he obliterated the word "income" from77 the item caption. In addition, in the margin caption to this section, petitioner deleted the word "Income" and inserted the word "Receipts."In that part of the first page of the form intended to reflect deductions from income, he deleted the words "Employee business expense (attach Form 2106)" from line 23 of the form and inserted "Non-taxable receipts." In addition, in the marginal caption to this section, petitioner deleted the word "Income" and inserted the word "Receipts," so that the caption reads "Adjustments to Receipts" instead of "Adjustments to Income."Petitioner filled in his name, address, Social Security number, occupation, and filing status in addition to the name, occupation, and Social Security number of his spouse. He claimed one exemption on the tampered form. The relevant information entries are as follows: On line 7 entitled "Wages, salaries, tips, etc.," taxpayer inserted the amount of $ 24,401.89. On line 23, under the category of "Non-taxable receipts," petitioner claimed an adjustment to "Receipts" of $ 24,401.89. He therefore showed a tax liability of zero. On line 55, entitled "Total Federal income tax withheld," he showed an amount of $ 1,770.75. 78 The total $ 1,770.75 that had been withheld from his wages was claimed as a refund. This tampered form was signed by petitioner and dated February 22, 1982. Petitioner's Form W-2 issued by Guardian Industries was attached.Petitioner's scheme in submitting this tampered form apparently was to conceal from the Service Center operators the fact that his inclusion of his wages on the tampered form was negated by his fabrication of "Non-taxable receipts" on line 23, thus simultaneously excluding the wages theoretically reported. 770 The net effect of the two steps was to create a zero tax liability. Since his employer had withheld against the amounts paid to him for the 1981 year, this scheme allowed him to claim a refund for that year.Petitioner has not always protested against his duty to pay taxes. For taxable year 1979 petitioner and his spouse, cash basis, calendar year taxpayers, reported jointly on an official Treasury Form 1040A, wages they received as taxable income, and showed the appropriate tax on such income. Their taxes withheld exceeded their tax liability and they were due a small refund. The Treasury Form 1040A was fully completed and correctly reflected79 the wages shown on the Forms W-2 they received.Petitioner has studied court cases, statutes, rules, and regulations pertaining to income tax. He recognizes that this Court has, on numerous occasions, categorized the "equal exchange" theory that wages are not subject to income tax, as frivolous and utterly without merit. 9The instant case is one of 23 cases that were on the March 5, 1984, trial calendar for Detroit, Mich., in which tampered forms are at issue. 10 Many other similar cases are pending before this Court. All of these 23 cases contain a fabricated adjustment for "Non-taxable receipts." All were submitted to the Internal Revenue Service in the year 1980 1181 or 1981. 12 All but 2 of the 23 were submitted with two- or three-page memorandums advocating that wages are not taxable income. Twenty-two of the petitions in these cases contained identical language except for entries relevant to the petitioners' personal 771 80 data. The remaining case contained a handwritten, individually composed petition. In cases in which replies or responses to respondent's motion for summary judgment were filed, all but one were the same format and language, with minor deviations to suit the petitioners in each case. It is abundantly clear that these docketed cases and documents represent a coordinated protest effort -- an attempt to obtain refunds where employers had withheld against amounts paid, as well as to drain further the limited resources of this Court with these frivolous contentions.The Internal Revenue Service has been forced to develop special procedures 13 to handle tampered forms like those in the group referred to above. The tampered forms are also referred to as "Eisner v. Macomber returns" because Eisner v. Macomber, 252 U.S. 189 (1920), is usually cited either in the form or in the literature attached. 14 From a cursory look, they appear to be official Forms 1040, but upon closer inspection, definitively are not. Internal Revenue Service employees must identify and then withdraw these from the normal processing channels, and gather 82 and deliver them to a special team for review. After such review, the person who submitted such a tampered return is often, but not always, informed that it is not acceptable as a return because it does not comply with the Internal Revenue Code. Petitioner was so informed by a letter dated July 16, 1982, stating that the tampered form was "not 772 acceptable as an income tax return because it does not contain information required by law, and it does not comply with Internal Revenue Code requirements."83 ULTIMATE FINDINGS OF FACTPetitioner actually received $ 24,401.89 from his employer as wages during the 1981 taxable year. The only documents he submitted for the 1981 taxable year were the tampered form and its accompanying memorandum. Petitioner has extensively studied the rules and regulations regarding the income tax laws in addition to income tax cases and, thus, his actions were the product of informed deliberation.OPINIONSummary Judgment IssueThe threshold issue is whether a motion for summary judgment is appropriate in this case. We conclude that it is. Rule 121 provides that a party may move for summary judgment upon all or any part of the legal issues in controversy "if the pleadings * * and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b). The summary judgment procedure is available even though there is a dispute under the pleadings if it is shown through materials in the record outside the pleadings that no genuine issue of material fact exists. 15 In passing upon such a motion, the factual materials presented84 "must be viewed in the light most favorable to the party opposing the motion." Jacklin v. Commissioner, 79 T.C. 340">79 T.C. 340, 344 (1982); Elkins v. Commissioner, 81 T.C. 669">81 T.C. 669 (1983).Since respondent is the movant with respect to this motion, he has the burden of proving there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. There is no dispute among the parties as a factual matter that petitioner received his Form W-2 from his 773 employer reflecting the $ 24,401.89 amount. The only justiciable error that petitioner alleges in his reply and response is that such amounts are not taxable, a legal issue. Petitioner does not question and thereby concedes85 to the authenticity of the respondent's evidence attached as exhibits to a submitted affidavit, 16 i.e.: the 1979 tax return and the tampered form at issue. He admits in his reply that this is the only form filed for the 1981 taxable year. That petitioner is familiar with the Federal income tax statutes, regulations, and case law is confirmed by the frequent citation of the Federal income tax cases, statutes, rules, and regulations in the documents filed by petitioner in this Court. The summary judgment pleadings, affidavits, and exhibits establish that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law.The burden of proof is upon the petitioner with respect to the deficiency set forth in the statutory notice and upon the respondent as to the issues raised in the answer. Welch v. Helvering, 290 U.S. 111 (1933); Nicholson v. Commissioner, 32 B.T.A. 977 (1935), affd. 90 F.2d 978">90 F.2d 978 (8th Cir. 1937);86 Rule 142 (a).Frivolous ContentionsWe first dispose of petitioner's two frivolous contentions. Respondent maintains that the amounts petitioner received for services performed as reflected in the 1981 Form W-2 are taxable as gross income to petitioner for the year in which he received such amounts. There is no doubt that such amounts are taxable as gross income. Sec. 61; Eisner v. Macomber, supra at 207; Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111 (1983).Petitioner received wages for the taxable year of $ 24,401.89, and thus was required to file a Federal income tax return for that year. Sec. 6012 (a)(1)(A). Section 6072 provides that in the case of returns under section 6012, returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year. It is clear that petitioner had a duty to file a return. The crucial issue is whether respondent must accept this tampered form in satisfaction of that duty.774 Petitioner, in his reply, asserts that he is entitled87 to a trial by jury for all issues contained in this case. It is well settled that in a suit concerning Federal tax liability, no right to a jury trial exists under the Seventh Amendment guaranteeing a jury trial on common law actions. Cupp v. Commissioner, 65 T.C. 68">65 T.C. 68 (1975), affd. without published opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977). Thus, we find taxpayer is not entitled to a jury trial.Failure To FileRespondent alleges an addition to tax under section 6651 (a)(1) for failure to file a Federal income tax return for taxable year 1981. Section 6651 (a)(1) provides for an addition to tax if a taxpayer fails to file a timely return unless such failure is due to reasonable cause and not due to willful neglect. Respondent maintains that the tampered form submitted by petitioner was not a return within the meaning of sections 6012, 6072, and 6651 (a)(1), that it will not be accepted as such (and was not accepted in this case), and thus petitioner is liable for an addition under section 6651 (a)(1). We agree.The general requirements of a Federal income tax return are set forth in section 6011 (a), in relevant part as88 follows:When required by regulations prescribed by the Secretary any person made liable for any tax * * shall make a return or statement according to the forms and regulations prescribed by the Secretary. [Emphasis added.]Regulations implementing this legislative mandate provide:(a) General rule. Every person subject to any tax, or required to collect any tax, under subtitle A of the Code, shall make such returns or statements as are required by the regulations in this chapter. The return or statement shall include therein the information required by the applicable regulations or forms. 17(b) Use of prescribed forms. Copies of the prescribed return forms will so far as possible be furnished taxpayers by district directors. A taxpayer will not be excused from making a return, however, by the fact that no return form has been furnished to him. Taxpayers not supplied with the proper forms should make application therefor to the district director in ample time to have their returns prepared, verified, and filed on or before the due date with the internal revenue office where such returns are required to be filed. 775 Each taxpayer should carefully89 prepare his return and set forth fully and clearly the information required to be included therein. Returns which have not been so prepared will not be accepted as meeting the requirements of the code. * * * 18The statutory grant of authority to the Treasury requires that taxpayers make a return or statement according to the forms and regulations prescribed by the Secretary of the Treasury. These regulations mandate the use of the proper official form, except as noted below. 19 The U.S. Supreme Court in the case of Commissioner v. Lane-Wells Co., 321 U.S. 219">321 U.S. 219 (1944), has recognized this mandate in stating:Congress has given discretion to the Commissioner to prescribe by regulation forms of returns and has made it the duty of the taxpayer to comply. It thus implements the system of self assessment which is so largely the basis of our American scheme of income taxation. The purpose is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished. [321 U.S. at 223; emphasis90 added.]This discretionary authority outlined in the regulations at section 1.6011-1, Income Tax Regs., has also been recognized in the case of Parker v. Commissioner, 365 F.2d 792 (8th Cir. 1966). Although the facts of that case are distinguishable from the91 instant case, the court did note that --Taxpayers are required to file timely returns on forms established by the Commissioner. * * * The Commissioner is certainly not required to accept any facsimile the taxpayer sees fit to submit. If the Commissioner were obligated to do so, the business of tax collecting would result in insurmountable confusion. * * * [365 F.2d at 800.]For years, the only permissible exception to the use of the official form has been the permission, granted from time to time to tax return preparers by the Internal Revenue Service, to reproduce and vary very slightly the official form pursuant to the Commissioner's revenue procedures. These revenue 776 procedures require advance approval of a specially designed form prior to use as well as following the guidelines for acceptable changes in the form. The philosophy of the revenue procedure is and has been required forms to conform in material respects to the official form for the obvious reasons of convenience and processing facilitation but also to be clearly distinguishable from the official form, thereby removing the opportunity for deceit. Portions of the revenue procedure92 in effect and applicable to the facts of this case are printed in the appendix hereto at pages 782-783.On the tampered form, various margin and item captions, in whole or in part, have been deleted and most replaced with language fabricated by the petitioner. These changes were not in conformity with the Revenue Procedure 20 rules at section 5.01(2)(a)(1) requiring each substitute or privately designed form to follow the design of the official form as to format, arrangement, item caption, line numbers, line references, and sequence. Also, Revenue Procedure section 3.04(1) and (2) prohibits any change of any Internal Revenue Service tax form, graphic or otherwise, or the use of a taxpayer's own (nonapproved) version without prior approval from the Internal Revenue Service. Petitioner made no attempt to obtain such approval. Additionally, petitioner was required by Revenue Procedure section 6.01 to remove the Government Printing Office symbol and jacket numbers, and in such space (using the same type size), print the employer identifying number of the printer or the Social Security number of the form designer. Petitioner did not remove the symbol and numbers and did not insert93 in their place his appropriate number. The tampered form deceptively bore the markings of an official form. Section 8.01, Revenue Procedure rules, prohibits the filing of reproductions of official forms and substitute forms that do not meet the requirements of the procedure. The only filing made by petitioner for the 1981 taxable year was the nonconforming tampered form.Petitioner's prohibited tampering with the official form, the net effect of which is the creation of a zero tax liability, adversely affects the form's useability by respondent. The tampered form, because of these numerous irregularities, 777 must be handled by special procedures and must be withdrawn from normal processing channels. There can be no doubt that due to its lack of conformity to the official form, it substantially impedes the Commissioner's94 physical task of handling and verifying tax returns. Under the facts of this case, taxpayer has not made a return according to the forms and regulations prescribed by the Secretary as required by section 6011(a). The rejection of the tampered form was authorized by the regulations for failure to conform to the revenue procedure. But whether or not rejected in this case, the question remains -- Is the Internal Revenue Service nevertheless required to accept and treat as a tax return this tampered form? We conclude that it is not.There have been factual circumstances in which the courts have treated as returns, for statute of limitations purposes, documents which did not conform to the regulations as prescribed by section 6011(a). Since the instant case is one of first impression, we will consider these cases that were decided on the statute of limitations issue because a return that is sufficient to trigger the running of the statute of limitation must also be sufficient for the purpose of section 6651(a)(1).The Supreme Court test to determine whether a document is sufficient for statute of limitations purposes has several elements: First, there must be sufficient data to95 calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.It is important to consider the factual circumstances under which this test has been applied. In Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930), at issue was whether the filing of a "tentative return" or the later filing of a "completed return" triggered the statute of limitations. A corporation had filed a tentative return along with a request for an extension of time to file a return which was later filed. The Court found that the filing of the tentative return was not in the nature of a "list," "schedule," or "return" required by tax statutes. It was designed to meet a peculiar exigency and "Its purpose was to secure to the taxpayer a needed extension of time for filing the required return, without defeating the Government's right to prompt payment of the first installment 778 [of tax]." The statute plainly manifested a purpose that the period of limitations was to commence96 only when the taxpayer supplied the required information in the prescribed manner -- the completed return.The Court recognized that the filing of a return that is defective or incomplete may under some circumstances be sufficient to start the running of the period of limitation. However, such a return must purport to be a specific statement of the items of income, deductions, and credits in compliance with the statutory duty to report information and "to have that effect it must honestly and reasonably be intended as such." (Emphasis added.) Thus, the filing of the tentative return was not a return to start the period of limitation running.This issue of whether the document was a return for the statute of limitation purposes was again before the Court in Zellerbach Paper Co. v. Helvering, 293 U.S. 172">293 U.S. 172 (1934). Justice Cardozo, speaking for the Court, said:Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such * * * and evinces an honest and genuine endeavor to satisfy the law. This is so even though at the time of filing the omissions or inaccuracies are such97 as to make amendment necessary. [Zellerbach Paper Co. v. Helvering, supra at 180. Citations omitted.]The most recent Supreme Court reaffirmation of the test articulated in Florsheim and Zellerbach is found in Badaracco, Sr. v. Commissioner, 464 U.S. (1984). The issue was whether the filing of a nonfraudulent amended return following a fraudulent original return started the running of the statute of limitations. One of the taxpayers' arguments was that their original return, to the extent it was fraudulent, was a nullity for purposes of the statute of limitations, relying upon Zellerbach. The Supreme Court noted that the Badaracco returns "purported to be returns, were sworn to as such and appeared on their faces to constitute endeavors to satisfy the law." Although fraudulent, these returns were not nullities under the Zellerbach test.The tampered form before us may purport to be a return in that it may "convey, imply or profess outwardly" to be a return. Black's Law Dictionary 1112 (rev. 5th ed. 1979) It was also sworn to. But it does not reflect an endeavor to satisfy the 779 law. It in fact makes a mockery98 of the requirements for a tax return, both as to form and content. Whether or not the form contains sufficient information to permit a tax to be calculated is not altogether clear. We have held that the attachment of a Form W-2 does not substitute for the disclosure on the return, itself, of information as to income, deductions, credits, and tax liability. Reiff v. Commissioner, 77 T.C. 1169">77 T.C. 1169 (1981). Ignoring the Form W-2, the tampered form does show an amount of "Wages, salaries, tips, etc.," but with the margin description altered from "Income" to "Receipts." Similarly, in place of a deduction, the form has an amount for "Non-taxable receipts." Thus, to compute a tax from this tampered form, one must effectively ignore the margin and line descriptions, imagining instead the correct ones from an official Form 1040, or one must simply select from the form, including the Form W-2, that information which appears to be applicable and correct, and from the information so selected, irrespective of its label, compute the tax. We do not believe such an exercise is what the U.S. Supreme Court had in mind in Commissioner v. Lane-Wells Co., supra at 222-223,99 and Germantown Trust Co. v. Commissioner, 309 U.S. 304">309 U.S. 304, 309 (1940).The tampered form here is a conspicuous protest against the payment of tax, intended to deceive respondent's return-processing personnel into refunding the withheld tax. Since such intentional tampering could go undetected in computer processing, respondent was forced to develop and institute special procedures for handling such submissions. The critical requirement that there must be an honest and reasonable attempt to satisfy the requirements of the Federal income tax law clearly is not met. As the Court of Appeals of the Seventh Circuit has said,In the tax protestor cases, it is obvious that there is no "honest and genuine" attempt to meet the requirements of the code. In our self-reporting tax system the government should not be forced to accept as a return a document which plainly is not intended to give the required information. [United States v. Moore, 627 F.2d 830">627 F.2d 830, 835 (7th Cir. 1980).]The tampered form is not in conformity with the requirements in section 6011(a) or section 1.6011-1(a) and (b), Income Tax Regs., and it is not a return 100 under the judicial line of authority set forth above.780 Section 6651(a)(1) provides that an addition to tax is due if a taxpayer fails to timely file a return unless such failure is due to reasonable cause and not due to willful neglect. The evidence is clear that petitioner's actions were deliberate, intentional, and in complete disregard of the statute and respondent's regulations. Petitioner made no attempt to file an authentic tax return, as he did for 1979, and offers no excuse for his failure to do so. He must accept the consequences of actions knowingly taken. See Reiff v. Commissioner, supra at 1180. Respondent has met his burden of proving that petitioner did not file a return for sections 6011, 6012, 6072, and 6651(a)(1) purposes, and thus an addition to tax is due.Intentional Disregard of Rules and RegulationsRespondent, in the answer, alleged an addition to tax under section 6653(a) in that all or part of petitioner's underpayment of income tax was due to petitioner's negligence or intentional disregard of rules and regulations. It was alleged, further, that the tampered form filed by petitioner was not a return as required101 by section 6011, and that without reasonable cause and due to willful neglect, petitioner failed to file a Federal income tax return for the year 1981 as required by section 6011.When a taxpayer has not filed a return for the taxable year, the underpayment is defined as "The amount of the tax imposed by subtitle A * * if a return was not filed on or before the last date (determined with regard to any extension of time) prescribed for filing such return." 21 In this case, we have found petitioner has willfully failed to file a return for the 1981 year. Additionally, we note petitioner is aware of the income statutes, regulations, and relevant case law such as Eisner v. Macomber, 252 U.S. 189">252 U.S. 189 (1920), as shown by his petition and the memorandum filed with the 1981 tampered form. Furthermore, petitioner has shown that he knows of his duty and how to properly report his income on his 1979 return. We conclude that petitioner's underpayment of tax was due to intentional disregard of rules and regulations.102 781 Proceeding Instituted Merely for DelayRespondent has requested that damages be awarded under section 6673 for instituting a proceeding before the Tax Court merely for delay. For cases commenced in this Court before January 1, 1983, the maximum damages that may be awarded is an amount not in excess of $ 500. 22 Petitioner, in his reply, 23 recognizes that this Court has on many occasions found the argument that wages are nontaxable, frivolous, and groundless. We have warned taxpayers that if they continue to bring frivolous cases, serious consideration would be given to imposing damages under section 6673. See, e.g., Hatfield v. Commissioner, 68 T.C. 895">68 T.C. 895, 899-900 (1977). Petitioner knowingly instituted a frivolous proceeding merely for the purposes of delay. Discussions of the reasons for awarding such damages are set forth in Grimes v. Commissioner, 82 T.C. 235">82 T.C. 235 (1984); Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403 (1984); Perkins v. Commissioner, T.C. Memo 1983-474">T.C. Memo. 1983-474. We see no reason to add to those discussions and hereby award the United States damages103 of $ 500.Accordingly, we grant the motion for summary judgment.An appropriate order and decision will be entered.782 APPENDIXRev. Proc. 80-47Section 1. PurposeThis revenue procedure states the requirements of the Internal Revenue Service relating to the preparation of acceptable reproductions and private design and printing of substitute federal tax return104 forms (i.e., Forms 1040, 1040A, 1120, 940, 941, etc.) and related forms (schedules) for filing purposes in place of the official forms and schedules.Sec. 2. Definitions.01 Definitions Used in This Publication (Relating to Tax Forms).1 Substitute Form. A tax form or related form or schedule that differs in any way from the official version and is intended to replace the entire form that is printed and distributed by the Service. This term also covers those approved substitute formats and forms described in this revenue procedure. (A photocopy of an official form or a copy produced from an unchanged reproduction proof, supplied by the Service, is not a substitute form.) * * Sec. 3. Summary of Contents.01 MESSAGE TO TAX RETURN PREPARERSIF YOU PLAN TO CHANGE OR MODIFY ANY TAX FORMS, YOU MUST FOLLOW INTERNAL REVENUE PROCEDURES AND, IN MOST CASES, YOU MUST GET OFFICIAL APPROVAL BEFORE USING SUBSTITUTE FORMS. THE SERVICE IS CONTINUING A NATIONWIDED PROGRAM TO IDENTIFY AND CONTACT TAX RETURN PREPARERS USING UNAPPROVED FORMS * * .04 THINGS YOU CANNOT DO TO INTERNAL REVENUE SERVICE PRINTED TAX FORMS.1 You cannot change any Internal Revenue Service105 tax form or use your own (non-approved) version, unless permitted by revenue procedures without prior Service approval.2 You cannot change any of the graphics on Forms 1040 and 1040A (except those specified in revenue procedures) without prior approval from the Service.* * * Sec. 5. Approval Information.01 Approvals. * * *783 2 Changes to Tax Forms. * ** * * (a) THE GUIDELINES FOR PRIVATELY DESIGNED AND PRINTED TAX FORMS ARE AS FOLLOWS:(1) Each form must follow the design of the official form as to format, arrangement, item caption, line numbers, line references and sequence. * * Sec. 6. Physical Aspects and Requirements.01 Printing Medium. * 1 Remove Government Printing Office Symbol. When privately printing a tax form, the Government Printing Office symbol and jacket numbers must be removed, and in its place (using the same type size) print the Employer Identifying Number (EIN) of the printer or the Social Security Number (SSN) of the form designer. * * .09 Marginal Printing -- Limited Area. You may print your logo, company or firm name, identifying and collation symbols, etc., in the top left margin of any Service106 form. The area you may use extends vertically from the top of the form's title designation to the top edge of the form and horizontally 3 1/2 inches from the left edge. No printing is permitted in the top right margin. With the exception of the actual tax return form (i.e., Forms 1040, 1040A, 1120, 940, 941, etc.) you may also print in the left vertical and bottom left margins. The bottom left margin you may use extends 3 1/2 inches from the left edge of the form.* * * Sec. 8. Other Considerations.01 Reproductions of official forms and substitute forms which do not meet the requirements of this revenue procedure may not be filed instead of the official forms and schedules. NIMS; CHABOT (In Part) Nims, J., concurring: I write this concurring opinion only to expressly dissociate myself from the views expressed in a concurring and dissenting opinion in support of petitioner's travesty tax return. I find it impossible to suppose that the Supreme Court intended its reasoning in Badaracco to be applied so totally out of context as to give intellectual aid and comfort to petitioner and others like him, whose so-called 784 returns on their face make clear 107 a concerted effort to disrupt the tax system.I fully agree with the reasoning and the result reached in the majority opinion. CHABOT (In Part) Chabot, J., concurring in part and dissenting in part: I agree with the majority's holdings as to the following issues:(1) Petitioner's wages are income, subject to tax, and he is not entitled to an offsetting deduction for "Non-taxable receipts".(2) Petitioner intentionally disregarded respondent's rules and regulations in claiming the unwarranted deduction for "Non-taxable receipts", and so is liable for an addition to tax under section 6653(a).(3) Petitioner is liable for damages under section 6673, for instituting proceedings in the Court merely for delay. (When he filed the petition in the instant case, the only matter in dispute was the deficiency, no additions to tax or damages having yet been asserted. In the words attributable to a sports figure in the 1930's, petitioner "should of stood in bed".)(4) Petitioner is not entitled to a jury trial.From the majority's determination to grant summary judgment that the Form 1040 filed by petitioner was not a tax return, I respectfully dissent.In Badaracco v. Commissioner, 464108 U.S. , (1984), the Supreme Court confronted the contention of the taxpayers therein that the first documents they had filed "were 'nullities' for the statute of limitations purposes." In the course of its analysis, the Supreme Court stated as follows:a document which on its face plausibly purports to be in compliance, and which is signed by the taxpayer, is a return despite its inaccuracies. * * Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), which petitioners cite, affords no support for their argument. The Court in Zellerbach held that an original return, despite its inaccuracy, was a "return" for limitations purposes, so that the filing of an amended return did not start a new period of limitations running. In the instant cases, the original returns similarly purported to be returns, were sworn to as such, and appeared on their faces 785 to constitute endeavors to satisfy the law. Although those returns, in fact, were not honest, the holding in Zellerbach does not render them nullities.An examination of the Form 1040 in question (see Appendix, pp. 788-789 infra) shows the following: (1) It is a document which109 on its face plausibly purports to be in compliance with the law; (2) it is signed by the taxpayer (under penalties of perjury); (3) it does not make believe that only gold and silver coins need be reported; (4) it is not chock-full of refusals to provide information (indeed, it provides all the information requested as to petitioner's "Wages, salaries, tips, etc.", and respondent does not contend that petitioner had any other reportable income); (5) the income is reported on the correct line of the return; (6) an unwarranted deduction is reported on a line reserved for deductions; and (7) apparently the Form 1040 includes everything respondent needed in order to determine petitioner's income tax liability. Compare the instant case with Reiff v. Commissioner, 77 T.C. 1169">77 T.C. 1169, 1177-1179 (1981), and the cases cited therein. Nothing in the majority's opinion or on the face of the Form 1040 shows that respondent is led into error because of the change in the text of any line on the Form 1040.I would hold that the document filed by petitioner constitutes a tax return under the standards adopted by the Supreme Court, as most recently articulated in Badaracco110 v. Commissioner, supra.We deal with this matter in the context of respondent's motion for summary judgment, a context in which, as the majority concede (p. 772 supra), "the factual materials presented 'must be viewed in the light most favorable to the party opposing the motion.'" The majority fail to make a finding of fact that any problem described in their opinion results from any of the eight alterations petitioner made on his Form 1040, whether the alterations are taken singly or in combination.The majority's opinion, at pages 776-777 supra, states that petitioner's alteration of the Form 1040 had "the net effect of * * * the creation of a zero tax liability" and that "because of these numerous irregularities, [it had to] be handled by special procedures and must be withdrawn from normal processing channels." This misdescribes the situation. Both the zero tax liability, and the requirement of special procedures, result from the unwarranted deduction. These problems would exist 786 -- because of the deduction -- even if there were no alterations to the Form 1040.On page 779 of their opinion, the majority state that --to compute a tax from this tampered form, 111 one must effectively ignore the margin and line descriptions, imagining instead the correct ones from an official Form 1040, or one must simply select from the form, including the Form W-2, that information which appears to be applicable and correct, and from the information so selected, irrespective of its label, compute a tax.The Form 1040 in question shows the necessary income information, and does so on the correct line, and that line has not been altered. This information is in accord with the Form W-2 (and not in conflict with it, as was the case in Reiff v. Commissioner, supra, relied on by the majority). There is no need to imagine the correct margin and line descriptions from an official Form 1040 because respondent's problems are no different, with the altered Form 1040, than they would be with an official Form 1040.The majority emphasize (p. 775 supra) the explanation by the Supreme Court in Commissioner v. Lane-Wells Co., 321 U.S. 219">321 U.S. 219, 223 (1944), that "The purpose is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the112 physical task of handling and verifying returns may be readily accomplished." I agree that we must follow the Supreme Court's analysis in applying section 6651(a)(1). However, the record in the instant case does not show -- and the majority have not found -- that the alterations to the Form 1040 (as distinguished from the unwarranted deduction) interfered in any manner with the accomplishment of the physical task of handling and verifying income tax returns.I understand and share the majority's frustration at having to deal with frivolous arguments such as the "equal exchange" theory. However, this Court should not confuse the law as to what is a tax return, just to punish a particular individual or even a class of individuals. The Congress has given the courts more effective tools. We have used these tools to impose damages of up to $ 5,000 for frivolous or groundless actions. (Sec. 6673.) The District Courts have used these tools to uphold penalties of $ 500 for frivolous filings. (Sec. 6702.) As the majority note (p. 771 note 14 supra), the injunction has been 787 used to prevent conduct which interferes with proper administration of the Internal Revenue laws. 113 (Secs. 7402(a), 7407.) When civil fraud is found, the sanction therefor now includes an additional amount under section 6653(b)(2). The criminal fraud fine has been increased from a maximum of $ 10,000 to a maximum of $ 100,000 ($ 500,000 in the case of a corporation). (Sec. 7201.)I would hold that petitioner's Form 1040 is a tax return. Since there is no finding that it was filed late, I would not impose an addition to tax under section 6651(a)(1). From the majority's contrary holding, I respectfully dissent.788 APPENDIXThe Form 1040 filed by petitioner is as follows (the oval markings having been added by the author of this opinion in order to indicate the places where the form was altered):[SEE ILLUSTRATION IN ORIGINAL]790 FORM -- NON-TAXABLE RECEIPTS: Eisner v. Macomber, 252 U.S. 189 (1920)This Form is supplied by the individual taxpayer, who after studying the tax laws (Title 26, U.S.C.) and Supreme Court decisions, in particular the Supreme Court case of Eisner v. Macomber, 252 U.S. 189">252 U.S. 189 (1920), realizes that certain earnings, or more generally certain receipts, are not taxable. After 114 a thorough analysis of this landmark case, when viewed in light of the tax law sections cited below, the individual taxpayer using this Form now puts the processor and/or examiner of this Form -- 1040 tax return for 1981 on notice that what is claimed must be followed and that the return must be processed as filed. The compulsion to follow the return flows from three factors: (1) the tax code sections cited and used to determine any tax liability are law and must be followed and enforced as such, (2) this ruling is a Supreme Court ruling which is therefore part of the United States Constitution and thus part of the Supreme Law of the Land, and (3) the Internal Revenue Service, by it own admission through the Tax Courts(quasi-judicial courts), states that the I.R.S. is only bound to follow the U.S. Constitution and Supreme Court decisions. Since this Supreme Court ruling has never been changed by subsequent decisions, the ruling remains good "law" and hence the processor/examiner is thereby compelled to follow it and process the return as filed.Looking to the specifics of this case, the processor/examiner is hereby notified that to be better prepared to perform his/her job he/she115 should have a full understanding of what the Supreme Court said and the implications following therefrom. Although the case deals with the taxability of a stock dividend issued to the taxpayer and the Court held that such a dividend was not taxable as income, the Court laid down in its opinion rulings that have a far more reaching effect than to just situations dealing with stock dividends. Mr. Justice Pitney recognized the importance of the Supreme Court in dealing with questions of interpretation of the taxing power afforded Congress through the Constitution and the 16th Amendment when he stated at page 206, "A proper regard for its genesis, as well as its very clear language, requires also that this Amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts.In order, therefore, that the clauses cited from Article I of the Constitution may have116 proper force and effect, save only as modified by the Amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not "income", as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, form which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised."791 So the next question to be answered is what did the Court say is incomeIncome is defined very succinctly by the Court in its definition which had been formulated in earlier cases, and was stated at this time at page 207, "Income may be defined as the gain derived from capital from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets . . ."And the Court elaborated on this definition when applied to a stock dividend further on in its opinion by emphasizing the necessity for the severance of the gain from the investment, 117 in order for the gain to be taxed as income.So what the Supreme Court defines as income is what is to be applied when assessing a taxpayer's tax liability, and not what the Congress may say income is or what is to be used as the yardstick is such situations, if such definitions conflict with Supreme Court rulings. In pointing out to the processor/examiner that although the Internal Revenue Code of 1954, 26 U.S.C. § 61attempts to define what is GROSS INCOME and later what is TAXABLE INCOME, Congress is precluded from doing so by this case ruling. But the tax laws do provide for the proper determination of income (gain) from wages, which when used properly do not conflict with the holding of Eisner, supra.Looking to the Internal Revenue Code of 1954, Title 26, U.S.C., the rule for the determination of gain (income) from the sale or other disposition of property (of which the exchange of labor for wages is an instance) is found in sections 1001(a), 1001(b), 1011(a), and 1012. 26 U.S.C. 1001(a):"the gain from the sale or other disposition ofproperty shall be the excess of the amount realizedtherefrom over the adjusted basis." 26 U.S.C. 1011(a):"the adjusted basis . . . shall be the basis (determinedunder section 1012)". 26 U.S.C. 1012:"The basis of property shall be the cost of suchproperty . . ."118 In summary, the gain from the exchange of labor for wages is the excess of the amount of wages realized therefrom over the cost of labor. Section 1001(b) defines "amount realized" as "the sum of money received plus the fair market value of the property (other than money) received." This section recognizes that in the determination of a potential gain, the amount received can be determined either in the form of money or in the fair market value of property other than money. The employee gets his amount realized in money, while the employer, in labor which has a fair market value determined by contract and accepted by government to be the value of wages. It is thus clear that it is the value of the amount received and not its form that is used to determine gain (income). The law permits my employer to use this standard of "value" to declare that the value of my labor is equal to his costs in the form of money (or wages) lost to him, and which he has a right to renew before he receives an excess of that cost, that is, a gain or income. I, as an individual, require that this same standard of "value" allow me to declare that the value of his wages paid to me is equal to my costs or119 losses in the form of valuable labor (time lost forever and skilled energy lost until renewed by the requirements of rest and food, etc. through wages). 792 Therefore, according to section 1001(a), if the law is evenly applied, there would be zero (0) excess of amount realized over the cost of my labor, since the cost of my labor is its fair market value, which is identical to the amount received in wages.The individual using this Form would also like to warn the processor/examiner not to fall into the same mistake as the Government did in Eisner, supra at page 213, "Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned -- a failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it."Other court decisions which may be helpful in clarifying the position held by the individual using this Form are as follows. In Conner v. U.S., 303 F.2d 202">303 F.2d 202 (1969), the court stated "Whatever may constitute income, therefore, must have the essential feature of gain to the recipient. This was120 true when the Sixteenth Amendment became effective, it was true at the time of the decision of Eisner v. Macomber, supra, it was true under section 22(a) of the Internal Revenue Code of 1954. If there is no gain, there is no income". From Champlin v. C.I.R., 123 F.2d 202">123 F.2d 202 (1941) it is stated "Where property is given in exchange for other property, the cost of the property acquired is the value of the property given exchanged therefore". Hence, the values of labor and wages are equivalent. "The moral requirement implicit in every contract of employment, viz, that the amount paid and the service rendered shall bear to each other some measure of just equivalence . . . In principle, there can be no difference between the case of selling labor and the case of selling goods (property)." Adkins v. Childrens Hospital, 261 U.S. 525">261 U.S. 525 (1923).Thus a proper appraisal must be made on an individual to individual basis in assessing taxes. Therefore the individual comes to the inescapable conclusion that this Form, NON-TAXABLE RECEIPTS, when viewed in light of the tax law sections cited and Eisner v. Macomber, supra,*121 is proper and binding on the tax processor and/or examiner. The following computations were used and the figures transferred to the Form-1040 in arriving at the proper tax to be payed.COMPUTATION OF NON-TAXABLE RECEIPTS SECTION:1. Total receipts (taken from line 21, Form-1040)24,401/892. Wages, salaries, tips, etc.24,401/893. Other receipts which do not meet Eisner test0/004. Total Non-taxable receipts (add lines 2 & 3)24,401/89transfer this amount to line 23, Form-10405. Adjusted Gross Income (subtract line 4 from line 1)0/00transfer to line 31, Form-1040 only if no other Adjustments to ReceiptsUnder penalties of perjury, I declare that I have examined this Form and to the best of my knowledge and belief, it is true, correct, and complete.(S) Robert D. Beard, Date 2-22-82FORM-NON-TAXABLE RECEIPTS Footnotes1. In accordance with Rule 121, Tax Court Rules of Practice and Procedure↩, such motion was filed on Jan. 17, 1984, and was submitted more than 30 days after the reply was filed in this case.2. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years at issue.↩3. This theory hereinafter will sometimes be referred to as the "equal exchange" theory. He also argues that the Commissioner has erroneously implied that he is a tax protester, which may prejudice this Court against petitioner in this case. We find this is a rhetorical argument rather than an assignment of error.↩4. This is the only justiciable error alleged by petitioner in the reply in response to respondent's allegation that there was no justiciable error present. Rule 37(c) provides, "where a reply is filed, every affirmative allegation set out in the answer and not expressly admitted or denied in the reply, shall be deemed to be admitted."↩5. An affidavit of Timothy S. Murphy, an attorney who has custody and control over the Commissioner of Internal Revenue's administrative file along with exhibits, was filed on Jan. 17, 1984. The attached exhibits include a copy of the statutory notice sent to petitioner for the 1981 year, a copy of Form W-2 issued to petitioner, a copy of the purported "return" and accompanying memorandums submitted by petitioner, a copy of petitioner's 1979 tax return (he filed a joint return) with accompanying Forms W-2, and a Form CSC 8-255-B letter sent to petitioner dated July 16, 1982.↩6. Petitioner admits in his petition that he actually received such amounts.↩7. Petitioner did not allege that an extension of time to file was requested.↩8. Since the Court records only contain copies of the tampered form, we cannot comment to what extent the tamperings are evident to the naked eye.↩9. Petitioner's admissions in his reply filed Apr. 1, 1983, pars. 9(b) and 10(a).↩10. Although the facts in each case are not identical, they are sufficiently similar to be classified as parts of a single protester group.↩11. For the 1980 taxable year, 9 of the 10 tampered forms had "Non-taxable receipts" inserted on line 24, and " Eisner v. Macomber, 252 U.S. 189↩," inserted on line 25. In two places in the left margin of these "forms" the word "receipts" replaced the word "income." On lines 9, 13, 19, and 21, the word "gain" replaced "income," and on line 22, the word "income" had been deleted. Five of the 1980 tampered forms had the same changes as above, except that line 25 had not been changed. One tampered form for the 1980 year was a copyrighted 1980 Eugene J. May "form" that placed "Non-taxable receipts" on line 23, and inserted cases on lines 24 through 29. Numerous other changes were made by replacing the word "income" with "receipts."12. For the 1981 year, 11 of the 13 tampered forms had inserted "Non-taxable receipts" on line 23, replaced the word "income" in the left margin of the form with "receipts," replaced the word "income" on lines 8a, 11, 18, and 20, with the word "gain," and deleted the word "income" from line 21. The remaining 2 "forms" for the 1981 year placed "Non-taxable receipts" on line 22, were copyrighted Eugene J. May 1981 "forms," and had numerous other changes similar to those in the 1980 Eugene J. May "forms."↩13. In the transcript of the hearing on Feb. 22, 1984, counsel for respondent brought to our attention information regarding these special procedures. Reference was made to affidavits filed in certain cases in the above-mentioned group. We take judicial notice of an affidavit of Marjorie A. Wyman, filed in Michael J. Blackwell↩, docket No. 26384-82.14. We note that a similar type of return was filed by a Robert D. Beard of Carleton, Mich., and in Beard v. United States, 580 F. Supp. 881 (E.D. Mich. 1984), a sec. 6702 civil penalty of $ 500 was sustained. The court in that case granted a motion to dismiss without an oral argument on the basis of papers filed. Petitioner filed a tampered form and made these same arguments concerning "receipts," "non-taxable receipts," and the "equal exchange" theory. The purported "return" was found frivolous on its face and petitioner was found liable for the penalty pursuant to sec. 6702, a section that imposes a civil penalty for the filing of a frivolous "return."A similar type of return as that used by petitioner was again at issue in the case of United States v. May, 555 F. Supp. 1008 (E.D. Mich. 1983). The U.S. District Court for the Eastern District of Michigan has recently enjoined May from engaging in conduct which interferes with the proper administration of the Internal Revenue laws. Included was conduct by Mr. May relating to the Eisner v. Macomber returns.We also note that the "Non-taxable receipts" deduction has been used by taxpayers in the Michigan area on other occasions. Cannon v. United States, an unreported case ( E.D. Mich. 1983, 52 AFTR 2d 83-6348, 83-2 USTC par. 9699); Corcoran v. United States, an unreported case ( E.D. Mich. 1983, 84-1 USTC par. 9148); Ervans v. United States, an unreported case ( E.D. Mich. 1984, 53 AFTR 2d 84↩-772, 84-1 USTC par. 9300).15. Such outside materials may consist of affidavits, interrogatories, admissions documents, or other materials which demonstrate the absence of such an issue of fact despite the pleadings. See Note to Rule 121(a), 60↩ T.C. 1127 (1973).16. See note 5 supra↩.17. Sec. 1.6011-1(a), Income Tax Regs.↩ General requirement of return, statement, or list. These regulations specifically apply to persons subject to any tax under subtitle A of the Code.18. Sec. 1.6011-1(b), Income Tax Regs.↩ Although not applicable to the facts of the instant case, the regulations also provide for the filing of a timely tentative return when the official form is not available, provided that without unnecessary delay such a tentative return is supplemented by a return made on the proper form.19. Respondent could have argued that the Commissioner's rejection of the tampered form as a return was a proper exercise of his discretion under these regulations. Since he did not, we do not address this argument.↩20. Rev. Proc. 80-47, 2 C.B. 782">1980-2 C.B. 782. The current version of this revenue procedure is Rev. Proc. 84-9↩, I.R.B. 1984-7, 14.21. Sec. 6653(c)(1) and sec. 301.6653-1(c)(1), Proced. & Admin. Regs. See Estate of Haseltine v. Commissioner, T.C. Memo. 1976-278↩.22. Sec. 6673, as in effect prior to amendment by sec. 292(b), Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 574, provided as follows:"Whenever it appears to the Tax Court that proceedings before it have been instituted by the taxpayer merely for delay, damages in an amount not in excess of $ 500 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax."↩23. See reply at par. 9(b).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619198/	Mississippi Chemical Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentMississippi Chemical Corp. v. CommissionerDocket Nos. 6556-82, 32440-831United States Tax Court86 T.C. 627; 1986 U.S. Tax Ct. LEXIS 128; 86 T.C. No. 39; April 9, 1986, Filed 128 Decisions will be entered under Rule 155. Upon the facts, held, that --1. Amounts paid by P, a nonexempt cooperative, resulting from purchases by SNS, SFA, and MFC, constituted patronage dividends deductible from its gross income pursuant to sec. 1382, I.R.C. 1954.2. An amount paid by P, resulting from a purchase by PR, was neither deductible as a patronage dividend nor excludable as a purchase price refund.3. "Dealer credits" granted by P to SNS were not ordinary or necessary business expenses within the meaning of sec. 162. Arthur E. Bryan, Jr., and Darrell McGowen, for the petitioner.Thomas R. Ascher, for the respondent. Korner, Judge. KORNER129 627 Respondent determined deficiencies in Federal income tax against petitioner as follows:Additions to taxDocket No.TYE June 30 --Deficiencysec. 6653(a) 26556-821976$ 4,042,534.95$ 202,126.7519774,351,882.91217,594.1532440-831978383,128.300 1979330,120.680 130 After concessions by both parties, the issues remaining for decision are (1) Whether, for the taxable years ending 628 June 30, 1976, through June 30, 1979, certain amounts paid by petitioner, a nonexempt cooperative, constituted patronage dividends deductible from its gross income pursuant to section 1382; (2) whether, for the taxable year ending June 30, 1976, a payment made by petitioner constituted a patronage dividend or a purchase price refund, and thus was deductible/excludable from petitioner's gross income; and (3) whether certain "dealer credits" granted by petitioner during the taxable years ending June 30, 1978, and June 30, 1979, were ordinary and necessary business expenses within the meaning of section 162.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.As of the dates of filing the petitions herein, petitioner's principal place of business was in Yazoo City, Yazoo County, Mississippi. Petitioner timely filed U.S. corporation income tax returns for the taxable years ending June 30, 1976, through June 30, 1979.BackgroundPetitioner131 was organized as a nonexempt supply cooperative in 1948 under the general corporate laws of Mississippi. During the years in issue, it was primarily engaged in the manufacturing and marketing of nitrogenous and other fertilizers, on a cooperative basis, for approximately 20,000 shareholders. The total sales of petitioner's fertilizer products during these years were as follows:TYE June 30 --Total sales1976$ 219,058,0001977236,465,0001978245,669,0001979262,138,000Petitioner's primary purpose was to provide fertilizer products at cost to its shareholders. Its articles of incorporation 3 required that a majority of its business be transacted 629 with its shareholders. During the years in issue, petitioner sold less than 10 percent of its fertilizer to nonshareholders.Patronage rights were granted, pursuant to petitioner's132 articles of incorporation and bylaws, to the holders of the various types of petitioner's common stock. The patronage rights guaranteed each shareholder the preferred right to purchase at least the amount of fertilizer which was allocated to his shares. The rights were issued to each shareholder in the same proportion that the number of shares owned by the shareholder bore to the number of shares of issued and outstanding common stock. For example, the bylaws provided that a share of nitrogen series I common stock gave the holder thereof the preferred right to purchase 15 units of nitrogen products. Similarly, a share of nitrogen series II common stock granted the preferred right to purchase 5 units of nitrogen products and a share of nitrogen series III common stock granted the preferred right to purchase 1 unit of nitrogen products. Petitioner's board of directors met annually, prior to the commencement of each of the years in issue, to determine the shareholder product allocation for the ensuing fiscal year pursuant to the above ratios.The articles of incorporation and bylaws did not require that purchases be limited to a direct relationship to the stock owned. Thus, some133 shareholders purchased more and some shareholders purchased less fertilizer than their patronage rights provided. If there was excess fertilizer for a given year because demand was low, and some shareholders did not fully exercise their patronage rights, the excess was either sold to other shareholders or to nonshareholders.In addition to patronage rights, each shareholder who purchased fertilizer products was entitled to receive patronage dividends. The amount of patronage dividends was determined, annually, as of the close of each fiscal year, and was defined in the articles of incorporation and bylaws as the excess of the aggregate selling price over the aggregate cost of the fertilizer products sold to the shareholders. During the years in issue, petitioner claimed deductions from its income for patronage dividends paid as follows: June 30, 1976 - $ 40,205,694; June 30, 1977 - $ 22,158,350; 630 June 30, 1978 - $ 18,067,367; and June 30, 1979 - $ 20,196,639.With respect to each shareholder, the articles of incorporation and bylaws provided that the patronage dividends were to be paid based solely on the dollar value of the business done by the shareholder with petitioner, 134 regardless of (1) the amount of stock owned by the shareholder, (2) the corresponding amount of patronage rights appurtenant to such stock, and (3) whether the shareholder was a shareholder of record at the end of the fiscal year in which the purchase was made. The articles of incorporation and bylaws further provided that the patronage dividends were to be paid pursuant to a resolution adopted by the board of directors prior to the beginning of the year in which petitioner received the amounts from which the patronage dividends were to be paid.Assignment of the patronage rights pertaining to petitioner's stock was permitted pursuant to its bylaws, provided that the terms and the conditions of the assignment did not conflict with its articles of incorporation or said bylaws. The assignment was also subject to approval by the board of directors.When an assignment of patronage rights took place, the assignee would then buy fertilizer products directly from petitioner, whether or not he was also a shareholder of petitioner. Patronage dividends on these purchases, however, were treated differently. The right to patronage dividends attached solely to petitioner's common stock, 135 not to the patronage rights. In this regard, prior to June 10, 1977, petitioner's bylaws provided that patronage dividends could not be allocated or distributed to purchasers of fertilizer who were not shareholders at the time the purchases were made. 4 Thus, during this time period, if the assignee-purchaser was also a shareholder of petitioner at the time of his purchases, then he was entitled to receive patronage dividends from petitioner. However, if the assignee-purchaser was not a shareholder of petitioner at the time of his purchase, then he was not entitled to receive 631 patronage dividends. In other words, by virtue of the assigned patronage rights, petitioner could sell fertilizer directly to nonshareholders, but it could not, prior to June 10, 1977, pay the nonshareholders any resulting patronage dividends.136 Southern Nitrogen Supply Corp.Southern Nitrogen Supply Corp. (SNS) was organized as a corporation under the general laws of Mississippi on January 15, 1954. The corporate charter of SNS provided, inter alia, that its stated purpose was to buy, sell, deal in and distribute fertilizers, and related products. In addition, the charter provided that each share of common stock was entitled to receive dividends in a sum not to exceed 5 percent per annum, with the dividends to be noncumulative, and that each share was to be entitled to one vote.At the time SNS was incorporated, all 49 of the individuals who purchased stock in SNS were also shareholders of petitioner. Two of the seven original incorporators of SNS were associated with petitioner; one, Owen Cooper, was an officer of petitioner, while the other, W.B. Dunwoody, was an employee. With the exception of Mr. Cooper, however, none of the other directors or officers of SNS were directors or officers of petitioner at or near the time of the formation of SNS. 5137 SNS had two full-time employees, 6 and it maintained its own office facilities, a bank account, its own payroll records, sales invoices, records of patronage rights assigned to it, cash receipts and disbursements journals, and a general ledger. It operated out of two leased offices and a leased record storage area in Yazoo City, Mississippi.SNS purchased fertilizer directly from petitioner, in part pursuant to stock which it owned in petitioner, 7 and in part 632 with patronage rights assigned to it from other shareholders of petitioner. 8 SNS then resold the fertilizer to its customers138 without ever having to take physical possession of it. The fertilizer was shipped direct from petitioner's facilities to SNS's customers. SNS has never owned or leased any land, building, or fertilizer storage facilities.During the taxable years in issue, SNS purchased the following amounts of fertilizer from petitioner through its own patronage rights, as well as through patronage rights assigned to it by other shareholders of petitioner, and, as a result of these purchases, received the following payments which were treated as patronage dividends139 by petitioner:FertilizerPayments treated bypurchasespetitioner asTYE June 30 --by SNSpatronage dividends1976$ 1,060,895$ 307,492.0719773,401,737631,138.0119783,056,682482,680.7419791,677,111287,922.00The Assignments by SNSDuring the taxable year ending June 30, 1976, SNS entered into three separate agreements whereby it assigned patronage rights which it held to a total of 28,000 tons of petitioner's nitrogen fertilizer production to Southern Farmers Association (SFA), MFC Services (MFC), and Pro Rico Industries (Pro Rico), in the amounts of 10,000 tons, 9,000 tons, and 9,000 tons, respectively. 9 The consideration paid for the assignments was $ 262,500 from SFA, $ 225,000 from MFC, and $ 337,500 from Pro Rico. SFA, MFC, and Pro Rico additionally agreed to assign to SNS any patronage dividends they might receive as a result of their purchases. 633 Petitioner was not a party to the assignment agreements, but the agreements were presented to petitioner before any purchases were made using the assigned patronage rights.140 During the taxable year ending June 30, 1976, SFA, MFC, and Pro Rico, pursuant to the patronage rights assigned to them by SNS, purchased nitrogen fertilizer directly from petitioner in the dollar amounts of $ 997,233, $ 1,117,240, and $ 1,115,977, respectively. Within 8 1/2 months after the close of the taxable year in which the SFA, MFC, and Pro Rico purchases occurred, petitioner made payments in the amounts of $ 323,823, $ 289,040, and $ 323,457 directly to SNS. These payments were a result of the respective purchases by SFA, MFC, and Pro Rico, were computed on a patronage basis, and were treated as patronage dividends by petitioner, but were paid directly to SNS at the direction of SFA, MFC, and Pro Rico, respectively. SFA and MFC were shareholders of petitioner throughout the taxable year ending June 30, 1976, and thus were shareholders at the time of their purchases. Pro Rico, however, was a shareholder of petitioner only until November 10, 1975, and was not a shareholder at the time its purchases were made.The Dealer CreditsPetitioner had approximately 1,200 shareholder-dealers during the years in issue, and granted each dealer a credit on the purchase price of fertilizer141 in the amount of $ 5 per ton purchased. The use of dealers is a common practice in the industry and over 50 percent of petitioner's fertilizer business was done through its dealers, resulting in approximately $ 9 million worth of dealer credits being granted for each of the years in issue.The dealers were required by petitioner to purchase fertilizer in carload lots ranging from 18 to 80 tons. Annual purchases by the dealers varied depending on the size of the dealer. A dealer in a small rural area, for example, might purchase as little as 300 tons of petitioner's fertilizer products per year, while other dealers might purchase several thousand tons per year.In order to qualify for the dealer credits, the dealers were required to perform certain services for petitioner. Though not all of petitioner's dealers provided the same services, 634 the more important services appeared to be that: first, the dealers were responsible for purchasing an acceptable volume of fertilizer, including taking possession of at least 40 percent of the product during the off-season, 10 in order to prevent petitioner from accumulating fertilizer in excess of its storage capacity, and second, 142 the dealers were responsible for providing prompt payment for the fertilizer, thus providing a source of working capital for petitioner. Other services (provided by some dealers but not by others) included: maintaining an inventory of fertilizer products; maintaining a retail outlet; being open to the public for 5 days during the week; and being available to assist farmers in the area to perform tasks such as spreading fertilizer.During each of the years in issue, SNS purchased approximately 30,000 tons of fertilizer from petitioner. Petitioner treated SNS as a dealer and accordingly "paid" SNS dealer fees, at the rate of $ 5 per ton, in the amount of $ 126,746.82 for the taxable year ending June 30, 1978, and $ 60,777.83 for the taxable year ending June 30, 1979, by crediting such amounts against the gross amounts due on the invoice for the fertilizer. SNS remitted to petitioner the gross invoice price 143 less the dealer credit. Petitioner treated the gross invoice price as income and deducted the dealer credit as a business expense.The following table provides a summary of the disallowances by respondent which are relevant to this case:Taxable year ending June 30 --1976197719781979Patronage dividendsdisallowed:On purchases bySNS$ 307,492.07$ 631,138.01$ 482,680.74$ 287,922.50On purchases bySFA323,823.00On purchases byMFC289,040.00On purchases byPro Rico323,457.00Dealer creditsdisallowed126,746.8260,777.83Total disallowances1,243,812.07631,138.01609,427.56348,700.33635 OPINIONI.The first issue for decision is whether, for the years before us, the amounts paid by petitioner to SNS, which resulted from the purchases of fertilizer by SNS, SFA, and MFC, were properly categorized as patronage dividends and thus deductible 11 from petitioners' gross income.144 Resolution of this question requires us to examine the definition of "patronage dividend." The statutory definition of this term, located in section 1388(a), is as follows:SEC. 1388(a). Patronage Dividend. -- For purposes of this subchapter, the term "patronage dividend" means an amount paid to a patron by an organization to which part I of this subchapter applies -- 12(1) on the basis of quantity or value of business done with or for such patron,(2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and(3) which is determined by reference to the net earnings of the organization from business done with or for its patrons.Such term does not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings from business done with or for other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions.145 Of particular importance to the disposition of this case is the language requiring that the distribution be made out of earnings from "business done with or for patrons." The parties do not dispute that petitioner has complied with the other provisions of section 1388(a); they disagree as to 636 whether the payments to SNS resulted from business done with or for a patron.Section 1388 does not explicitly define the term "patron." Looking to the regulations, however, we find that:The term "patron" includes any person with whom or for whom the cooperative association does business on a cooperative basis, whether a member or a nonmember of the cooperative association, and whether an individual, a trust, estate, partnership, company, corporation, or cooperative association. [Sec. 1.1388-1(e), Income Tax Regs.]During the years in issue, SNS was a corporation and, as such, qualified as a "person." SNS was also a person "with whom" petitioner did business, in that SNS purchased fertilizer products from petitioner and petitioner delivered the products by shipping them to destinations designated by SNS. The business was done with SNS on a "cooperative basis" in that SNS was a stockholder146 of petitioner and thus was contractually entitled, pursuant to petitioner's articles of incorporation and bylaws, to receive patronage dividends based on the value of its business done with petitioner. It is clear that the patronage dividends paid to SNS on its purchases did result from business done with or for a patron. It is also clear that the patronage dividends on the purchases by SFA and MFC were a result of business done with or for patrons for the same reasons we have articulated with respect to SNS.Our result is not affected by the assignment agreements existing between SNS and SFA, and SNS and MFC. In Land O'Lakes, Inc. v. United States, 675 F.2d 988">675 F.2d 988, 989-990 (8th Cir. 1982) the Eighth Circuit indicated that patronage dividends were deductible at the cooperative level, despite the fact that the right to receive these dividends was, in effect, assigned by patrons of the cooperative to nonpatrons. Here, an even stronger case exists for recognizing the assignments because the parties to the assignment agreements were all shareholder-patrons. Petitioner's bylaws, moreover, specifically provided that the patronage rights were assignable. 147 Assignment of the resulting patronage dividends was also allowed, provided, as was true at least with respect to SNS, SFA, and MFC, that the patronage dividends were not allocated by petitioner to persons who were not shareholders at the time the purchases were made. 637 Thus, in our opinion, the assignment agreements do not affect the deductibility of the patronage dividends by petitioner. If A owes money to B, and the latter directs that the money be paid to C in discharge of B's debt to C, it is a payment to or for the benefit of B, and is still B's income in the first instance. See Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 729-730 (1929); Huff v. Commissioner, 80 T.C. 804">80 T.C. 804, 814-815 (1983). We note further, that petitioner was not a party to the agreements between SNS and SFA and MFC, respectively, but simply honored the requests of the latter as to payment.Petitioner thus argues that SNS, SFA, and MFC were patrons with whom petitioner did business during the years in issue. Respondent disagrees with petitioner and directs us to a case where he believes a court was faced with a similar problem, Mississippi Valley Portland Cement Co. v. United States, 408 F.2d 827 (5th Cir. 1969),148 cert. denied 395 U.S. 944">395 U.S. 944 (1969) (MVP Cement).Respondent's reliance on MVP Cement is misplaced. In MVP Cement, virtually all of the patronage rights to buy the taxpayer-cooperative's cement were assigned to Valley Sales, as sales agent for the cooperative and for its shareholders. As a result of this arrangement, all of the cement produced by the cooperative was delivered to Valley Sales to be sold to the general public. At the conclusion of each tax year, the net receipts from sales of cement over and above production costs were then allocated and distributed to the cooperative's shareholders of record, in proportion to each person's stock ownership as of the year's end. On these facts, the Fifth Circuit held that the cooperative's profits were not from business done with or for its shareholders, and therefore the payment of its margins to its shareholders were not excludable from its income as patronage dividends.MVP Cement is not dispositive of the facts here primarily for two reasons. First, in MVP Cement, the Fifth Circuit was clearly faced with a situation where the cooperative's product (i.e. the cement) went one way, and149 the so-called patronage dividends went another. There, almost all of the cement was delivered to Valley Sales and then sold to the general public, yet the alleged patronage dividends were 638 paid directly to the cooperative's shareholders, in proportion to each person's stock ownership at the end of the year. Valley Sales, acting as sales agent, could not be considered the true patron of the cooperative, nor could the cooperative's shareholders, who bought no product. The true purchasers of the product, and thus the true patrons, were the purchasers who bought from the taxpayer through Valley Sales as agent, yet those patrons received no patronage dividend.Here, however, the product was bought by SFA, MFC, and SNS (even though later perhaps resold by them), and the resulting patronage dividends were required to be paid to these same shareholder-patrons, and they were. As we previously indicated, the fact that SFA and MFC assigned their patronage dividends to SNS is wholly irrelevant. More importantly, the dividends were not paid in proportion to SNS, SFA, and MFC's stock ownership in petitioner, as was the case in MVP Cement, but instead were paid based on the dollar150 value of the purchases by them. Thus, unlike the pseudo-cooperative in MVP Cement, petitioner here was clearly in compliance with the provisions of sections 1388(a) and 1382(b).Second, in MVP Cement, the arrangement between the taxpayer-cooperative and Valley Sales was one of principal-agent. Here, on the other hand, SNS, SFA, and MFC were each independent entities, purchasing from petitioner for their own accounts. They were true patrons. It follows that, because SNS, SFA, and MFC acquired title to the product, unlike Valley Sales, they could make various contractual arrangements between themselves without the assent of petitioner, including the terms upon which they bought and sold preferred patronage rights. 13151 As we have stated, the patronage dividends paid by petitioner were a result of, and in proportion to, the value of 639 the purchases made by SNS, SFA, and MFC. They were also paid in full compliance with the provisions of sections 1388(a) and 1382(b). This is where our inquiry should and does end. We cannot agree with respondent that, as a result of the various assignment agreements, MVP Cement somehow controls the facts here. Petitioner was never a party to these agreements, and to yield to respondent's argument would place an extreme hardship on petitioner. By holding for respondent, we would, in effect, be requiring petitioner not only to comply with the statutory requirements of subchapter T, but also to control the activities of its shareholder-patrons. The law does not require this.We accordingly hold that the payments by petitioner to SNS, SFA, and MFC were properly classified as patronage dividends, and as such, were deductible from petitioner's gross income under section 1382(b).II.The second issue for decision is whether, for the taxable year ending June 30, 1976, the amount paid by petitioner to SNS, as a result of the purchase of fertilizer by Pro Rico, 152 was deductible or excludable from petitioner's gross income.The facts regarding petitioner's sales to Pro Rico are the same as the facts regarding petitioner's sales to SFA and MFC, with one vital difference: Pro Rico was not a shareholder of petitioner at the time the fertilizer was purchased.Petitioner's articles of incorporation did not address the payment of patronage dividends to nonshareholders at the time of said purchase, but its bylaws provided that "The excess of the selling price over the cost of products sold to nonshareholders shall not be allocated to such non-shareholder-patrons." Thus, as petitioner admits on brief, because Pro Rico was not a shareholder at the time of its purchase, and because neither petitioner's bylaws nor its articles of incorporation created a preexisting obligation between petitioner and Pro Rico, the payment by petitioner of "patronage" resulting from said purchase was not deductible from gross income under the provisions of 640 section 1382(b). See sec. 1388(a)(2); sec. 1.1388-1(a)(1), Income Tax Regs.14153 Petitioner nevertheless maintains that the payment to Pro Rico qualifies for exclusion as a refund of the purchase price of the fertilizer. As authority for this proposition, petitioner cites Dixie Dairies Corp. v. Commissioner, 74 T.C. 476 (1980); Haas Bros., Inc. v. Commissioner, 73 T.C. 1217">73 T.C. 1217 (1980); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), affd. 630 F.2d 670">630 F.2d 670 (9th Cir. 1980); and Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707">26 T.C. 707 (1956).In each of the aforementioned cases, the Court indicated that a purchase price refund was excludable from the taxpayer-vendor's gross income. A common thread runs through each of these cases, viz, in each case there was an agreement between the taxpayer and its customers, entered into prior to the sale of the product, providing for the refund of some part of the purchase price. 15 In this case, the common thread does not appear.154 In its search for a purchase price refund agreement, petitioner points to the assignment agreement between Pro Rico and SNS. Petitioner argues that this agreement, which was presented to petitioner prior to the purchase of fertilizer by Pro Rico, shows that there was a purchase price refund agreement between petitioner and Pro Rico.The assignment agreement in question provides, inter alia, that "All patronage refunds will accrue to Southern Nitrogen Supply Company." This language, contends petitioner, indicates that a refund of the purchase price equal in amount to a patronage dividend was anticipated by Pro Rico, and that petitioner accepted Pro Rico's order and purchase price knowing this to be the case.The burden of proving the existence of the purchase price refund agreement is on petitioner. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a). We do not believe that 641 this burden has been met. The only evidence petitioner has introduced is that of the assignment agreement between Pro Rico and SNS. Petitioner was not a party to the assignment agreement, and thus it cannot be held that this defined petitioner's obligations155 with respect to Pro Rico. If anything, the agreement suggests that the payment to SNS, at the direction of Pro Rico, was treated by petitioner as a patronage dividend.16 Accordingly, we conclude that the payment in issue was not deductible or excludable from petitioner's gross income, either as a patronage dividend or as a price rebate.III.The third issue for decision is whether the dealer credits granted by petitioner to SNS during the taxable years ending June 30, 1978, and June 30, 1979, were ordinary and necessary business expenses within the meaning of section 162.Section 162 allows a deduction for all "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Whether expenditures are directly related to a business and whether they are ordinary and necessary are usually156 questions of fact. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 475 (1943); Henry v. Commissioner, 36 T.C. 879">36 T.C. 879, 883 (1961). For business expenditures to be "ordinary," the payments must be normal, usual, and customary in size and character; they must arise from transactions which were of a common or frequent occurrence in the type of business involved. Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90, 93 (1952). For the expenditures to be "necessary," within this context, they must be appropriate and helpful. Commissioner v. Heininger, supra at 471. The taxpayer is ordinarily the best judge as to whether the expenditures were "necessary." Henry v. Commissioner, supra at 884.With these well-established principles in mind we turn to the facts before us. Petitioner argues, and we agree, that the primary functions of a dealer for petitioner, which would 642 justify some price concession, were twofold: first, the dealer would be responsible for taking delivery of a substantial amount (i.e., at least 40 percent of its total acquisitions) of 157 fertilizer during the off-season, 17 and second, the dealer would be responsible for prompt payment for the fertilizer. The former is important because, otherwise, petitioner would have to pay the high costs of storing the huge amounts of fertilizer it produced during the off-season, and the latter is an important source of working capital to enable petitioner to operate during this time period. It is these benefits to petitioner which justify the granting of a price concession of $ 5 per ton as a dealer credit or an "agent fee" and which makes such a concession an ordinary and necessary expense within the meaning of section 162.The parties do not dispute that SNS purchased approximately 30,000 tons of fertilizer during each of the years in issue. For SNS to comply with the above-stated dealer requirements during the off-season, however, it would have had to acquire, and provide payment for, at least 40 percent158 of 30,000, or 12,000 tons of fertilizer.Petitioner relies on the testimony of its president, Thomas C. Parry, and certain invoices introduced in evidence, in order to show that it did meet these requirements.Mr. Parry testified to the effect that SNS took approximately 50 percent of its fertilizer during the off-season. 18 We find this brief and very general testimony to be unconvincing, particularly where, as here, the time, the 643 amount, and the billing of SNS's purchases could have been precisely proved through petitioner's sales invoices to SNS. See Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 699 (1982).159 The sales invoices produced, however, are also unconvincing. Petitioner has provided us with only 13 invoices on which dealer credits were granted and only 4 of these invoices were actually billed to SNS. The pertinent facts of these 4 invoices may be summarized as follows:InvoiceQuantity purchasedAmount ofdate(in tons)dealer credits1.June 12, 197823.10$ 115.502.June 30, 1978484.902,424.50Totals for TYEJune 30, 1978508.002,540.003.Nov. 6, 19784,251.9621,259.804.June 11, 197921.26106.30Totals for TYEJune 30, 19794,273.2221,336.10As the above table indicates, petitioner has fallen well short of showing that SNS made the required purchases of 12,000 tons of fertilizer, and paid for them, for each of the years in issue in the off-season. The "ordinary and necessary" element of the claimed deduction has therefore not been shown. Because petitioner has failed to meet its burden of proof on this issue, Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a), respondent's disallowance of the claimed deductions must be sustained.To reflect the foregoing, as well as concessions160 made by both parties,Decisions will be entered under Rule 155. Footnotes1. The instant cases were consolidated by order of this Court dated Apr. 8, 1985.↩2. 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 Tax Court Rules of Practice and Procedure, except as otherwise noted.↩3. Unless otherwise stated, all references to petitioner's articles of incorporation and bylaws are to said documents as they existed during the years in issue.↩4. The bylaws were amended, effective June 10, 1977, to provide that petitioner "may agree, by contract or agreement entered into prior to the sale, to pay a nonshareholder-patron a patronage refund on any product sold to such nonshareholder-patron."↩5. During the taxable years in issue, Mr. Cooper was a director but not an officer of petitioner and was neither an officer nor a director of SNS. Neither party has provided us with any evidence as to whether SNS and petitioner had any directors or officers in common during the years before us.↩6. During the years in issue, the two employee positions consisted of a general sales manager and a secretary. The general sales manager position was held by Mr. R.H. Fisackerly from 1967 until his death in September 1979. Prior to 1967, Mr. Fisackerly served as vice president of sales for petitioner. He also owned stock in petitioner, and assigned the patronage rights attendant to such stock to SNS through June 30, 1979.↩7. During the years in issue, SNS owned 1,118 shares of petitioner's common stock. Petitioner has never owned any of the stock of SNS.↩8. The number of petitioner's shareholders who assigned their patronage rights to SNS during the years in issue was as follows:No. of shareholdersTYE June 30 --assigning rights to SNS1976465197745819784361979425As previously found, petitioner had approximately 20,000 shareholders in the years in issue.↩9. The assignment agreements were substantially identical, with the exception of the amount of product allocation for, and the initial amount of cash paid by SFA, MFC, and Pro Rico.↩10. The term "off-season" is defined as the 10-month period beginning in May and continuing through February.↩11. There is some confusion as to whether patronage dividends are treated as exclusions or deductions. The statute on its face appears to indicate that these dividends are treated as deductions. Sec. 1382(b). In Mississippi Valley Portland Cement Co. v. United States, 408 F.2d 827">408 F.2d 827, 831 n. 6 (5th Cir. 1969), cert. denied 395 U.S. 944">395 U.S. 944 (1969) (MVP Cement), however, the Fifth Circuit stated "The intent to treat these payments as exclusions could not be clearer if Congress had used the word 'exclusion'." Accord Des Moines County Farm Service Co. v. United States, 324 F. Supp. 1216">324 F. Supp. 1216, 1217 and n. 2, 1219 (S.D.Iowa), affd. per curiam 448 F.2d 776">448 F.2d 776 (8th Cir. 1971). Cf. Stevenson Co-Ply, Inc. v. Commissioner, 76 T.C. 637">76 T.C. 637, 644↩ and n. 9 (1981). We do not find it necessary to resolve this question here, as our result is consistent with the use of either term. For purposes of convenience only, we will use the term "deduction."12. The parties have stipulated, and we hold, that petitioner was a cooperative within the meaning of sec. 1381(a) and satisfied the consent provisions of sec. 1388(c)↩.13. There are other differences between the two cases. For example, in MVP Cement, the purported patronage dividends were paid to shareholders of record at the end of the year; thus, if a shareholder disposed of his stock prior to yearend, he would not receive a refund. Here, however, the patronage dividends were paid to shareholders who (1) purchased fertilizer during the year, and (2) who made said purchases while they were shareholders; regardless of whether they still held stock at the end of the year. Also, in MVP Cement↩, the cooperative discouraged its shareholders from purchasing the cement, preferring instead to deliver the product to its sales agent. By contrast, in the instant matter, the parties have stipulated that petitioner never discouraged its shareholders from purchasing fertilizer.14. Sec. 1.1388-1(a)(1), Income Tax Regs., requires the preexisting obligation to be evidenced by either the articles of or bylaws of the cooperative, a requirement under State law, or by a written contract.As we have indicated in the text, neither petitioner's articles of incorporation nor its bylaws fulfilled this requirement. Nor is it clear that State law created such an obligation, particularly where, as here, petitioner's bylaws precluded such an arrangement. Cf. Miss. Code Ann. sec. 79-17-25(1985). Since the parties have not presented us with any evidence of a written contract, we must conclude that there was no preexisting obligation between petitioner and Pro Rico within the meaning of sec. 1388(a)↩.15. See also Eaton v. Commissioner, T.C. Memo. 1979-320↩.16. In fact, petitioner deducted it as such in its return, as the parties have stipulated, although, as we have held, petitioner was not obligated to pay any patronage refund to Pro Rico.↩17. As was stated in our findings, the "off-season" consists of the 10 months other than March and April.↩18. Mr. Parry testified as follows:Q. What are some of these [dealer] qualifications?A. Well, qualifications are -- basically, they're simple. The whole idea of a dealer approach is that, you know, really they save us money because they do functions more inexpensive than we could do. A dealer is responsible for payment of the fertilizer and an extremely important thing, the dealer is responsible for taking a substantial amount of products off-season.We want our clients 12 months a year, the actual use period for the farm is a very short period of time and it's rather obvious we couldn't deliver all the material in that time. As a rule of thumb, we usually say a dealer needs to take at least 40 percent of his product during the off-season in order to be able to take 60 percent during the on-season.I might add, you know, Southern Nitrogen did a very good job in that area. They probably took 50 percent off-season and sometimes a little bit more than that. * * ** * * *Basically, as far as the real reason is concerned for dealers, all they receive is the $ 5 discount because number one, they buy or store off-season and number two, they are financially responsible and can pay for the fertilizer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619200/	Thomas Robinson and Elaine Robinson, Petitioners, v. Commissioner of Internal Revenue, RespondentRobinson v. CommissionerDocket No. 61744United States Tax Court31 T.C. 65; 1958 U.S. Tax Ct. LEXIS 64; October 13, 1958, Filed 64 Decision will be entered under Rule 50. The expenses of operation of a lodge and guest ranch should be computed without eliminating portions of the cost of food, insurance, fuel, electricity, laundry, and telephone to represent the cost of meals and lodging furnished to an owner-operator of the lodge and ranch who lodged and ate therein not for his own personal convenience but because it was necessary in connection with the operation of the lodge and ranch. 65 Samuel M. Monatt, C. P. A., for the petitioners.Paul D. Ritter, Esq., for the respondent. Withey, Judge. Opper, Fisher, and Mulroney, JJ., dissent. Raum, J., dissenting. Pierce and Atkins, JJ., agree with this dissent. WITHEY65 The respondent has determined a deficiency of $ 241.16 in the petitioners' income tax for 1953. The only issue for decision is what portions, if any, of the deductions taken by petitioners in their income tax return for operating costs and expenses incurred in the operation of a lodge and guest ranch represented personal living expenses of the petitioners and therefore were not deductible.FINDINGS OF FACT.The petitioners, who are husband and wife, have their residence and place of business at R. D. No. 2, Stroudsburg, Pennsylvania. They filed their joint individual income tax return for 1953 with the director at Scranton, Pennsylvania.During 1953 the petitioners owned and operated a lodge and guest ranch 7 miles west of Stroudsburg under the name of Twin Pines Lodge and Guest Ranch, sometimes hereinafter referred to as the resort. All of their income for 1953 was derived from that business.In addition to providing meals66 and lodging for their guests at the resort, the petitioners also maintained stables with from 30 to 40 horses for the guests' use.The resort was closed during the months of January and December 1953. During those months the petitioners went away on vacation. During the remainder of the year the petitioners lived in an apartment which they had built on to the main resort building but which was without a door connecting with that building. The apartment, which was built at a cost of approximately $ 3,500, was built by the petitioners for their personal use. Most of the furnishings in the apartment had been acquired by petitioners before they entered into the resort business about 1938. They took no deduction in their income tax return for 1953 for depreciation of the apartment structure or the furnishings therein.66 Except for the 2 months the petitioners were on vacation they gave their full time and attention to the operation of the resort in 1953. Prior to opening the resort for the year the petitioners were engaged in making preparations for reopening.During 1953 the resort was open for business about 8 1/2 months or exactly 257 days. During those days, guests were67 served 3 meals a day. On each of those days the petitioners together averaged eating a total of 5 meals in the resort. Other meals eaten by the petitioners when the resort was open for business and meals eaten by them when the resort was not open were either eaten in restaurants or in their apartment where they were prepared from food purchased by petitioners. Neither the cost of petitioners' meals in restaurants nor the cost of food eaten in their apartment was included in the cost of food used in the operation of the resort and deducted by petitioners in their income tax return. A total of 29,766 meals was served in the resort during 1953 to guests and employees and to petitioners. It was necessary in the operation of the resort that the two petitioners live there and eat the meals in the resort which they actually ate there during 1953.In their income tax return for 1953 the petitioners took deductions, among others, for the following items in the indicated amounts as costs or expenses incurred in the operation of the resort during that year:Food$ 14,156.00Insurance1,592.32Fuel1,090.68Electricity1,054.06Laundry456.12Telephone390.74The foregoing 68 amounts included the cost of the food consumed by petitioners in the resort, the cost of insurance on petitioners' apartment, the cost of heat and electricity for the apartment, the cost of a small amount of laundry and cleaning for the petitioners, and petitioners' use of the telephone at the resort for personal purposes.In determining the deficiency in question the respondent disallowed an amount of $ 1,200 with the following explanation:The deductions claimed on your income tax return for the taxable year ended December 31, 1953 for operating costs and expenses have been disallowed in the amount of $ 1,200.00 for the costs attributable to your meals, lodging, and other personal and family living expenses.OPINION.Relying on our decisions in Everett Doak, 24 T. C. 569, and in Richard E. Moran, T. C. Memo. 1955-202, the petitioners contend that the respondent erred in determining that any portion of the deductions 67 taken by them as costs and expenses of operating the resort represented their personal living expenses and consequently was not allowable. The respondent contends that a portion of each of the deductions69 taken by petitioners for food, insurance, fuel, electricity, laundry, and telephone represented personal expenses of the petitioners, that the total of such portions was $ 1,200 and that his disallowance of that amount was proper. In support of his contention he relies on Commissioner v. Doak, 234 F. 2d 704 (C. A. 4, 1956), and Commissioner v. Moran, 236 F. 2d 595 (C. A. 8, 1956), in which our decisions in the Doak and Moran cases, respectively, were reversed. The respondent also relies on United States v. Briggs, 238 F. 2d 53 (C. A. 10, 1956).In Everett Doak, supra, the taxpayers, husband and wife, during 1950 owned and operated a hotel. They gave their full time and attention to the operation of the hotel in which they occupied rooms and ate most of their meals. It was necessary in the operation of the hotel that the taxpayers live and eat the meals in the hotel which they actually ate there during 1950. On authority of George A. Papineau, 130">16 T. C. 130, we held that the expenses of the hotel should be70 computed without eliminating portions of depreciation, cost of food, wages, and general expenses to represent the cost of meals and lodging furnished to the taxpayers.The taxpayer in the Papineau case was a member of a partnership which during 1944 operated a hotel. He was manager of the hotel and devoted all of his time to his duties in that capacity. Pursuant to an agreement with his partners, he lived in the hotel and took his meals there. That arrangement was essential in order to manage the hotel to the best advantage of the partnership at all hours of the day and night. The question presented there was whether all or any part of the value of the meals and lodging which the taxpayer had at the hotel represented income to him. After considering the applicable portions of the Internal Revenue Code and the respondent's regulations relative thereto in connection with decisions regarded as pertinent to the question presented and after observing that the taxpayer was at the hotel, not for his own personal convenience and benefit so that his expenses were primarily living expenses, but to operate the hotel, we concluded that the taxpayer had no taxable income from the meals71 and lodging had by him at the hotel. In reaching that conclusion we said, among other things:It is in accordance with sections 22 and 23 of the Internal Revenue Code that the expenses of operation be computed without eliminating small portions of depreciation, cost of food, wages, and general expenses to represent the cost of his meals and lodging and that he be not taxed with the value of his meals and lodging. There may be other similar examples where the business features of a dual item outweigh its personal living expense aspects.68 On appeal by respondent to the Court of Appeals for the Fourth Circuit, our holding in the Doak case was reversed by a divided court. The majority of the court were of the view that "[the] issue boils down to whether these expenses were predominantly personal or business in nature," and admitted that "such questions cause no little difficulty." After a consideration of the provisions of section 24 (a) (1) of the 1939 Code, the provisions of respondent's regulations relative thereto, and certain decisions deemed pertinent, in connection with our holdings in the Papineau and Doak cases the court said:True it is, as has been 72 pointed out previously, that the items here involved may be viewed, on the one hand, as business expenses, on the other hand, as personal. We think their essential nature, their inherent and dominant attributes characterize them as personal with a tinge of business and not as business with a personal tinge. And we see Section 24 (a) (1) as an absolute blanket inclusion of these items in income, thereby prohibiting their deductibility, unless the federal statutes expressly and clearly provide to the contrary. There are no such statutes.In a dissenting opinion in the Doak case, Chief Judge Parker expressed the view that our decision in the Doak case should be affirmed for the reasons stated therein and in the Papineau case. He further stated:The question involved is not one of deducting personal expenses from a tax return. It is whether deductions for the expense of operating the business should be decreased because the owner of the hotel eats and lodges at the hotel in connection with operating it. The Tax Court answered this question in the negative on the theory that meals and lodging incidental to carrying on a business are to be treated as an expense of the73 business rather than as a personal expense. It is on this theory that the statute excludes from gross income of an employee the value of meals furnished the employee whose presence is required on the premises. See section 119 of the Revenue Code of 1954. There is no reason why the value of such meals should be considered as income and as the personal expense of the taxpayer merely because he is self employed in his own business rather than employed in the business of another. The question involved is, strictly speaking, neither one of fact nor of law, but of the minor policy type involved in such matters as whether the owner of a dairy farm should decrease the deduction due to expense of operation because he has consumed some of the milk produced by the dairy. These are just the sort of questions that the Tax Court, because of its wide experience in tax matters, is peculiarly competent to decide. I would not disturb its decision here, which is in accord with its decision in a number of other cases.In Richard E. Moran, supra, the taxpayers, husband and wife, during 1949 and 1950 operated a hotel in partnership. They performed various duties at74 the hotel which required them to be present in the hotel at different times during both the day and night. They lived at the hotel and took their meals there of necessity and for the convenience and benefit of the business. On authority of our decision in 69 Everett Doak, supra, we held that the respondent improperly eliminated the expense of such meals and lodging in computing the ordinary net income of the partnership and the taxpayers' distributive shares thereof.On appeal by respondent of the Moran case to the Court of Appeals for the Eighth Circuit, that court followed the majority decision of the Court of Appeals for the Fourth Circuit in the Doak case and reversed our decision.In United States v. Briggs, supra, the Court of Appeals for the Tenth Circuit in a per curiam opinion, and on authority of the majority opinion of the Court of Appeals for the Fourth Circuit in the Doak case and on authority of the decision of the Court of Appeals for the Eighth Circuit in the Moran case, reversed the United States District Court for the District of Colorado which had held that the living costs75 of a managing partner and of his family who was required under the partnership agreement to live at the hotel and manage the same were deductible business expenses of the partnership under section 23 (a) (1) of the Internal Revenue Code of 1939.After carefully reconsidering the problem here presented in the light of the decisions of the Courts of Appeals for the Fourth, Eighth, and Tenth Circuits in the Doak, Moran, and Briggs cases, respectively, we are, with all due respect to those courts, unable to apply their decisions here since we are of the opinion that the Papineau, Doak, and Moran cases were correctly decided by us. 1Being of the opinion that the factual situation presented here falls within the purview76 of our decision in the Doak case, we hold for the petitioners.Since the respondent made other determinations respecting the petitioners' tax liability which are not involved herein,Decision will be entered under Rule 50. RAUMRaum, J., dissenting: The issue is not free from doubt and several courts of appeals have passed upon it. I would follow their decisions. Footnotes1. In this case, unlike Arthur L. Lawrence, 27 T.C. 713">27 T. C. 713, reversed on another issue 258 F. 2d 562↩, the Court of Appeals for the circuit to which this case would normally go on appeal has not yet passed on the question here involved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619202/	WILMINGTON PARTNERS, L.P., WILMINGTON MANAGEMENT CORP., TAX MATTERS PARTNER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Wilmington Partners, L.P. v. Comm'rDocket No. 15098-06United States Tax Court2010 U.S. Tax Ct. LEXIS 56; 2012-2 U.S. Tax Cas. (CCH) P50,557; May 28, 2010, DecidedWilmington Partners L.P. v. Comm'r, T.C. Memo 2009-193">T.C. Memo 2009-193, 2009 Tax Ct. Memo LEXIS 195">2009 Tax Ct. Memo LEXIS 195 (T.C., 2009)56 Diane L. Kroupa, Judge.Diane L. KroupaORDER AND DECISIONThis case is a TEFRA partnership-level proceeding that involves Wilmington. Partners, L.P. (Wilmington).Respondent issued Wilmington a notice of final partnership administrative adjustment (FPAA) for two short taxable years that Wilmington reported for 1999 (respectively., 1999-1 and 1999-2). Respondent determined that the basis in a note ("Reset Note") that B&L International Holdings Corporation. (BLIHC) contributed to Wilmington in 1993 was zero rather than $550 million as Wilmington had reported for each subject year. The FPAA also reduced Wilmington's basis in several assets in connection with Wilmington's 1999-2 section 7541 election and correspondingly increased the ordinary income and capital gain Wilmington reported for 1999-2.Petitioner timely filed a petition in this case. Petitioner alleged in the petition that the regular 3-year limitations period barred the assessment and collection of tax with respect to partnership items for 1999-2. Respondent countered in 57 the answer that the limitations period remained open in that the extended 6-year limitations period applied due to an overstatement of basis. We disagreed with respondent, noting that we had already decided that underlying issue (the Bakersfield issue) adversely to respondent. Bakersfield Energy Partners, L.P. v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767">568 F.3d 767 (9th Cir. 2009).258 Respondent asked us in this case to overrule Bakersfield. We declined to do so.We have issued numerous orders and opinions in this and its related case. See, e.g. Wilmington Partners, LP v. Commissioner, T.C. Memo. 2009-193; Wilmington Partners, Order and Decision entered dated April 30, 2008, revised by Order dated July 25, 2008, 2008 Tax Ct. Memo LEXIS 306">2008 Tax Ct. Memo LEXIS 306; Bausch and Lomb Incorporated and Consolidated Subsidiaries v. Commissioner, T.C. Memo 2009-112">T.C. Memo 2009-112; Bausch and Lomb Incorporated and Consolidated Subsidiaries v. Commissioner, Order of Dismissal for Lack of Jurisdiction at docket no. 20958-07 entered April 30, 2008. In summary, we concluded that we have jurisdiction over both 1999-1 and 1999-2, but we questioned whether a trial would be necessary to decide this case. We noted as to 1999-1 that respondent had not determined (nor was seeking) any adjustment to income for that year. We noted as to 1999-2 that respondent was precluded from assessing any income 59 tax because the 3-year limitations period had expired.We issued another order dated October 21, 2009, directing respondent to show cause why we should not enter a decision barring him from assessing any tax relating to the adjustments in the FPAA (Show Cause Order). We specifically asked respondent to address two issues in the Show Cause Order. First, we asked respondent to address why assessment was not barred as to 1999-2 since we declined to overrule Bakersfield. We also asked respondent to explain why we should decide the basis of the Reset Note as to 1999-1 if there was no adjustment to Wilmington's income, gain, loss, deduction, or credit for that year.Respondent filed a response, Respondent devoted much of the response - and the entire memorandum of law - arguing again that we should overrule Bakersfield. This time respondent argued we should overrule Bakersfield and apply the temporary regulations issued on September 24, 2009. See secs. 301.6229(c)(2)-1T and 301.6501(e)-1T, Temporary Proced. & Admin. Regs. We find perplexing respondent's focused argument that Bakersfield applies to both 1999-1 and 1999-2. Bakersfield is irrelevant for 1999-1.With respect to 1999-2, we declined, 60 in an unanimous Court-reviewed opinion, to overrule Bakersfield and apply the temporary regulations. Intermountain Ins. Serv, of Vail, LLC v. Commissioner, 134 T.C. 211">134 T.C. 211, 134 T.C. No. 11">134 T.C. No. 11 (2010). We concluded in Intermountain that the temporary regulations did not apply because the applicable limitations period expired before September 24, 2009, the date the temporary regulations were issued. Similarly, the limitations period in the present case expired before respondent issued the FPAA in 2006. We also determined in Intermountain that the temporary regulations are not entitled to deferential treatment because the Supreme Court unambiguously foreclosed respondent's interpretation of sections 6229(c)(2) and 6501(e)(1)(A) in Colony, Inc. v. Commissioner, 357 U.S. 28">357 U.S. 28, 78 S. Ct. 1033">78 S. Ct. 1033, 2 L. Ed. 2d 1119">2 L. Ed. 2d 1119, 2 C.B. 1005">1958-2 C.B. 1005 (1958), We see no reason to revisit these issues. We follow our decision in Intermountain. We do so especially here where respondent's sole allegation in his pleadings was the extended 6-year limitations period.Moreover, respondent previously conceded that no tax related to the 1999-2 adjustments may be assessed unless the Court overrules Bakersfield. We disagreed with respondent's litigating position in Bakersfield, and we have repeatedly 61 declined his invitation to overrule that decision. See UTAM, Ltd. v. Commissioner, T.C. Memo 2009-253">T.C. Memo 2009-253; R and J Partners v. Commissioner, Order and Decision at docket no. 7166-06 entered October 23, 2009; SN Laguardia Partners v. Commissioner, Order and Decision at docket no. 4906-07 entered September 4, 2009; Gold Blossom Explorations, LLC v. Commissioner, Order and Decision at docket no. 13120-07 entered September 3, 2009; Intermountain Ins. Serv. of Vail LLC v. Commissioner, T.C. Memo. 2009-195; Salman Ranch, Ltd. v. Commissioner, Order and Decision at docket no. 13677-08 entered August 7, 2009, 2009 U.S. Tax Ct. LEXIS 44">2009 U.S. Tax Ct. LEXIS 44; M.I.T.A. Partners v. Commissioner, Order and Decision at docket no. 17832-07 entered August 6, 2009; Beard v. Commissioner, T.C. Memo 2009-184">T.C. Memo 2009-184; Reynolds Properties Inc. v. Commissioner Order and should not be allowed to retract his concession and again argue that the FPAA was issued within the limitations period for 1999-2. Accordingly, we find respondent may not assess any tax related to the 1999-2 adjustments.We now focus on 1999-1 and note that respondent made no relevant legal arguments in his memorandum to support his response on why we are authorized to make an assessment for that 62 year. Respondent's only position regarding 1999-1 is that we should determine Wilmington's 1999-1 basis in the Reset Note because respondent could then determine the tax consequences of BLIHC's sale of its partnership interest in Wilmington whenever that event should occur. We find this argument unconvincing. First, respondent reverses the construct of Subchapter K by asserting that BLIHC's basis in the partnership interest "flows from" Wilmington's basis in the Reset Note. See sec. 6229(a). No provision in Subchapter K or TEFRA provides that a partner's basis in its partnership interest is to be adjusted based on changes in a partnership's basis in contributed property. Respondent's logic is circular and patently absurd. Wilmington's basis in the Reset Note is derived from and dependent on BLIHC's adjusted basis in the Reset Note at the time of contribution, not vice-versa.Second, even if Wilmington's basis in the Reset Note determined BLIHC's basis in its partnership interest, the carryforwards at issue stem from a loss claimed by BLIHC in 1999-2, not 1999-1. The appropriate basis to use in measuring the claimed loss and any related carryforwards is Wilmington's 1999-2 basis in the 63 Reset Note. A decision as to Wilmington's 1999-1 basis in the Reset Note would not affect the disposition of this case. We find it counterproductive to have a trial if there is no adjustment to be made. Interests of judicial economy and efficiency will be served by simply issuing an order and decision in this case.As previously mentioned, we issued the Show Cause Order to respondent. Respondent needed to have alleged specific facts to demonstrate that a decision consistent with the Show Cause Order should not be entered. United States v. Kis, 658 F.2d 526">658 F.2d 526, 538-39 (7th Cir. 1981); Rule 91(f). Respondent has failed to satisfy this burden. Accordingly, we shall enter a decision as to each year over which we have jurisdiction.Upon due consideration and for cause, it isORDERED that the Court's Order to Show Cause, dated October 21, 2009, is made absolute to the extent stated in this order and decision. It is furtherORDERED AND DECIDED that the adjustments set forth in the Notice of Final Partnership Administrative Adjustment mailed May 12, 2006, regarding the tax year ending December 25, 1999 (1999-2), are barred as a result of the expiration of the applicable limitations period. It is *64 furtherORDERED AND DECIDED that respondent's 1999-1 adjustment to Wilmington's basis in the Reset Note leads to no adjustment in the income, gain, loss, deduction, or credit of Wilmington for the tax year ending June 4, 1999 (1999-1)./s/ Diane L. KroupaDiane L. KroupaJudgeFootnotes1. All section references are the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩2. Respondent suffered a string of judicial losses in which the courts determined that, the 3-year, not the 6-year, limitations period applies when a understatement of income results from an overstatement of basis. See, e.g., Bakersfield Energy Partners, L.P. v. Commissioner, 128 T.C. 207">128 T.C. 207 (2007), affd. 568 F.3d 767">568 F.3d 767 (9th Cir. 2009); Salman Ranch Ltd. v. Commissioner, 573 F.3d 1362">573 F.3d 1362, 1377 (Fed. Cir. 2009). Respondent and the Treasury Department responded to these losses by issuing temporary regulations under secs. 6229 (c)(2) and 6501(e)(1)(A) on Sept. 24, 2009. See secs. 301.6229(c)(2)-1T and 301.6501(e)-1T, Temporary Proced. & Admin. Regs. The temporary regulations provide, in pertinent part, that "an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income for purposes of [secs. 6229(c)(2) and 6501(e)(1)(A)]." Id. This interpretation in the temporary regulations is respondent's litigating position and runs contrary to interpretations the courts have adopted for Bakersfield↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619203/	Esther La Fargue, Petitioner v. Commissioner of Internal Revenue, RespondentLa Fargue v. CommissionerDocket Nos. 5629-75, 6259-77United States Tax Court73 T.C. 40; 1979 U.S. Tax Ct. LEXIS 42; October 10, 1979, Filed 42 Decisions will be entered under Rule 155. Pursuant to an overall plan, petitioner established a trust with a nominal corpus of $ 100. Petitioner's sister, the son of friends, and her lawyer were trustees. Two days later, petitioner transferred various assets to the trust in return for equal annual payments for life from the trust. The annual payment multiplied by petitioner's life expectancy equaled the fair market value of the assets transferred, no allowance having been made for any interest 43 factor. Held, based upon all the facts and circumstances, the transfer of assets was not a sale or exchange for an annuity but a transfer in trust with a reserved interest, with the result that the payments received by petitioner were includable in her gross income under secs. 677 and 671, I.R.C. 1954, to the extent of the lesser of the gross income of the trust or the annual payment, rather than taxable as an annuity under sec. 72, I.R.C. 1954. Harry Margolis, Richard Gladstein, and W. Palmer Kelly, for 44 the petitioner.John E. Lahart, Jeannette A. Cyphers, and William E. Bonano, for the respondent. Tannenwald, Judge. TANNENWALD40 Respondent determined deficiencies in the Federal income45 tax of petitioner for 1971, 1972, and 1973 in 41 the respective amounts of $ 3,576.58, $ 4,052.04, and $ 3,912 together with negligence penalties under section 6653(a). 1 The negligence penalties have been conceded by respondent, and capital loss adjustments set forth in one notice of deficiency have been conceded by petitioner. There remains at issue whether certain transactions between petitioner and a trust which she established should be treated as constituting a transfer of property in exchange for an annuity in her favor, with the result that the taxation of the payments received by her should be governed by section 72 and other applicable legal principles, or as creating a trust in which petitioner retained the requisite interest under sections 671 through 677 governing trusts where grantors are treated as substantial owners.A constitutional objection raised by46 petitioner is no longer an issue before this Court. This matter was disposed of when the Court granted respondent's motion to strike amendments to the petitions herein. 247 The trial of this case was held before Special Trial Judge Aarons. He prepared a report which was served on the parties and to which they have filed certain exceptions. These exceptions have been taken into account by the Court and appropriate weight has been given to the findings of fact recommended by Special Trial Judge Aarons. See Rule 182(c) and (d), and the Note thereto, Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1149-1150 (1973).FINDINGS OF FACTSome of the facts have been stipulated and those facts are so 42 found. The stipulation of facts, supplemental stipulation of facts, and all attached exhibits are incorporated herein by this reference.Petitioner resided in Los Gatos, Calif., at the time the petitions were filed herein. She filed her Federal income tax returns for the years in issue with the Internal Revenue Service Center, Fresno, Calif.Anna Bracher Blum, petitioner's mother, died in March 1969 leaving a sizeable estate to her three daughters equally. Petitioner's share amounted to more than $ 165,000, including stock in a family fruit business (Bracher Fruit Co.), bonds, cash, and other stocks, which was finally48 distributed in December 1970. Mrs. Blum's death also terminated a testamentary trust created by her husband's will 30 years before. The remainder of the trust was divided equally among petitioner and her two sisters. The final distribution of trust assets to petitioner included bonds and a one-third interest in two parcels of land in San Jose, Calif. One of the parcels was rented to Bank of America for use as a parking lot. The other was an unimproved lot producing no income.While petitioner was involved in administering her mother's estate, she became concerned about the problems of managing such a large amount of property. Although she had been managing her own property since her husband's death in March 1968, her holdings had not been so extensive. She asked her mother's attorney about the advisability of setting up a trust for her daughter, Emily, and he thought it was a good idea. They did not discuss the matter in detail, since he was from a different city and petitioner did not intend to have him draft the trust documents. During this same period, petitioner was being approached by representatives of life insurance companies who suggested that she purchase an annuity. 49 A friend of her late husband, a securities dealer, also contacted her to discuss an investment plan.After pondering these alternatives, petitioner tentatively decided to set up a trust and visited her attorney, Harry Margolis. Petitioner and her immediate family had been friends of Mr. Margolis and his family for nearly 20 years, and an informal social relationship existed between them. Petitioner and her husband had executed wills drafted by Mr. Margolis, but 43 they had never been involved in complex matters in which they required sophisticated legal advice.Since she was aware that she did not fully understand the relative advantages of the suggestions that she had received, petitioner discussed different arrangements with Mr. Margolis and an associate. After these discussions, she again decided to create a trust and, with the help of Mr. Margolis, went about the task of selecting trustees. She was advised that it would be a good idea to have a member of the family as a trustee, someone who was a friend and contemporary of the beneficiary, and someone who was competent in technically handling the assets of the trust. To fill these roles petitioner chose Maxine Gardner50 (her youngest sister), Daniel Hawkes (son in a family close to both the La Fargues and the Margolises), and Mr. Margolis. Of the three, only Mr. Margolis was at all experienced in trust administration.The plan involved two steps: first, creating the trust with a nominal corpus; second, executing a contract with the trustees for annual payments to petitioner in exchange for a large portion of the inherited property.Petitioner and the chosen trustees executed a trust agreement dated February 10, 1971. Petitioner caused to be delivered $ 100 to the trustees as the initial corpus. The trust agreement consisted of two parts, a general "Master Trust Agreement" and a "Trust Agreement" with specific terms which modified or deleted portions of the master agreement to meet the needs of petitioner. The specific portion of the document provided as follows:TRUST AGREEMENTThis Trust Agreement is entered into this 10th day of February, 1971, by and between Esther Marie LaFargue of Los Gatos, California, as Trustor, and Maxine Louise Gardner, Daniel Hawkes and Harry Margolis, as Trustees.Attached hereto and made a part thereof as if fully set forth herein is a "Master Trust Agreement" consisting51 of a one (1) page index and thirteen (13) pages of content. Said "Master Trust Agreement" shall apply fully in all respects except as specifically, by reference, hereinafter deleted, modified, (Articles I, IV and V) (5), [sic] or otherwise rendered inapplicable.ARTICLE ITrustor has delivered to Trustees the sum of ONE HUNDRED DOLLARS ($ 100.00) as the initial corpus of this Trust.[The Court notes that there is no ARTICLE II or III.]44 ARTICLE IVThe beneficiaries of this Trust shall be Emily Anne LaFargue, daughter of the Trustor; the issue of Emily Anne LaFargue; and, all blood relatives of Esther Marie LaFargue and Emily Anne LaFargue. Issue shall become beneficiaries immediately upon birth. The term "issue" shall include anyone legally adopted by Emily Anne LaFargue effective immediately upon the judicial confirmation of the parent-child relationship. Persons, other than those specifically referred to above as beneficiaries, may become beneficiaries only upon the exercise of the Special Limited Power of Appointment hereinafter provided.ARTICLE V(2) This is not an accumulation trust.(5) A Special Limited Power of Appointment is hereby granted to Emily Anne LaFargue52 as to the total assets of the Trust. * * * The persons and/or organizations which are proper subjects of this Power include:1. The legal spouse of Emily Anne LaFargue;2. All blood relatives of all beneficiaries named specifically in this instrument and/or designated as such by the operation of this Power;3. [Charitable, etc., organizations];4. [Any other person or organization so long as such recipient would not cause the Power to be defined as a general power of appointment.]This Power shall take effect only after the death of the survivor of Esther Marie LaFargue and Emily Anne LaFargue. This Power may be exercised by Will or Deed. Should Emily Anne LaFargue not exercise this Special Limited Power of Appointment, then the Trust shall come to an end thirty days after the death of the survivor of Emily Anne LaFargue and Esther Marie LaFargue, and all the assets of the Trust shall, at that time, be distributed equally among all blood relatives selected within the second degree of consanguinity. Emily Anne LaFargue shall have the power to grant additional Special Limited Powers of Appointment to any of the beneficiaries of this Trust upon terms and conditions not inconsistent53 with this Trust Agreement.The master trust agreement, to which the specific agreement was referenced, provided that the trust was irrevocable and unamendable and further provided in pertinent part, as follows:ARTICLE IVDesignation and Description of Trustor, Trustee and BeneficiariesThe Trustor, Trustee and Beneficiaries of this Trust shall be set forth in the instrument of which this is a part. The Trustor and Trustee are expressly excluded, both directly and indirectly, from becoming Beneficiaries. Any person who may hereafter be born or legally adopted, who comes within any of the definitions of Beneficiaries hereunder, shall be included as an additional Beneficiary.The respective interests, whether immediate, contingent or potential of each 45 of such named or described Beneficiaries hereunder shall be those interests which are set forth in the document of which this is a part.ARTICLE VProvisions re Accumulation and DistributionProvisions concerning accumulation and/or distribution of corpus and/or income will necessarily differ from trust to trust. Such questions shall be governed as set forth in the total Trust instrument of which this is a part.In the absence54 of specific directions to the contrary, the following general principles shall be applied by the Trustee.(1) Taxation of Trustor or Donor.Should the Trustor or any subsequent Donor be taxed in any way in any connection with this Trust, the corpus or income which is taxable to such Trustor or Donor shall be returned to such Trustor or Donor, and such gift or income from a gift shall be treated as if the corpus had never been contributed to the Trust in the first instance. It shall be proper for an addition to be made to this Trust which operates in a manner contrary to this provision, but only with the written consent of the Trustee.(2) Corpus and Accumulated Income.Corpus and all accumulated income shall be finally distributed in any event no later than twenty-one (21) years after the death of the last named Beneficiary.(3) Emergencies.The mode, manner, terms and conditions intended to govern the distribution of all corpus and income of the entire Trust hereby established will have been set forth for normal circumstances and conditions. Emergencies and conditions of special need, however, constitute special categories not contemplated under such provisions55 and not intended to be governed thereby and which shall be separately and specially governed as provided below. The additional powers given the Trustee under conditions of emergency are intended to be limited to such special emergency circumstances but, in such special emergency circumstances, shall supersede and prevail over any other provision set forth in this Trust. The Trustee shall have the power and is instructed to depart from the program set forth for normal circumstances and conditions in any emergency for any Beneficiary of the Trust hereby established. Trustor intends here to rely on the judgment of the Trustee.In any such emergency, the Trustee should do anything and everything to assist the necessitous Beneficiary affected, and should make any distributions of income or corpus, or both, from the Trust hereby established, which Trustee, in its sole judgment, in the premises may deem advisable. Action, even to the full consumption of the entire Trust, in any manner, shall be taken if the emergency requires it. Equality among the Beneficiaries is of little consequence in an emergency.(4) Special Needs.In the absence of any emergency, any Beneficiary may apply56 to the Trustee 46 in writing to request distribution of corpus or income upon the basis that such corpus or income is necessary to the Beneficiary in relation to education, support, maintenance and health, or to enable any such Beneficiary to maintain his or her accustomed standard of living. In cases of need, within these standards, the Trustee may utilize any or all of the Trust assets, and no precept of equality need apply, provided only that the Trustee shall in its sole judgment determine that such distribution of corpus or income is then consistent with the general interests of the Trust and all of the Beneficiaries.* * * ARTICLE VIIGeneral Provisions re Trustee and Trustee Powers(A) Specific Trustee-Power Provisions. * * (3) Trustee's Power to Determine Principal and Income.The Trustee shall have full power and authority to determine, in its absolute discretion, what shall constitute principal of the Trust estate, gross income therefrom, and net income distributable under the terms of this Trust, except as herein otherwise specifically provided, and the determination of the Trustee with respect to all such matters shall be conclusive upon all persons57 howsoever interested in this Trust.* * * (10) Power to Replace Trustee. * * Neither the Trustor nor any Beneficiary shall ever be given any appointment as a Trustee or co-Trustee hereunder. Any Beneficiary appointed as a Trustee or co-Trustee shall be considered to be dead immediately from the moment of such appointment.No provision of the total trust agreement, other than those set forth above, more specifically defines the nature of the beneficiaries' interests in the trust. Nor does any term specify whether capital gains and losses should be attributed to the corpus of the trust or to income, other than giving the trustees power to determine principal and income.In an instrument entitled "Annuity Agreement," executed 2 days later on February 12, 1971, petitioner conveyed to the trust assets having a collective fair market value of $ 335,000. These assets included petitioner's one-third interest in the non-income-producing parcel of land she received from her father's trust, as well as the proceeds from the liquidation of Bracher Fruit Co., and assorted stocks and municipal bonds. Petitioner's basis in this property was $ 320,541.Petitioner received in return58 a promise by the trustees to pay 47 her $ 16,502 annually. At that time, petitioner's life expectancy was 20.3 years, calculated according to the mortality tables of table I, sec. 1.72-9, Income Tax Regs. If she were to live exactly that long, she would recover over her lifetime an amount equal to the fair market value of the assets transferred.The relevant terms of the annuity agreement are set out below:1. LaFargue hereby assigns, transfers and sets over to TRUSTEES all of her right, title and interest in and to the assets described in Exhibit "A", attached hereto and incorporated by this reference as if fully set forth herein. LaFargue warrants to TRUSTEES that they will have good title to and are owners of the described property.2. The sole consideration for the transfer of the above described assets by LaFargue is the annuity for them. There is no independent security for the payment of the annuity. TRUSTEES agree to pay LaFargue the sum of Sixteen Thousand Five Hundred and Two Dollars ($ 16,502.00) annually commencing on June 1, 1971, and thereafter on the 1st day of June and each succeeding year for the remainder of LaFargue's life. The calculation of this amount59 is shown in Paragraph 2 of Exhibit "B". All amounts due to LaFargue shall cease to be paid upon her death.3. The parties to this agreement recognize that there are alternative methods available to accomplish their objectives. These methods have been very seriously considered by the parties and this annuity agreement, providing for the annuity to LaFargue, has been expressly chosen by LaFargue as personally preferable to her. While life expectancy tables and interest tables were consulted, they have not been the sole factors in deciding upon entering into this agreement. LaFargue and TRUSTEES have expressly agreed that no interest factor should be involved in this annuity agreement but do, however, recognize the possibility that the Congress of the United States may, at some time, require an interest factor by statute. The parties, therefore, agree that all payments of annuities made under this agreement shall, for the first ten (10) years, be principal only with the understanding that any interest factor required by law shall then be one half (1/2) of the next ten payments until such interest shall have been brought current with one half (1/2) each such payment from the 11th60 continuing to be principal. * 4. LaFargue expects any annuity payment to be paid promptly, and all such payments made later than ten (10) days after they are due shall carry a penalty assessment of ten percent (10%) of the amount due. Any payment which has not been made within sixty (60) days of the time it shall be due, in addition to the ten percent (10%) penalty payment, shall entitle LaFargue to the payment of any attorney's fees and court costs by TRUSTEES which LaFargue may occur [sic] in bringing an action to compel payments that are due. * 5. In executing this annuity agreement and consumating the assignment of the assets referred to hereunder, the parties do not intend that any gift be made by TRUSTEES to LaFargue or to any other person or party and the parties do not intend that any gift be made by LaFargue to TRUSTEES or 48 any other person or party. The parties have agreed that each of them is respectively receiving full market value under the terms of this agreement.* * * EXHIBIT "B"I.Agreed Fair Market Value of Assetstransferred to trustees $ 335,000.00II.Annuitant's Life Expectancy20.3 years III.Annuity Calculation $ 335,000.00/20.3 yrs. =3 $ 16,500.00 per year61 The subsequent operation of the trust was flavored more by the close family and social friendship among the parties than by the formal legal relationships of grantor/annuitant, trustee, and beneficiary. Petitioner attended meetings regarding the administration of the trust. Strict attention was not paid to the procedures required by the trust and annuity agreements. For example, petitioner received her payment for 1971 not on June 1, but on September 1. No penalty assessment for the late payment was made although the annuity agreement provided for a penalty. Similarly, the 1972 payment was not made until December 29, but no penalty was included. In 1973, the trust paid petitioner $ 16,502 on July 6, more than a month late.Administration was lax in the other areas. Although petitioner gave the trustees the stock certificates when the annuity agreement was executed, no notice of the transfer was62 given to the transfer agent of the issuers of stock until much later. As a result, petitioner continued to receive dividends, which she deposited in her personal account, of approximately $ 2,200 per year in 1971, 1972, and 1973. However, she did not report these dividends as income for the 3 years. The dividends for 1971 and 1972 were reported on the fiduciary income tax returns of the trust for those years, which were filed June 1973. The 1973 dividends were reported on the fiduciary income tax return for that year, which was filed in April 1974. Most of the stock transferred to the trust was not transferred on the records of the issuers until November 1973.Confusion existed in the minds of the parties as to trust payments to Emily La Fargue. 4 Although the trust instrument 49 specifically provided that it was not an accumulation trust, both petitioner and her daughter understood that Emily was entitled only to the money she needed. Inquiries were made from time to time by Mr. Margolis' office as to whether Emily needed money. Although it is difficult to determine from the record the exact amounts actually distributed to the beneficiary, it appears that she received63 nothing from the trust in 1971 and 1972 and $ 6,500 in 1973.Distributions in these amounts were not reflected on any of the tax returns filed for the years in question. On the trust's various fiduciary returns for 1971 and 1972 (the first versions of which were not executed until June 11, 1973), the trust deducted amounts for "distributions to beneficiaries" which resulted in no taxable income to the trust. The amounts of these deductions, as shown on the returns, are as follows:DateDeduction for distributionReturnexecutedto beneficiary1971 original6/11/73$ 1,186.541971 amended4/4/7412,950.01 1972 original6/11/7317,176.17 1972 amended4/4/7417,427.23 1972 second amended1/26/7710,402.00 Emily did not file 1971 and 197264 returns including any of these amounts in her income until April 1974. Emily's returns were prepared by Mr. Margolis' office, which withdrew money from the trust to pay her taxes and deposited any tax refunds in the trust's bank account.The trust had the following items of income and loss or deduction for these years:1971IncomeLossOrdinary dividends$ 2,231.29Long-term capital loss$ 11,828.61Interest11,459.511972IncomeDeductionsOrdinary dividends$ 2,256.60Taxes$ 1,435.55Interest16,744.51Miscellaneous (trust andproperty-maintenance Capital gain dividends82.35expenses, etc.) 138.331973IncomeLoss and DeductionsOrdinary dividends$ 2,113.86Partnership loss$ 10,000.00Interest7,832.45Taxes1,344.97Rent120.00Miscellaneous (trust andproperty-maintenance Capital gain dividends50.63expenses, etc.) 173.1650 OPINIONThe question presented is how the set of events described above should be characterized for income tax purposes. Petitioner would have us view them as two separate events: (1) The creation of a trust and (2) the sale to, or exchange with, the trust for an annuity of property worth $ 65 335,000. She contends that no portion of the payments in question is taxable under section 72, 5 the provision dealing with taxation of annuities, which provides for taxation of only that portion of each payment which exceeds the product of the "exclusion ratio" (investment in contract divided by expected return) and the amount of the payment. Because the annuity agreement specifically states that the annuity contains no interest factor, and because the annual payments were computed by simply dividing the total consideration by petitioner's life expectancy, petitioner argues that her 51 expected return exactly equals her investment in the contract, and that a 100-percent exclusion ratio results.66 Petitioner also contends that she realizes no taxable gain on her exchange of appreciated property for an annuity until she recovers her basis in the property. She relies on Lloyd v. Commissioner, 33 B.T.A. 903">33 B.T.A. 903 (1936), which held that, where property is transferred in exchange for an individual's promise to make annuity payments in the future, no taxable gain is recognized by the transferor until he recovers his basis because the transferee's promise has no fair market value due to the uncertainty as to whether the individual will actually be able to make the payments when they are due. Compare 212 Corp. v. Commissioner, 70 T.C. 788">70 T.C. 788 (1978), and Estate of Bell v. Commissioner, 60 T.C. 469 (1973), holding that gain is recognized in year of transfer where the annuity contract is secured.Respondent, on the other hand, characterizes the transaction as, in essence, a transfer in trust as to which petitioner should be treated as the owner under section 677(a), 667 with the result that its income would be taxable to her under section 671. 7In the alternative, if the transaction is treated as an annuity for tax purposes, respondent contends68 that the application of section 72 to the facts herein is governed by Estate of Bell v. Commissioner, supra. He asserts that petitioner's "investment in the contract" is the present value of the right to receive $ 16,502 for 20.3 years, as computed from the actuarial tables (based on a 6-percent interest rate) set forth in section 20.2031-10(f), Estate Tax Regs. Dividing this present value figure ($ 176,990) by the expected return ($ 16,502 x 20.3 or $ 334,990), 52 respondent calculates the exclusion ratio to be 52.8 percent. Respondent characterizes the difference between the market value of the property transferred to the trust and the present value of the right to receive the annual payments as a gift to the trust, not properly includable in the computation of the "investment in the contract" 8 under Estate of Bell v. Commissioner, supra.In the event that the Court should disagree with this contention and find that the "investment in the contract" was the full fair market value of the property transferred, respondent argues that petitioner realized a capital gain represented by the difference between her cost69 basis in the transferred assets and such full fair market value, reportable ratably over her life expectancy. 970 The pivotal question is whether the transaction at issue is to be treated as an annuity or a trust. Petitioner argues that she is entitled to arrange her affairs in whatever manner she chooses, that she chose an annuity and not a trust, and that the tax consequnces are governed by that form. It is well accepted that a taxpayer has "The legal right * * to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits." See Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 46953 (1935). It is also well established that the substance of a transaction rather than its form determines the tax consequences of a transaction unless the statute indicates that form is to govern. See, e.g., Lazarus v. Commissioner, 58 T.C. 854">58 T.C. 854, 864 (1972), affd. 513 F.2d 824">513 F.2d 824 (9th Cir. 1975). "This principle is peculiarly applicable to annuities and trusts because they are easily susceptible of manipulation so as to create illusion." See Lazarus v. Commissioner, supra at 864, and cases cited thereat. Indeed, we have frequently viewed a series71 of related transactions as a whole and found that what was in form a transfer of property to a trust in exchange for an annuity was in substance a trust of which the "annuitant" was a grantor-owner or beneficiary. See Lazarus v. Commissioner, supra;Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 789-791 (1972); Smith v. Commissioner, 56 T.C. 263">56 T.C. 263 (1971); Wright v. Commissioner, 38 B.T.A. 746">38 B.T.A. 746 (1938). See also Legg v. Commissioner, 57 T.C. 164">57 T.C. 164, 170-171 (1971), affd. per curiam 496 F.2d 1179">496 F.2d 1179 (9th Cir. 1974). Moreover, even if a taxpayer appears to be entitled to the benefit of a particular statutory provision, he may nevertheless find himself caught, because of the nature of the transaction, in the net of another statutory provision. See Lazarus v. Commissioner, supra at 864.We conclude, for the reasons hereinafter stated, that the substance of the transaction in question was the creation of a trust providing, among other things, for an annual payment of $ 16,502 to the grantor. In reaching72 this conclusion, no one factor has been decisive. Rather, our decision is based on the totality of the considerations discussed below. See Lazarus v. Commissioner, supra at 867. Cf. Furman v. Commissioner, 45 T.C. 360">45 T.C. 360, 364 (1966), affd. per curiam 381 F.2d 22">381 F.2d 22 (5th Cir. 1967).We see no need to repeat the litany of the specific criteria which have been utilized in analyzing transactions such as those involved herein -- criteria this Court and the Ninth Circuit Court of Appeals (to which an appeal herein would lie) set forth in detail and applied in Lazarus v. Commissioner, supra. Rather, we will concentrate our analysis herein on those specific elements of similarity and difference between the instant case and Lazarus which are warranted by the circumstances.In the first place, there was no reason for petitioner to bifurcate the transaction into the creation of a trust and the purchase of an annuity. The trust and annuity were part of a 54 prearranged plan. Petitioner could have achieved the same result more directly by transferring her property to 73 the trust and reserving the right to receive an annual payment of $ 16,502. See Estate of Schwartz v. Commissioner, 9 T.C. 229">9 T.C. 229, 238-241 (1947). In fact, the transfer to the trust, which petitioner characterizes as a purchase of an annuity, was the very foundation of the trust. Without that property, the trust would have been an empty shell. See Samuel v. Commissioner, 306 F.2d 682">306 F.2d 682, 688 (1st Cir. 1962), affg. Archbishop Samuel Trust v. Commissioner, 36 T.C. 641 (1961); Lazarus v. Commissioner, 58 T.C. at 868.Second, in point of fact, petitioner could look only to the transferred property itself, including some of the income therefrom (see p. 59 infra ), as the source of the annual payments to her. We recognize that in a variety of situations involving transfers, there is no personal obligation (e.g., property sold "subject to" a purchase-money mortgage) or the personal obligation may be of little value except to the extent that an otherwise impecunious transferee-promisor uses the property or its proceeds to make the required payments. We also recognize74 that the identification of source of payment herein is not as direct as it was in Lazarus v. Commissioner, supra, where the payment involved was coextensive with the anticipated income from the transferred property. Thus, while the element of the transferred property as the source of payment may well be less significant in the instant situation, it should be accorded considerable weight in evaluating the totality of the circumstances. Indeed, this element was considered significant by the Ninth Circuit Court of Appeals in Lazarus v. Commissioner, supra, in distinguishing Fidelity-Phila. Trust Co. v. Smith, 356 U.S. 274">356 U.S. 274, 280 n. 8 (1958), heavily relied upon by petitioner. In fact, the Court of Appeals concluded that the language of the Supreme Court militated against the taxpayer's position because in Lazarus, as is the case herein, the transferred property was chargeable with the payments to be made, while in the case of an annuity, the annuitant has no continuing interest in the property. See 513 F.2d at 830. See also Samuel v. Commissioner, supra at 687.75 Third, the lack of relationship between the present value of the purported sale price (i.e., the present value of the payments to which petitioner was entitled, i.e., $ 176,990) and the fair 55 market value of the property transferred ($ 335,000) is uncharacteristic of an arm's-length sale or exchange. The absence of a downpayment and lack of security would clearly point to a differential in the other direction, i.e., a premium. 10 See Lazarus v. Commissioner, supra at 868. Moreover, the unreality of the claim of a bona fide sale is also reflected by the express negation of a gift and the failure of petitioner to consider how much a comparable annuity from a commercial institution would have cost.76 Fourth, the absence of an interest factor in the calculation of the deferred payments is another indication of absence of an arm's-length transaction. See Lazarus v. Commissioner, supra at 869. Petitioner claims that there is no provision of law requiring that an annuity contain an interest factor and that we should hold that the absence of such a factor as a matter of law has no bearing on whether a transaction constitutes an annuity. Respondent, on the other hand, places great emphasis on the absence of an interest factor as the critical element of decision. Both parties have favored us with exhaustive analyses of the legislative and judicial history of annuities since the inception of the income tax law. Petitioner's importuning to the contrary, notwithstanding, we find it unnecessary to resolve the question whether, under any and all circumstances, the absence of an interest element is irrelevant to the existence of an annuity.There is no doubt that Congress, in enacting section 72 (and its predecessors starting with section 22(b)(2) of the Revenue Act of 1934, Pub. L. 216, 73d Cong., 2d Sess.) dealing with annuities, had contractual arrangements77 involving an interest element in mind. See, e.g., H. Rept. 704, 73d Cong., 2d Sess. 21 (1934), 1939-1 C.B. (Part 2) 554; S. Rept. 558, 73d Cong., 2d Sess. 23 (1934), 1939-1 C.B. (Part 2) 586. Admittedly, an interest factor is usually present where an annuity is involved. See Hill's Estate v. Maloney, 58 F. Supp. 164">58 F. Supp. 164 (D. N.J. 1944); Lazarus v. Commissioner, supra at 869. Moreover, in a recent case, where the difference between the expected return ($ 224,400) and the fair market value of the property transferred ($ 207,600) clearly was less than the comparable figure arrived at by the use of an appropriate 56 interest factor, we did not hesitate to utilize the discounted value of the annuity in determining the tax consequences, i.e., the Court in effect imputed interest. See Estate of Bell v. Commissioner, supra.See also Estate of Bartman v. Commissioner, 10 T.C. 1073">10 T.C. 1073, 1078 (1948); Estate of Bergan v. Commissioner, 1 T.C. 543">1 T.C. 543, 554 (1943).On the other hand, as petitioner78 points out, we have declined to find a taxable interest element in other situations not involving annuities. See Crown v. Commissioner, 67 T.C. 1060 (1977), affd. 585 F.2d 234">585 F.2d 234 (7th Cir. 1978) (whether interest-free loan gives rise to a taxable gift); Dean v. Commissioner, 35 T.C. 1083">35 T.C. 1083 (1961) (whether interest-free loans to controlling shareholder give rise to taxable income), recently reaffirmed in Zager v. Commissioner, 72 T.C. 1009">72 T.C. 1009 (1979), and Greenspun v. Commissioner, 72 T.C. 931">72 T.C. 931 (1979). 11 But, we think that we would be painting with too broad a brush stroke if we were to draw from the foregoing analysis, covering many diverse tax issues, the rule of law which petitioner seeks to elicit from us. We think that, in the context of this case, we need and should go no further than we did in Lazarus v. Commissioner, supra, i.e., to hold that the absence of an interest element is simply one factor to be taken into account in determining whether there is a sale or exchange of property or a transfer in 79 trust with a reserved interest. 12Fifth, the manner in which the80 transferred property and "annuity" were administered suggests that petitioner viewed herself more as the beneficial owner of the property than as the creditor of the trustees. See Samuel v. Commissioner, 306 F.2d at 688. For 3 years, petitioner continued to receive directly dividends from stocks that were supposed to have been sold to the trust. Further, annuity payments to petitioner were not timely but she did not assert her right to a penalty payment. Additionally, petitioner was included in meetings to discuss the 96 administration of the trust and her testimony indicated that, although she did not take an active role and was not particularly well informed about the trust investments, she expected to be kept informed. That petitioner viewed herself as the beneficial owner of the property is further evidenced by her testimony that she wanted an arrangement that would provide for the management of her property. And Emily confirmed this view on petitioner's part through her testimony that the purpose of the trust was to preserve the assets and provide primarily for her mother and only secondarily for her. We make the foregoing observations81 about attitudes and methods of administration, solely in the context of the sale or exchange versus trust issue and not in the context of whether such participation in and of itself created sufficient ties to the property to satisfy the tests of taxability of the income of a trust to the petitioner as grantor of the trust under sections 671 through 677. Cf. United States v. Byrum, 408 U.S. 125">408 U.S. 125 (1972); Estate of Gilman v. Commissioner, 65 T.C. 296">65 T.C. 296 (1975), affd. per curiam 547 F.2d 32">547 F.2d 32 (2d Cir. 1976).Sixth, as we have already noted (see p. 54 supra), the precise tie-in between the income of the trust and the annual payment to the taxpayer, which existed in Lazarus v. Commissioner, supra, is lacking herein. Indeed, this is a distinction upon which petitioner places great reliance. Nothing in Lazarus, however, persuades us that it represents the outer limits for determining that a purported transfer of property for an annuity in reality constitutes a transfer in trust. Becklenberg's Estate v. Commissioner, 273 F.2d 297">273 F.2d 297 (7th Cir. 1959),82 revg. 31 T.C. 402">31 T.C. 402 (1958), also relied upon by petitioner, is clearly distinguishable. In that case, payments were being made by the trust to one of the grantors as an interim measure until the trust could be liquidated and an annuity purchased. Moreover, there were three grantors and the decedent's rights were not limited to the property transferred by her. See also Lazarus v. Commissioner, 58 T.C. at 872-873.In view of the foregoing, we hold that the transactions involved herein did not constitute a transfer of property in exchange for annuity payments to petitioner, but rather resulted in the creation of a trust of which petitioner should be treated as the owner to the extent of her interest therein. In so holding, we are not concluding that there may never be an arrangement between a transferor and a trust established by him which would qualify as a bona fide transfer of property for 58 an annuity. Resolution of this issue will inevitably depend, as it has herein, upon an analysis of the totality of the circumstances of the particular situation, including such elements as the availability of other trust assets83 as a source of payment of the so-called annuity (cf. Becklenberg's Estate v. Commissioner, supra), and upon the degree of clarity of the underlying documentation and of the care with which the arrangements were implemented. We note, however, that we have serious doubts whether section 72 rather than the grantor trust provisions of sections 671 through 677 would apply to any situation where the assets transferred to the trust are the engine designed to fuel the so-called annuity payments.We now turn to the question of the extent to which petitioner is taxable on the income of the trust under the so-called grantor trust provisions of the Code. Section 677(a) provides that the grantor of a trust "shall be treated as the owner of any portion of a trust * * whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be * * * distributed to the grantor." 1384 Although it is not entirely clear, respondent appears to be contending that the measure of petitioner's taxability under section 677(a) is the entire income of the trust. Thus, in his Exceptions to the Special Trial Judge's Findings of Fact and Conclusions of Law, respondent concedes that the petitioner would not be taxable on the $ 16,502 annual payments if the trust income were less than that amount, but it is unclear whether he accepts the position that $ 16,502 is the limiting amount in respect of any year in which the trust income exceeds that amount, a situation which seems to obtain in respect of the 1972 taxable year of the trust.Respondent's position seems to be that (1) if the property transferred by petitioner to the trust had been converted by petitioner into cash, it would have produced $ 335,000 (its stipulated fair market value); (2) if that amount were put in a savings account, paying 5-percent interest, it would at a 59 minimum have produced the amount of the annual payment of $ 16,502; (3) passbook savings accounts are notoriously conservative investments; (4) ergo, it could be anticipated that the trust would produce income in excess of the amount of the85 annual $ 16,502 payment and, consequently, petitioner should be considered as the owner of the entire trust income. Our analysis of the instant situation, however, leads us to conclude that, if respondent's position extends as far as we have outlined, it should be rejected.There can be no question but that it was contemplated that the initial principal would provide for the annual payment of $ 16,502 to petitioner, since this payment times her life expectancy was exactly equal to the fair market value of the property at the time of transfer. Thus, it seems that, at most, only future increases in the value of the trust principal and the income could have been considered available for distributions to other persons. But, the trust instrument made no specific provisions for distributions to the "beneficiaries" who were designated as Emily, petitioner's daughter, Emily's issue (of which there were none), and all blood relatives of petitioner and Emily. It simply stated that the trust "is not an accumulation trust." See p. 44 supra. We do not view this latter provision as requiring that the current income could not be used as a source for the annual payments to petitioner. We86 reach this conclusion because of the absence of any direction for distribution of income currently except to meet Emily's needs and in emergencies or other special situations, all of which were to be accomplished in the trustees' discretion. Under such circumstances, we do not think that the use of current income as a source of the annual payments to petitioner would be considered an "accumulation." On the other hand, we view the provision regarding accumulation as prohibiting the addition to corpus of any ordinary income (as distinguished from income properly allocable to corpus) which was not used to make the annual payment and that, to this extent, such income was required to be distributed and could not be held for payments to petitioner in subsequent years. In short, to the extent outlined, we think that, in each year, the payments to petitioner were to come ahead of all others irrespective of the labels which might be accorded to recipients of funds from the trust. Lazarus v. Commissioner, 58 T.C. at 869-870; cf. Estate of Pardee, 49 T.C. 140">49 T.C. 140, 148 (1967).60 Based upon the foregoing, we hold that the current87 income of the trust, both ordinary income and income allocable to corpus, in an amount not to exceed $ 16,502 per year, "may be distributed" to petitioner within the meaning of section 677(a). In accordance with the regulations, a portion of each item of trust income, 14 deduction, and credit (or each item in its entirety, if the trust income is less than $ 16,502) is includable in petitioner's income. Sec. 1.671-3(a)(3), Income Tax Regs. The portion of each item which is attributable to petitioner is treated as if it had been received or paid directly by her. 15Sec. 1.671-2(c), Income Tax Regs. Where, in any year (such as 1972) the ordinary income and income allocable to corpus exceeds $ 16,502, the proportionate share of each item of income, deduction, and credit will be determined by applying the fractional share of such item in which the numerator is $ 16,502 and the denominator is the aggregate amount of ordinary income and income allocable to corpus. Cf. Barber v. United States, an unreported case ( N.D. Ala. 1956, 52 AFTR 1222, 57-1 USTC par. 9377), affd. 251 F.2d 436">251 F.2d 436 (5th Cir. 1958). Compare Edgar v. Commissioner, 56 T.C. 717">56 T.C. 717, 759 (1971),88 where the taxpayers were denied the benefit of certain partnership losses allocable to corpus, because they were found to be the grantor-owners only to the extent of the current ordinary income of the trust.89 In view of our holding that section 677(a) is applicable, we have no need to delve into a further issue (raised by the Special Trial Judge and given sparse treatment by the parties on brief) as to the possible applicability of section 673 because the right of petitioner to the annual payments should be treated as a reversionary interest. 16 The issue raises difficult questions as to 61 the definition of a "reversionary interest" for purposes of section 673 and the need to evaluate potential fluctuation in the principal of the trust in order to determine whether the entire principal of the trust or only a portion thereof could "reasonably be expected" to come back to petitioner within 10 years. Cf. Crane v. Commissioner, 368 F.2d 800">368 F.2d 800 (1st Cir. 1966), affg. 45 T.C. 397">45 T.C. 397 (1966).90 Decisions will be entered under Rule 155. Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended and effective in the years in issue, unless otherwise indicated.↩2. Petitioner's constitutional claim was originally presented in the form of a motion for summary judgment, but with leave of the Court, the motion was withdrawn by petitioner, who was granted permission to embody her constitutional objection in the amendments to her petitions referred to above. In the opening brief in this case, filed after trial and after the Court's order striking the amendments, petitioner's counsel requested that the motion for summary judgment be reinstated.We are unable to discern any purpose that would be served by such action and petitioner has suggested none. In granting respondent's motion to strike, the Court considered as true facts alleged in an affidavit of petitioner's counsel, which facts together with the amended pleadings provided a factual basis that was more extensive than that which was set forth in the affidavits submitted with petitioner's motion for summary judgment. Thus, the Court having determined that petitioner had failed to state a claim upon which relief could be granted, it follows that the motion for summary judgment based on the same allegations would suffer the same fate. In this context, and in view of the fact that a full trial on the merits has taken place, reinstatement, consideration, and disposition of the motion for summary judgment would be an exercise in futility.↩3. In fact, the correct quotient is $ 16,502 and that is the payment specified in the body of the annuity agreement.↩4. According to the trust agreement, the beneficiaries of the trust were Emily, her issue, and all blood relatives of Emily and petitioner. However, Emily had no issue and no distributions were ever made to, or considered for, anyone other than Emily.↩5. SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS.(a) General Rule for Annuities. -- Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.(b) Exclusion Ratio. -- Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date). This subsection shall not apply to any amount to which subsection (d)(1) (relating to certain employee annuities) applies.(c) Definitions. -- (1) Investment in the contract. -- For purposes of subsection (b), the investment in the contract as of the annuity starting date is -- (A) the aggregate amount of premiums or other consideration paid for the contract * * ** * * (3) Expected return. -- For purposes of subsection (b), the expected return under the contract shall be determined as follows: (A) Life expectancy. -- If the expected return under the contract, for the period on and after the annuity starting date, depends in whole or in part on the life expectancy of one or more individuals, the expected return shall be computed with reference to actuarial tables prescribed by the Secretary or his delegate.(B) Installment payments. -- If subparagraph (A) does not apply, the expected return is the aggregate of the amounts receivable under the contract as an annuity.↩6. SEC. 677. INCOME FOR BENEFIT OF GRANTOR.(a) General Rule. -- The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under section 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be -- (1) distributed to the grantor or the grantor's spouse;(2) held or accumulated for future distribution to the grantor or the grantor's spouse * ↩7. SEC. 671. TRUST INCOME, DEDUCTIONS, AND CREDITS ATTRIBUTABLE TO GRANTORS AND OTHERS AS SUBSTANTIAL OWNERS.Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual. Any remaining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this title, except as specified in this subpart.↩8. We note that, although respondent characterizes the transfer as a gift in part, he has not asserted a gift tax deficiency.↩9. In his notice of deficiency for the years 1971 and 1972, respondent stated that "the transaction giving rise to the purported private annuity should not be recognized as bona fide for federal tax purposes" and included in her income the payments of $ 16,502 received in each of the years. In his notice of deficiency for 1973, respondent stated that the "sum of $ 16,502.00 received by [petitioner] * * is taxable as ordinary income in the amount of $ 16,502.00." Petitioner contends that, because of the general language of the deficiency notices, the burden of proof on all issues should be shifted to respondent. Although petitioner does not so state, we assume that the thrust of her argument is that the specificity in respondent's arguments (as contrasted with the general language of the deficiency notices) requires such arguments to be characterized as "new matter." See Rule 142(a), Tax Court Rules of Practice and Procedure. However, a clarification or development of respondent's original determination that does not raise new factual issues or increase the amount of the deficiency does not constitute new matter. See Estate of Jayne v. Commissioner, 61 T.C. 744">61 T.C. 744, 748-749 (1974); McSpadden v. Commissioner, 50 T.C. 478">50 T.C. 478, 493 (1968). We think respondent's arguments fall within the scope of this Rule. Nor are we aware of any other basis for shifting the burden of proof to respondent except possibly in the context of the constitutional issue raised by petitioner which we have rejected. See n. 2 supra.There is, in any event, little dispute as to the facts that bear on the characterization of the transaction herein. With respect to the amount of the trust's income, respondent stated in his Exceptions to the Special Trial Judge's Report that, for the purpose of a Rule 155 computation herein, he would accept the Special Trial Judge's findings of fact with respect to the income, deductions, and losses of the trust, although he has done so solely in respect of the computation of petitioner's taxable income for the taxable years before us (1971, 1972, and 1973). Petitioner has not objected to the Special Trial Judge's findings of fact in these respects and presumably has no objection since they were based on the trust's fiduciary tax returns. Thus, the question of where the burden of proof lies has no practical impact.↩10. In this connection, we are not unaware of the fact that where property is sold or exchanged for an annuity, there is usually no downpayment and often no security. But, the issue we are dealing with is not whether there is an annuity rather than a sale or exchange, but rather, whether there is a reserved interest in a trust rather than a sale or exchange. See n. 12 infra↩.11. Compare Blackburn v. Commissioner, 204">20 T.C. 204 (1953), and Berkman v. Commissioner, T.C. Memo. 1979-46↩, in which we imputed interest for gift tax purposes, where term (as distinguished from demand) notes were involved.12. Conceptually speaking, it is only in this context that the no-interest factor has relevance. Whether or not a sale or exchange occurs should not turn on the fact that property is transferred for annual lifetime payments instead of a series of payments over a period of time -- witness the fact that a transfer of property in return for annual lifetime payments can produce taxability of both portions of the payments as an annuity and a gain from the sale or exchange. Compare 212 Corp. v. Commissioner, 788">70 T.C. 788 (1978), and Estate of Bell v. Commissioner, 60 T.C. 469↩ (1973), and cases discussed therein.13. It is clear that none of the trustees is an adverse party, a term which is defined in sec. 672(a) as "any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust." Although Maxine Louise Gardner is a blood relative of petitioner and, thus, within the class of beneficiaries, the trust agreement further provides that any beneficiary who is appointed as a trustee shall "be considered to be dead immediately from the moment of such appointment."↩14. As used in the regulations, "income" refers to income for tax purposes and not to income for trust accounting purposes. Thus, it includes both ordinary income and income allocable to corpus. Sec. 1.671-2(b), Income Tax Regs.↩15. We have made no findings with respect to certain losses and credits which are carried back from subsequent years on some of the trust returns for the years in issue. Such findings are not necessary because petitioner is entitled to no share of these carried back items except during the years in which they originate. In any year in which the trust income exceeds $ 16,502, petitioner's allocable share of each item of deduction or credit will be less than the full amount thereof. The balance of each such item of deduction or credit will be allocable to the trust in the same proportion that the excess income is allocable to it. Any rights to carrybacks or carryforwards stemming from deductions or credits thus allocable to the trust will belong to it and not to petitioner. Whether petitioner might carry back or carry forward the losses or credits allocable to her (including, as stated in the text, the entire losses or credits when the income is $ 16,502 or less) will be controlled by her own individual tax situation.↩16. The possibility of a reversionary interest also exists by virtue of article V(1) of the master trust agreement (see p. 45 supra ), which provides that if the grantor is held to be taxable in any way, the income or corpus which is so taxable shall revert to her. See Thompson v. United States, 209 F. Supp. 530">209 F. Supp. 530, 541 (E.D. Tex. 1962), revd. and remanded on another issue 332 F.2d 657">332 F.2d 657 (5th Cir. 1964). Compare Commissioner v. Procter, 142 F.2d 824">142 F.2d 824 (4th Cir. 1944), revg. and remanding a Memorandum Opinion of this Court, with King v. United States, 545 F.2d 700">545 F.2d 700↩ (10th Cir. 1976).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619206/	Curran Realty Co., Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCurran Realty Co. v. CommissionerDocket No. 22705United States Tax Court15 T.C. 341; 1950 U.S. Tax Ct. LEXIS 76; September 29, 1950, Promulgated 76 Decision will be entered under Rule 50. 1. Income -- Accrual Basis -- Reversing Entries. -- Taxpayer properly reported accrued rent as shown on corporate books after reversing entries had eliminated amounts which were collected but later refunded.2. Deductions -- Accrual Basis -- State Tax on Income -- Increases Due to Deficiency Determination. -- Additional deduction for state excise tax proper where adjustments made by Commissioner increasing net income were proper and uncontested but not where they were contested. Maurice H. Baitler, Esq., for the petitioner.James R. McGowan, Esq., for the respondent. Murdock, Judge. MURDOCK 341 The Commissioner determined deficiencies in the petitioner's tax as follows:Declared valueYear:Income taxexcess-profits tax1945$ 635.56$ 166.3419464,643.6019471,530.9177 The issues raised by the petitioner are, (1) whether the petitioner's income from rent for 1946 includes $ 20,000 which was originally accrued on its books but for which an adjusting entry was made before the close of the year, and (2) whether the Commissioner erred in disallowing a deduction for salary of the treasurer of the petitioner in excess of $ 100 a month for 1946 and 1947. The respondent, by an amended answer, alleges that he erred in allowing the petitioner deductions for 1946 and 1947 for additional Massachusetts tax based upon the increased income for those years determined in the notice of deficiency.FINDINGS OF FACT.The petitioner filed its returns for the taxable years with the collector of internal revenue for the district of Massachusetts. It used an 342 accrual method of accounting and reporting. Its income consisted solely of rents derived from real estate.Liberty Liquors, Inc., at all times material hereto, was a corporation engaged in the wholesale liquor distributing business. Its stock was owned 90 per cent by Patrick J. Curran and 10 per cent by his wife, Beatrice. It bought land and buildings in Springfield, Massachusetts, in October 1943 and78 conducted its business on those premises. It sold the property in January 1945 to Patrick and Beatrice Curran and they, in that same month, conveyed it to the petitioner in return for the capital stock of the petitioner consisting of 745 shares of which 375 shares were issued to Patrick and 370 to Beatrice. Thereafter, Liberty Liquors, Inc., rented the premises from the petitioner and continued to conduct this business from those premises. There was no written lease.The lessee paid to the lessor rental of $ 2,000 per month from January 1, 1945, through August 1946 and $ 2,500 per month beginning September 1, 1946.Curran was president and his wife was treasurer of each corporation in the latter part of 1946.A revenue agent, auditing the return of Liberty Liquors, Inc., for its fiscal year ended August 31, 1945, determined that a reasonable rent for the premises which it occupied was $ 1,250 a month. Curran consented to the disallowance of the excess over $ 1,250 per month claimed by that taxpayer on its return and determined in 1946 upon behalf of the petitioner to adjust the liability for rent accordingly. An entry dated December 6, 1946, was made on the books of the petitioner79 debiting "rental income" $ 20,000 for the calendar year 1946 and crediting "accounts payable" by a like amount.The total rents accrued on the books of the petitioner for 1946, after the above adjusting entry, was $ 9,000, and that amount was reported on its return for 1946.Entries were made on the books of Liberty dated in 1946, debiting $ 20,000 to "prepaid rent" and crediting $ 15,000 to "earned surplus" and $ 5,000 to "rental expense" for its fiscal year ended August 31, 1947.The petitioner paid $ 20,000 to Liberty Liquors, Inc., by a check dated January 8, 1947.The petitioner did not report the $ 20,000 as a part of its rental income for 1946. The Commissioner, in determining the deficiency, increased rental income for 1946 by $ 20,000. The $ 20,000 did not represent taxable income of the petitioner for 1946.The petitioner paid to Beatrice Curran, its treasurer, for part time services, $ 1,000 per month for the last 4 months of 1946 and $ 500 per month for each of the 12 months in 1947, and claimed those amounts as deductions on its returns. The Commissioner, in determining the 343 deficiency, held that $ 100 per month represented reasonable compensation for the 80 services rendered to the petitioner by Beatrice Curran and disallowed the claimed deductions for her salary in excess of $ 400 for 1946 and $ 1,200 for 1947.A reasonable allowance for salary or other compensation for personal services actually rendered to the petitioner by Beatrice Curran is not in excess of $ 400 for 1946 and is not in excess of $ 1,200 for 1947.The Commissioner, in determining the deficiency for 1946, made several adjustments which changed a net loss, as shown on the return, to a substantial amount of net income. One of the adjustments which he made was to allow a deduction of $ 1,188.42 which he described as additional Massachusetts excise tax. The adjustments for 1947 included the allowance of a deduction of $ 422.54 which he described as additional Massachusetts excise tax. He explained that by reason of the changes made, the taxpayer will be called upon to pay additional income tax to the State of Massachusetts, and "Since this tax accrued upon and is deductible from the income which gives rise to it the same as the original tax, deduction therefore has been made."The facts stipulated by the parties are incorporated herein by this reference.OPINION.Patrick81 J. Curran and his wife owned all of the stock of the petitioner and of its lessee. Curran was the president of both corporations. He learned in the latter part of 1946 that the revenue agent would not allow a deduction to Liberty for rent in excess of $ 1,250 a month, which the agent considered reasonable for the premises. Curran agreed to the adjustment made by the agent, determined upon behalf of the lessor to adjust the liability for rent to conform, and caused adjusting entries to be made on the books of the petitioner, as well as on the books of Liberty, reversing the accrual of rent in excess of $ 1,250 a month. Liberty had actually paid the petitioner during 1945 and 1946, $ 20,000 in excess of rent at the rate of $ 1,250 a month, and the petitioner refunded to Liberty that amount of money on January 8, 1947. The petitioner reported the net amount of rent accrued on its books for 1946 as due from Liberty. Its books at the end of that year did not show an accrual of a total amount in excess of that reported. In other words, it reported rent in accordance with the method of accounting regularly employed in keeping its books as required by section 41. The Commissioner 82 erred in adding any additional amount to its income for that year on account of rent. Cf. ; ; ; ; ; . , is distinguishable because there the adjustment 344 occurred after the close of the taxable year so that the books showed the larger amount of income accrued for that year.There is practically no evidence on the second issue and such as there is fails to show that reasonable compensation for the services of Beatrice Curran was in excess of $ 400 for 1946 or in excess of $ 1,200 for 1947.The Commissioner has recognized that the Massachusetts excise tax is a deductible item in computing net income in this case for the year to which that excise tax applies. It is proper to compute, accrue, and deduct the correct amount of state income or excise tax. 83 . The petitioner deducted the amount which it thought would be proper. The Commissioner, thereafter, determined that the net income of the petitioner was greater for 1946 and 1947 than the amounts shown on the returns. He allowed larger deductions for the Massachusetts excise tax to include that which would be applicable to the increased income. He now contends that he erred. Obviously, he erred in so far as the increased tax deduction was based upon improper increases in income. However, some of the adjustments made by the Commissioner to increase income were proper. One of those adjustments, the disallowance of a deduction for an officer's salary, was contested by the petitioner. The increased Massachusetts tax on the additional net income resulting from the disallowance of that deduction was not accruable or deductible in 1946 or 1947. . The Commissioner, who raised this issue, has not shown that the petitioner disputed any other proper adjustment and the additional Massachusetts tax based on those adjustments was properly*84 allowed as a deduction.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619207/	THE UNITED LIGHT AND POWER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.United Light & Power Co. v. CommissionerDocket No. 77404.United States Board of Tax Appeals38 B.T.A. 477; 1938 BTA LEXIS 862; September 8, 1938, Promulgated 862 The petitioner corporation's affiliated subsidiary, R, transferred part of its assets, consisting of common stock in two public utility corporations, to 11 newly organized corporations in exchange for all their stock, and immediately thereafter R transferred all its stock in the 11 newly organized corporations to A in exchange for common stock of A. Held, that the foregoing transfers were interdependent steps in an integral plan which, for income tax purposes, must be treated as a single transaction, and do not constitute a reorganization within the meaning of section 112, Revenue Act of 1928, since upon the consummation of the transaction the element of statutory control and the continuity of interest necessary to make A a party to a reorganization were lacking; following Groman v. Commissioner,302 U.S. 82">302 U.S. 82; Helvering v. Bashford,302 U.S. 454">302 U.S. 454; A. W. Mellon,36 B.T.A. 977">36 B.T.A. 977; Gilbert D. Hedden,37 B.T.A. 1082">37 B.T.A. 1082, and Whitney Corporation,38 B.T.A. 224">38 B.T.A. 224, hence the A stock received by R is "other property" and the gain therefrom constitutes taxable income. Homer Hendricks, Esq., Park863 Chamberlain, Esq., and Thomas K. Humphrey, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. MURDOCK 477 The Commissioner determined a deficiency of $1,564,884.54 in income taxes for 1928 of the affiliated group of which the petitioner was parent. The only issue is whether the conceded gains of the United Light & Railways Co. from the disposition of stock of the Detroit Edison Co. and Brooklyn Borough Gas Co. in exchange for stock of the American Light & Traction Co. were properly recognized for income tax purposes by the Commissioner or whether those gains escape recognition under section 112 of the Revenue Act of 1928. The parties have settled all of the other differences by a stipulation, which is made a part hereof by this reference. FINDINGS OF FACT. The petitioner (hereinafter called United) filed a consolidated income tax return for the calendar year 1928 with the collector of internal revenue at Chicago, Illinois. The return was for the petitioner, as the parent corporation, and a large number of subsidiaries, including the United Light & Railways Co. (hereinafter called Railways). United was the top holding company864 of a large group of corporations engaged principally in supplying electrical energy to the public. United owned all of the common stock of Railways, which was 478 also a holding company. William Chamberlain was president and the principal executive officer of United and also of Railways. The American Light & Traction Co. (hereinafter called American) was the top holding company of a large group of corporations engaged principally in supplying artificial gas to the public. Its president and principal executive officer was R. B. Brown. The Koppers Co. (hereinafter called Koppers) was the top holding company of a large group of corporations engaged principally in the business of constructing, owning, and operating byproduct coke ovens. One of its principal subsidiaries was the Koppers Gas & Coke Co. (hereinafter called Koppers Gas). The group also owned and operated bituminous coal mines, manufactured certain chemical byproducts arising out of their coke operations, manufactured and sold gas making equipment, held stocks in utility companies, and had some steamship and other transportation facilities in connection with their coal business. Koppers had two stockholders, 865 H. B. Rust and the McClintic-Marshall Corporation. The latter owned five-sixths of the Koppers stock and was in trun owned by A. W. Mellon, R. B. Mellon, H. H. McClintic, and C. D. Marshall. The president of Koppers and Koppers Gas was H. B. Rust. The securities which formed the subject matter of the transactions hereinafter described, were held in the following manner: (a) Railways owned 75,000 shares of common stock of the Detroit Edison Co., which had cost it $11,490,432.32. These shares represented much less than 50 percent of the outstanding common stock of the Detroit Edison Co. (b) Railways owned the equitable interest in 39,582 shares of the common stock of the Brooklyn Borough Gas Co. The total cost of the Brooklyn Borough stock to Railways was $4,424,707.53. This stock, of which there were 40,000 shares outstanding, had been acquired in 1925 by Frank Hulswit, the then president of Railways, who purchased the stock with the funds of Railways without the knowledge or authority of the board of directors of that company. When the purchase was brought to the attention of the board of directors, it was decided that Hulswit should retain the legal title to the stock866 so that the provisions of the New York Public Service Commission Law, which prohibited a stock corporation from acquiring more than 10 percent of the capital stock of a gas or electric company operating in the former First Public Service Commission District of the State of New York, might not be violated. The Brooklyn Borough Gas Co. was a gas company operating in that district. Thereupon, Hulswit signed and delivered a declaration of trust to Railways, acknowledging that he held title to the stock for the benefit of Railways. The legal title to the stock was transferred 479 in March 1926 to Richard Schaddelee, Hulswit's successor as president of Railways, who executed a similar trust in favor of Railways. (c) Railways owned 101,771 common shares and 31,233 preferred shares of the stock of American. Both the common and preferred stock had voting privileges. The shares woned by Railways represented approximately 20 percent of America's voting stock. (d) Koppers Gas owned 101,444 common shares and 19,399 preferred shares of American, or slightly less than 20 percent of American's voting stock. (e) Koppers Gas owned all the common stock (35,000 shares) of the Milwaukee867 Coke & Gas Co. The latter company was under contract to supply gas, a byproduct of its coke operations, to the Milwaukee Gas Light Co., a subsidiary of American. (f) American owned the entire capital stock (except directors' qualifying shares) of four New Jersey corporations known as Mutual, Waverly, Bexley, and Provident. These four corporations together owned 153,200 shares of the common stock of the Brooklyn Union Gas Co. No one of the four New Jersey corporations owned more than 10 percent of the outstanding Brooklyn Union common stock. American held the Brooklyn Union stock in this way, on the advice of counsel, to comply with the New York Public Service Commission Law. The Koppers interests had adopted the policy of acquiring coke producing properties at strategic points along the Atlantic Seaboard for the purpose of establishing a monopoly of that business in that area. They acquired such properties in Boston, New Haven, and other eastern cities. The sale of byproduct gas to public utilities under long term contracts was an important consideration in the operation of those properties. The Koppers interests, through H. B. Rust, entered into negotiations in the fall868 of 1927 with the Brooklyn Union Gas Co. for the purchase of its byproduct coke plant and the execution of a long term contract for the supply of gas from that plant by the Koppers interests to the Brooklyn Union Gas Co. H. B. Rust, at that time was also chairman of the executive committee of American. Koppers and American each had a minority interest in the Brooklyn Union Gas Co. American's interest represented an investment of over $16,000,000. When Brown, the then president of American, learned of the negotiations between the Koppers interests and the Brooklyn Union Gas Co., he took immediate steps to forestall their consummation. Brown was of the opinion that gas utilities should own and control their source of gas supply in order to insure a constant and efficient service to the public. Rust had a contrany view, believing that gas utilities undertaking this type of business would seriously jeopardize the stability of their 480 earnings. Chamberlain, the then president of United, agreed with Brown, and together they prevailed upon Brooklyn Union not to sell the coke oven plant to Koppers. This difference of opinion between Brown and Rust, the two principal officers869 of American, as to a major question of policy pertaining to the company's operations, together with the personal friction which arose betwwen those two officers, seriously disrupted the organization and administrative operation of the company. Numerous conferences were held between the conflicting interests during the succeeding months up to July 1928, in an effort to reach a satisfactory adjustment of their differences. The negotiations which took place at these meetings may be summarized as follows: Brown proposed to Rust that Koppers Gas dispose of its entire holdings in American and that American transfer to the Koppers group its interest in the Brooklyn Union Gas Co., thus enabling Koppers to continue without interference its negotiations for the purchase of the byproduct coke oven plant from the Brooklyn Union Gas Co., and leaving American free to pursue Brown's policy of acquiring gas producing properties for its operating subsidiaries. It was also proposed that American acquire the Milwaukee Coke & Gas Co. stock owned by Koppers Gas and that the Koppers group acquire the Brooklyn Borough Gas Co. stock in which Railways had the equitable interest. Rust agreed to this solution870 of their difficulties. But the question then arose as to how Koppers would dispose of its American stock. Koppers could not conveniently sell the stock on the open market, for the reason that the market probably could not absorb such a large quantity of the stock. It was then proposed that United purchase the American stock owned by Koppers. United agreed to purchase the American stock owned by Koppers on the condition that it, or Railways, would be allowed to acquire additional American stock sufficient to give it, or Railways, directly or indirectly, the majority voting control of American. Since neither United nor Railways possessed sufficient cash to pay for the American stock to be purchased from Koppers, an obligation in favor of Koppers had to be created as part payment for the stock, and the United group was unwilling to assume such an obligation without control over the dividend policy of American. The following general plan was agreed upon to accomplish all of the results desired: (a) Railways was to transfer 75,000 shares of Detroit Edison common, owned by it, to the American group in exchange for 75,000 shares of American common stock. (b) Railways was to transfer871 its equitable interest in 39,582 shares of Brooklyn Borough Gas Co. common to the American group in 481 exchange for 56,248 shares of American common. The Koppers interests were then to acquire control of the Brooklyn Borough stock from the American group. (c) Koppers Gas was to transfer the entire capital stock of the Milwaukee Coke & Gas Co. owned by it to American (thereby giving American's Milwaukee Gas Light Co. control of its gas supply), in exchange for 38,272 shares of American common. The latter block of stock was then to be transferred by Koppers Gas to the United group (together with the American common and preferred stock already held by Koppers Gas). The foregoing transfers were made the subject of written contracts between the respective corporate parties, duly approved by the boards of directors of each. Most of the contracts were dated July 6, 1928. The contracts were carried out in the latter part of the month of July 1928, through the following transactions: (a) Railways on July 25, 1928, transferred to Dexter Co. 75,000 shares of common stock of the Detroit Edison Co., in exchange for the entire capital stock of Dexter Co. The Dexter Co. had872 been organized on July 3, 1928. (b) Railways on July 25, 1928, transferred all of the Dexter Co. stock to American in exchange for 75,000 shares of American common stock. The fair market value of the American stock so received was $15,000,000. (c) Railways on July 25, 1928, transferred its interest in 39,582 shares of Brooklyn Borough Gas Co. common stock to ten New Jersey companies (hereinafter referred to as the ten A to J New Jersey companies), as follows: SharesTo Aden Co.3,959Burma Co3,959Canton Co3,958Dover Co3,958Etna Co3,958To Falcon Co3,958Gordon Co3,958Hector Co3,958Irving Co3,958Java Co3,958Railways received all of the stock of the ten A to J New Jersey companies in exchange for the Brooklyn Borough stock so transferred. 1 The ten A to J New Jersey corporations had been organized on July 11, 1928. (d) Railways on July 25, 1928, transferred all of the stock of the ten A to J New Jersey companies to American in exchange for 56,248 shares of American common. The fair market value of the American stock so received873 was $11,249,600. (e) The ten A to J New Jersey companies, which were then owned by American, on July 27, 1928, transferred their assets, consisting of 482 a total of 39,582 shares of the common stock of Brooklyn Borough, to ten Delaware corporations which were owned by the five individuals who were, either directly or indirectly, the owners of the stock of Koppers, the parent corporation of the Koppers group. The ten Delaware companies, in exchange for the assets so transferred, delivered to the ten A to J New Jersey companies their 20-year 5 1/2 percent gold debentures in the total amount of $11,249,600, the payment of which was secured by a pledge with a trustee, as collateral, of the Brooklyn Borough stock. The debentures were guaranteed as to principal and interest by Koppers. (f) The four New Jersey companies, Mutual, Waverly, Bexley, and Provident, the stock of which was owned by American, on July 27, 1928, transferred their assets, consisting of 153,200 shares of common stock and certain debentures of the Brooklyn Union Gas Co., to four Delaware companies owned by the five individuals who owned, directly or indirectly, the stock of Koppers. The four New Jersey874 companies received, in exchange for the assets so transferred, 20-year 5 1/2 percent gold debentures of the four Delaware companies in the total amount of $21,321,900, the payment of which was guaranteed by Koppers and secured by a pledge with a trustee, as collateral, of the Brooklyn Union Gas Co. stock and debentures. (g) Koppers Gas between July 6 and July 27, 1928, transferred to American all the stock of the Milwaukee Coke & Gas Co. in exchange for 38,272 shares of American common stock. Upon receipt of this block of American stock, Koppers Gas then owned a total of 139,716 shares of American common stock. (h) Koppers Gas on or about July 27, 1928, transferred all its holdings in American (139,716 shares of common and 19,399 shares of preferred stock) to a newly organized Delaware corporation, the United American Co., in exchange for all the latter company's capital stock and its 20-year 5 1/2 percent gold debentures in the total amount of $26,872,970, secured by the American stock transferred. (i) Koppers Gas on or about July 27, 1928, transferred all the United American Co. stock to United in exchange for 150,000 shares of class A common stock of United and an option875 to acquire an additional block of 180,000 shares of the same stock at $20 per share. The $26,872,970 of United American Co. debentures transferred to Koppers Gas were guaranteed as to principal and interest by Railways. United transferred all the stock of the United American Co. to Railways shortly after July 27, 1928, and received in exchange therefor 32,500 shares of Railways common stock. The transfer of the American stock to Railways through the medium of United American Co. and Railways' guarantee of the United American debentures was essential to the completion of the transaction. Railways 483 could not transfer its own stock to Koppers Gas in exchange for the American stock without United losing its 100 percent control of Railways, which was considered undesirable. Nor could Railways issue debentures entirely secured by the American stock to Koppers. Railways at that time had outstanding an issue of unsecured debentures in the amount of $25,000,000. The provisions of the trust indenture under which those debentures had been issued entitled the holders of the unsecured debentures to participate equally with the holders of any secured debentures, thereafter issued, 876 in the security for the secured debentures. Immediately following the above described transactions, Railways owned or controlled over 50 percent, but not more than 52 percent, of the voting stock of American. The value of the property transferred in each of the transactions was equivalent to the value of the property received in exchange therefor. Each transaction was dependent upon the completion of the other transactions. No one of the transactions would have been agreed to and concluded without a concurrent agreement for and conclusion of the others. The Dexter Co. was organized in order to comply with American's policy of holding its investments in wholly owned subsidiaries. The ten A to J New Jersey corporations were formed for the same reason and for the additional purpose of complying with the New York Public Service Commission Law, which prohibited the acquisition by any corporation of more than 10 percent of the stock of gas utilities operating under the laws of that state. The Dexter Co. continued in existence until 1936, when it was dissolved. During its existence it purchased for $3,000,000 additional common stock of the Detroit Edison Co. with funds borrowed877 from American. The ten A to J New Jersey corporations existed at least until the fall of 1930, when American sold the stock of those companies. The Commissioner, in determining the deficiency, held that Railways realized a profit from the disposition of the 75,000 shares of Detroit Edison Co. stock, equal to the difference between the cost of those shares and the fair market value of the 75,000 shares of American stock ultimately received in exchange, which profit was taxable income for 1928. He likewise held that Railways realized a profit from the disposition of the 39,582 shares of Brooklyn Borough Gas Co. stock, equal to the difference between the cost of those shares and the fair market value of the 56,248 shares of American stock ultimately received in exchange, which profit was taxable income for 1928. 484 OPINION. MURDOCK: The parties are now in agreement as to all figures. The gain, if any is to be recognized, is $3,509,567.68 in the Detroit Edison Co. stock transactions and $6,824,892.47 in the Brooklyn Borough Gas Co. stock transactions. The petitioner contends that the transfer of the Detroit Edison shares to Dexter was a separate complete transaction; 878 the transfer of the Dexter stock was another separate complete transaction; and the first was a nontaxable reorganization under the provisions of section 112(i)(1)(B), 2 (b)(4), 3 and (b)(5) 4 of the Revenue Act of 1928, while the second was a nontaxable reorganization under the provisions of section 112(i)(1)(A) 5 and (b)(3). 6 It makes simiar contentions in regard to the transactions relating to the disposition of the Brooklyn Borough Gas stock. The soundness of these arguments depends upon whether Railways ever had "control" 7 of Dexter, or of American, and upon whether the stock of American received by Railways was stock of a corporation, a party to a reorganization, or was "other property" as that term is used in section 112. These questions, in turn, depend largely upon whether the transactions are to be regarded as independent exchanges or as interdependent steps in one integral plan or transaction. 879 The Commissioner first contends that these transactions were not separate and complete in themselves for income tax purposes, but were mere interdependent steps in carrying out an integral plan. 485 He insists that the plan must be viewed as a whole. If it is so viewed, then Railways never had control of the Dexter stock because Railways received the stock subject to a preexisting binding contractual obligation to transfer that stock to American, and, furthermore, Railways had not the necessary continuity of interest in the Detroit Edison Co. stock. That stock went to Dexter, in which Railways, upon final consummation, had no direct interest, but only an indirect interest through the ownership of the stock in American. The result is that American was not a party to a reorganization and its stock received by Railways was "other property", the receipt of which was a recognized gain. The most recent court and Board decisions support this contention of the Commissioner. The decision of this case need not depend upon whether the use of Dexter and the ten A to J corporations had some real business purpose, as the petitioner contends, or whether the use of those corporations880 was merely to avoid the tax consequences of more direct transfers. The former alternative may be assumed to be the correct one. Furthermore, the facts, which the Board deems material to a proper decision, are not subject to any serious dispute between the parties. The ownership of the Dexter stock by Railways was transitory and incident to a plan which required its immediate transfer. That ransfer was not an independent transaction but was an essential part of the plan. This circumstance distinguishes the present case from some others cited by the petitioner in which there was control immediately after the integral plan had been completed, but that control was then dissipated by a separate subsequent contract and transfer. Control is determined as of the completion of the integral plan. Railways did not have control of Dexter when the interdependent transfers were completed, since it did not own a share of Dexter stock. Nor did it control American. The transfer of property (Detroit Edison Co. stock) by Railways to the American group must be viewed as a whole. "For income tax purposes the component steps of a single transaction can not be treated separately", 881 ; certiorari denied, , affirming ; Prairie Oil & Gas Co; v. ; , affirming on this point, ; ; certiorari denied, ; , affirming , on this point; ; affd., ; ; ; . Railways parted with some of its property and came out with 486 some American stock, while American received all of the stock of Dexter and Dexter received the property. American received none of the property originally owned by Railways. Although Railways owned some American stock, American owned all of the882 Dexter stock and Dexter owned the property formerly owned by Railways, nevertheless Railways did not maintain a sufficient continuity of interest in the property (Detroit Edison Co. stock). Railways and American did not merge or consolidate. Neither acquired a majority of the voting stock or substantially all of the assets of the other. Neither was in control of the other. American was not a party to any reorganization material to the decision of this case, and its stock received by Railways was "other property." Thus the entire gain of Railways is recognized under section 112(a), since none of the exceptions apply. ;; ; ; . The petitioner argues strenuously that the above cited cases are distinguishable on their facts and are not in point in principle. It also argues that the Whitney case was incorrectly decided and was not like the Bashford and Groman cases. These arguments might be difficult to answer were we not883 obliged to look at these transactions as all a part of one plan. Although the parent company in the Bashford and Groman cases received the stock of its subsidiary from the subsidiary, while here American received the stock of its new subsidiaries from Railways, still in the end the result was the same in all three cases in that the transferor had no direct interest in the corporation receiving the property which was transferred. If the continuity of interest test is to be applied upon the consummation of the integral plan, then the cited cases are in point. The petitioner cites and relies upon , and . Those cases were decided prior to the decisions of the Supreme Court in the Bashford and Groman cases and, in case of conflict, the latter are, of course, controlling. But it is not necessary to overrule the Independent Oil Co. case or to say that we will not follow the Ballwood case, since there are important differences between the facts in those cases and the facts here which may serve to distinguish the cases. 884 No general principle is stated in either of those cases which is contrary to the reasoning of this opinion. The transactions whereby Railways disposed of Brooklyn Borough Gas Co. stock and ultimately received American stock are not more favorable to the petitioner but, if different, are less favorable to the petitioner. Under the principles and authorities above discussed, the full gain of Railways from those transactions was subject to tax. The difference is that here, when the plan was complete, 487 Railways had a much less direct interest in the Brooklyn Borough stock (which went through the ten A to J New Jersey companies to ten Delaware companies owned by Koppers) than it had in the Detroit Edison stock. Since the full gain of Railways from both dispositions was subject to tax, the other arguments of the respondent need not be discussed. Decision will be entered under Rule 50.Footnotes1. Three shares of each corporation were issued at qualifying directors' shares. ↩2. SEC. 112. RECOGNITION OF GAIN OR LOSS. (i) Definition of reorganization. - As used in this section and sections 113 and 115 - (1) The term "reorganization" means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or * * . ↩3. (b) Exchanges solely in kind. - (4) SAME - GAIN OF CORPORATION. - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. ↩4. (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩5. SEC. 112. RECOGNITION OF GAIN OR LOSS. (i) Definition of reorganization. - As used in this section and sections 113 and 115 - (1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or * *. ↩6. (b) EXCHANGES SOLELY IN KIND. - (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩7. "Control" is defined in section 112(j) as the ownership of at least 80 per centum of voting stock and at least 80 per centum of all other classes of stock of a corporation. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619211/	James M. Pierce Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentJames M. Pierce Corp. v. CommissionerDocket No. 84670United States Tax Court38 T.C. 643; 1962 U.S. Tax Ct. LEXIS 101; August 15, 1962, Filed 101 Decision will be entered under Rule 50. 1. Held, under these facts the petitioner was not availed of during the taxable years 1954 through 1957 for the purpose of avoiding the income tax with respect to its stockholders by permitting earnings and profits to accumulate instead of being divided or distributed.2. Petitioner for many years had followed the practice, sanctioned by respondent, of including in its income for each year only the portion of its prepaid subscription income actually earned in that year. The unearned portion of its prepaid subscription income was carried to subsequent years in two reserve accounts, a reserve for unearned subscriptions and a reserve for perpetual subscriptions, and on June 28, 1957, the balances in these reserve accounts were $ 396,019.31 and $ 40,340.25, respectively. On June 26, 1957, petitioner's stockholders adopted a plan of liquidation under sec. 337 and on June 27, 1957, they approved the sale of petitioner's assets. The purchaser paid a cash consideration of $ 1,406,789 and assumed certain liabilities of the petitioner, including the liabilities for unexpired subscriptions. Held, respondent correctly included in petitioner's income 102 for its taxable year 1957 the amount of petitioner's liabilities for unexpired subscriptions which were assumed by the purchaser of its assets. Kent Emery, Esq., and James F. Swift, Esq., for the petitioner.Jack Morton, Esq., for the respondent. Mulroney, Judge. MULRONEY 644 The respondent determined deficiencies in petitioner's income tax as follows:Taxable yearended June 30 --Amount1954$ 35,129.47195544,242.53195638,791.48195737,895.74For the taxable year 1957 the respondent originally determined a deficiency in the amount of $ 37,895.74, and in an amendment to his answer the respondent determined an additional deficiency of $ 307,546.21, making a total deficiency for that taxable year of $ 345,441.95. The issues remaining for our consideration are (1) whether petitioner was availed of during the taxable years before us for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed within the meaning of section 102 of the Internal Revenue Code of 1939 and sections 531- 537 of the Internal Revenue Code of 1954; 1 and (2) whether respondent correctly included in petitioner's income 103 for the taxable year 1957 its reserve for unearned subscriptions in the amount of $ 396,019.31 and its reserve for perpetual subscriptions in the amount of $ 40,340.25.FINDINGS OF FACT.Some of the facts were stipulated and they are herein included by this reference.James M. Pierce Corporation, hereinafter called the petitioner, was incorporated in the State of Iowa in 1902 as the Homestead Company for the purpose of taking over a publishing business founded by James M. Pierce. In October 1929 petitioner changed its name to the James M. Pierce Corporation. Petitioner filed its corporation income tax returns for the taxable years ended June 30, 1954 through 1959, with the district director of internal revenue for the district of Iowa, at Des Moines. Petitioner maintains its accounting records and files its income tax returns on an accrual method of accounting.During the taxable years petitioner was engaged in publishing and distributing a farm newspaper known as Wallaces' Farmer and Iowa Homestead. Petitioner also conducted a job printing business. Petitioner has maintained 104 its principal place of business at 1912 Grand Avenue in Des Moines, Iowa. The land at that location was purchased by petitioner in 1913 and the first buildings were erected on the site by petitioner in 1914 and 1915, with additional buildings erected in 1920 and 1951.645 On September 21, 1929, petitioner sold its real estate, machinery, and equipment, and all assets relating to its job printing business and to the publication of the Iowa Homestead to the Wallace Publishing Company, publisher of a farm newspaper known as Wallaces' Farmer. After the sale the two farm newspapers (the Iowa Homestead and Wallaces' Farmer) were combined into one farm newspaper, Wallaces' Farmer and Iowa Homestead. Wallace Publishing Company became delinquent in its purchase contract on October 15, 1931, foreclosure proceedings were instituted by petitioner, and on April 2, 1932, Dante M. Pierce was appointed receiver and he assumed direct management of Wallace Publishing Company during receivership. In December 1935 petitioner purchased at a sheriff's sale all of the property owned by Wallace Publishing Company and used in the operation of its business. Judgment had been entered against Wallace Publishing 105 Company for $ 2,230,950.40; the property was bid in by petitioner for a total of $ 1,013,000; and the petitioner assumed the liabilities of Wallace Publishing Company, including liabilities for unearned subscriptions. Included in the assets of Wallace Publishing Company acquired by the petitioner in December 1935 was "Circulation Structure" in the amount of $ 158,282.14.Dante M. Pierce succeeded his father, James M. Pierce, as president and general manager of the petitioner in 1920 and served in such capacity until his death on July 27, 1955. Richard S. Pierce, son of Dante M. Pierce, succeeded his father as president and as publisher of petitioner's newspaper.During the taxable years 1954 through 1957 the petitioner's outstanding capital stock consisted of 2,000 shares of common stock having a par value of $ 100 per share. During the petitioner's taxable year 1954 and as of the date of death of Dante M. Pierce, July 27, 1955, the petitioner's common stock was owned as follows:Shares heldStockholder6/30/54 andPercentage7/27/55Dante M. Pierce1,02051.00Anne Pierce Schnabel36518.25Anne Pierce Schnabel Trust1256.25Elsie S. Pierce522.60Ray S. Pierce Trust43821.90Total2,000100.00On June 106 30, 1957, the petitioner's common stock was owned as follows:StockholderSharesPercentageEstate of Dante M. Pierce1,020 51.00Anne Pierce Schnabel365 18.25Anne Pierce Schnabel Trust62 1/23.15James M. Pierce163 1/28.15Elsie S. Pierce52 2.60Hugo Schnabel, Jr62 1/23.15Ray S. Pierce Trust274 1/213.70Total2,000 100.00646 The relationships of the several stockholders to Dante M. Pierce were as follows: Anne Pierce Schnabel, sister; Ray S. Pierce, brother; Elsie S. Pierce, sister-in-law; James M. Pierce, nephew; Hugo Schnabel, Jr., nephew.Since 1929 petitioner has owned stock in the Wisconsin Farmer Company, a Wisconsin corporation, which publishes an agriculture newspaper. During the taxable years and as of June 28, 1957, the Wisconsin Farmer Company had a total of 400 shares of no-par-value common stock outstanding, of which petitioner owned 300 shares, and a total of 1,250 shares of 7 percent, $ 100-par-value preferred stock, of which petitioner owned 1,175 shares.The principal properties left by Dante M. Pierce, who died July 27, 1955, were his 1,020 shares of $ 100-par-value common stock of petitioner, representing 51 percent of the outstanding stock, and $ 74,341.40 of life 107 insurance proceeds, all of which insurance proceeds were payable to his widow. At the time of his death Dante M. Pierce was indebted to petitioner in the amount of $ 180,400, in that he had been making withdrawals from petitioner for a period of years, and petitioner owed Dante M. Pierce $ 20,400, representing unpaid dividends for 1931, so that the net amount due petitioner by Dante M. Pierce at the date of his death for previous withdrawals was $ 160,000. These withdrawals were not evidenced by notes in favor of petitioner, drew no interest, had no maturity date, and (except for the amount of $ 20,400) did not appear on the balance sheets of the petitioner at the end of its fiscal years 1953, 1954, and 1955. It was Dante's practice in these years to borrow money from a bank just prior to the end of petitioner's fiscal year, repay petitioner the outstanding withdrawals (except for $ 20,400), and then after the end of the fiscal year make further withdrawals from the petitioner which were used by Dante to repay his obligations to the bank.If repayments had not been made by Dante M. Pierce at or just prior to the end of each fiscal year (and after allowing credit for $ 20,400 representing 108 unpaid dividends for 1931), the liability of Dante M. Pierce to petitioner on June 30 of each of the years 1951 through 1955 would have been $ 19,000, $ 15,000, $ 97,000, $ 120,000, and $ 160,000, respectively.At a special meeting of the board of directors of petitioner held on September 2, 1955, Richard S. Pierce, executor-nominee of the estate of Dante M. Pierce, notified the board of directors and the stockholders that at the time of his death Dante M. Pierce owed a net indebtedness of $ 160,000 to the petitioner. Petitioner filed a claim against the estate for this amount. The obligation of the estate to petitioner in the amount of $ 160,000 remained outstanding through June 30, 1957.647 The estate of Dante M. Pierce was unable to repay petitioner the $ 160,000 debt of the decedent, the Federal estate taxes, and the State inheritance taxes without liquidating some of the common stock of petitioner which decedent owned. When the time came for the estate to make a payment of the Federal estate taxes due, petitioner was authorized by its stockholders and board of directors to make a loan to the estate, and, accordingly, on October 23, 1956, the petitioner made a loan to the estate 109 in the amount of $ 65,000 evidenced by a 1-year 3-percent note. The note was paid within its time limitation.During the taxable years ended June 30, 1946 through 1953, the petitioner had total net earnings after taxes of $ 1,655,052.40 and it paid total dividends of $ 763,759.84. During the same period it increased its inventories by $ 235,449.62 and its accounts and notes receivable by $ 66,173.53. During the taxable years 1954 through 1957 these same items were as follows:Years ended June 30 --19541955Net earnings after taxes$ 223,415.47 $ 244,900.89 Additions to fixed assets117,982.88 134,928.62 Increase (or decrease) in inventories(41,839.58)8,733.28 Increase (or decrease) in receivables14,805.77 (6,441.56)Dividends paid100,000.00 100,000.00 Years ended June 30 --19561957Net earnings after taxes$ 223,899.42$ 231,459.09 Additions to fixed assets86,780.15125,158.70 Increase (or decrease) in inventories111,856.21(121,345.72)Increase (or decrease) in receivables66,907.3918,246.43 Dividends paid100,000.00100,000.00 From 110 1930 through June 28, 1957, the petitioner had total net earnings after taxes in the amount of $ 3,367,805.06 and paid total dividends in the amount of $ 2,082,431.64.Petitioner's earned surplus for the taxable years 1948 through 1952 was $ 1,114,789.17, $ 1,278,776.73, $ 1,399,861.85, $ 1,491,903.40, and $ 1,544,572.95, respectively.Petitioner's balance sheets for the taxable years 1953 through 1957 disclose the following:AssetsJune 30 --1953Cash, in bank and on hand U.S. Treasury bonds,$ 472,499.94(amortized value)326,561.22Notes and accounts receivable$ 221,035.84Less: Reserve for bad debts 14,000.00217,035.84Inventories346,098.35Other investments448,363.56Cash value of officers life insurance Stock in affiliate, Wisconsin Farmer Co., and other securitiesDepreciable assets1,591,840.93Less: Reserve for depreciation899,167.09692,673.84Real estate26,158.57Goodwill and deferred charges167,782.58Other assets, advance payment on new equipmentOrganizational expenseTotal assets2,697,173.90Liabilities and CapitalDante M. Pierce, dividend (1931)20,400.00Notes and mortgages payable23,000.00Accounts payable78,020.22Federal income tax payable166,078.66State income tax payable2,776.86Accrued expenses81,298.56Unearned subscriptions447,163.69Perpetual subscriptions40,623.75Capital stock200,000.00Earned surplus1,637,812.16Total liabilities and capital2,697,173.90111 AssetsJune 30 --1954Cash, in bank and onhand$ 576,313.76U.S. Treasury bonds,(amortized value)326,453.24Notes and accountsreceivable$ 235,841.61Less: Reserve for baddebts 14,000.00231,841.61Inventories307,405.36Other investmentsCash value of officerslife insurance251,730.37Stock in affiliate,Wisconsin FarmerCo., and othersecurities214,692.74Depreciable assets1,664,161.11Less: Reserve for depreciation941,536.21722,624.90Real estate26,158.57Goodwill and deferredcharges185,349.97Other assets, advancepayment on newequipmentOrganizationalexpenseTotal assets2,842,570.52Liabilities andCapitalDante M. Pierce, dividend(1931)20,400.00Notes and mortgagespayable13,000.00Accounts payable72,334.14Federal income taxpayable192,696.60State income tax payable3,124.75Accrued expenses86,538.07Unearned subscriptions447,699.29Perpetual subscriptions40,592.25Capital stock200,000.00Earned surplus1,766,185.42Total liabilitiesand capital2,842,570.52AssetsJune 30 --1955Cash, in bank and onhand$ 703,908.64U.S. Treasury bonds,(amortized value)326,345.26Notes and accountsreceivable$ 229,400.05Less: Reserve for baddebts 14,000.00225,400.05Inventories312,992.05Other investmentsCash value of officerslife insurance269,728.80Stock in affiliate,Wisconsin FarmerCo., and othersecurities213,692.74Depreciable assets1,770,307.27Less: Reserve for depreciation1,002,866.88767,440.39Real estate26,158.57Goodwill and deferredcharges187,020.30Other assets, advancepayment on newequipmentOrganizationalexpenseTotal assets3,032,686.80Liabilities andCapitalDante M. Pierce, dividend(1931)20,400.00Notes and mortgagespayable3,000.00Accounts payable91,226.38Federal income taxpayable218,360.72State income tax payable2,726.30Accrued expenses78,219.94Unearned subscriptions456,499.92Perpetual subscriptions40,560.75Capital stock200,000.00Earned surplus1,921,692.79Total liabilitiesand capital3,032,686.80112 June 30 --Assets1956Cash, in bank and on hand$ 540,731.40U.S. Treasury bonds (amortized value)620,862.28Notes and accounts receivable$ 455,887.44Less: Reserve for bad debts 14,000.00451,887.44Inventories424,848.26Other investments:Cash value of officers life insurance28,786.16Stock in affiliate, Wisconsin FarmerCo., and other securities213,692.74Depreciable assets1,825,617.87Less: Reserve for depreciation1,080,372.96745,244.91Real estate26,158.57Goodwill and deferred charges178,501.91Other assets, advance payment on newequipment13,420.00Organizational expenseTotal assets3,244,133.67Liabilities and CapitalDante M. Pierce, dividend (1931)20,400.00Notes and mortgages payableAccounts payable145,910.38Federal income tax payable186,998.03State income tax payable3,516.11Accrued expenses84,399.21Unearned subscriptions434,438.02Perpetual subscriptions40,504.50Capital stock200,000.00Earned surplus2,127,967.42Total liabilities and capital3,244,133.67June 30 --Assets1957Cash, in bank and on hand$ 717,533.53U.S. Treasury bonds (amortized value)620,754.30Notes and accounts receivable$ 476,421.66Less: Reserve for bad debts476,421.66Inventories303,502.54Other investments:Cash value of officers life insurance36,013.43Stock in affiliate, Wisconsin FarmerCo., and other securities213,692.74Depreciable assets1,921,372.83Less: Reserve for depreciation1,155,549.98765,822.85Real estate27,409.05Goodwill and deferred charges176,330.02Other assets, advance payment on newequipmentOrganizational expense879.65Total assets3,338,379.77Liabilities and CapitalDante M. Pierce, dividend (1931)20,400.00Notes and mortgages payableAccounts payable99,147.47Federal income tax payable197,960.12State income tax payableAccrued expenses20,372.91Unearned subscriptions396,019.31Perpetual subscriptions40,340.25Capital stock200,000.00Earned surplus2,364,139.71Total liabilities and capital3,338,379.7 113 649 The item shown as "Other investments" on the June 30, 1953, balance sheet and as "Stock in affiliate, Wisconsin Farmer Co., & other securities" on the June 30, 1954, 1955, 1956, and June 28, 1957, balance sheets includes stock in Wisconsin Farmer Company valued at $ 210,519.34 on the books of the petitioner. The item shown as "Goodwill & deferred charges" on the balance sheets as of June 30, 1953, 1954, 1955, and 1956 includes $ 158,282.14 carried on the books of the petitioner as "Circulation Structure" and the same item on the June 28, 1957, balance sheet includes $ 154,863.14 carried on the petitioner's books as "Circulation Structure."Petitioner reported total income in its returns for the taxable years 1954 through 1957 in the respective amounts of $ 3,640,636.05, $ 3,823,562.57, $ 4,010,708.45, and $ 3,936,551.04, and in the same taxable years claimed total deductions of $ 3,224,274.79, $ 3,359,940.66, $ 3,590,197.68, and $ 3,510,529.55.Petitioner's ratio of quick assets (cash and U.S. Treasury bonds) to current liabilities for each of the taxable years 1954 through 1957 was 2.36 to 1, 2.50 to 1, 2.65 to 1, and 3.96 to 1. Petitioner's 114 ratio of current assets to current liabilities for each of the taxable years 1954 through 1957 was 3.78 to 1, 3.82 to 1, 4.66 to 1, and 6.26 to 1.Petitioner sold subscriptions for fixed terms beyond 1 year and payment was made in advance by the subscriber. In or about 1919 the petitioner adopted the practice of reporting an aliquot part of prepaid subscription income for fixed periods for each year of the prepaid subscription period and continued such practice until petitioner sold its business on or about June 28, 1957. That part of the prepaid subscription income received by the petitioner in a given year which was not reported as income in that year was credited to an account entitled "Reserve for Unearned Subscriptions" if the subscription was for a fixed period. The balance in the petitioner's reserve for unearned subscriptions account as of June 28, 1957, was $ 396,019.31. In the audit reports prepared for petitioner for the taxable years 1953 through 1957 it was noted that "This account represents the income applicable to operations of future years on subscriptions obtained during the current and prior years."650 When petitioner acquired the assets of Wallace Publishing Company 115 in 1935, among the liabilities assumed by petitioner was a "Reserve for Perpetual Subscriptions" in the amount of $ 43,321.50. Prior to 1920 a subscriber paid $ 10 for a perpetual subscription, and the Wallace Publishing Company treated $ 1 as earned income for the taxable year in which the subscription was sold and carried the balance of $ 9 in the reserve for perpetual subscriptions account. A subscriber, his heirs, or assigns, could redeem the perpetual subscription certificate at any time after 1 year from date and receive $ 9. After 1920 the subscriber paid $ 12.50 for a perpetual subscription, and the Wallace Publishing Company treated $ 1.25 as earned income in the fiscal year in which the subscription was sold and carried the balance in the reserve account. A subscriber, his heirs, or assigns, could redeem the perpetual subscription certificate at any time and receive $ 11.25 in cash. Petitioner has not sold any perpetual subscriptions since 1935 and the balance in petitioner's reserve for perpetual subscriptions account as of June 28, 1957, was $ 40,340.25.For the taxable years 1954 through 1957 the average total paid circulation of Wallaces' Farmer and Iowa Homestead 116 was as follows:Taxable yearended June 30 --Amount1954$ 309,2931955309,2121956308,6511957308,598On June 26, 1957, the stockholders of petitioner adopted a plan of complete liquidation and dissolution in accordance with section 337 with distribution of its assets, less assets retained to meet claims, to its stockholders within 1 year of such date.On June 27, 1957, the stockholders of petitioner approved an offer of the Prairie Farmer Publishing Company, an Illinois corporation, to purchase the business of the petitioner. After giving effect to the assumption by the purchaser of certain liabilities of the petitioner, including the liability for unexpired subscriptions, the adjusted cash consideration was in the sum of $ 1,406,789, which cash consideration was set forth in the sales agreement, as follows:Adjusted cashconsiderationCirculation structure, going business$ 1.00Inventories303,502.54Real estate21,186.00Buildings315,619.00Office furniture and equipment50,768.00Machinery, equipment, and automobiles500,936.92The Wisconsin Farmer Company stock193,308.66Accounts and notes receivable897.26Prepaid expense20,569.62Total1,406,789.00651 117 Section 9 of the sales agreement provided as follows:9. Obligations assumed by Prairie Farmer. Prairie Farmer assumes the obligation of Pierce to publish "Wallaces' Farmer and Iowa Homestead" and to carry out in accordance with their terms all subscription contracts in force as of the date of closing for the unexpired period of the subscriptions. Prairie Farmer also assumes the obligation of completing all work in progress at the date of closing and fulfilling all uncompleted contracts for job printing and for advertising in "Wallaces' Farmer and Iowa Homestead". Prairie Farmer agrees to assume and perform the ordinary trade obligations of Pierce under $ 1,000 (except for items to be paid for as inventory) and also assumes and agrees to carry out the purchase contracts listed in schedule 3 for the purchase of binding machinery and equipment and the slitter for the press at a price not to exceed that stated in said schedule 3. Prairie Farmer likewise assumes the obligations of Pierce under the labor contracts, the Prudential group life insurance contract, the Bankers Life group life insurance contract, the agreement with Mid-West Farm Paper Unit, the contract with Mutual Benefit 118 Insurance Company to sell policies to subscribers, service contract with I.B.M. and charitable pledges listed in said schedule 3. Any accrued dividends under such group life insurance contracts shall become payable to Prairie Farmer. Prairie Farmer assumes the obligation of Pierce to accept delivery from Hennepin Paper Company of any rewound paper not delivered to Pierce prior to the date of closing, provided, however, that such paper be billed to Prairie Farmer at a price not in excess of the original billing to Pierce, and also assumes the obligation to accept delivery of paper, ordered for June delivery as set forth in said schedule 3 or in accordance with subparagraph (f) of paragraph 5, but not delivered to Pierce prior to the date of closing. Prairie Farmer also assumes in addition to the foregoing the contracts shown on schedule 3 under the caption "Additional contracts to be assumed by Prairie Farmer." Prairie Farmer assumes no other obligations and assumes no debts or liabilities of Pierce of any nature except as otherwise herein above expressly set forth.Section 2 of the sales agreement provided that the closing of the sale would take place on June 28, 1957.Petitioner 119 made liquidation distributions to its stockholders on July 24, 1957, in the amount of $ 100,000 and on November 8, 1957, in the amount of $ 1,800,000.The following table sets forth the amounts of Federal income taxes shareholders of petitioner, Dante M. Pierce (Estate of Dante M. Pierce after July 27, 1955) and Anne Pierce Schnabel, reported per return and computations for the taxable years 1954, 1955, and 1956, provided accumulated taxable income per statutory notice of deficiency and the amendment to answer had been paid in dividends to them in the percentage of their stock ownership:Income tax payableIncome taxprovided accumulatedYearreported pertaxable incomereturndistributedper percentageof owneshipDante M. Pierce (Estate after 7/27/55) 51 percent19541 $ 41,823.94$ 82,698.6519551 25,461.0176,960.94Year ended June 30, 195623,929.9675,739.57Anne Pierce Schnabel 18.25 percent1954$ 11,882.78$ 23,654.81195510,096.0924,087.3419567,859.8519,696.58652 On March 17, 1958, respondent mailed to petitioner a notification as provided by section 534(b) with respect to the proposed accumulated earnings tax for the taxable year ended June 30, 1954, under section 102 of the Internal Revenue Code of 1939, 120 and for the taxable years ended June 30, 1955 through 1957, under section 531. Within an extended time period the petitioner submitted a statement setting forth the grounds on which it relied, pursuant to section 534(c), to establish that all or any part of the earnings and profits were not permitted to accumulate beyond the reasonable needs of its business.Respondent in the statutory notice of deficiency determined that petitioner was availed of for the purpose of avoiding income tax upon its stockholders through the medium of permitting its earnings and profits for the taxable years 1954 through 1957 to be accumulated beyond the reasonable needs of its business instead of being divided or distributed. In an amendment to his answer the respondent determined that the balance of $ 40,340.25 in petitioner's reserve for perpetual subscriptions account as of June 28, 1957, and the balance of $ 396,019.31 in petitioner's reserve for unearned subscriptions account as of June 28, 1957, were includible in petitioner's gross income and subject to the accumulated earnings tax for the taxable year 1957.Petitioner did not permit its earnings and profits for its taxable years 1954 through 1957 121 to accumulate beyond the reasonable needs of its business.Petitioner was not formed or availed of in its taxable years 1954 through 1957 for the purpose of avoiding the income tax with respect to its shareholders by permitting its earnings and profits to accumulate instead of being divided or distributed.OPINION.Section 102 of the Internal Revenue Code of 1939 and sections 531 and 532 of the Internal Revenue Code of 1954 impose an additional tax, called an accumulated earnings tax, upon a corporation formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.The first issue is whether petitioner was availed of during its taxable years 1954 through 1957 for the purpose of avoiding the income tax with respect to its shareholders within the meaning of the above sections. The question is one of fact. Helvering v. National 653 ., 304 U.S. 282">304 U.S. 282. The fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business is determinative of the proscribed purpose 122 unless the corporation by the preponderance of the evidence shall prove to the contrary. (Sec. 102(c), I.R.C. 1939; sec. 533, I.R.C. 1954.) Section 537 provides that "the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business." See also Lion Clothing Co., 8 T.C. 1181">8 T.C. 1181. Section 534 casts the burden on respondent on the issue of accumulation beyond reasonable needs if the corporation has submitted a statement of the grounds and facts on which he relies to show there was no accumulation beyond reasonable needs.Petitioner listed some 19 grounds in its statement under section 534(c) to establish that its earnings and profits were not accumulated beyond the reasonable needs of its business, and in an amendment to its petition listed 6 additional grounds, namely: (1) Need for installation of air conditioning, (2) need for a parking lot, (3) need for installation of lithographing equipment, (4) need for a new elevator, (5) need to replace usable but obsolete equipment, and (6) need to buy out minority stockholders in the Wisconsin Farmer Company. Respondent argues that the petitioner in his statement failed to include facts which would support the 123 listed grounds, see section 534(c), and that consequently the burden of proof as to unreasonable accumulations does not shift to respondent under section 534(a)(2).We need not decide the burden of proof issue. We believe that petitioner has demonstrated that it did not accumulate its earnings and profits beyond the reasonable needs of its business and that it was not availed of for the purpose of preventing the imposition of income tax on its stockholders. In F. E. Watkins Motor Co., 31 T.C. 288">31 T.C. 288, this Court said that in deciding whether a taxpayer had accumulated a greater surplus than was necessary for the reasonable needs of the business, "the actual current needs of the business are to be considered and also the necessity for presently accumulating a surplus to meet foreseeable future needs." In passing judgment on the reasonableness of accumulations to meet the needs of a business and to insure its continued success, we would hesitate to substitute our opinion as to the reasonableness of the amounts involved for the opinion of the corporate officers and directors who have exercised their business judgment after a consideration of these matters. Breitfeller Sales, Inc., 28 T.C. 1164">28 T.C. 1164.Petitioner's 124 earned surplus at the end of its taxable years 1954 through 1957 was $ 1,770,185.42, $ 1,925,692.79, $ 2,131,967.42, and $ 2,364,139.71, respectively. We feel that petitioner's manner of doing business would justify the accumulation of funds to meet operation expenses for at least 1 year. See F. E. Watkins Motor Co., supra;654 J. L. Goodman Furniture Co., 11 T.C. 530">11 T.C. 530. Petitioner's income tax return for the taxable year 1954 shows total deductions of $ 3,224,274.79 from a total income of $ 3,640,636.05. These deductions include printing and mailing costs of $ 735,826.86, salaries and wages, $ 958,731, compensation of officers, $ 39,637.55, and commissions, $ 105,169.81. With the exception of the cost of materials ($ 704,213.13) which is included in the total deductions and which may properly be regarded as an inventory item, the bulk of the remaining expenditures were incurred by the petitioner in the current operation of its business. The pattern of current expenditures in the taxable years 1955 through 1957 is much the same, both as to the substantial amount of the expenditures and to the relation of total expenditures to total income. We have included these amounts in our findings 125 of fact and it is unnecessary to repeat them here. It is apparent that, in view of the heavy current operational expenses required by the petitioner each year in carrying on its operations, its accumulation of funds as evidenced by its surplus account was not unreasonable.It also appears that the petitioner, with competitive conditions in mind, was actively considering the installation of new lithographing equipment during the period before us, and actually purchased a small experimental press for about $ 5,000 with the intention of subsequently going into lithographing work on a large scale. Petitioner was also keenly aware of the growing competition to its farm paper by radio and television and felt it necessary to be in a sound financial condition to meet this competitive threat. In addition, there is some evidence that petitioner's executive officers felt the need to buy out the minority stockholders in the Wisconsin Farmer Company and they were considering a need for air conditioning the plant, replacing the 25-year-old printing equipment used for the farm paper, and installing an elevator for a more efficient use of petitioner's building. Not much weight need be given to 126 these last enumerated factors since the petitioner's intentions as to them were not manifested by any concrete and definite course of conduct. See Smoot Sand & Gravel Corp. v. Commissioner, 241 F. 2d 197, 202. However, this evidence should not be ignored. There was evidence that these needs were discussed in meetings of the board of directors and the directors stated their views that a strong financial position should be maintained to meet these potential liabilities.We have considered the withdrawals from the petitioner over a period of years made by Dante M. Pierce, who owned 51 percent of petitioner's stock. Many of the cases in this area regard the withdrawals by stockholders of corporate funds as one indication that such funds are not required for the needs of the business. This is some evidence to support respondent's position but we think it is weakened by the method employed by Dante in keeping these withdrawals 655 concealed from the other officers and directors by means of temporary borrowings from a bank, which were used to repay the petitioner at the end of petitioner's fiscal year. 2 Evidently his credit standing was such that he could at any time pay off these loans. 127 Cf. F. E. Watkins Motor Co., supra.Petitioner's officers testified they were unaware of Dante's withdrawals of corporate funds, and, after Dante's death the petitioner, upon being informed that Dante owed a net indebtedness of $ 160,000 to the petitioner, filed a claim for such amount against his estate.We hold that, upon careful analysis of the entire record and giving proper regard to the nature of petitioner's operations, petitioner did not permit its earnings and profits in the taxable years 1954 through 1957 to accumulate beyond the reasonable needs of its business. We have discussed only the dominant elements in the record which persuade us to reach this holding. Other arguments were advanced by petitioner which might lend additional support for its position but we need not discuss them.We hold also that petitioner was not availed of during the taxable years 1954 through 1957 for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. 128 We believe that the petitioner's motives for the accumulations were geared to its reasonable corporate needs and not to any desire to avoid the imposition of taxes on its shareholders. It would serve no useful purpose to repeat the evidentiary facts which we have found and which we have discussed above. But on this ultimate issue it is especially significant, we think, that petitioner has consistently paid substantial dividends to its stockholders from its taxable years 1936 through 1957, including its taxable year 1939, which showed a net loss of $ 32,544.48. From 1930 through June 28, 1957, petitioner had total net earnings after taxes in the amount of $ 3,367,805.06 and paid total dividends in the amount of $ 2,082,431.64. Beginning with its taxable year 1947 the petitioner consistently distributed total dividends of $ 100,000 in each year, while its net earnings in this period ranged from a low of $ 144,670.24 (taxable year 1948) to a high of $ 285,345.94 (taxable year 1947). We think that this policy of dividend distributions over the years, coupled with the other evidence in the record, is inconsistent with a motive to prevent the imposition of taxes upon stockholders.The 129 next issue is whether respondent was correct in including in petitioner's income for the taxable year 1957 the balances in its reserve for unearned subscriptions account in the amount of $ 396,019.31 and its reserve for perpetual subscriptions in the amount of $ 40,340.25. On June 26, 1957, the stockholders of petitioner adopted a plan of complete 656 liquidation and dissolution under section 337, and on June 27, 1957, petitioner accepted an offer of the Prairie Farmer Publishing Company to purchase its business. It is stipulated that "After giving effect to the assumption, by the purchaser, of certain liabilities of the petitioner, including the liability for unexpired subscriptions, the adjusted cash consideration was in the sum of $ 1,406,789.00." Respondent contends that as a result of the assumption by the purchaser of the unearned subscriptions liability totaling $ 436,359.56 the petitioner realized income in that amount.We agree with respondent. Petitioner sold subscriptions for fixed periods extending beyond the year of sale and although it received these payments in advance, did not include them all in its income for that year but, since 1919, adopted the practice of reporting 130 only an aliquot portion of the prepaid subscription income in each year, and carrying the unearned portion of the subscription income in a reserve account. Obviously the subscription income was brought into income only in the year in which it was earned. When the purchaser of its business assumed the petitioner's liability for unearned subscriptions on June 27, 1957, the petitioner, in effect, realized income to the extent of the amounts of prepaid subscriptions which had been held in reserve until earned. The need for holding these unearned subscriptions in a reserve account no longer existed. Petitioner was released from its liability to its subscribers, and it was, consequently, the appropriate time to restore the prepaid subscriptions to income. If this were not done it is quite apparent that these amounts would, under the facts of this case, escape being taxed altogether.An analogy exists in the line of cases involving reserves for bad debts being returned to income, the general rule being "that any balance in a reserve for bad debts existing when the reserve becomes no longer necessary, as for example, when all the accounts have been collected, must be included in taxable 131 income, upon the theory that the amount of the reserve, having been previously deducted, must be restored to income." Ira Handelman, 36 T.C. 560">36 T.C. 560, 565; see also West Seattle National Bank of Seattle, 33 T.C. 341">33 T.C. 341, affd. 288 F.2d 47">288 F. 2d 47.We think the provisions of section 455, which was enacted in 1958, are of significance here even though the section was made applicable only to taxable years beginning after December 31, 1957. For years prior to 1940 many publishers reported their prepaid subscription income only as it was earned, and in 1940 the practice was sanctioned in I.T. 3369, 1 C.B. 46">1940-1 C.B. 46, in the case of publishers on an accrual basis who had over the years consistently followed this practice. 3132 657 However, the Treasury Department concluded that without express statutory sanction it could not permit new publishers to spread subscription income over the period of the subscription or permit publishers to change over to this method of reporting subscription income. 4133 Section 455 was enacted to enable the remaining publishers to adopt this practice if they so elected.Section 455(b) provides as follows:(b) Where Taxpayer's Liability 134 Ceases. -- In the case of any prepaid subscription income to which this section applies -- (1) If the liability described in subsection (d)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.(2) If the taxpayer dies or ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such death, or such cessation of existence, occurs.Section 455(d)(2) defines the word "liability" as used in the section to mean "a liability to furnish or deliver a newspaper, magazine, or other periodical."We do not think that section 455(b) of the 1958 legislation expounds any new principle of tax law but, on the contrary, is merely a reiteration of a fundamental principle of taxation applicable to the treatment of prepaid income items which are deferred over future years. It merely prevents these income items from escaping taxation completely. 658 There is no merit in petitioner's argument on brief that it paid "The Prairie 135 Farmer Publishing Company to assume the liabilities under the subscription contracts in that it transferred property to Prairie having a total market value in excess of the sum of the liabilities assumed and the cash received."Decision will be entered under Rule 50. Footnotes1. All section references will be to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩1. A surplus reserve, includible in earned surplus.↩1. A surplus reserve, includible in earned surplus.↩1. Includes assessments due to audits.↩2. These special circumstances, together with other factual differences, serve to distinguish this case from Nemours Corporation, 38 T.C. 585">38 T.C. 585↩.3. I. T. 3369 states, in part, as follows:"It is held that where a publisher of periodicals has, over a period of years, followed consistently either of the two methods outlined above, [reporting as income in year of receipt or reporting an aliquot part of the subscription income for each year of the subscription period] he may continue to file his returns on such basis, he will not be required to change to the other basis, and his net income for the past years will not be redetermined on such other basis. * "4. In Senate Report No. 1983, 85th Cong., 2d Sess., 3 C.B. 922">1958-3 C.B. 922, 963, the Finance Committee stated the following:"In the case of the publishers representing the major portion of the subscription income, this income is reported for tax purposes in the year in which the publisher is required to issue the periodical to which the income relates. In 1940 the Treasury Department officially sanctioned (in I.T. 3369, C.B. 1940-1, 46) this method of reporting subscription income in the case of the publishers of periodicals on an accrual basis who had over a period of years consistently followed the practice of reporting periodical subscriptions as income for the year of the subscription period rather than as income for the year of receipt. The Treasury Department has indicated that it permitted publishers who had consistently reported on this basis to continue to do so because to do otherwise would have resulted in a distortion of income, or would have resulted in double reporting in the same year, in one case 1 year's subscription income based upon receipts and in the other case 1 year's subscription income based upon the liability to provide the periodical. However, the Treasury apparently concluded that without express statutory sanction, it could not permit new publishers to spread subscription income over the period of the subscription, nor could it permit existing publishers to change over to this method of reporting subscription income. * * "your committee believes that it is unfair and discriminatory to permit the majority of publishers to defer the reporting of subscription income until the year of the subscription yet deny this treatment to publishers accounting for a minority of the publishing business. This appears particularly unfortunate in that the more favorable treatment presently is denied new publishers, adding to their already difficult problem of competing with well-established companies. * *"↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619212/	EARNEST BOOTH, M.D., P.C., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBooth v. CommissionerDocket No. 7854-80.United States Tax CourtT.C. Memo 1982-423; 1982 Tax Ct. Memo LEXIS 320; 44 T.C.M. (CCH) 595; T.C.M. (RIA) 82423; July 27, 1982. Peter I. Chirco, for the petitioner. Larry D. Anderson, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax for the fiscal years ended322 June 30, 1975, and June 30, 1976, in the amounts of $610 each year under section 11 1 and the amounts of $11,265 and $14,042 under section 531, respectively. The issue for decision is whether for its fiscal years ended June 30, 1975, and June 30, 1976, petitioner was availed of for the purpose of avoiding income taxes with respect to its shareholder by permitting its earnings and profits to accumulate beyond the reasonable needs of its business. 2323 FINDINGS OF FACT Petitioner Earnest Booth, M.D., P.C., is a corporation organized under the Michigan Professional Service Corporation Act, Mich. Stat. Ann. sec. 21.315, on September 18, 1968.Its office was located in Southfield, Michigan, at the time of the filing of the petition in this case. Petitioner filed its Federal corporate income tax returns, Forms 1120, for its fiscal years ended June 30, 1975, and June 30, 1976, with the Central Service Center, Covington, Kentucky. These returns were prepared on the cash basis of accounting. Earnest Booth, M.C., is, and has been since the organization of Petitioner, its sole shareholder. Dr. Booth exercises full control over petitioner. Dr. Booth is a pathologist. He was born on August 30, 1927. After graduating from medical school, he served three years of internship and four years of residency and qualified as a pathologist. In 1958 he was certified by the American Board of Clinical and Anatomical Pathologists. On March 19, 1973, Petitioner entered into a contract with Hutzel Hospital, a Michigan nonprofit corporation. The contract provided that the hospital retained the corporation to manage the laboratories and blood bank324 and pathology department of the hospital. Under the terms of the contract, Dr. Booth was to serve as chief pathologist for the hospital and be directly responsible for supervision of all professional personnel employed or retained by the corporation. The contract further provided that-- The Corporation agrees that Dr. Booth and each of the associate pathologists or physicians employed or retained by its shall be covered by malpractice insurance of at least Two Hundred Thousand ($200,000.00) Dollars per act, and Six Hundred Thousand ($600,000.00) Dollars per occurrence, with appropriate coverage insuring each such associate as to liability, if any occasioned by the malpractice of this fellow employees or associates. * * The contract further provided that in the performance of these medical responsibilities and obligations under the contract, the corporation shall at all times be acting and performing as an independent contractor. The hospital agreed to provide the corporation with facilities and personnel other than the pathologists employed by the corporation necessary to the operation of the laboratories and blood bank and pathology department. However, it was understood325 that Dr. Booth would direct the operation of the personnel employed by the hospital. The contract provided for the compensation of petitioner for the services rendered. The duration of the agreement was a period of 10 years unless terminated by petitioner or because of the death or total disability of Dr. Booth. In the event of the death or total disability of Dr. Booth, the contract automatically terminated. In the event Dr. Booth became partially disabled for a period of 6 months or longer and the disability was of such a nature as to impair his ability to perform the services required of him by the contract, the hospital had the right to terminate the agreement by 30 days' notice in writing to that effect. There was no right in the hospital to terminate the agreement for any reason other than the death or disability of Dr. Booth. However, the agreement provided that petitioner had the right to terminate the agreement for any reason upon 6 months' notice in writing to the hospital. Upon its incorporation in 1968, petitioner entered into an agreement with Hutzel Hospital comparable to the one entered into on March 19, 1973. In 1971, Dr. Booth, on behalf of petitioner, gave326 the requisite 6 months' notice of termination and entered into a comparable contract on behalf of petitioner to operate the pathology laboratory of Mt. Carmel Hospital. After approximately a year and a half, he gave notice to Mount Carmel Hospital of his election to terminate that agreement to permit him to enter into the March 19, 1973, agreement with Hutzel Hospital which was in effect during the years here in issue.Under Petitioner's contract with Hutzel Hospital, its compensation was a percentage of the laboratory fees charged by the laboratory. Dr. Booth was paid a salary by petitioner. For its fiscal year ended June 30, 1972, petitioner paid Dr. Booth a salary of $130,000. For each of its fiscal years ended June 30, 1973, 1974, and 1975, it paid Dr. Booth a salary of $142,000. For its fiscal year ended June 30, 1976, petitioner paid Dr. Booth a salary of $148,000. The following schedule shows the retained earnings of petitioner at the beginning and end of its fiscal year 1975 and the end of its 1976 fiscal year and the current retained earnings for each of its fiscal years 1975 and 1976: Taxable YearRetainedCurrentEndingEarningsRetained Earnings7-1-74$282,8936-30-75320,568$39,6936-30-76370,36049,792327 Petitioner on its Federal income tax return for each of its fiscal years ended June 30, 1975 and 1976, showed the following income and expenses and taxable income: YearYearEndedEnded6-30-756-30-76Gross Receipts$378,554$441,862Interest income2,575Total income$378,554$444,437Salary - Dr. Booth$142,000$148,000Salaries - other62,19189,657Contribution to pension plan80,27795,945Insurance expense5,46710,711Legal and accounting10,3358,561Taxes11,07712,292Other10,2559,479Total expenses$321,602$374,645Taxable income$ 56,952$ 69,792Federal income tax$ 17,259$ 20,000No formal dividends were declared by petitioner during its fiscal years ended June 30, 1970, through June 30, 1977. The equipment which Hutzel Hospital had in its pathology laboratory for the use of Dr. Booth and his associates had a value of over $500,000 during each of the years here in issue. During each of the years here in issue, the pathology department which Dr. Booth supervised performed approximately 3,000,000 laboratory tests per year. During these years, Dr. Booth was responsible as supervisor for the328 work of three other pathologists and 160 medical technologists, technicians, and laboratory assistants. The work performed in the pathology laboratory was performed generally at the direction of physicians practicing on the staff of Hutzel Hospital. During the years here in issue, approximately 550 physicians were on the staff of Hutzel Hospital. Petitioner carried its basic malpractice insurance during the years here in issue and for some years prior and subsequent thereto with Medical Protective Company of Fort Wayne, indiana. The insurance coverage ran from December 1 of one year to December 1 of the next year. For the period December 1, 1973, to December 1, 1974, petitioner's coverage with Medical Protective Company was $200,000 per event and $600,000 total. This policy was amended effective May 23, 1974, to $1,000,000 per event and $1,000,000 total. For the period December 1, 1974, to December 1, 1975, the malpractice insurance petitioner carried with Medical Protective Company was $1,000,000 per event and $1,000,000 total. For the period December 1, 1975, to December 1, 1976, the insurance coverage with Medical Protective Company was $200,000 per event and $600,000329 total. For the period December 1, 1976, to December 1, 1977, this insurance was $100,000 per event and $300,000 total. For years prior to the period December 1, 1976, to December 1, 1977, petitioner's policy had also covered Dr. Booth. For the year December 1, 1976, to December 1, 1977, in addition to the policy carried by petitioner, Dr. Booth carried a personal policy of coverage of $100,000 per event and $300,000 total. For the period December 1, 1977, to December 1, 1978, petitioner carried malpractice insurance coverage of $200,000 per event and $600,000 total.All of the pathologists employed by petitioner also carried personal malpractice insurance during each of the years here in issue. in addition to the basic malpractice insurance carried by petitioner with Medical Protective Company for the period September 17, 1972, to September 17, 1975, petitioner carried an excess limits policy with St. Paul Insurance Company of $1,000,000 of malpractice insurance. The policy, which was taken out on September 17, 1972, was a three-year policy.This policy was not renewed on September 17, 1975, because St. Paul Insurance Company lost its authority to sell malpractice insurance in the330 State of Michigan because a new form which it submitted to the State was not approved. St. Paul Insurance Company sold its insurance through independent agents. In August 1975, when petitioner was notified that St. Paul Insurance Company would not be authorized to write insurance in the State of Michigan after September 17, 1975, petitioner was informed by the independent agent who had procured the policy with St. Paul Insurance Company for petitioner that petitioner could procure an excess limits policy of $1,000,000 with Interstate Fire and Casualty Company.Both the Medical Protective Company and St. Paul Insurance Company determined premiums for medical malpractice insurance according to their estimation of the risks and hazards inherit in the particular speciality of the physicians being covered. Each of these companies has five classes of physicians covered by insurance. Of the five classes of physicians insured by both Medical Protective Company and St. Paul Insurance Company, pathologists are in the lowest classification of risk.The State of Michigan required that insurance companies doing business in that State submit to the State Insurance Bureau a completed form when331 an insurance claim had been filed and another completed form when the claim had been settled. The information submitted to the State Insurance Bureau by companies doing business in the State of Michigan was compiled by the National Association of Insurance Commissioners into a statistical report showing information with respect to claims filed and claims paid in the State of Michigan during the years 1975 through 1978. The statistics compiled in this report included claims disposed of by settlement prior to trial and by verdicts at trials. For the years 1975 through 1978, the average amount of indemnity paid by all insurance companies for malpractice claims against all physicians in Michigan was as follows: YearAmount1975$16,027197614,944197721,465197818,297The average amount of indemnity paid by the Medical Protective Company during the period 1975 through 1978 for malpractice by physicians was $12,617 and the average amount of indemnity paid by St. Paul Insurance Company during this same period was $19,772. During the period 1975 through 1978, there were only six claims made in the State of Michigan for malpractice by pathologists. In February332 1980, a complaint was filed against Hutzel Hospital, three surgeons and two of the pathologists employed by petitioner. The act assigned as malpractice in these complaints had occurred on May 17, 1976.Petitioner was not named in the suit. This suit was pending unresolved at the time of the trial of this case. In August 1975, a Dr. Teitelbaum filed a complaint against two pathologists who practiced in Grace Hospital in Michigan and against a Michigan professional corporation by whom these two pathologists were employed. In July 1979, consent judgments in the amount of $325,000 were entered against each of the individual pathologists against whom the suit was filed. There is no indication in the record of what was done with respect to the suit against the professional corporation. However, the record does show satisfaction of the judgment in full by each of the physicians. The $325,000 entered was without costs and without interest and was the full amount owed by the individual doctor defendants under the consent judgment order. Petitioner carried no reserve on its books for malpractice self insurance. It did not carry a reserve on its books for malpractice lawsuits. 333 The arrangement that petitioner had with Hutzel Hospital was comparable to the arrangements that most hospitals have for the operation of their pathology laboratory. Although there are differences in the amounts, most hospitals compensate the doctor or professional corporation operating the pathology department on the basis of a percentage of the receipts from work done in the pathology laboratory. Some have a fixed amount of compensation in addition and others do not. Dr. Booth was highly regarded by the administration of Hutzel Hospital and also by the administration of Mt. Carmel Hospital. When petitioner canceled its contract with Hutzel Hospital and when it canceled its contract with Mt. Carmel Hospital, it was at Dr. Booth's request and not at the instigation of the hospital. During the course of an audit of petitioner's Federal income tax returns for its fiscal years ended June 30, 1973, and June 30, 1974, the examining agent proposed to recommend the imposition of an accumulated earnings tax under section 531.Representatives of petitioner told the agent that petitioner was reserving funds for possible medical malpractice lawsuits. Respondent's agent requested all minutes334 of the corporation and was furnished the minute book which covered the period September 1968 to March 12, 1974. There was no reference in any of these minutes to any necessity for retention of earnings for possible malpractice lawsuits. The only reference in any of these minutes to malpractice is a statement in the minutes of September 1969 that the corporation is to pay the malpractice insurance for all its employees. The agent was investigating petitioner's fiscal years 1973 and 1974 returns during May and June 1975. During the course of the examination, petitioner's representatives informed the agent that it was the intent of the corporation to make dividend distributions in the very near future. For this reason, the examining agent did not recommend the assertion of an accumulated earnings tax under section 531 against petitioner for its fiscal years 1973 and 1974. At the meetings petitioner's directors held shortly after June 30, 1975, and shortly after June 30, 1976, which were attended by the representatives of petitioner who had represented petitioner in the investigation of petitioner's tax liability for the fiscal years 1973 and 1974, a discussion was held with respect335 to the need by petitioner for funds to cover possible malpractice lawsuits. On May 23, 1979, respondent issued by certified mail a notification to petitioner pursuant to section 534 that he proposed to issue a statutory notice of deficiency to petitioner for its fiscal years 1975 and 1976 setting forth an amount with respect to the accumulated earnings tax imposed by section 531. In early July 1979, petitioner filed with respondent "Statements of Grounds Relied Upon by the Taxpayer for the Accumulation of Funds Needed by the Business." After reciting the nature of petitioner's operations, this statement was as follows: In the case of the present taxpayer, the surplus was not excessive for two reasons as follows: i. It is entirely possible that a lawsuit or a number of lawsuits may be instituted against the corporation beyond the present limits of possible insurance coverage of $100,000.00 per occurrence and $300,000.00 in the aggregate. (Although an additional $100,000.00 - $300,000.00 is issued to each doctor, this additional amount may not be available to the Corporation.) Furthermore, that insurance coverage is cancellable at the will of the insurer and may not be available336 in the future. The corporation should reserve a substantial sum annually for potential lawsuits. ii. The corporation operates its business out of premises owned by Hutzel Hospital. It uses and relies on equipment costing over $500,000.00 belonging to Hutzel Hospital. If the contract with the Hospital is not renewed the corporation would be out of business unless a new contract was obtained or it was financially able to purchase the bildings and equipment necessary to continue its practice. Therefore a substantial reserve for the possible purchase of equipment or a building is proper under such circumstances. In the notice of deficiency issued to petitioner on March 10, 1980, determining the tax under section 531, the following explanation is given: It is determined that you were formed or available of for the purpose of avoiding the income tax with respect to your shareholder by permitting earnings and profits to accumulate instead of being divided or distributed during the taxable years ended June 30, 1975, and June 30, 1976. Accordingly, the accumulated earnings tax provided by Section 531 of the Internal Revenue Code is being asserted for these337 taxable years. In determining your accumulated earnings credit under the provisions of Section 535 of the Code, consideration was given to the statement dated July 2, 1979, filed by you in response to the notification sent to you by certified mail on May 23, 1979, pursuant to Section 534(b) of the Code. It is determined that the information set forth in your statement is not sufficient to establish that any part of your earnings and profits for the taxable years ended June 30, 1975, and June 30, 1976, was retained for the reasonable needs of your business. Inasmuch as you do not qualify for the minimum accumulated earnings credit provided for in Section 535(c) (2) of the Code, no accumulated earnings credit has been allowed in the computation of the accumulated earnings tax. OPINION Section 531 imposes a tax on the accumulated taxable income of every corporation described in section 532. Section 532 provides that the accumulated earnings tax applies to every corporation formed or availed of for the purpose of avoiding the income tax with respect to its shareholders. Section 533(a)338 provides that for the purpose of section 532, the fact that earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to its shareholders unless the corporation by a preponderance of the evidence shall prove to the contrary. Section 534 deals with whether petitioner or respondent has the burden of proof. It provides that where a corporation is notified of respondent's intent to assert an accumulated earnings tax and submits a statement within the time allowed of the grounds, together with facts sufficient to show the basis thereof, on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business, the burden shall be on respondent with respect to the grounds set forth in the statement submitted. Section 353 provides for the method of computing the accumulated taxable income to which the accumulated earnings tax is applicable. Section 537 provides that the reasonable339 needs of a taxpayer's business include the reasonable anticipated needs. The record here shows that respondent notified petitioner of his intent to determine an accumulated earnings tax for petitioner's fiscal years ended June 30, 1975 and 1976, and petitioner filed the statement of grounds referred to in section 535. We have recited the grounds assigned by petitioner in our findings of fact. The first ground assigned by petitioner is the possibility that a lawsuit might be instituted against the corporation beyond the limits of its insurance coverage and the second is that petitioner might lose its contract with Hutzel Hospital and have to equip a laboratory. No facts were assigned to support the two grounds set forth.Since the statement contained no facts in support of the alleged grounds, it is insufficient to shift the burden of proof to respondent on the two grounds claimed in the statement to justify the accumulation of earnings by petitioner. Dixie, Inc. v. Commissioner,31 T.C. 415">31 T.C. 415, 427 (1958). See also Chatham Corp. v. Commissioner,48 T.C. 145">48 T.C. 145, 147 (1967), and cases there cited. Although we conclude that the statement filed by340 petitioner was insufficient to shift to respondent the burden of proof as to whether petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business, we are also satisfied from the evidence, without regard to which party has the burden of proof, that petitioner's earnings and profits were permitted to accumulate beyond the reasonable needs of its business in both its fiscal year 1975 and its fiscal year 1976. This record shows that during the years here in issue petitioner for most of the period had $1,00,000 primary coverage for malpractice insurance and for part of the time had $1,000,000 in excess limits. The record also shows that, during the approximate six months when petitioner had only $200,000/$600,000 of malpractice insurance coverage, the doctors working for the corporation other than Dr. Booth also carried malpractice insurance and Dr. Booth was covered individually by petitioner's malpractice insurance. Sec. 21.315(6) of the Michigan Professional Services Corporation Act provides that any officer, shareholder, agent, or employee of a341 corporation organized as a professional service corporation shall remain personall and fully liable for any negligence or wrongful act committed by him, and that nothing contained in the act shall be interpreted to abolish, repeal, modify, restrict, or limit the law now in effect applicable to the professional relationship and liabilities between the persons furnishing professional services and the persons receiving such services. 3 The act then further provides that-- 342 The corporation shall be liable up to the full value of its property for any negligent or wrongful acts or misconduct committed by any of its officers, shareholders, agents or employees while they are engaged on behalf of the corporation in the rendering of professional services. It is clear under this act that the primary liability is on the doctors employed by the corporation and that the corporation has only limited liability up to the amount of its property. Whereas the individual doctors employed by petitioner might be personally liable for any amount of damages that might be determined against them for malpractice, the corporation's liability is limited. The record here shows that petitioner did not set up any reserve for possible payments it might have to make on malpractice lawsuits and that no mention of any possibility of such payments by the corporation was made in the minutes of the corporation until after a revenue agent had proposed an accumulated earnings tax for petitioner' fiscal years 1973 and 1974. The clear implication from the record is that the need by petitioner to accumulate earnings to cover any possible malpractice judgments is an afterthought occasioned343 by the proposal to determine an accumulated earnings tax against it. The record also shows that at no time up through the years here involved had any suit for malpractice actually been instituted against petitioner or any of the doctors working for petitioner and that judgments on the average in the State of Michigan were well below petitioner's insurance coverage. The record shows that of all doctors in Michigan covered by malpractice insurance, pathologists were in the lowest premium range because they were considered to be the lowest risk of any doctors covered by malpractice insurance. Petitioner did show that over three years after the close of its fiscal year 1976 a suit was instituted against two of the doctors employed by the corporation. However, this suit did not include the corporation as a defendant. Petitioner offered in evidence pleadings and judgments in a suit by a doctor against two pathologists who practiced at Grace Hospital in Michigan and a Michigan professional corporation. The judgments were against the two pathologists. The record does not show how the suit against the professional corporation was concluded, but the inference is that no judgment was rendered344 for damages against the professional corporation. The record further shows that for the period 1975 through 1978 only six claims for damages for malpractice had been filed in the entire State of Michigan against pathologists. The record in this case is clear that any need for petitioner to accumulate any funds in addition to the over $282,000 of retained earnings it had at the beginning of its fiscal year 1975 and over $320,000 in retained earnings it had at the beginning of its fiscal year 1976 for the purpose of some possible lawsuit against one of its pathologists is far too speculative to be considered to be a reasonable need of petitioner's business. Petitioner's second claimed ground for the need to accumulate its earnings during the years here in issue is also speculative. Petitioner's contract with Hutzel Hospital had approximately seven years to run at the close of the last fiscal year here in issue. The contract could not be canceled by the hospital except upon the death of incapacity of Dr. Booth. The administrator of the hospital testified that the hospital was highly satisfied with Dr. Booth's services and the record is unquestionably clear that there was no probability345 of petitioner's contract with Hutzel Hospital not being renewed at the end of seven years after the close of the last year here in issue. While section 537 does provide that the term "reasonable needs of the business" includes the reasonably anticipated needs of the business, it is clear that for a need to be a reasonably anticipated need there must be some indication that the future needs of the business required the accumulation and the corporation must have a specific, definite and feasible plan for the use of such accumulation. Section 1.537-1(b)(1), Income Tax Regs. The regulation provides that the accumulation need not be used immediately and the plans need not be consummated within a short time after the close of the taxable year provided the accumulation would be used within a reasonable time period. It further provides that accumulation cannot be justified on the grounds of reasonably anticipated needs of the business if the future needs are uncertain or vague or the plans are not specific. The facts in this case show no real likelihood that petitioner346 would ever need to furnish and equip a liboratory. The evidence indicates that petitioner's contract with Hutzel Hospital is likely to be continued as long as Dr. Booth lives and is not incapacitated. The record shows that Dr. Booth, at the end of the last fiscal year here in issue, was not quite 49 years old. Certainly his death or incapacity of too speculative to be a basis for the corporation's retaining earnings because of a possibility of its contract with Hutzel Hospital being canceled. This case is different from most cases involving accumulated earnings tax in that petitioner is a professional corporation and much more the alter ego of its sole shareholder than even most other one-shareholder corporations. What would happen to the corporation upon Dr. Booth's death is far too speculative to form a basis for a reasonable need for the corporation to accumulate its earnings.Apparently, Dr. Booth was in very good health at the time of the trial of this case, approximately five years after the last fiscal year involved herein. Since we have concluded that petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business in each of the*347 fiscal years here in issue, it follows that it is presumed that the purpose of the accumulation was to avoid tax with respect to its shareholders unless it proves to the contrary by a preponderance of the evidence. The record here shows that Dr. Booth's salary was $142,000 in one of the years here in issue and $148,000 in the other. There is no evidence that the accumulation by the corporation of earnings beyond the reasonable needs of its business was not for the purpose of avoiding income tax with respect to its sole shareholder, Dr. Booth. Because petitioner has failed to meet its burden of proof in rebutting the statutory presumption, we conclude that the corporation permitted its earnings and profits to accumulate beyond the reasonable needs of its business for the purpose of avoiding income tax with respect to its shareholder and therefore is subject to the accumulated earnings tax imposed by section 531. See Ivan Allen Co. v. United States,422 U.S. 617">422 U.S. 617, 628 (1975). Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years here in issue. ↩2. Although petitioner put in issue in the petition the disallowance of $1,270 each year of claimed automobile expense deduction, no evidence was introduced in this connection at the trial. We therefore assume petitioner has abandoned this issue which resulted in the deficiency of $610 for each of the years here in issue determined under sec. 11. The parties also argued whether the statement submitted by petitioner under sec. 534(c) was sufficient to shift the burden of proof with respect to the reasonable needs of petitioner's business to respondent. We view this as merely a part of the overall issue presented herein. See p. 15, infra.↩3. Mich. Stat. Ann. sec. 21.315(6) (Callaghan 1974) provides as follows: Nothing contained in this act shall be interpreted to abolish, repeal, modify, restrict or limit the law now in effect in this state applicable to the professional relationship and liabilities between the person furnishing the professional services and the person receiving such professional service and to the standards for professional conduct.Any officer, shareholder, agent or employee of a corporation organized under this act shall remain personally and fully liable and accountable for any negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional service on behalf of the corporation to the person for whom such professional services were being rendered. The corporation shall be liable up to the full value of its property for any negligent or wrongful acts or misconduct committed by any of its officers, shareholders, agents or employees while they are engaged on behalf of the corporation in the rendering of professional services.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619213/	JAMES R. and LINDA L. RICHARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentRichard v. CommissionerDocket No. 40780-86.United States Tax CourtT.C. Memo 1988-217; 1988 Tax Ct. Memo LEXIS 245; 55 T.C.M. (CCH) 864; T.C.M. (RIA) 88217; May 16, 1988Claude T. Allen, for the petitioners. Thomas N. Thompson, for the respondent. PARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined a deficiency of $ 6,527 against petitioners for the 1983 taxable year. The only issue we must decide is whether James R. Richard (hereinafter Mr. Richard or petitioner) was a "qualified individual" within the meaning of section 911(a)1 thereby entitling petitioners to the foreign earned income exclusion. FINDINGS OF FACT The parties have filed a stipulation of facts which is incorporated herein by this reference. Petitioners were United States citizens with a home in Louisiana when they timely filed their petition in this case. During the 1983 taxable year Mrs. Richard and petitioners' two children resided in Louisiana. Mr. Richard spent time in Louisiana, the Sudan and on drilling rigs offshore of Tunisia and Holland. Mr. 248 Richard worked as a drilling fluids engineer for Dresser Industries. He was an employee at will. His job required him to work on a rotation schedule which generally meant working 28 continuous days outside the United States followed by approximately 28 days off duty. Between his tours of duty Mr. Richard returned to Louisiana to be with his wife and their children. Mr Richard did not perform any services within the United States. While petitioner was on his tours of duty in the Sudan he lived on the land in a trailer provided by his employer. While working off Tunisia petitioner lived on the drilling rig approximately 15 to 20 miles offshore. The drilling rig petitioner lived on while working offshore of Holland was an hour's helicopter ride from the land. During 1983 petitioners jointly owned their home in Louisiana. Mortgage payments were made either with Mr. Richard's own funds or petitioners' joint funds. Mr. Richard also maintained a valid United States driver's license and credit cards. Mr. Richard did not maintain any foreign bank accounts, foreign credit cards or foreign driver's licenses. He never maintained his own home or apartment in any foreign country. 249 While living in the Sudan and to some extent while offshore of Tunisia, Mr. Richard made some small attempts to relate to the culture and the citizens of those countries. Mr. Richard learned about and participated in certain aspects, such as deer hunting, of these African cultures. Mr. Richard also made an attempt to learn Arabic to be better able to communicate with the native Africans both at work and in his personal relations. Mr. Richard presented no evidence indicating the same level of integration while living offshore of Holland. Mr. Richard never made a declaration disclaiming residency in the Sudan, Tunisia or Holland. In fact, petitioner applied for residency in those countries where it was feasible or necessary to get work permits. However, petitioner never joined any local organizations, never filed any foreign tax returns, and never applied for citizenship in any of these countries. OPINION On their 1983 Federal income tax return petitioners claimed entitlement to the foreign earned income exclusion. Section 911(a) permits certain qualified individuals to exclude250 foreign earned income, as defined under section 911(b), from their gross income. The only issue we must decide is whether Mr. Richard is a "qualified individual" within the meaning of section 911(a). Section 911(d)(1) defines a qualified individual as: an individual whose tax home is in a foreign country and who is -- (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or (B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period. Thus, petitioner must prove his tax home was outside the United States and he must meet the requirements of section 911(d)(1)(A) (the so-called "bona fide residence test") or the requirements of section 911(d)(1)(B) (the so-called "physical presence test") to be entitled to the foreign earned income exclusion. Petitioner has conceded he cannot meet the251 physical presence test. Therefore, our determination is solely whether petitioner's tax home was outside the United States and whether he has met the bona fide residence test. Under Section 911(d)(3) tax home means: with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States. Tax home is further defined in regulations section 1.911-2(b), Income Tax Regs., and provides: (b) Tax home * * * an individual's tax home is considered to be located at his regular or principal (if more than one regular) place of business, or if the individual has no regular or principal place of business, then at his regular place of abode in a real and substantial sense. An individual shall not, however, be considered to have a tax home in a foreign country for any period for which the individual's abode is in the United States. Temporary presence of252 the individual in the United States does not necessarily mean that the individual's abode is in the United States during that time. Maintenance of a dwelling in the United States by an individual, whether or not that dwelling is used by the individual's spouse and dependents, does not necessarily mean the individual's abode is in the United States.Petitioner does not meet the tax home requirement of section 911(d)(1) because during 1983 his abode was within the United States. 2In a virtually identical case 3 addressing the meaning of abode we stated: "Abode" has been variously defined as one's home, habitation, residence, domicile or place of dwelling. Black's Law Dictionary 7 (5th ed. 1979). While an exact definition of "abode" depends upon the context in which the word is used, it clearly does not mean one's principal place of business. Thus "abode" has a domestic rather than vocational meaning, and stands in contrast to "tax253 home" as defined for purposes of section 162(a)(2). [Footnote ref. omitted. Bujol v. Commissioner,T.C. Memo. 1987-230, 53 T.C.M. (CCH) 763">53 T.C.M. 763, 56 P-H Memo T.C. par. 87,230 at 87-1112.] In this case the facts that petitioner maintained (1) a home in Louisiana; (2) a United States driver's license; (3) bank accounts at United States banks; and (4) United States credit cards, especially in contrast with his limited commitment to the Sudan, Tunisia and Holland convince us that his abode was within the United States. While petitioner may have made certain attempts to integrate himself within the African community, he presented no evidence indicating that his home, habitation, residence, domicile or place of dwelling was in any of these foreign countries. Petitioner presented no evidence which indicates that he remained overseas during any of his free time, or that his employer would have allowed him to stay254 in the employees' quarters. Petitioner has not convinced us that these "foreign" locations were anything more than his place of business. Even is petitioner had established a tax home outside the United States within the meaning of section 911(d)(3), he still fails the bona fide residence test. Section 911(d)(5) specifies that an individual cannot be a bona fide resident of a foreign country if the individual, who has foreign earned income, submits a statement to authorities of that foreign country that he is not a resident of that country, and he is held not to be subject to the income tax of that foreign country due to his nonresidency. Section 911(d)(5) is merely one way in which a taxpayer can fail to meet the bona fide residence test. Additionally, a taxpayer who does not affirmatively establish his residency in a foreign country will fail the test. A taxpayer must offer "strong proof" of bona fide residency in a foreign country to qualify for the foreign earned income exclusion under section 911(a). Schoneberger v. Commissioner,74 T.C. 1016">74 T.C. 1016, 1024 (1980).255 The determination of whether a United States citizen is a bona fide resident of a foreign country within the meaning of section 911(d)(1)(A) is primarily a factual question requiring an analysis of all relevant facts and circumstances. Dawson v. Commissioner,59 T.C. 264">59 T.C. 264, 268 (1972); Harvey v. Commissioner,10 T.C. 183">10 T.C. 183, 188 (1948). When making this factual determination we look, to the extent practicable, to the principles of section 871 and the regulations 4 thereunder relating to determining residency of aliens within the United States. Riley v. Commissioner,74 T.C. 414">74 T.C. 414, 420 (1980); Maclean v. Commissioner,73 T.C. 1045">73 T.C. 1045, 1054 (1980); section 1.911-2(c), Income Tax Regs.; section 1.871-2, Income Tax Regs.We also consider the following factors, originally set forth in Sochurek v. Commissioner,300 F.2d 34">300 F.2d 34, 38 (7th Cir. 1962), in determining whether256 a United States citizen has established bona fide residency in a foreign country: (1) intention of the taxpayer; (2) temporary establishment of a home in a foreign country for an indefinite period; (3) participation in the activities of the chosen community both socially and culturally, identification with the daily lives of people and, in general assimilation with the foreign environment; (4) physical presence in the foreign country consistent with employment; (5) the nature, extent and reasons for temporary absences from the foreign home; (6) assumption of economic burdens and foreign tax obligations; (7) status as resident rather than transient or sojourner; (8) treatment accorded his income tax status by his employer; (9) marital status and residence of his family; (10) nature and duration of his employment, whether his assignment abroad could be promptly accomplished within a definite or specified time; and (11) whether the trip abroad is for purposes of tax evasion. Dawson v. Commissioner, supra.257 Here petitioner claims his intent was to become a resident of the foreign country where the rig was located. The objective evidence contradicts petitioner's stated intent. Petitioner did try to become involved, to a limited extent, in the foreign community. However, compared to petitioner's connection and ties to the United States, we do not believe petitioner can be considered a "qualified individual" within the meaning of section 911(a). Petitioner has fallen short of the strong proof required to establish bona fide residency in a foreign country. Petitioner was a resident of the United States who traveled to the location of the oil rig for 28-day rotation periods. As such, he is not entitled to the foreign earned income exclusion. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code applicable to the 1983 taxable year. ↩2. Since petitioner's abode was within the United States we need not address the effect of his principal place of employment being a floating oil rig. ↩3. Bujol v. Commissioner,T.C. Memo. 1987-2340, affd. without published opinion 842 F.2d 328">842 F.2d 328 (5th Cir. 1988). See also Lemay v. Commissioner,837 F.2d 681">837 F.2d 681 (5th Cir. 1988), affg. T.C. Memo. 1987-256↩. 4. Section 1.871-2(b), Income Tax Regs., provides: (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 this section, in the absence of exceptional circumstances.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619214/	Benjamin P. Cohen v. Commissioner.Cohen v. CommissionerDocket No. 40164.United States Tax Court1953 Tax Ct. Memo LEXIS 113; 12 T.C.M. (CCH) 1065; T.C.M. (RIA) 53312; September 18, 1953113 Held, the petitioner is not entitled to exemption for son whose gross income for the taxable year was over $500. Benjamin P. Cohen, 1213 Meigs Street, Augusta, Ga., pro se. A. F. Barone, Esq., and F. L. Van Haaften, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined a deficiency in income tax for the calendar year 1948 in the amount of $100. The only question is whether the petitioner is entitled to114 a dependency exemption on account of his son, Sheldon Bradley Cohen, for the calendar year 1948. Findings of Fact The petitioner, a resident of Augusta, Georgia, in his return for the calendar year 1948 filed with the collector of internal revenue at Atlanta, Georgia, claimed his son, Sheldon Bradley Cohen, as a dependent. The son was a medical student at the University of Georgia Medical School, Augusta, Georgia, where he worked part-time as a research assistant. In 1948 he earned and received $531.68 from this part-time employment. Opinion The sole issue is whether the petitioner is entitled to a dependency exemption on account of his son, Sheldon Bradley Cohen, for the calendar year 1948 under section 25 (b) (D) of the Internal Revenue Code. At the hearing the 1948 tax returns of both the petitioner and his son were introduced in evidence by the respondent. Sheldon Cohen's return disclosed that his only income for 1948 was $531.68 received from part-time employment. The petitioner in his 1948 return claimed his son, Sheldon, as an exemption and attached to his return an "Explanation of Income of Sheldon Cohen." In his explanation the taxpayer stated115 that Sheldon's income was $531.68 for the year. He then deduction $65 from this amount as the yearly depreciation of Sheldon's medical instruments and medical books and termed the resulting $466.68 as Sheldon's "net income" for 1948. On the basis of the explanatory statement attached to his income tax return the petitioner's argument presumably is that in determining his son's gross income as this term is used in section 25 (b) (D), an amount for depreciation of the son's medical instruments and medical books should first be deducted from his total wages for the year. However, the petitioner offered no oral argument on this point at the hearing. No written briefs have been filed. Section 25 (b) (D) of the Internal Revenue Code allows the taxpayer 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. Gross income is defined in section 22 (a) of the Code as including gains, profits and income derived from salaries, wages, or compensation for personal services (including personal services as an employee of a state or any of its agencies or instrumentalities) of whatever116 kind and in whatever form paid. By definition, therefore, no allowance is made for depreciation in the determination of gross income. As related to the instant case "gross income" means simply the total wages received during the year by the petitioner's son from his part-time employment. Nevertheless, as we understand it, the petitioner's argument is that this section of the Code is not based on reason and should be set aside by the Courts. He points out that if his son had a gross income of $499.99 the exemption could properly be claimed, but if the son earned more than the $500 allowed, the credit for the exemption is lost, no matter how slightly the $500 mark is exceeded. The petitioner's argument cannot be accepted. In broad language it has often been said by the courts that exemptions and deductions are matters of legislative grace. Mertens, Law of Federal Income Taxation, section 308, and cases there cited. In allowing dependency credits it would seem that Congress, if it decides to make gross income of the dependent one of the qualifying factors for the credit (as it has), has the power to set a limiting figure on that gross income. The reasonableness of the figure chosen*117 by Congress is not for us to decide. The statutory language is clear and the petitioner has not brought himself within it. The petitioner's son was not properly claimed as a dependent for the calendar year 1948 since his gross income was admittedly in excess of the $500 limitation provided in section 25 (b) (D). Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619215/	MARION L. LAWRENCE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLawrence v. CommissionerDocket No. 18771-84.United States Tax CourtT.C. Memo 1986-522; 1986 Tax Ct. Memo LEXIS 85; 52 T.C.M. (CCH) 870; T.C.M. (RIA) 86522; October 21, 1986. Marion Lee Lawrence, pro se. Kevin M. Flynn, for the respondent. PAJAKMEMORANDUM OPINION PAJAK, Special Trial Judge: This case was assigned pursuant to section 7456 and Rule86 180 et seq. 1 For ease of understanding, the findings of fact and conclusions of law have been combined in this opinion. Respondent determined the following deficiencies in petitioner's federal income taxes: Additions to TaxesYearDeficiencySec. 6653(a)(1)1980$1,509.66$75.481981$1,507.78$75.39Respondent also determined that the amount of underpayment of tax caused by negligence for the taxable year 1981 was $1,507.78 and an addition to tax of 50 percent of the interest due on this amount is to be added to the tax under section 6653(a)(2). After concessions by respondent, the issues for decision are: (1) whether petitioner had unreported income for the years in issue; (2) whether petitioner is entitled to various itemized deductions; and (3) whether petitioner is liable for additions to tax under section 6653. To the extent stipulated, the facts are so found. Petitioner's mailing address was in87 Guilderland, New York, when her petition was filed. During the taxable years 1980 and 1981, petitioner received social security benefits belonging to her mother, Mrs. Leora Broom (Mrs. Broom). During all relevant periods Mrs. Broom lived in Brooklyn, New York and petitioner lived in Albany, New York.Prior to 1980, petitioner had filed the application for Mrs. Broom's social security benefits with the Social Security Administration and requested that Mrs. Broom's checks be sent in care of petitioner to petitioner's post office address in the Albany area. Petitioner established a joint account with Mrs. Broom in the Albany area. Petitioner also maintained a joint checking account with her husband and a personal savings account for herself. During the taxable years in issue, petitioner deposited Mrs. Broom's social security checks in the joint bank account with Mrs. Broom. Petitioner also deposited her own funds in the joint bank account with Mrs. Broom. Petitioner used the comingled funds for her personal benefit. When Mr. Broom (petitioner's stepfather) applied for a Medicaid card for Mrs. Broom, he signed a statement that he had just discovered that Social Security checks in88 his wife's name were going to petitioner. The Social Security Administration took the position that petitioner had prepared Mrs. Broom's application and that petitioner was using Mrs. Broom's money. Petitioner filed her Federal income tax returns for 1980 and 1981 using the married filing separate status. On these returns she reported income consisting solely of her wages earned as a clerk for the Department of the Treasury. Petitioner also claimed various itemized deductions. Respondent determined that Mrs. Broom's social security benefits were appropriated to petitioner's personal use and therefore were includable in petitioner's income for 1980 and 1981 in the amounts of $1,625.40 and $1,029.90, respectively. Respondent also disallowed all claimed itemized deductions for lack of substantiation and asserted the additions to tax under section 6653. Petitioner contends that she received the social security funds for Mrs. Broom's benefit and therefore the funds were not includable in petitioner's income. Section 61 defines taxable income in broad terms as "all income from whatever source derived." Generally, a lawful or unlawful gain constitutes taxable income when the recipient89 has such control over it that, as a practical matter, the recipient derives readily realizable economic value from it. ; see . A taxpayer has such control when the property is received in a manner which allows the taxpayer freedom to dispose of the property at will. Respondent's determination is presumptively correct and petitioner has the burden of proving that the amounts should be excluded from her income. Rule 142(a); . The only evidence petitioner presented to support her claim was her own uncorroborated testimony. Petitioner asserted that Mrs. Broom had been a party to the agreement to have the checks sent to her. Petitioner also claimed that she gave most of the money to Mrs. Broom. She said she visited Mrs. Broom at least once a month at which time she gave Mrs. Broom the cash contents of her wallet except for $15. Petitioner testified that she withheld $15 to pay her toll expenses on her way to Brooklyn because "I didn't see it as my mother's90 or my money, whatever was in my wallet." Petitioner presented no evidence other than her own testimony to support her contentions regarding the agreement, the joint bank account and alleged transfers of funds between Mrs. Broom and petitioner. Mr. Broom signed a statement in direct conflict with her testimony. The determination of whether and in what amount petitioner had unreported income in the years in issue turns on our evaluation of the credibility of the witness. We need nor accept her testimony as true; we are entitled to take into account whether it is improbable, unreasonable, or questionable. , affirming a Memorandum Opinion of this Court; see . We found petitioner's testimony with respect to this issue to be vague, confusing, conflicting, and unconvincing. On this record, we find that petitioner received funds belonging to her mother over which petitioner exercised unrestricted access and control. Since petitioner has failed to sustain her burden of proof, respondent's determination on this issue is sustained. The second issue is whether91 petitioner is entitled to various itemized deductions. Petitioner claimed and respondent disallowed the following itemized deductions: 19801981Interest Expense$1,400.00$1,550.00Medical and Dental(After the 3% limitation)$2,250.00$2,394.00Taxes$ 640.40$ 697.02Charitable Contributions$1,250.00$1,700.00Casualty$ 100.00Miscellaneous-Union Dues$ 72.00$ 125.00Respondent has conceded the interest expense issue in full as a result of the records provided in a conference between the parties. The parties stipulated to various bills, checks, and a receipt relating to medical and dental expenses. Based on the representations of petitioner in a conference, and to the extent there was any documentation, respondent conceded medical expense deductions in the amounts of $1,458.28 and $965.51 for 1980 and 1981, respectively. Petitioner testified specifically with respect to a foot operation in 1981 with Dr. Coush in Albany that cost "about $300." Based on this testimony, we allow a medical deduction of $200 in 1981 in addition to the amounts conceded by respondent. .92 The remaining unsubstantiated medical expense must be disallowed. Based on documentation provided by petitioner, respondent conceded charitable deductions were substantiated for 1980 and 1981 in the amounts of $480 and $74.50, respectively. Petitioner, a Roman Catholic, attended church almost every Sunday during 1980 and 1981. Petitioner explained that the church had the following three types of collections: (1) general; (2) maintenance; and (3) upkeep and maintenance for a school which petitioner's two children attended. Petitioner claimed that sometimes she made contributions of $5, $10, $15, or $25 to the church. While we are satisfied that petitioner made cash contributions to her church, we are not satisfied with her vague testimony in regard to the amount. On this record we conclude that petitioner is entitled to deduct $104 in each of the years 1980 and 1981 for weekly cash contributions to her church. Petitioner claimed two checks paid to the Notre Dame Bishop Gibbons High School in 1980 and 1981, respectively, were charitable contributions. For purposes of section 170 and term "contribution" is synonymous with the93 word "gift." , affd. . A gift is generally defined as a voluntary transfer of property without further consideration therefore. If a payment proceeds primarily from the incentives of an anticipated benefit to the taxpayer beyond the satisfaction which flows from a generous act, it is not a gift. . Although the charity may also benefit from such payment, the presence of a substantial direct personal benefit inuring to and anticipated by the taxpayer is fatal to any characterization of the expense as a "charitable contribution." . Petitioner's children were enrolled at the Notre Dame Bishop Gibbons High School at the time the disputed checks were drawn. These payments helped to support a school where petitioner's children were being educated.The religious education of petitioner's children was clearly a benefit to petitioner. Petitioner has failed to show that the payments were charitable contributions rather than tuition payments. As such, the payments are nondeductible. 94 In 1980 petitioner also claimed deductions for cash contributions of $150 and $125 to the United Way and the Girl Scouts, respectively. Petitioner had no receipts for such contributions and her testimony was simply inadequate to support any allowance of these deductions. As part of the 1981 charitable contribution deduction, petitioner claimed $250 as "other than cash contributions." This amount represents expenses incurred by petitioner for travel to conventions as a delegate for the Albany chapter of Blacks in Government. To qualify for a charitable contribution deduction, petitioner must prove that she made contributions to a "corporation, trust or community chest, fund or foundation" which is "organized and operated exclusively for religious, charitable, scientific, literary or educational purposes." Section 170(c). Petitioner has offered no evidence that Blacks in Government is an organization qualifying within the meaning of section 170(c). The record contains no general information regarding the organization itself or the specific purpose for which it was organized. In the absence of evidence that expenses were95 incurred while serving a qualified organization, such expenses may not be deducted as charitable contributions. Finally, petitioner claimed deductions for taxes, and union dues on her 1980 and 1981 tax returns and for a casualty loss on her 1980 return. Petitioner made no attempt to prove these deductions at trial. Accordingly, respondent's determination with respect to these items must stand. In addition to his adjustments made in the notice of deficiency, respondent determined that petitioner is liable for additions to tax for 1980 and 1981 under section 6653(a)(1) and for 1981 under section 6653(a)(2). Again, petitioner bears the burden of proof on this issue. . Petitioner has not sustained her burden. Her records were inadequate and in many cases nonexistent. Moreover, petitioner made no serious effort to rebut the respondent's determination. Accordingly, petitioner is liable for additions to tax for 1980 and 1981 under section 6653(a)(1) and for 1981 under section 6653(a)(2). 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 taxable years in question, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619216/	SAVANNAH SHIP CHANDLERY & SUPPLY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Savannah Ship Chandlery & Supply Co. v. CommissionerDocket No. 14805.United States Board of Tax Appeals13 B.T.A. 958; 1928 BTA LEXIS 3128; October 12, 1928, Promulgated 3128 The Commissioner taxes as income to petitioner certain profits made on the purchase and sale of ships. The evidence was found to establish that such gains were not income to this petitioner, which had no part in the transaction. T. J. O'Brien, Jr., Esq., for the petitioner. T. M. Mather, Esq., for the respondent. PHILLIPS 958 This proceeding is for a redetermination of income and excessprofits taxes for 1920 amounting to $17,241.05. FINDINGS OF FACT. Petitioner is a Georgia corporation with principal offices at 201 West River Street, Savannah, and is engaged in the business of trading in ships' supplies. The 500 shares of petitioner's stock were held by the following persons in 1920: SharesJ. F. O'Brien206J. F. Paulsen112G. H. Meinert82V. B. Avery80J. H. Paulsen20959 O'Brien was petitioner's president and treasurer in 1920. He was also president of two other companies, from which he received salaries in excess of the salary paid him by petitioner. He was also a stockholder and director of the Propeller Tow Boat Co., which company paid him no salary. The total outstanding capital3129 stock of the Propeller Tow Boat Co. in 1920 was $200,000, divided into 2,000 shares of the par value of $100 a share. The following holders of petitioner's stock owned the following number of shares of the stock of the Propeller Tow Boat Co. in 1920: SharesJ. F. O'Brien155V. B. Avery128J. F. Paulsen37J. H. Paulsen29G. H. MeinertNoneOn or about June 24, 1920, two tow boats were bought by O'Brien from the Propeller Tow Boat Co. for $105,000, and were sold on the same day by O'Brien to one Armstrong for $110,000. Armstrong made payment directly to the Tow Boat Co. O'Brien received a check for $5,000 on the same day from the Propeller Tow Boat Co. to account for the profit made on the transaction. He deposited the check in a bank to his personal account. On the same day he gave his personal checks to the following persons in the following amounts: J. F. Paulsen$1,120J. H. Meinert820V. B. Avery800J. H. Paulsen200On or about July 13, 1920, O'Brien purchased three tugs from the Propeller Tow Boat Co. for $50,000. He made one cash payment of $1,000 on July 13, 1920, and a further payment of $49,000 in cash on July 21, 1920. 3130 The tugs were delivered on July 14, 1920. He borrowed $33,500 on July 21, 1920, from Globe Dredging Co. and also borrowed some money from his sister for the purpose of paying for the tugs. He sold one of the tugs on or about August 10, 1920, for $40,000, and the other tugs on or about September 15, 1920, for $45,000. He endorsed the two checks for $40,000 and $45,000 which he received from the sale of the tugs, deposited them to petitioner's credit in its bank, and was credited with $85,000 on petitioner's books. On December 22, 1920, entries were made on petitioner's books charging O'Brien's personal account and crediting the accounts of the following persons in the following amounts: J. F. Paulsen$7,571.20G. H. Meinert5,543.20V. P. Avery5,408.00J. H. Paulsen2,552.00960 Petitioner gave notes to those persons in those amounts. Commissioner has added to petitioner's income for 1920 profits on the purchases and sales of the five boats amounting to $40,000. OPINION. PHILLIPS: The respondent takes the position that the profit made by one O'Brien, the president of the taxpayer, on the purchase and sale of certain boats was taxable3131 income to the petitioner. The petitioner contends that these transactions were not made by it or for it and that it had no part in them. The position taken by the respondent appears to be based on the action of O'Brien in sharing these profits with those who were his associates in this corporation. This petitioner appears to have been only one of a number of corporations in which O'Brien and its other stockholders were interested. It was not engaged in the business of buying and selling ships, but in the business of trading in ships' supplies. It took no part in the transactions which gave rise to the profit which the Commissioner seeks to tax as its income. The distribution made by O'Brien was sufficient to justify inquiry into the relationship which existed between O'Brien, the individuals who shared in the profits, and the various enterprises in which they were interested, for the purpose of learning whether O'Brien was acting for himself, as agent for these individuals, or as agent for one of the corporations. The record before us discloses, however, that whatever may have been the relationship between O'Brien and these individuals, this petitioner was not involved and the3132 gain is not taxable to it. Decision will be entered for the petitioner under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619217/	Jacob B. and Ardythe J. Daggett Miller, Petitioners v. Commissioner of Internal Revenue, RespondentMiller v. CommissionerDocket No. 37640-87United States Tax Court94 T.C. 316; 1990 U.S. Tax Ct. LEXIS 18; 94 T.C. No. 19; March 8, 1990March 8, 1990, Filed 18 Decision will be entered under Rule 155. H and W, after regularly filing returns and paying Federal tax, claimed exemption from the withholding of their income tax and ceased filing returns. H and W, after being questioned by R regarding their failure to file and upon advice of their attorney, filed late returns for 1982, 1983, and 1984, properly reported their income, and paid the tax liability. Thereafter, H and W were divorced and began maintaining separate residences and each filed individual returns which advised R of their new addresses. Although R possessed H's and W's separate addresses in his computer system, a joint notice of deficiency determining various additions to tax with respect to both H and W was mailed before the 3-year limitations period for assessment under sec. 6501(a), I.R.C., to what later proved to be only H's "last known address." H received the notice and forwarded a copy of it to W. Within the 90-day period in which a petition may be filed with this Court under sec. 6213(a), but after the expiration of the 3-year limitations period for assessment, W received actual notice of the determination. H and W filed a joint petition instituting this case19 that was timely under sec. 6213(a). After the filing of the petition, R, by amended answer, pled that H and W were liable for the addition to tax under sec. 6653(b) in the alternative to the addition to tax under sec. 6653(a) determined in the notice of deficiency. W argues that pursuant to sec. 6212(b)(2), R was required in this case to send duplicate original joint notices to H and W at the respective "last known address" of each. W contends that R's failure to do so constitutes a failure to send a notice of deficiency to W and that R is now time-barred from sending her a proper notice or assessing the tax. R agrees that he did not send a notice of deficiency to W's "last known address" and that he did not send a duplicate original notice to W in accord with sec. 6212(b)(2) R contends, however, that he did determine deficiencies with respect to W and attempted to communicate the same by mailing a joint notice, albeit to an address which was not the "last known address" of W. R further contends that W's actual notice of the determination and her timely filing of a joint petition with H is sufficient to provide this Court with jurisdiction to decide the merits of W's case. 20 Held, R determined deficiencies with respect to W and attempted to mail notice of such determination to her. Held, further, although R failed to mail a duplicate joint notice to W's "last known address," we have jurisdiction to decide the merits of W's case because W received actual notice of the determination and timely petitioned this Court. Held, further, although W did not receive actual notice of the determination until after the normal 3-year limitations period for assessment was to expire, the limitations period did not expire because R timely mailed a notice of deficiency for purposes of providing W with notice of the determination, W received actual notice of the determination, and W timely filed a petition with this Court. Held, further, H and W are liable for an addition to tax under sec. 6653(b) for each of the taxable years 1982, 1983, and 1984. Douglas Scott Maynard and Earle A. Sylva II, for the petitioners.Christopher J. Croudace, for the respondent. Gerber, Judge. GERBER318 Respondent, in a statutory notice of deficiency dated September 1, 1987, determined the following additions to petitioners' 1982, 1983, and 1984 income21 tax:Sec. 6651Year(a)(1) & (2) 1Sec. 6653(a)(1)Sec. 6654Sec. 66611982$ 3,146$ 629 $ 1,532$ 3,14619832,816563 6912,81619842,934587 7402,934The additions relate to petitioners' failure to timely file their joint income tax returns and timely pay their income tax. The notice of deficiency, however, did not reflect income tax deficiencies because petitioners made untimely payment of that portion of the tax liability prior to respondent's issuance of a deficiency notice. By an amended answer, respondent has alternatively alleged that petitioners are liable for the section 6653(b) addition to tax for fraud.Respondent concedes that the section 6661 addition to tax is not applicable here. By an order22 dated November 7, 1988, we held that we lacked jurisdiction, in this case, to redetermine additions to tax determined under sections 6651 and 6654.The primary issues remaining for our consideration concern the validity and timeliness of the notice of deficiency, as it relates to petitioner Ardythe J. Daggett Miller (Ardythe). Respondent issued a joint notice of deficiency in the names of both petitioners which reflected deficiency determinations in petitioners' 1982, 1983, and 1984 joint income tax. Respondent timely mailed the joint deficiency notice to addresses that later proved to belong solely to petitioner Jacob B. Miller (Jacob); but no deficiency notice was mailed to Ardythe's "last known address." Petitioners had previously established separate residences. Following the expiration of the 3-year period for assessment (section 6501(a)) and before the expiration of the 90-day period within which to petition this Court (section 6213(a)), 319 Ardythe received actual notice of respondent's deficiency determination and, along with Jacob, timely petitioned this Court. These facts present the following issues for our consideration: (1) Whether respondent mailed a joint 23 notice of deficiency to Ardythe; (2) whether actual notice of the deficiency and timely filing of a petition are sufficient to provide this Court with jurisdiction; (3) whether the joint notice of deficiency was issued timely (as it relates to Ardythe) under section 6501(a); and (4) whether petitioners are liable for the addition to tax for fraud under section 6653(b), or, alternatively, whether petitioners are liable for the addition to tax for negligence under section 6653(a).FINDINGS OF FACTMost of the facts have been stipulated. The stipulation of facts, together with the attached exhibits, are incorporated by this reference. At the time their petition was filed, Jacob 2 resided in San Leandro, California, and Ardythe resided in Mountain View, California. During the years 1982, 1983, and 1984, petitioners were married and resided together; however before respondent's September 1, 1987, issuance and mailing of the notice of deficiency, petitioners separated and were subsequently divorced. Petitioners are educated professionals. Jacob was employed as an electronics engineer, and Ardythe was employed as a "computer specialist."24 Petitioners were aware of their obligation to file Federal income tax returns and were diligent in preparing and filing their returns for taxable years prior to 1982. Petitioners' 1981 joint income tax return was prepared by the accounting firm of Deloitte, Haskins & Sells, and, like petitioners' previous returns, was timely filed. Petitioners reported total 1981 wages of $ 54,196, adjusted gross income of $ 66,017, and a tax liability of $ 11,832. All but $ 513 of petitioners' 1981 tax liability was paid through withholding tax credits.During June 1982, approximately 2 months after filing the 1981 return, Ardythe prepared and submitted to her employer, Ford Aerospace, an Employee's Withholding Allowance Certificate (Form W-4) claiming that she was 320 exempt from withholding taxes because she did not owe any Federal income tax for 1981 and did not expect to owe any income tax for 1982. Also during June 1982, Jacob prepared and submitted to his employer, Honeywell Information Systems, a Form W-4 in which he claimed that he was exempt from withholding taxes because he did not owe any Federal income tax for 1981 and did not expect to owe any income tax for 1982. During 1983, 25 petitioners each prepared and submitted additional Forms W-4 again claiming that they were exempt from withholding taxes. All Forms W-4 were signed under a "penalty of perjury."At the time petitioners prepared and submitted the Forms W-4, Ardythe believed that she and her husband would have an income tax liability owing for those taxable years. Petitioners were gainfully employed and they timely received Wage and Tax Statements (Forms W-2) from their employers which correctly reflected their wages for each of the 3 taxable years in issue. The Forms W-2 reflected total wages of $ 75,139.71 for 1982, $ 73,341.57 for 1983, and approximately $ 80,592 for 1984.Once petitioners began submitting false Forms W-4 to their employers (claiming that they were exempt from withholdings), petitioners ceased filing income tax returns and, consequently, reporting and paying their income tax. The failure to file, report, and pay continued until after respondent's Examination Division questioned petitioners regarding their failure to file.After petitioners were contacted by respondent, they were at first unwilling to comply with the revenue laws. Sometime prior to May 25, 1984, respondent assessed26 section 6682 penalties against each petitioner for submitting false information with respect to the Forms W-4 submitted in 1982 and 1983. After learning of this assessment, Ardythe wrote at least two letters to respondent objecting to the penalty. In a letter mailed by Ardythe and received by respondent on or about May 25, 1984, Ardythe demanded that respondent "instruct my company to obey the W-4 form as filed." Ardythe also threatened legal action against the Internal Revenue Service, its agents, and her own employer.321 After being advised by their attorney to file, petitioners filed untimely 1982, 1983, and 1984 joint income tax returns on September 23, 1984, September 26, 1984, and May 14, 1986, respectively. No extension of time for filing the returns had been requested or granted.On their 1982, 1983, and 1984 returns, petitioners reported their home address as 6111 Springer Way, San Jose, California 95123. The returns also reported petitioners' wage income and tax liabilities as follows:YearWage incomeTax liability1982$ 75,140$ 12,587198373,34211,264198480,59211,737By submitting false Forms W-4 to their employers and failing to otherwise27 file returns or pay tax, petitioners intentionally underpaid their income tax in the amounts of $ 3,884 for 1982, $ 10,029 for 1983, and $ 2,877 for 1984.Respondent accepted petitioners' late filed 1982, 1983, and 1984 income tax returns as correctly reporting petitioners' total income tax liabilities for those years (without considering the potential for additions to tax). Their income tax liabilities (without considering potential additions to tax) were satisfied by petitioners' remitting payment with the returns or by the application of excess withholding in subsequent years. Presumably, petitioners filed new Forms W-4 sometime after being contacted by respondent's agents.Sometime after 1984, Ardythe separated from her husband, Jacob, and established a separate residence at 1983 San Luis Avenue, #27, Mountain View, California 94043 (Mountain View address). Likewise, Jacob established his own residence after the separation, first in Las Vegas, Nevada (Las Vegas address), and then at 2811 San Leandro Boulevard, #103, San Leandro, California 94578 (San Leandro address). Ardythe reported her new Mountain View address as her current address on her timely filed 1986 Federal income28 tax return. Ardythe's Mountain View address was posted, during the week of May 10, 1987, in respondent's national computer system (at the National Computer Center).322 On September 1, 1987, respondent issued a joint "zero income tax" deficiency notice to petitioners. Although the notice reflected no deficiencies in petitioners' income tax for 1982, 1983, and 1984, it did reflect respondent's determination that petitioners were liable for additions to tax under sections 6651, 6653(a), 6654, and 6661.Respondent mailed the joint statutory notice of deficiency to petitioners by certified mail, addressed as follows: JACOB B. & ARDYTHE J. DAGGETT MILLER2811 SAN LEANDRO BLVD 103SAN LEANDRO, CA 94578This was Jacob's "last known address" for purposes of section 6212. Jacob received the notice within 5 days of its mailing. Respondent also mailed a copy of the joint notice of deficiency to Jacob's Las Vegas address. Apparently believing that petitioners were still residing together, respondent's agents did not mail a duplicate of the joint notice of deficiency to Ardythe at what the parties agree was her "last known address" -- the Mountain View address. 329 On or about October 12, 1987, during a telephone conversation with her ex-husband, Jacob, Ardythe was informed of the joint notice of deficiency and that it reflected respondent's deficiency determination with respect to both spouses. On or about the same date, Jacob mailed a copy of the joint notice of deficiency to Ardythe who, in turn, forwarded it to her attorneys. On November 30, 1987, Ardythe and Jacob joined in and caused the timely filing of a petition in this Court. A copy of the joint notice of deficiency was attached to the petition.OPINIONFour issues are presented for our consideration: (1) Whether respondent mailed a notice of deficiency to Ardythe; (2) whether actual notice of the deficiency and timely filing of a petition are sufficient to provide this Court with jurisdiction; (3) whether the joint notice of 323 deficiency was timely (as it relates to Ardythe) under section 6501(a); and (4) whether petitioners are liable for the addition to tax for fraud under section 6653(b), or, alternatively, whether petitioners are liable for the addition to tax for negligence under section 6653(a).Jurisdiction: General ConsiderationsThe parties agree that respondent30 determined deficiencies with respect to Ardythe and Jacob. Respondent's issuance of a joint notice of deficiency in Ardythe's and Jacob's name is the obvious basis for the parties' agreement. Further, petitioners, who filed joint income tax returns before their divorce, each notified respondent that they had established separate residences by means of separate returns filed for subsequent taxable years. It is agreed that respondent did not mail a duplicate original joint notice to Ardythe's Mountain View address. Respondent's agents, however, did attempt to provide Ardythe with notice of the deficiency determination by mailing it to addresses which later proved to belong only to Jacob.These facts present a question of first impression in an area of the law that is not without ambiguities. Petitioners contend that respondent is statutorily required to mail a duplicate original notice to each spouse at his/her "last known address" after he is notified of their separate addresses. They argue that the notice is invalid and ineffectual as to Ardythe because respondent failed to mail a duplicate original joint notice to her "last known address."In essence, petitioners argue that31 respondent's failure to mail a duplicate joint notice to Ardythe's Mountain View address raises the fundamental and novel issue of whether respondent issued and mailed a notice or otherwise attempted to communicate a deficiency determination to Ardythe. More specifically, Ardythe argues that respondent's failure to mail a duplicate joint notice to her as required by section 6212(b)(2), may be tantamount to a complete failure by respondent to mail her a deficiency notice. Ardythe places no significance on the fact that a joint determination was made and a joint notice was issued to her, but mailed to addresses belonging only to Jacob. She concludes that the 3-year period for assessing a 324 deficiency has expired and that respondent is barred from assessing any tax deficiency as to her.Respondent agrees that under the standard of Abeles v. Commissioner, 91 T.C. 1019">91 T.C. 1019 (1988), he was charged with knowledge that petitioners had established separate residences and of Ardythe's Mountain View address. 4 He also agrees that section 6212(b)(2) requires the mailing or communication of a duplicate joint notice to Ardythe at her last known address and32 that he failed to mail or attempt to mail a duplicate joint notice to Ardythe's last known address -- the Mountain View address. Respondent, however, contends that while he failed to comply with the last known address requirement of section 6212(b), he did comply with the more basic requirements of sections 6212(a), 6213(a), and 6503(a)(1) by determining a deficiency with respect to Ardythe and mailing notice of or otherwise communicating his determination to Ardythe. Simply stated, respondent argues that the notice was improperly mailed, but nonetheless mailed and his failure to comply with the last known address requirement of section 6212(b)(2) did not invalidate the notice. Finally, respondent argues that we have jurisdiction over Ardythe's case because he mailed a joint notice to Ardythe, Ardythe received actual notice of respondent's determination, and Ardythe timely petitioned this Court.33 We, therefore, must determine whether respondent either: (1) Failed to mail notice of or otherwise communicate his deficiency determination to Ardythe, as petitioners argue, or, in the alternative, (2) failed to satisfy the last known address requirement of section 6212(b), as respondent argues. The character of the error is pivotal in this case because in the first instance respondent may be barred from assessing and collecting a deficiency if he fails to mail 325 notice of or otherwise communicate his deficiency determination to the taxpayer. However, respondent's mailing of a deficiency notice to an address that is not the taxpayer's last known address is not necessarily fatal to respondent's ability to assess and collect the deficiency where the taxpayer receives actual notice of the determination. See Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42 (1983).1. Notice of Deficiency -- "Determination," "Mailing," and "Last Known Address" Requirements.With some exceptions not applicable here, respondent is precluded from assessing and collecting any tax deficiency without first mailing a notice of deficiency under section 6212(a)535 or otherwise34 notifying the taxpayer of the deficiency. Sec. 6213(a). Pursuant to section 6213(a), within 90 days (or, in some circumstances not applicable here, 150 days) after the mailing of a notice of deficiency, the taxpayer may file a petition with this Court. The mailing of a notice of deficiency in accord with section 6212 tolls the running of the period of limitations on assessment of a deficiency and starts the running of the 90-day period for filing a petition with this Court. See secs. 6503(a)(1) and 6213(a). The mailing of a notice of deficiency also bars assessment and collection during that 90-day period and, if a petition is filed in this Court, bars such assessment and collection until the decision of this Court has become final. Sec. 6213(a). Our jurisdiction in deficiency cases is generally dependent upon respondent's mailing a notice of deficiency to the taxpayer under section 6212 and the timely filing of a petition with this Court under section 6213. 6Frieling v. Commissioner, supra at 46-47.36 326 Section 6212(b) guides respondent in determining where to mail the notice of deficiency. Paragraphs (1) and (2) of section 6212(b) provide, as follows: SEC. 6212(b). Address for Notice of Deficiency. --(1) Income and gift taxes and certain excise taxes. -- In the absence of notice to the Secretary under section 6903 of the existence of a fiduciary relationship, notice of a deficiency in respect of a tax imposed by subtitle A, chapter 12, chapter 42, chapter 43, chapter 44, or chapter 45 if mailed to the taxpayer at his last known address, shall be sufficient for purposes of subtitle A, chapter 12, chapter 42, chapter 43, chapter 44, chapter 45, and this chapter even if such taxpayer is deceased, or is under a legal disability, or, in the case of a corporation, has terminated its existence.(2) Joint income tax return. -- In the case of a joint income tax return filed by husband and wife, such notice of deficiency may be a single joint notice, except that if the Secretary has been notified by either spouse that separate residences have been established, then, in lieu of the single joint notice, a duplicate original of the joint notice shall be sent by certified37 mail or registered mail to each spouse at his last known address.We have construed section 6212(b)(2) in conjunction with section 6212(b)(1). Dolan v. Commissioner, 44 T.C. 420">44 T.C. 420, 433 (1965). In Dolan v. Commissioner, supra, we found that in the case of a deficiency in respect of a joint return, respondent has the option of sending each spouse his/her own separate, individualized notice of deficiency under section 6212(b)(1), or respondent may, at his option, send a single joint deficiency notice to both spouses under section 6212(b)(2) which indicates that a deficiency has been determined against both spouses. However, if respondent has been notified that the spouses have established separate residences, he may still issue a joint notice provided that he mails a duplicate original of the joint notice to each spouse at his/her last known address.In Abeles v. Commissioner, 91 T.C. 1019">91 T.C. 1019, 1030-1031 (1988), we held that compliance with section 6212(b)(2) --327 requires respondent to send duplicate originals of the joint notice of deficiency to each spouse's last known address whenever38 respondent has been notified, prior to the time that the notice of deficiency is to be issued, that the joint filers maintain separate last known addresses. Further, this rule shall apply so long as respondent is given notice that the two spouses do not share the same last known address, even if respondent is given notice of only one of such spouses' last known addresses.In determining whether respondent "has been notified" of separate last known addresses, we focused on whether the last known address of one spouse was different than the last known address of the other spouse. Abeles v. Commissioner, supra at 1036-1037.When Congress considered whether notice of a deficiency determined against joint filers could be adequately provided in one joint notice, it focused upon the type of relationship which is presumed to exist between spouses. Abeles v. Commissioner, supra at 1028. "Congress believed that most marital relationships maintain open and frequent communication between the spouses such 'that receipt of the notice by either spouse would be well calculated to equal notice to both.'" Abeles v. Commissioner, supra at 1028,39 quoting Cohen v. United States, 297 F.2d 760">297 F.2d 760, 773 (9th Cir. 1962). Thus, respondent may mail a single joint notice to joint filers. However, Congress also recognized that not all marital relationships continued to deserve such a presumption of open communication. As we stated in Abeles v. Commissioner, supra at 1028-1029:It is for this reason that Congress provided for the issuance of a duplicate original of the joint notice to each of the joint filers. That is, Congress provided that duplicate originals of the joint notice of deficiency should be sent to each spouse's last known address when, by reason of communications the Commissioner has received from the taxpayer, it is evident that a single joint notice could not reasonably be expected to constitute notice to both joint filers. See Dolan v. Commissioner, supra at 434, where we said that "The provision relating to the sending of duplicate originals of the joint notices where respondent has been notified that the spouses have separate addresses clearly was intended to assure that each spouse received actual notice, if respondent40 chose to send a joint notice of deficiency." [Fn. ref. omitted.]In the present case respondent was constructively charged with notice of Ardythe's separate address, but in 328 actuality the joint deficiency notice was sent to what respondent likely thought was the "last known address" of both petitioners. Although respondent clearly did not meet the last known address or duplicate original joint notice requirements, the joint deficiency notice was a notice of a deficiency determination within the meaning of section 6212(a). Further, it notified Ardythe that a deficiency had been determined against her, and it gave Ardythe the opportunity to petition this Court for a redetermination of the deficiency without having to first pay the deficiency. See Abeles v. Commissioner, supra at 1028; McKay v. Commissioner, 89 T.C. 1063">89 T.C. 1063, 1067 (1987), affd. 886 F.2d 1237">886 F.2d 1237 (9th Cir. 1989); Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42, 46 (1983).Respondent's failure to send a duplicate notice to Ardythe's Mountain View address bears upon whether the notice was mailed to the "correct" 41 address(es), rather than to whether a notice was issued and/or mailed at all. The contrary view would be incompatible with the fact that the joint notice in this case was issued to, delivered to, and received by Ardythe, one of the intended recipients. Therefore, we conclude that respondent mailed Ardythe a notice of deficiency and/or that his violation of section 6212(b)(2) was not tantamount to a lack of mailing. To find otherwise would ignore the reality of this situation.Our holding follows the statutory construction of section 6212. Subsection (a) authorizes the Secretary to send a notice of deficiency "to the taxpayer by certified mail or registered mail." However, it does not specify the address to which the notice must be directed in order to be sent "to the taxpayer." Frieling v. Commissioner, supra at 51. Those requirements are set forth in subsection (b), entitled "Address for Notice of Deficiency." Paragraph (1) of subsection (b) provides that the notice of deficiency "shall be sufficient" if it is mailed to the taxpayer at his "last known address." Congress enacted section 6212(b)(1) as a safe harbor that protects respondent by42 establishing a definite procedure for giving notice. Frieling v. Commissioner, supra at 52. Paragraph (2) of subsection (b), which must be read in pari materia with paragraph (1), modifies paragraph (1) by setting forth the address(es) which may be used for safe 329 harbor purposes in situations involving joint income tax returns. Generally, a single address may be used to provide notice to both spouses. However, where respondent has been notified that the spouses have separated, paragraph (2) provides that the joint notice must be sent to two addresses -- the last known address of each spouse. Therefore, by mailing a joint notice of deficiency, respondent will satisfy subsection (a). However, his failure to mail a joint notice in the manner provided in subsection (b)(2) will violate the requirement that the notice be mailed to the taxpayer's "last known address." See Davis v. Commissioner, 661 F. Supp. 733 (M.D. Ala. 1987); Grafton v. United States, 563 F. Supp. 39">563 F. Supp. 39 (W.D. Mo. 1983). Accordingly, we find that respondent, in an attempt to notify Ardythe of his deficiency determination, 43 issued and mailed a joint notice of deficiency to her despite the fact that respondent failed to send a duplicate joint notice to Ardythe's last known address. 7 We now proceed to decide whether the improperly addressed notice is sufficient to provide us with jurisdiction over Ardythe.2. Timely Petition -- Acquisition of Jurisdiction.We have held that the mailing of a notice of deficiency to 44 a taxpayer's last known address under section 6212(b) is a safe harbor assuring respondent that the notice is valid for purposes of section 6212(a). Frieling v. Commissioner, supra. Consequently, a notice that is mailed to the taxpayer's last known address will toll the period for assessment even if the notice is not received by the taxpayer. King v. Commissioner, 857 F.2d 676">857 F.2d 676, 681 (9th Cir. 1988), affg. on other grounds 88 T.C. 1042">88 T.C. 1042 (1987); Wallin v. Commissioner, 744 F.2d 674">744 F.2d 674, 676 (9th Cir. 1984), revg. and remanding a Memorandum Opinion of this Court; United States v. Zolla, 724 F.2d 808">724 F.2d 808, 810 (9th Cir. 1984); DeWelles v. United States, 378 F.2d 37">378 F.2d 37, 39-40 (9th Cir. 1967); Alta Sierra Vista, Inc. v. Commissioner, 62 T.C. 367">62 T.C. 367, 372 (1974), affd. without 330 published opinion 538 F.2d 334">538 F.2d 334 (9th Cir. 1976); Lifter v. Commissioner, 59 T.C. 818">59 T.C. 818, 821 (1973).In certain relatively unique circumstances, however, the45 mailing of a deficiency notice which is not addressed to the taxpayer's last known address may result in our acquisition of jurisdiction. In a limited but established line of cases, incorrectly addressed notices have resulted in our jurisdiction where the taxpayer receives "actual notice [of the contents of the deficiency notice] without prejudicial delay." Clodfelter v. Commissioner, 527 F.2d 754">527 F.2d 754, 757 (9th Cir. 1975), affg. 57 T.C. 102">57 T.C. 102 (1971); see also McKay v. Commissioner, 886 F.2d 1237">886 F.2d 1237 (9th Cir. 1989), affg. 89 T.C. 1063">89 T.C. 1063 (1987); Frieling v. Commissioner, supra at 51-53; Goodman v. Commissioner, 71 T.C. 974">71 T.C. 974, 977-978 (1979); Zaun v. Commissioner, 62 T.C. 278">62 T.C. 278 (1974); Brzezinski v. Commissioner, 23 T.C. 192">23 T.C. 192, 195 (1954); Commissioner v. Stewart, 186 F.2d 239">186 F.2d 239 (6th Cir. 1951), revg. a Memorandum Opinion of this Court. By providing the safe harbor of section 6212(b), Congress did not intend to invalidate actual rather46 than constructive methods of communicating respondent's determination. McKay v. Commissioner, 89 T.C. at 1068 n. 6. Frieling v. Commissioner, 81 T.C. at 53, contains a discussion of the "actual notice" principle, as follows:The deficiency notices in those cases were held to be valid because they served the two functions of section 6212: (1) They notified the taxpayer that a deficiency had been determined against him; and (2) they gave the taxpayer the opportunity to petition this Court for redetermination of the proposed deficiency.Both elements are satisfied here. Ardythe received actual notice of the deficiency and was aware of respondent's determination of deficiencies. Moreover, Ardythe filed her petition within 90 days after respondent mailed the notice of deficiency.Petitioners acknowledge the line of cases holding that a notice not mailed to the taxpayer's last known address may be effective if the taxpayer receives actual notice and timely petitions this Court. Petitioners contend, however, that our opinion in Abeles v. Commissioner, supra, somehow modified these cases. 47 We disagree. Abeles concerns the "safe-harbor" aspects of a "section 6212 mailing." To comport with respondent's improved computer capability, we set 331 forth "up-dated" guidelines for determining a taxpayer's last known address. The Abeles holding did not address situations where a taxpayer had actual notice of an incorrectly addressed notice and petitioned this Court. Our holding here is in accord with the opinion of the Court of Appeals for the Ninth Circuit in Clodfelter v. Commissioner, 527 F.2d at 757, which held that a notice of deficiency is valid if its mailing results in actual notice without prejudicial delay, or if the notice is mailed to the taxpayer's last known address. 8 The Court of Appeals for the Ninth Circuit held that:in those cases where actual notice did not result or was not proved to have resulted from a mailing, or where delivery of mail was delayed to the prejudice of the petitioner in seeking redetermination, mailing to suffice under [section] 6212(b) must be to the last known address. We conclude, however, that if mailing results in actual notice without prejudicial delay (as clearly was the case48 here), it meets the conditions of [section] 6212(a) no matter to what address the notice successfully was sent. [Fn. ref. omitted.]We, therefore, conclude that the notice of deficiency in the instant case is valid and that we have jurisdiction to consider the merits of this case. 949 Timeliness of Notice of DeficiencyPetitioners also argue that the 3-year period within which respondent may assess under section 6501(a) expired with respect to Ardythe's 1982 and 1983 tax years. 10 Petitioners rely upon the fact that Ardythe did not receive the deficiency notice until sometime in October 1987, more than 3 years after the returns for 1982 and 1983 were filed.This argument was squarely addressed and rejected by this Court in Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42, 57 (1983). There, respondent mailed the deficiency notice before the limitations period expired. However, the notice was not 332 addressed to the taxpayers' last known address. Nonetheless, the taxpayers received the notice, but after 3 years from the date their returns were filed. The taxpayers argued that the notice did not become valid for any purpose until it was actually received by them, by which time the limitations period under section 6501(a)50 had expired. In dismissing this argument, we held as follows:Based on the express language of section 6503(a)(1), the Ninth Circuit's opinion in Clodfelter, and on the foregoing reasons, we hold that the mailing of the notice of deficiency, which complied with section 6212(a) [under the same reasoning we have applied here], which was received by petitioners, and in regard to which a timely petition was filed in this Court, tolled the period of limitations on the date the notice was mailed even though the notice was not sent to their last known address. Therefore, since the mailing date of that notice was the last day of the 3-year period under section 6501(a), a valid notice of deficiency was issued. [Frieling v. Commissioner, supra at 57; see also Clodfelter v. Commissioner, 527 F.2d at 757.]We, accordingly, hold here that respondent's determination (statutory notice of deficiency) was timely communicated and that the period for assessment was tolled and has not expired.Section 6653(b) Fraud AdditionRespondent, by an amended answer, has asserted that petitioners are liable for the section 6653(b) addition51 to tax for fraudulently underpaying their income tax for 1982, 1983, and 1984. Respondent has alleged an addition under section 6653(b) in the alternative to additions under section 6653(a). Additions under both sections 6653(a) and 6653(b) are not permitted. See sec. 6653(b)(3). Section 6653(b) provides that if any part of the underpayment is due to fraud, there will be an addition to tax equal to 50 percent of the entire underpayment. Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. Powell v. Granquist, 252 F.2d 56">252 F.2d 56 (9th Cir. 1958); Estate of Pittard v. Commissioner, 69 T.C. 391">69 T.C. 391 (1977).Respondent has the burden of proving by clear and convincing evidence that an underpayment exists for the years in issue and that some portion of the underpayment is due to fraud. Sec. 7454(a); Rule 142(b). To meet this burden, 333 respondent must show that petitioners intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968),52 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. a Memorandum Opinion of this Court; Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). Respondent need not prove the precise amount of the underpayment resulting from fraud, but only that some part of the underpayment of tax for each year in issue is attributable to fraud. Lee v. United States, 466 F.2d 11">466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F.2d 299">465 F.2d 299, 303 (7th Cir. 1972), affg. a Memorandum Opinion of this Court.The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 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); Estate of Pittard v. Commissioner, supra. Fraud is not to be imputed or presumed, but rather must be established by some independent evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970);53 Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96 (1969). However, fraud may be proved by circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492">317 U.S. 492 (1943); Rowlee v. Commissioner, supra;Stephenson v. Commissioner, 79 T.C. 995">79 T.C. 995 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, supra at 105-106. The intent to conceal or mislead may be inferred from a pattern of conduct. See Spies v. United States, supra at 499.Courts have relied upon different indicia of fraud in considering section 6653(b) addition to tax cases. Although no single factor may be necessarily sufficient to establish fraud, the existence of several indicia may be persuasive circumstantial evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459">732 F.2d 1459, 1461 (6th Cir. 1984),54 affg. per curiam a 334 Memorandum Opinion of this Court; Beaver v. Commissioner, supra at 93.In Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307 (9th Cir. 1986), affg. a Memorandum Opinion of this Court, the Ninth Circuit Court of Appeals utilized a nonexclusive list of circumstantial evidence which may give rise to a finding of fraudulent intent. Such "badges of fraud" would include: (1) Understatement of income; (2) inadequate records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealment of assets; and (6) failure to cooperate with tax authorities. The Court of Appeals for the Ninth Circuit in Bradford further stated that the existence of the following facts supported a finding of fraudulent intent: (1) The taxpayer's filing of false W-4's; and (2) his failure to make estimated tax payments.The section 6653(b) addition to tax for fraud has been imposed in numerous circumstances where the taxpayer filed false Forms W-4 resulting in the under-withholding of their tax liabilities and then filed tax protestor returns or did not file any returns. See, e.g., Castillo v. Commissioner, 84 T.C. 405">84 T.C. 405 (1985);55 Hammers v. Commissioner, T.C. Memo 1988-167">T.C. Memo. 1988-167; Guillory v. Commissioner, T.C. Memo 1986-290">T.C. Memo. 1986-290; Clemens v. Commissioner, T.C. Memo 1986-146">T.C. Memo. 1986-146; Diercks v. Commissioner, T.C. Memo 1985-611">T.C. Memo. 1985-611; Bates v. Commissioner, T.C. Memo 1985-362">T.C. Memo. 1985-362; Mitchell v. Commissioner, T.C. Memo 1985-239">T.C. Memo. 1985-239, affd. without published opinion 793 F.2d 1296">793 F.2d 1296 (7th Cir. 1986). In Castillo v. Commissioner, supra, the taxpayer failed to file tax returns for 4 consecutive years. Before the tax return for the first of these years was due, he filed a false Form W-4 claiming 18 withholding allowances. However, he was not entitled to more than 4 allowances. On two subsequent occasions, the taxpayer filed Forms W-4 claiming he was exempt from withholding. As a result of these claims, only minimal income tax was withheld for the 4 years at issue. Prior to his nonfiling, the taxpayer had a history of properly filing tax returns. Under those facts, the imposition of the section 6653(b)56 addition was upheld. The following discussion is helpful in understanding the rationale underlying the holding in Castillo:Respondent has affirmatively shown various indicia of fraud. Petitioner did not file Federal income tax returns for the taxable years 1975, 1976, 335 1977, and 1978. While the failure to file tax returns, even over an extended period of time, does not per se establish fraud * * , the failure to file returns is persuasive circumstantial evidence of fraud. * * Further, when petitioner's failure to file returns for the taxable years 1975, 1976, 1977, and 1978 is viewed in light of his previous filing of Federal income tax returns for the taxable years 1964 through 1972 and 1974, petitioner's inaction weighs heavily against him.* * * Petitioner also filed false W-4 Forms to reduce or stop the withholding of Federal income taxes from his wages during the taxable years at issue. Such activities are indicative of an attempt to evade the payment of income taxes. * Finally, where a taxpayer's failure to file is predicated on frivolous arguments and where respondent has shown substantial amounts of unreported income on which withholding has been57 reduced or prevented by the submission of false Form W-4 certificates, we have repeatedly held that fraud has been established by clear and convincing evidence justifying the addition to tax under section 6653(b). * * * We reach the same conclusion in this case. * * [Castillo v. Commissioner, supra at 409-410. Citations omitted.]Respondent has satisfied his burden of proving that the underpayment of tax was due to fraud in this case. We find that petitioners intended to evade taxes which they knew they owed by conduct intended to conceal, mislead, and prevent the collection of taxes. We believe that petitioners, who were knowledgeable about their taxpaying responsibilities, consciously decided to unilaterally opt out of our system of taxation. See, e.g., Stoltzfus v. Commissioner, 398 F.2d 1002">398 F.2d 1002 (3d Cir. 1968); Cirillo v. Commissioner, 314 F.2d 478">314 F.2d 478 (3d Cir. 1963), affg. in part and revg. in part a Memorandum Opinion of this Court; Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85 (1970); Newman v. Commissioner, T.C. Memo. 1984-416; Young v. Commissioner, T.C. Memo 1983-604">T.C. Memo. 1983-604;58 Watkins v. Commissioner, T.C. Memo 1983-603">T.C. Memo. 1983-603; Fuhrmann v. Commissioner, T.C. Memo 1982-255">T.C. Memo. 1982-255. Petitioners filed four Forms W-4 in 1982 and 1983 in which they stated, under penalty of perjury, that they were exempt from withholding for the years at issue because they owed no tax for the prior year and expected to owe no tax for the current year. The filing of the Forms W-4 is an indicia of fraud because petitioners filed their 1981 tax return reflecting a tax liability of approximately $ 12,000 just prior to submitting the Forms W-4 to their employers. Moreover, 336 petitioners' income level was increasing during this period, further evidencing that their claim that they would owe no tax in 1982, 1983, and 1984 was an attempt to evade paying income tax. Ardythe testified that at the time of submitting the Forms W-4 she believed she and her husband would owe income tax for the years at issue.In conjunction with their cessation of withholding tax, petitioners ceased filing tax returns. Petitioners continued with this deceptive behavior and only began filing returns again after being contacted by respondent. This59 malfeasance weighs heavily against petitioners, particularly when we consider that petitioners knew of their filing requirements and had a prior history of filing timely tax returns. We find that petitioners' failure to file returns, combined with their failure to have estimated taxes withheld by their employers, was a deliberate attempt to conceal their correct tax liability and to frustrate its collection.Ardythe testified that they filed the false Forms W-4 because she was told by a "supervisor" that they had the option to pay their entire tax liability with their returns rather than through withholdings. We do not find Ardythe's testimony credible. Not only did petitioners fail to present the "supervisor" as a witness, but the wording of the Forms W-4 is clear and unambiguous, and does not suggest such a reading. Furthermore, the objective facts show that petitioners did not intend to voluntarily pay their tax with their returns, or at any other time. Most telling is petitioners' failure to file timely returns or to timely pay the tax until respondent began his investigation. Ardythe explained that their failure to file was due to Jacob's gambling habit during the years60 at issue which caused petitioners to have insufficient funds to pay their tax liability at the times the returns were due. Again, other than this self-serving testimony, petitioners failed to present any evidence to support this claim. Moreover, petitioner husband did not appear or testify at trial. Nevertheless, if petitioner's story were true, it is hard to understand why both petitioners would stop their employers from withholding their tax if they knew it was unlikely that funds would be available when the returns were to be filed. We find petitioner's explanations lacking in credibility. Even after failing to file returns, failing to pay 337 tax for 1982 and 1983, and after being assessed the section 6682 penalty for submitting false information with respect to the four Forms W-4, Ardythe demanded in a letter to respondent that he "instruct" and "direct" her employer to "obey" her Forms W-4 as they were submitted. This suggests that Ardythe, although her and her husband's scheme to conceal their tax liability was discovered and even though she knew she owed and would owe tax, had no intention of paying her income tax.Petitioners also contend that they are somehow61 not liable for the section 6653(b) addition because they finally filed "honest" returns for the years at issue. It is well settled, however, that later repentant behavior does not absolve a taxpayer of his antecedent fraud. Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 394 (1984); George M. Still, Inc. v. Commissioner, 19 T.C. 1072">19 T.C. 1072, 1077 (1953), affd. 218 F.2d 639">218 F.2d 639 (2d Cir. 1955). Therefore, we believe that petitioners' filing of false Forms W-4, coupled with their failure to file timely income tax returns for 1982, 1983, and 1984, was an attempt to evade the payment of tax.The evidence produced here clearly and convincingly establishes that petitioners are liable for the addition to tax under section 6653(b) for 1982, 1983, and 1984. Because the addition to tax under section 6653(b) applies, we do not consider respondent's alternative argument under section 6653(a).To reflect the foregoing and concessions of the parties,Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code as amended and in effect for the years at issue. All Rule references are to this Court's Rules of Practice and Procedure.↩. Plus 50 percent of the interest due on the underpayment pursuant to sec. 6653(a)(2)↩.2. Jacob did not attend the trial of this case, but was represented by counsel.↩3. Although it is clear that Ardythe's new address was available in respondent's computers, no explanation has been provided as to why respondent's agent, who prepared the notice for mailing, was unaware of the new address.↩4. In his opening brief, respondent admits that:It is undisputed in this case that petitioner Ardythe Miller separated from her former husband and co-petitioner, Jacob Miller, after filing the late-filed joint returns for the years at issue and before the notice of deficiency was issued. Before the notice was sent, Ms. Miller filed a subsequent return using a separate filing status, which gave a different address for her from that of her former husband. Moreover, this new address had [been] posted to respondent's computers prior to the mailing of the deficiency notice. Despite these facts, respondent sent only a single joint notice of deficiency to petitioner Jacob Miller. No duplicate notice was sent to Ms. Miller at her new address.It should be noted, however, that our holding in Abeles v. Commissioner, 91 T.C. 1019">91 T.C. 1019↩ (1988), had not been published or available to respondent at the time of the issuance of the notice of deficiency in this case.5. Sec. 6212(a) provides:If the Secretary determines that there is a deficiency in respect of any tax * * *, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail.↩6. Although rarely focused upon, it should be understood that respondent is not limited to the use of a mailing by certified or registered mail to effectuate notice of his deficiency determination for purposes of sec. 6212. However, as we will discuss infra, such a mailing to the taxpayer's "last known address" provides respondent with a safe harbor for purposes of staying the limitations period for assessment under sec. 6501 and commencing the 90-day limitations period for the taxpayer to petition this Court under sec. 6213. The taxpayer need not even receive the notice for this to occur. Frieling v. Commissioner, 81 T.C. 42">81 T.C. 42 (1983).In addition to certified or registered mail, respondent may use regular mail, hand delivery, and/or actual communication. However, such methods must provide the taxpayer with actual notice of respondent's determination to be sufficient under sec. 6212 for purposes of staying the period for assessment under sec. 6501 and commencing the 90-day period for petitioning this Court. See McKay v. Commissioner, 89 T.C. 1063">89 T.C. 1063, 1069 n. 7 (1987), affd. 886 F.2d 1237">886 F.2d 1237 (9th Cir. 1989), and cases cited therein. See also Clodfelter v. Commissioner, 527 F.2d 754">527 F.2d 754, 757 n. 7 (9th Cir. 1975), affg. 57 T.C. 102">57 T.C. 102 (1971); Tenzer v. Commissioner, 285 F.2d 956">285 F.2d 956, 957-958 (9th Cir. 1960). Moreover, this Court's jurisdiction will be invoked if the taxpayer receives actual notice and timely files his petition. McKay v. Commissioner, 886 F.2d 1237">886 F.2d 1237 (9th Cir. 1989), affg. 89 T.C. 1063">89 T.C. 1063↩ (1987).7. Even if we found that respondent failed to mail a deficiency notice to Ardythe, respondent would not necessarily be time-barred from issuing a new deficiency notice to Ardythe and possibly assessing and collecting any deficiency. Pursuant to sec. 6501(c)(2) respondent may assess and collect the additions to tax under sec. 6653(b) at any time in a case of a willful attempt to defeat or evade tax. See Goodman v. Commissioner, 71 T.C. 974">71 T.C. 974, 978-979 (1979); see also sec. 6662(a). See also supra↩ note 6 for a discussion on the effect of actual notice on the limitations period.8. The Court also acknowledged the existence of other methods of providing valid notice. Clodfelter v. Commissioner, 527 F.2d 754">527 F.2d 754, 757 n. 7 (9th Cir. 1975), affg. 57 T.C. 102">57 T.C. 102 (1971); see also McKay v. Commissioner, 89 T.C. at 1069 n. 7. Moreover, the Court of Appeals for the Ninth Circuit would be the appropriate venue for appeal of this case. 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).9. In retrospect, we should not feel sorry for Ardythe because it was Congress' intent to provide taxpayers with the ability to contest respondent's tax determination before assessment and payment. That is the result that has ultimately occurred.↩10. But see sec. 6501(c)(2) and supra↩ note 7.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619218/	BOSTON SAFE DEPOSIT AND TRUST COMPANY AND C. OLIVER WELLINGTON, EXECUTORS OF THE WILL OF CLINTON H. SCOVELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boston Safe Deposit & Trust Co. v. CommissionerDocket No. 49272.United States Board of Tax Appeals30 B.T.A. 679; 1934 BTA LEXIS 1283; May 15, 1934, Promulgated 1283 1. Where partnership agreement provided for life insurance to be carried on lives of general partners, premiums to be paid by partnership, policy to be held by and any loans to be for benefit of partnership, insured partner to designate and successively change beneficiaries, but, upon death of insured partner and payment of proceeds to designated beneficiaries, capital account of deceased partner was debited with the amount of such proceeds and capital accounts of surviving partners credited with same amount in proportion to their interests in the partnership, held, full partnership interest as of date of death is includable in gross estate, but no part of proceeds paid to executors of insured partner is includable as insurance. 2. Decedent during his lifetime offered cash prizes for essays to be written by members of the National Association of Cost Accountants. At time of his death, essays had been submitted which were subsequently judged and prizes in the amounts offered were paid. Held, amount paid is not deductible. 3. Value of remainder interest payable to charity after termination of certain annuities, life estates, and payment of principal to persons in1284 being and not yet born, held not presently ascertainable, hence no amount is deductible from decedent's gross estate. Charles M. Rogerson, Esq., for the petitioner. Ralph F. Staubly, Esq., for the respondent. MATTHEWS 680 OPINION. MATTHEWS: The Commissioner determined that there was a deficiency of $12,287.33 in estate taxes due from the estate of Clinton H. Scovell. The issues involved are: (1) The amount to be included in the gross estate as the value of decedent's interest in a partnership where under the partnership agreement $100,000 of such interest was to be paid and was paid with the proceeds of a life insurance policy carried by the partnership on the life of decedent, payable to beneficiaries designated by insured, all the premiums on the policy having been paid by the partnership; (2) whether amounts pledged by decedent prior to his death to two alleged charitable purposes and paid after his death, are deductible; and (3) whether any amount is deductible by reason of the gift of the remainder estate to charity after life estates to certain persons in being and others not yet born. The facts were stipulated by the parties, 1285 a copy of the articles of partnership and a copy of the will of decedent being a part of the stipulation. (1) Clinton H. Scovell died December 31, 1926 and at that time he was a general partner in the firm of Scovell, Wellington and Company. (2) In accordance with the terms of the Articles of Partnership of the Firm of Scovell, Wellington and Company insurance was carried on the life of said Clinton H. Scovell in the face or principal amount of $100,000. Premiums on said insurance were paid by said partnership. (3) After the death of said Clinton H. Scovell said insurance was paid in the amount of $90,000 to his estate and $10,000 to named beneficiaries. (4) The value of the interest of said Clinton H. Scovell in the partnership assets of Scovell, Wellington and Company, capital and profits, at the time of the decedent's death, was $129,247.19, against which it was provided by the partnership agreement that there should be debited, as and for the purpose stated in the partnership agreement, the amount of the life insurance upon the decedent's life, the premiums of which were paid by the firm. The insurance upon the lives of the members of the partnership, paid for by1286 the firm, in accordance with the partnership agreement, was, substantially, in proportion to their respective interests in the firm. 681 (5) Said Clinton H. Scovell during his lifetime pledged the sum of $1,500 to the Newton Hospital Building and Equipment Fund, $1,000 of which remained unpaid at the time of his death, but which has since been paid by his executors. Said pledge was made in consideration of the pledges of others to make similar donations. (6) Said Clinton H. Scovell during his lifetime by the terms of a circular letter offered to pay the sum of $1,500 as prizes for essays to be written and presented by members of the National Association of Cost Accountants. At the time of his death, essays had been submitted in response to this offer which were subsequently judged and the prizes in the total amount of $1,500 were paid in accordance with the terms of said offer. (7) By the terms of the will of said Clinton H. Scovell the residue of his estate was left in trust for the payment of annuities and other sums, and upon the completion of said payments, the then existing principal and accumulated income was to be paid to charitable and municipal corporations1287 which fall within the purview of paragraph (3) of subdivision (a) of Section 303 of the Revenue Act of 1926, all in accordance with the will * . (8) The value of the net estate as determined by the Commissioner, including the $90,596.63 of insurance as such (of the face value of $90,000, referred to in paragraph (3) above), and treating the decedent's interest in the partnership of Scovell, Wellington and Company as possessing a value, as of the date of the decedent's death, of $129,479.19, and without any deduction for bequest to charity, is $447,102.89. (9) The ages of the annuitants and the persons to whom payments are to be made as of the date of death of Clinton H. Scovell are: 1. Rosa W. Scovell52 years of age2. Albert D. Scovell86 years of age3. Helen Louise Stevens33 years of age4. Margaret C. Gustin21 years of age5. Carrie Mason Scovell85 years of age6. Harriet Mason82 years of age7. Constance E. Thatcher66 years of age8. Louise M. Harleston74 years of age9. Mary Wright Johnston78 years of ageand the following grandchildren of Constance E. Thatcher whose ages at the death of Clinton E. Scovell were as follows: 1288 10. Eugene V. Thatcher Jr10 years of age11. Jerome D. Thatcher8 years of age12. Norma D. Thatcher4 years of age13. Lois K. Stiles4 years of age(10) The only two annuitants above named whose children are entitled to payments of either income or principal are Helen Louise Stevens and Margaret C. Gustin. Helen Louise Stevens had been married and at the death of Clinton H. Scovell had been divorced and had one child, Prescott A. Stevens, who was four (4) years old. Margaret C. Gustin was unmarried and was twwnty-one (21) years old. The partnership agreement is very long and elaborate. Only such provisions as are pertinent will be summarized or quoted. The purpose and business of the partnership was the general practice of public accounting, industrial engineering, business management, and such other activities as might be incidental thereto. The amount of capital invested by the general partners was to be "$200,000 more or 682 less", in the proportion of two thirds by Scovell and one third by Wellington. The exact amounts were to be determined from time to time on the basis that Scovell and Wellington would jointly, in the proportion1289 of two thirds and one third, provide such capital as might be necessary in addition to the amounts contributed by the special partners properly to finance the business of the firm. The partners were to draw salaries and interest on the balances in their capital accounts, and were to share in the profits, after profit-sharer's profits were deducted, in the proportion of two thirds and one third. Paragraph (9) provides that the profits of the business are to be the sum remaining from the gross earnings after deducting all expenses of the business. The expenses are specifically set forth and included therein as one of the items is "Premiums on life insurance policies as provided in paragraph (12) and any other insurance policies that may be agreed upon directly or indirectly benefiting the business or reserves to create an insurance fund within the business." Paragraph (12) provides: (12). Insurance of a continuously renewable kind shall be carried on the lives of the general partners with the policies in each case payable to the assured, or to whomsoever he may designate, always with the assured reserving the right to change and successively change the beneficiary, and with phraseology1290 to define the insurable interest of other partners, so far as the rules and practice of the insurance companies require. All policies of insurance shall remain in the custody of the firm, and the premiums on such policies are to be paid by the firm and charged as an expense of the firm, and the administration of insurance, premiums, proceeds, and cash surreder value. shall be generally as provided in paragraphs (13) to (25), and otherwise as may be elsewhere specially provided. The amount of insurance carried on the life of each general partner was to be at least five sevenths of his capital, with provision for its increase whenever the capital should become more than seven fifths of the principal of the insurance. Paragraph (15) provides: (15). In the event of the death of any general partner the proceeds of the insurance policies on the deceased partner's life (payable to the beneficiaries named in the policies), when paid, shall be entered on the partnership books as a debit to the deceased partner, as part of the settlement with him for his interest in the capital and profits of the partnership, and as a credit to the surviving general and special partners in proportion1291 to their interests in the business as defined in paragraph (18), all on condition that each such surviving general partner shall not, after the death of the deceased partner, withdraw or require payment of any of his capital account as created by contribution as of September 1, 1925, and that each such surviving special partner shall not, after the death of the deceased partner, withdraw or require payment of any amount to his credit with the firm * * * until all of the obligations to the deceased partner have been discharged; * * . Paragraph (18) provides for the method of determining the proportionate interest of the general and special partners entitled to 683 share in the credit for the proceeds of the insurance on the life of a deceased partner. The provision with respect to loans on the policies provides: (23). When the policies have been in force a sufficient time to have a loan value, money may be borrowed on them by the assured, but only for the benefit of Scovell, Wellington & Company, and only with the assent of all general partners. Such money borrowed for the benefit of the firm shall be a liability of the firm, and on the death of any general partner1292 or at the dissolution of the partnership by mutual agreement or in the event of any of the contingencies mentioned in paragraph (22) these loans shall be paid from the assets of the firm, or proper accounting made to give the same effect as if they were paid in cash, before the division of the assets of the firm is made. In the event of the death of a general partner the business was to be carried on by the surviving general partner or partners, with such additional general partners as the survivors might mutually agree upon, subject to certain provisions. The accounting of the business was to be continued as usual, except that the salary of a deceased partner was to cease at the end of the month in which the death occurred, and at the end of the fiscal year profits were to be determined as provided in paragraph (9) and apportioned as usual to general partners, special partners, and profit-sharers. Paragraph (30) provided that the net credit balance of the deceased partner's capital and current accounts, as determined after apportioning profits at the end of the fiscal year in which death occurred, was to be a liability of the business and of the continuing partners to pay to1293 him as provided in paragraphs (44) and (45). (33). The partnership shall continue to have fiscal years ending on August 31st each year, or such other date as may have been unanimously agreed to prior to the death * * * of any one general partner. The surviving general partners shall continue the business together until the end of the fiscal year which is two full years or more beyond the date of the death * * * if the death occurs * * * within the first 16 weeks of a fiscal year, otherwise to the end of the fiscal year which is three full years or more beyond the date. In any event the surviving general partners shall continue the business until they have completed the payment to the deceased * * * partner provided in paragraph (42). Any loans on the policy of the partner who was dead were to be paid out of the firm assets. (36). Upon the execution of an agreement by the partners who are to continue the business after the death * * * of a general partner, to carry out all the provisions of this agreement with reference to settlement with the estate of such deceased partner * * , and with reference to a continuance of the business, title of the former general partner or1294 partners in the partnership property shall cease, and title thereto shall vest in the continuing partners without any further act or conveyance; and * * * the legal representatives of a deceased partner shall execute such conveyance and assurances, if any, as may be necessary in law to fully and effectually vest title to all the partnership property in the continuing partners. All amounts then or 684 thereafter due under the provisions hereof to * * the legal representatives of any partner deceased shall be ascertained and credited to them as promptly as possible, and paid to them as and when due under the provisions hereof, and shall constitute a debt of said continuing partners to * * * the legal representatives of a deceased partner. * * * (39). To * * * the estate of the deceased partner there shall be credited at the end of the fiscal year in which death occurs * * * and for two or three full fiscal years thereafter - as provided in paragraph (33) - the same proportion of the net profits as would have been paid to the deceased * * * partner if living and active in the business. These profits are to be determined as stated in paragraph (9), subject to the additional1295 provisions regarding salaries and shares in the profit-sharing plan for surviving general partners and new general or special partners, whether previously associated with the business or otherwise, as provided in paragraphs (34) to (38), and subject also to the payment of interest on the capital of the deceased * * partner provided in paragraph (46). * * * A payment in cash of the profits due to the legal representatives of a deceased general partner was to be made as soon as possible after the close of each fiscal year and to bear interest if not paid within 30 days after the close of the fiscal year. (42). The surviving general partner or partners, and such additional general partners as these survivors may mutually agree upon, shall be responsible to the deceased * * * general partner or to his legal representatives, not only to pay for the capital of such deceased * * * general partner, with interest * * * and to pay the proportion of profits during the fiscal year in which any of the contingencies mentioned in paragraph (22) occurs, and through two or three full fiscal years thereafter, as provided in paragraph (39), but, if necessary, to continue payments further until1296 in total they equal the balance of the current and capital accounts of the deceased * * general partner, determined as defined in paragraph (30) at the end of the year in which the death * * * occurs, with interest on unpaid balances at the rate of 6% credited monthly, and an additional 2% at the end of each fiscal year as provided in paragraph (8), plus an amount equal to twice the average annual amount of profits accruing to the deceased * * * general partner for the previous five full fiscal years, both from general partners' profits and from profit participation shares. (43). The general partners hereby bind themselves, their estates, or legal representatives, to leave all their capital in the business after death * * * subject to the foregoing provisions and provided furthermore: (44). In case of death the proceeds of the policies of insurance on the life of the deceased partner (payable to the beneficiaries named in the policies), when paid, shall be entered on the partnership books as a debit to the deceased partner and a credit to the survivors as provided in paragraph (15). The net balance of the capital and current accounts of the deceased partner at the end of1297 the fiscal year in which the death occurs, * * after deducting the payment of the proceeds of the policies of insurance on his own life, shall be divided into five parts; at least two parts (two-fifths of the capital remaining) shall be paid in cash to the legal representatives of the deceased partner within the ensuing fiscal year; at least one part shall be paid in cash during the third six months; and within 90 days after the end of the second full fiscal year the total amount of the capital shall be paid in cash. 685 The total paid to the estate or legal representatives of a deceased partner for his capital was to be at least the amount standing to his credit when the books were closed, necessary adjustments made and profits distributed at the end of the fiscal year in which the death occurred, plus interest as provided. Any losses after the close of the fiscal year in which death occurred were to be losses of the surviving partner or partners. The will of decedent is also very long and elaborate. Only the pertinent provisions will be summarized or quoted. By section three decedent devised his house and $100,000 in trust for his wife, the net income, after1298 paying taxes, insurance, and repairs on the house, to be paid to her for life. In addition, should the wife's circumstances require it, not over $2,500 a year was to be paid to his wife from the principal. On her death all principal and accumulated income was to become a part of the trust provided for under section six. There follow certain specific legacies and a specific amount left in trust, not pertinent here. By section six all of the residue of the estate was comprehended within a trust. The amount of $3,000 from the principal was to be paid to each child of his wife's two daughters, Helen Louise Stevens and Margaret C. Gustin, when each child who was living at the time of decedent's death became 25 years of age and when each child born after decedent's death became 21 years of age. With respect to the same children, the will provides: (31) It being my desire that the children of said Helen L. Stevens and Margaret C. Gustin shall be assured good, normal living conditions such as a discreet parent would provide for his own children, and educational opportunities, probably including college or professional training following high school, I direct my trustees, from the1299 income of the trust, to pay to or apply for each child of said Helen and of said Margaret such amount not exceeding twelve hundred (1,200) dollars in any one year for each, until each such child is seventeen (17) years of age; and thereafter not exceeding fifteen hundred (1,500) dollars in any one year for each, until each such child who is living at the time of my death has reached twenty-five (25) years of age, and until each such child who is born after my death has reached twenty-one (21) years of age, as my trustees deem necessary to give each such child good, normal living conditions and educational opportunities. (32) In determining the amounts to be spent or applied consideration shall be given to the ability of parents to provide such living conditions and educational opportunities, as it is not my intention that such aid shall be given where the parents are able to make suitable provision therefor, but rather to supply such living conditions and educational opportunities where by reason of the death of their parents, or their parents' inability to make such suitable provision therefor, said children would not have such living conditions and educational opportunities. The1300 amounts to be expended and the need therefor, the method of payment or application, shall be within the absolute discretion of my trustees, and they may withhold payments to and application for any such child or all of them. In the exercise of their discretion they should be governed 686 by the ability of parents to provide good living conditions and educational opportunities, by the need and capacity of each child therefor, and the ambition, energy and resourcefulness in self-help of each child. After any child is twenty years old I advise against any payments or application for such child unless he or she is doing distinctly creditable work in a college, or a school for professional training, of higher grade than high school; that is, I recommend that unless educational work equivalent to college preparatory grade has been completed at that time it should not be further encouraged by payments by my trustees, and that educational work in college or a school for professional training should be encouraged by payments by my trustees only in case the children are doing distinctly creditable work. * * Other annuities to various relations follow. Provisions were made for1301 an annuity to his wife's daughter Margaret Gustin, and on her marriage and on certain conditions she was to have $2,500 from the principal. Other annuities on condition follow. Decedent further directed that all income of the trust not paid or applied in accordance with the provisions of section six of his will, in each calendar year, should, during the life of his wife, be added at the end of each calendar year to the income of the trust of $100,000 created under section three and applied by his trustees as therein directed. After the death of his wife, all income not used in accordance with the terms of section six was to be added to and become a part of the principal of the trust, but if the income was inadequate to make the payments directed to be made, the trustees might draw upon the principal to make up such deficiency to the extent that income not used in previous years had been added to and became a part of the principal of the trust. If the income of the trust under section six was insufficient in any year to make the monthly or annual payments provided, the trustees were directed to pay or apply the available income as set forth in the will. Provision was made for1302 certain changes in the beneficiaries in case decedent's wife waived the provisions for her in the will and elected instead dower or statutory rights. On the termination of the trust the principal and all accumulations were to go, in the portions stated and for the purposes stated, to Harvard College, Radcliffe College, Boston School of Physical Education, Bradford Academy, city of Manchester, and city of Newton. (1) With respect to decedent's interest in the partnership, petitioners state that the only point in issue is whether the $100,000 of insurance on the life of insured, carried as provided in the articles of partnership, of which $90,000 was payable to his estate, is to be credited upon decedent's interest in the firm, thus reducing the value of his interest, as petitioners claim, or is in effect to be taxed twice, as respondent claims, by including the $90,000 of insurance payable to the estate as part of the gross estate and including the full value 687 of decedent's interest in the partnership without allowing as a credit any part of the proceeds of the insurance. The real question is how much is to be included in gross estate on account of the insurance and1303 the decedent's interest in the partnership. The decedent did not leave $100,000 of life insurance and also interest in a partnership of the value of $129,247.19. It is clear from the articles of partnership that the insurance was carried by the partnership for the benefit of the surviving partners, so that the surviving partners would be in a position to carry on the partnership with the same capital unaffected by the death of a partner. The insurance carried by the firm gave the surviving partners the means with which to pay for the greater part of the deceased partner's interest and at the same time to increase their capital in the partnership. The right of the insured partner to designate the beneficiaries to whom the insurance was to be paid was merely the naming by the insured of the persons to whom an equivalent amount of his partnership capital should be paid after his death. The firm and not the insured owned the policy. When, therefore, the policy became a claim by reason of the death of the insured, the beneficiaries named could not collect the amount until the policy was surrendered by the firm. In the light of the partnership provisions, and even though the insured1304 partner in all probability signed the application for the insurance, we are of the opinion that the insurance was not "taken out by the decedent upon his own life" within the meaning of section 302(g) of the Revenue Act of 1926. The value of the decedent's interest in the partnership against which the insurance proceeds were debited was stipulated to be $129,247.19. This amount should be included in the gross estate, but no amount should be included as insurance received by the executor under a policy taken out by the decedent upon his own life. (2) Respondent in his brief concedes that the balance due at decedent's death on his subscription to the Newton Hospital Building and Equipment Fund, which was paid by his executors, is deductible; hence, we will not consider it further. The other gift took the form of a promise by decedent during his lifetime, made in a circular letter, to pay $1,500 as prizes for essays to be written by members of the National Association of Cost Accountants. Essays had been submitted in response to this offer before decedent's death, and thereafter the executors distributed prizes in the sum of $1,500 to those adjudged best in the competition. 1305 Respondent, relying upon Porter v. Commissioner, 60 Fed.(2d) 673; affirmed on other grounds, 288 U.S. 436">288 U.S. 436; asserts that this was 688 not a claim under section 303(a)(1), nor a charitable gift within the meaning of section 303(a)(3). We have given careful consideration to this case and to prior decisions of this Board. In the Porter case, L. Hand, J., stated the reasons of the Circuit Court as follows: The other question raised is of deductions claimed by the executors for payments made to fulfill the testator's benefactions. He had promised to Princeton University to pay the cost of a memorial window to be built for his son, killed in the war. To a hospital in Glen Cove, Long Island, he promised to pay for the building of an X-ray room, as another memorial. Each institution in reliance upon the promise performed the condition, and the executors paid. The record contains no evidence as to the character of either, but we take judicial notice that Princeton University is "organized and operated exclusively for * * educational purposes", within section 303(a)(3) of the Act of 1926. We can know nothing about the hospital. There1306 are private hospitals, "part of the net earnings of which inures to the benefit of any private stockholder or individual". This may not be one, but upon the bare record we cannot assume so, and the taxpayer has the burden of proof. Against this result the executors invoke section 303(a)(1) which allows a deduction of "claims against the estate * * to the extent that such claims * * * were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth." That the testator's promise created a valid contract nobody denies; "promissory estoppel" is now a recognized species of consideration; (Restatement of Contracts section 90); indeed, the doctrine first gained currency in cases like those before us. But the section was certainly not intended to include all contracts supported by a consideration; so much is clear. We need not limit it to cases where the consideration passes to the testator; for example, a promise to pay for goods delivered to another might fall within it, if the testator has recourse over. But if he has not, the transaction is in substance a gift, and must stand or fall within section 303(a)(3). So here, though the testator1307 was bound by his promise, what in fact he did was to give to the hospital a memorial to his son; it was not a financial bargain at all, and subdivision one is concerned with such. Had he delivered to it a bond under seal in a state where the common law still persists, the claim would hardly have been incurred for "full consideration in money or money's worth"; though the purpose were to use the proceeds to add to its equipment. The statute cannot have meant to make critical the accident that the hospital, by acting upon the promise, fastened a debt upon the estate. So to construe the language is to confuse the purposes of the two subdivisions. The reasoning in the Porter case is particularly applicable here. It is immaterial whether a valid contract would be raised on the decedent's offer to pay money prizes, for the plain condition of the statute that the contract shall be for "adequate and full consideration in money or money's worth" obviously remained unsatisfied. The change in the wording of this provision in the 1926 Act from the words "fair consideration" used in the 1924 Act sufficiently well indicates the legislative intent to substitute for the consideration necessary1308 to support a contract at common law an equivalent in terms of money. We do not think that the gift for prizes meets this test. 689 Therefore, it is not deductible under section 303(a)(1) as a claim. It is unnecessary to consider in the premises whether the claim is enforceable against the estate under local law. Is it deductible as a gift to charity under subsection (a)(3)? We think not. The prizes were to go to members of the National Association of Cost Accountants. But even if the association was to receive the prizes, the petitioners, upon whom rests the burden of showing its charitable purpose, Estate of Edward Moore,21 B.T.A. 279">21 B.T.A. 279, put in no evidence to show that the National Association of Cost Accountants was educational or charitable in character. Judicial notice has its limits. We hold the $1,500 paid by the executors as prizes should not be allowed as a deduction from the gross estate. 3. We turn now to the last issue, whether the remainder interest of certain trusts left to charitable purposes is sufficiently ascertainable and certain to allow its deduction. In all the circumstances we think not. Decedent's will named nine annuitants1309 between the ages of 21 and 86 at the time of decedent's death, four more annuitants who were children at that time ranging in age between 4 and 10, and also the children of Helen Stevens and of Margaret Gustin, whether in being then or not. At the time of decedent's death, Helen Stevens was 33, had been married and divorced and had one child of the age of 4; Margaret Gustin was aged 21 and was unmarried. Invasion of the principal was allowed to the extent of $2,500 a year in favor of decedent's wife, should her circumstances require it; his wife's daughter, Margaret Gustin, was to have $2,500, on certain conditions, from the principal; and all the children, whether living at the time of decedent's death, or born thereafter, of his wife's two daughters, were to have $3,000 each from principal on reaching certain ages. The annuities, except that above-mentioned to the wife, were to be paid out of income only. This leaves for consideration the effect on the gifts to charity of the wife's possible annuity from principal of $2,500, the payment out of principal to her daughter, Margaret, and those to the Gustin and Stevens children. 1310 Upon the basis of an expected age of 17 years more for Mrs. Scovell, who was 52 at the time of decedent's death, and of the probability of neither daughter of Mrs. Scovell having more than 10 children each, the petitioners build up an elaborate argument to show that there was a remainder of at least $219,676.14 which would go to Harvard College and the other tax-exempt uses. It is pointed out that a gift over to charity is not unascertainable merely because the principal may be invaded to some extent. Ithaca Trust Co. v. United States,279 U.S. 151">279 U.S. 151; Hartford-Connecticut Trust Co. v. Eaton, 36 Fed.(2d) 710; Boston Safe Deposit & Trust Co. et al., Executors,21 B.T.A. 394">21 B.T.A. 394. 690 It is unnecessary to examine these cases in detail. It need only be said that the cases relied on by petitioners for the most part deal only with the situation of the suitable maintenance of the decedent's widow in the style to which she had been accustomed, the authority of the trustees to invade the principal not extending beyond such maintenance. Such is the case here, but it is further complicated by the contingent gifts to living and unborn1311 children. Even when we regard the estate's value and the provisions of the will as of the decedent's death in 1926, as we are supposed to do, and assume, therefore, that the estate left had then a high probability of being sufficient to fulfill the then more or less certain prophecy of the future, which events since 1929 may have since greatly altered, we should still be indulging in pure speculation when it comes to calculating the contingent gifts to the unborn children. We do think we are permitted to indulge in such a speculative calculation of probabilities as is urged on us by petitioners. Treasury Regulations 70, article 44, require that: Where a trust is created for both a charitable and a private purpose, deduction may be taken of the value of the beneficial interest in favor of the former only in so far as such interest is presently ascertainable, and hence severable from the interest in favor of the private use. * * We are not dealing here with a legal presumption which is contradicted by facts presently ascertained and known at the time of decedent's death, such as was considered by the Supreme Court in 1312 United States v. Provident Trust Co.,291 U.S. 272">291 U.S. 272; but with factual possibilities unknown at the decedent's death, unknown now, and not likely to be definitely ascertained for many years to come. It is not a question here of fact against fiction, but of guesswork pure and simple. While the probability of the charities taking is here perhaps greater than in the situation before the Supreme Court in Humes v. United States,276 U.S. 487">276 U.S. 487, the definite ascertainment of the amount of the gifts over to charity is hardly more possible. As was pointed out in the Humes case, there are distinct limitations to the application of the actuarial art in tax cases. We think the applicability of it here to the probable natural increase of the two young women too uncertain in its results to justify its use. As was said in a recent District Court case, Pennsylvania Co. for Insurances on Lives and Granting Annuities et al., Executors, Estate of T. C. Birnbaum v. Brown,6 Fed.Supp. 582, where there were gifts to beneficiaries with contingent gifts in designated sums to any daughters born of those beneficiaries, with gifts over the1313 charity: * * * This case happens to be one in which, in view of the large amount of the residuary estate, the small size of the contingent bequests and the age *691 of the parties, the percentage of error in any guess at the amount which will go to charity is likely to be small, but the fact that such cases will arise does not call for encroachment upon the plain policy of the law. This case was affirmed per curiam by the Circuit Court of Appeals for the Third Circuit, 70 Fed.(2d) 269. We hold, therefore, that the amount of the gifts over to charity are not sufficiently ascertainable to allow a deduction therefor from decedent's gross estate. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619221/	Wilbert Garrison v. Commissioner.Garrison v. CommissionerDocket No. 9155.United States Tax Court1947 Tax Ct. Memo LEXIS 336; 6 T.C.M. (CCH) 17; T.C.M. (RIA) 47002; January 16, 1947336 [Deductions: Losses: Sale of worthless stock.] Petitioner is not entitled to a claimed capital loss in 1941 of $13,322.50 or for any lesser amount on account of an alleged sale for $5.00 of 400 shares of stock in the Independence Indemnity Company which he had acquired many years prior to the date of sale. The corporation had been declared insolvent in 1932 and all of its assets transferred in that year to another corporation which had agreed to reinsure its liabilities. In 1933 the Independence Indemnity Company had been dissolved under the laws of the State of Pennsylvania and its affairs placed in the hands of the Insurance Department of that state for liquidation. Petitioner's shares of stock in the corporation had become worthless in some year prior to 1941 and he cannot establish a tax loss in that year by an alleged sale for $5.00 which cost him $52 to effect. Said sale was only a gesture and is not effective for tax purposes. Wilbert Garrison, pro se. R. O. Carlsen, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion The Commissioner has determined a deficiency in petitioner's income tax for the year 1941 of $583.63, resulting from adjustments made to net income as disclosed by petitioner's return, which adjustments were as follows: Unallowable deductions and additional income: (a) Capital loss$13,322.50(b) Selling expenses52.00(c) Dividends110.41These adjustments were explained in a statement attached to the deficiency notice as follows: (a) It is held that the stock of Independence Indemnity Company became worthless prior to 1941. When stock has become worthless in a prior year, a sale in a later year for a nominal amount does not give rise to a deductible loss. * (b) It is held that the expenses of $52.00 claimed on line 16 of your return in connection with the aforementioned sale are not deductible separately under any of the provisions of section 23 of the Internal Revenue Code338 as amended. (c) [This is explained as an adjustment of dividends received. It is not copied here because petitioner does not contest that adjustment.] Petitioner assigned error as to adjustments (a) and (b) as follows: A. Petitioner assigns as error the respondent's decision "that the stock of Independence Indemnity Company became worthless prior to 1941." B. Petitioner assigns as error respondent's disallowance of petitioner's claim for loss on account of sale of Independence Indemnity Company stock. Findings of Fact At the hearing the parties filed a stipulation of facts which reads in part as follows: 1. Petitioner is an individual engaged in the printing business with his principal place of business at 30 Ferry Street, New York, New York. 2. Petitioner filed an income tax return for the calendar year 1941 with the Collector of Internal Revenue for the Second Collection District of New York. Under item 7 (c) of said return for 1941, petitioner claimed a deduction of $13,322.50, representing 50% of an alleged capital loss sustained from the sale of certain Independence Indemnity Company stock, explained as follows: AcquiredSoldSelling PriceCostLossTaken into Account193212/30/41$5.00$26,650$26,645$13,322.50339 Said return further indicated a total net loss for the year 1941 of $7,937.06. 3. On December 30, 1941 after advertisement of sale at The Exchange Salesrooms, 20 Vesey Street, Borough of Manhattan, New York City, petitioner sold at auction 400 shares of said stock for $5.00. Petitioner claimed as deductible expenses in connection with said sale the sum of $52.00, itemized as follows: U.S. Revenue Stamps$ 1.00State Revenue Stamps12.00Advertising & catalogue2.00Salesman's fees2.00Commission 1/4%35.00$52.00 * 5. Taxpayer acquired 2,800 shares of Independence Indemnity stock at a cost of $77,600 purchased as follows: Date AcquiredSharesCostNov. 192250 (later replaced by 10 for 1)$15,000June 192350 (later replaced by 10 for 1)15,000Dec. 192450 (later replaced by 10 for 1)15,000Sept. 192850015,00080017,6002800$77,600 On the basis of the above total cost, the average cost per share was $27.71. * 7. Independence Indemnity Company was incorporated under the laws of the State of Pennsylvania on Oct. 31, 1922. On September 21, 1931, a new company was organized340 by the same name, resulting from the merger of the old company, the Commonwealth Casualty Company, the American Mine Owners Casualty Company, and the Liberty Surety Bond Insurance Company. The new Independence Indemnity Company was domiciled in Philadelphia, Pennsylvania, and commenced business on October 1, 1931. 8. From the outset, the Independence Indemnity Company was in financial difficulties. By a Treaty of Re-insurance, effective September 30, 1932, the company was re-insured 100 per cent by the International Re-insurance Corporation, a corporation which was formed on May 18, 1931 and was incorporated under the laws of the State of Delaware. 9. By the above agreement, the International Re-insurance Corporation agreed to re-insure all the liabilities of Independence Indemnity Company which were outstanding at that time and thereafter to be contracted, until that Independence Indemnity Company was rehabilitated, in consideration for payment to the International Re-insurance Corporation of a premium equal to the entire assets of the Independence Indemnity Company, or such part thereof as might be necessary to liquidate its liabilities. 10. By a subsequent agreement entered341 into between the two companies on October 31, 1932, the International Re-insurance Corporation took over all the assets and assumed the liabilities of the Independence Indemnity Company. The agreement provided that the International Re-insurance Corporation was to pay over to the Independence Indemnity Company the sum, if any, by which the proceeds of the assets exceeded the liabilities assumed, less expenses paid in discharge of such liabilities and such portion of the overhead expenses of the International Re-insurance Corporation as might be applicable thereto. At the date of this agreement the liabilities of the Independence Indemnity Company exceeded its assets by an amount approximating $5,000,000. 11. On April 19, 1933, the International Re-insurance Corporation was declared insolvent and receivers were appointed by the Chancery Court of the State of Delaware. By order of the Supreme Court, New York County, dated April 21, 1933, the Superintendent of Insurance of the State of New York was directed to take possession of and to conserve the property and assets in the State of New York of said International Re-insurance Corporation. Ancillary receivers were thereafter appointed342 for the corporation's property and assets situated in Pennsylvania. 12. Following the appointment of receivers for the International Re-insurance Corporation, application was made in Pennsylvania by the Insurance Commissioner for an order to liquidate the business and affairs of the Independence Indemnity Company. By a decree of the Court of Common Pleas of Dauphin County, Pennsylvania, in a proceeding instituted by the Insurance Commissioner of the Commonwealth of Pennsylvania, being No. 96, Commonwealth Docket 1933, the Independence Indemnity Company was formally dissolved on May 11, 1933 as an insolvent insurance corporation, and on May 12, 1933 the Insurance Commissioner of the Commonwealth of Pennsylvania was appointed liquidator thereof. 13. On January 2, 1934, the Insurance Commissioner of Pennsylvania also instituted proceedings in the United States District Court for the Eastern District of Pennsylvania against the Ancillary Receivers of the International Re-insurance Corporation by which the Insurance Commissioner sought to obtain the return of the assets of the Independence Indemnity Company on the basis that the International Re-insurance Corporation was insolvent343 at the time the agreement of October 31, 1932 was entered into. The decision of the Federal Court was in favor of the International Re-insurance Corporation. The Circuit Court of Appeals for the Third Circuit denied a rehearing on May 11, 1939. 14. On November 15, 1932, the Wilbert Garrison Company, a creditor of the Independence Indemnity Company, received the sum of $360 in full payment of certain printed merchandise previously sold to the Independence Indemnity Company. 15. On October 22, 1946, the Wilbert Garrison Company received notice from Arthur G. Logan and William D. Denney, Receivers of International Re-insurance Corporation, that its claim No. 4804 had been certified by an ancillary jurisdiction to the Court of Chancery of the State of Delaware for allowance as a general claim in the amount of $80, and that its claim No. 4803 had likewise been certified for allowance as a general claim in the amount of $1.45. 16. The liquidation proceedings involving the Independence Indemnity Company and the International Re-insurance Corporation have not been terminated up to the present time. On October 22, 1946, petitioner received a document addressed to all stockholders and344 creditors of International Re-Insurance Corporation. It is signed by the receivers of International Re-Insurance Corporation. It does not purport to make any distribution whatever to the stockholders of Independence Indemnity Company. It is incorporated in these findings of fact by reference. On March 4, 1942, petitioner received a letter from the Liquidation Division, Insurance Department, Commonwealth of Pennsylvania, which, omitting formal parts, reads as follows: Your letter of December 30, 1941 addressed to James L. Baxter, Special Master, relative to the affairs of the Independence Indemnity Company was referred to this office by the Receivers of the International Re-Insurance Corporation with their letter of February 20, 1942. It is true that we are the custodians of the stock records of the Independence Indemnity Company, and since we have received your letter of December 30th we have been attempting to dig up for you the necessary information which you request. I had thought at first that we could locate this data quite easily for you but it has turned out to be a larger task than we first thought it would be, and as we do not have any funds in our possession belonging345 to the Independence Indemnity Company with which to pay for the necessary work in digging out this information for you we have had to discontinue our efforts. Estates in our possession must be self-sustaining and we cannot use funds belonging to other estates to work on estates where there is no money. As you probably know, the assets of the Independence Indemnity Company were all turned over to the Receivers of the International Re-Insurance Corporation, and after quite extensive litigation in which we attempted to recover the assets of the Independence Indemnity Company, said litigation extending over a period of almost four years, the Court decided that the Insurance Commissioner was not entitled to have the assets of the Independence Indemnity Company turned over to him for the purpose of paying the Independence Indemnity claims. If you desire the accountant in your office, or bookkeeper, to review such stock records as we have of the Independence Indemnity Company, we will be glad to make available all such records, allowing him to make such copies as he desires or obtain photostat copies. It is, of course, understood that records will have to be reviewed at our office between346 the hours of 9:00 and 5:00 from Monday to Friday. We have a photostat machine on the premises and if photostats are desired of any of the stock records the only charge made for operating the photostat machine will be for the actual materials used. We have found in the stock records indications that you owned a considerable number of shares of stock and undoubtedly if this is a proper claim under your income tax you would be entitled to a substantial credit. We regret that we could not make this information available to you but you still have ample time before March 15th to send someone over from New York to check books in our possession if you care to. The shares of stock which petitioner owned in the Independence Indemnity Company became worthless prior to the year 1941. Opinion BLACK, Judge: The Commissioner in his determination of the deficiency has definitely determined that the 400 shares which petitioner owned in Independence Indemnity Company and which were the subject of the alleged sale in 1941 had become worthless prior to the year 1941. It, of course, requires no citation of authorities to establish the proposition that this determination of the Commissioner is347 presumed to be correct. In order for petitioner to overcome by evidence the presumptive correctness of the Commissioner's determination in this case, it is necessary for him to prove two things: (1) That the stock of Independence Indemnity Company had some value at the beginning of 1941. Roosevelt Investment Corporation, 45 B.T.A. 440">45 B.T.A. 440; Frank C. Rand, 40 B.T.A. 233">40 B.T.A. 233; Bartlett v. Commissioner, 114 Fed. (2d) 634. And (2) that it was actually sold during the taxable year in a bona fide sale. The Internal Revenue Code requires the loss of a taxpayer on worthless stock to be taken in the year when the stock became worthless. The taxpayer is not permitted to postpone the taking of his loss to a later year by the device of a sale. De Loss v. Commissioner, 28 Fed. (2d) 803, certiorari denied 279 U.S. 840">279 U.S. 840; Schmidlapp v. Commissioner, 96 Fed. (2d) 680. Let us see whether the evidence embodied in the stipulation of facts and in the documentary evidence introduced by the petitioner at the hearing meets either of the foregoing requirements. First, has petitioner proved that the stock had any value at the beginning348 of the year 1941? Clearly he has not done so. In 1932 the Independence Indemnity Company being in financial difficulties conveyed all of its assets to International Re-Insurance Corporation which corporation agreed to reinsure the Indemnity Company's liabilities at that time. In 1933 the International Re-Insurance Corporation was itself declared insolvent and thrown into the hands of a receiver. Following this, by a decree of the Court of Common Pleas of Dauphin County, Pennsylvania, the Independence Indemnity Company was dissolved on May 11, 1933 as an insolvent insurance corporation and on May 12, 1933 the Insurance Commissioner of the Commonwealth of Pennsylvania was appointed liquidator thereof. It seems reasonable to assume that from that date on the stock of Independence Indemnity Company had no value. Certainly petitioner has not proved that there were any assets in the hands of the Insurance Commissioner of Pennsylvania which gave the stock any value. Such evidence as there is in the record is to the contrary. For example, on December 30, 1941, petitioner sought information as to what the records of the company showed as to the number of shares of stock he owned in it at the349 time it ceased to do business. The Liquidation Division of the Insurance Department of the Commonwealth of Pennsylvania replied to this letter of petitioner and informed him in substance that to give him the information which he desired would require considerable research and that there were no assets in hand belonging to the Independence Indemnity Company to pay for such research and that if petitioner secured the information which he sought, he would have to come down and do the searching of the records for himself. We quote a paragraph from that letter as follows: Estates in our possession must be self-sustaining and we cannot use funds belonging to other estates to work on estates where there is no money. As you probably know, the assets of the Independence Indemnity Company were all turned over to the Receivers of the International Re-Insurance Corporation, and after quite extensive litigation in which we attempted to recover the assets of the Independence Indemnity Company, said litigation extending over a period of almost four years, the Court decided that the Insurance Commissioner was not entitled to have the assets of the Independence Indemnity Company turned over to him350 for the purpose of paying the Independence Indemnity claims. The stipulation of facts shows that in the litigation to which the Insurance Department of the State of Pennsylvania refers in the above letter, the decision of the Federal District Court was in favor of the International Re-Insurance Corporation and against the Insurance Department of Pennsylvania, and that the Circuit Court of Appeals for the Third Circuit affirmed this decision and that rehearing was denied May 11, 1939. Therefore, it seems clear that at the latest the stock of Independence Indemnity Company could have had no value after May 11, 1939. Petitioner seems to be of the view, as expressed in his memorandum brief and reply brief, that because of a document which he introduced at the hearing dated October 1946 which shows that the Receivers of International Re-Insurance Corporation were preparing to pay dividends on claims filed against that corporation, that he has made some showing that the stock of the Independence Indemnity Company had some value. There is absolutely nothing in this document which shows that any payments whatever are to be made to stockholders of Independence Indemnity Company. The document351 from the Receivers of International Re-Insurance Corporation simply shows that certain dividends are to be paid to the creditors of that corporation, as will be shown by the following quotation from the letter: The Receivers, in and by the Report and Petition, now recommend that they be authorized to pay the preferred claims summarized above in full, and a first dividend of 7 1/2% on all claims allowed as general claims in accordance with their recommendations summarized above. * * Therefore, having carefully examined the stipulation of facts and the documentary evidence which petitioner has introduced, we find absolutely nothing which shows that the stock of Independence Indemnity Company had any value on January 1, 1941. On the contrary, all the evidence in the record supports the Commissioner's determination that the stock in question did in fact become worthless in some year prior to 1941. Second, the stock having become worthless in some prior year, the petitioner cannot secure the allowance of a loss in 1941 by a purported sale which amounts only to a gesture. The stipulation of facts shows that petitioner paid out in 1941 $52 to effect a sale of 400 of his shares for*352 $5.00. It is clear that such a purported sale amounts only to a gesture and cannot be given recognition to establish a tax loss. The Tax Court had before it very recently a similar question in the case of Franklin R. Chesley, Docket No. 7296 [5 TCM 995]. The case was decided against the taxpayer in a memorandum opinion entered November 27, 1946. In that case we held that: Taxpayer is not entitled to a loss deduction in 1941 on account of the sale for $5.00 of stock of the Petroleum Rights Corporation which had been acquired in 1936 for $20,000, since the stock had become worthless in an earlier year when the corporation entered into an agreement with its largest creditor by which its assets were transferred to its creditors. The execution of the agreement was an act of insolvency fixing the time of worthlessness. Taking of the loss may not be postponed to a later year by the device of a sale. On the strength of the authorities above cited, we sustain the determination of the Commissioner. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619222/	JAMES A. HELFAND and ARLENE M. HELFAND, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHelfand v. CommissionerDocket No. 10117-82.United States Tax CourtT.C. Memo 1984-102; 1984 Tax Ct. Memo LEXIS 573; 47 T.C.M. (CCH) 1203; T.C.M. (RIA) 84102; March 1, 1984. James A. Helfand, pro se. Karen Nicholson Sommers, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: Respondent determined a deficiency in petitioner's Federal income taxes for taxable year ended December 31, 1979, in the amount of $422. After concessions, the sole issue for decision herein is the extent, if any, to which petitioners were entitled to a deduction under section 167(a), 1 in their taxable year ended December 31, 1979, for the depreciation of rental property purchased by them on December 21, 1979. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation and the exhibits attached thereto are incorporated by this reference. James A. 575 Helfand (hereinafter referred to as "petitioner") and Arlene M. Helfand were husband and wife (hereinafter referred to collectively as "petitioners") and residents of San Diego, California at the time of filing their petition herein. Petitioners timely filed a joint Federal income tax return for the taxable year ended December 31, 1979, with the Internal Revenue Service Center in Fresno, California. On December 21, 1979, petitioners purchased a single family residence located at 8042 Camino Tranquilo in San Diego, California for a total consideration of $116,806. This property was acquired and held by petitioners for use as a residential rental property, and, as of the trial in this matter, it continued to be held as such. Petitioners first rented the property in January 1980. Petitioners' depreciable basis in the Camino Transquilo property as of the end of taxable year 1979, was $77,871, consisting of the following components: (1) Building - $73,188; (2) appliances 2 - $1,553; and (3) carpets and drapes - $3,130. For purposes of accounting for the depreciation of the Camino Tranquilo property, petitioners combined these items into a separate composite account, as provided576 for in section 1.167(a)-7(a), Income Tax Regs.On their Federal income tax return for taxable year ended December 31, 1979, petitioners utilized straight-line depreciation over a 25-year composite useful life for the Camino Tranquilo property. Treating their account for such property as a "multiple asset account," within the meaning of section 1.167(a)-10(b), Income Tax Regs., petitioners applied an "averaging convention" provided for thereunder, whereby they assumed that all additions to and retirements from the account occurred uniformly throughout the taxable year, resulting in depreciation computed on the average of the beginning and ending balances in such account for the taxable year. This computation resulted in a depreciation allowance for the Camino Tranquilo account in the amount of $1,557 for 1979 (in effect, depreciation for a six-month period), and petitioners deducted this amount of depreciation for such account on their Federal income tax return for that year. Petitioners did not elect on such return to include an577 additional first-year depreciation allowance under section 179 with respect to any tangible personal property associated with their Camino Tranquilo property. Absent use of the averaging convention, the depreciation allowable to petitioners in 1979 with respect to these assets, using the same cost bases and composite rate and based upon eleven days of ownership, would have been $94. By timely notice of deficiency, respondent disallowed the entirety of the depreciation deduction claimed by petitioners for 1979 with respect to the Camino Tranquilo property, citing the following, in pertinent part, 3 as the reasons therefor: It has not been established that you are entitled to use the depreciation method described as an "averaging convention method" that is, by using an assumed timing of additions and retirements "[sic] in the case of a multiple asset account. Also, it has not been established that the deduction does not materially distort the depreciation allowable. 578 The use by petitioners of the averaging convention in 1979 with respect to the Camino Tranquilo property substantially distorted the depreciation allowance for that year. OPINION Pursuant to section 1.167(a)-10(b), Income Tax Regs., the period for depreciation of an asset begins when the asset is "placed in service," and a "proportionate part of one year's depreciation is allowable for that part of the first and last year during which the asset was in service." It is sufficient for a finding that the instant property was placed in service that it was held for the production of income, even where it was not actually rented. See Sears Oil Co., Inc. v. Commissioner,359 F.2d 191">359 F.2d 191 (2d Cir. 1966), affg. in part, revg. in part and remanding in part a Memorandum Opinion of this Court; SMC Corp. v. United States, 80-2 USTC par. 9642, 46 AFTR 2d 80-5827 (E.D. Tenn. 1980), affd. 675 F.2d 113">675 F.2d 113 (6th Cir. 1982); cf. Grow v. Commissioner,80 T.C. 314">80 T.C. 314 (1983). Compare Cooper v. Commissioner,542 F.2d 599">542 F.2d 599 (2d Cir. 1976),579 affg. a Memorandum Opinion of this Court. We have found that petitioners purchased the Camino Tranquilo property in issue on December 21, 1979. There is no dispute that this property was held by petitioners for the production of rental income as of the date they acquired it, even though it was not actually rented until January 1980. Accordingly, since petitioners placed their Camino Tranquilo rental property in service on December 21, 1979, they were entitled to depreciate it, at least as of that date. Petitioners, claiming for 1979 not just eleven days, but the equivalent of six months of straight-line depreciation for their Camino Tranquilo property, rely upon the use of an averaging convention provided for in section 1.167(a)-10(b), Income Tax Regs., as follows: However, in the case of a multiple asset account, the amount of depreciation may be determined by using what is commonly described as an "averaging convention," that is, by using an assumed timing of additions and retirements. For example, it might be assumed that all additions and retirements580 to the asset account occur uniformly throughout the taxable year, in which case depreciation is computed on the average of the beginning and ending balances of the asset account for the taxable year. See example (3) under paragraph (b) of section 1.167(b)-1. * * * An averaging convention, if used, must be consistently followed as to the account or accounts for which it is adopted, and must be applied to both additions and retirements. In any year in which an averaging convention substantially distorts the depreciation allowance for the taxable year, it may not be used. [Emphasis added.] Contending that they combined the building, appliances, and carpets and drapes at their Camino Tranquilo property into a qualifying "multiple asset account," petitioners claimed a depreciation deduction therefor in 1979 in the amount of $1,557, computed as the average of their asset balance at the beginning of 1979, which was zero, and their asset balance at the end of that year, which was $77,871, spread over a 25-year "composite" useful life. In opposition to petitioners' utilization of this averaging convention, respondent contends, first, that the Camino Tranquilo property purchased581 by petitioners could not qualify as a multiple asset account, and second, that the use of the averaging convention to compute first-year depreciation on such property substantially distorted the depreciation allowance for taxable year 1979. 4The averaging conventions authorized by section 1.167(a)-10(b), Income Tax Regs., may be applied only to a "multiple asset account," within the meaning of that section. The term "multiple asset account" is not explicitly defined in the regulations. Section 1.167(a)-7(a), Income Tax Regs.582 , provides, however, that depreciable property may be accounted for either by treating each individual item as an account or by "combining two or more assets in a single account." Exemplary of the latter type of account, under that section, are the "group account," wherein assets similar in kind with similar useful lives may be grouped together; the "classified account," wherein assets are segregated according to use without regard to useful lives; and the "composite account," wherein assets are included in the same account regardless of their character or useful lives. Petitioners herein identify their Camino Tranquilo account as a multiple asset account of the composite type, wherein multiple assets were grouped without regard to their character or useful lives. Respondent concedes that a rental residence, like the Camino Tranquilo property, can be categorized as a composite asset consisting of disparate components, and that a grouping of personal property and real property in one account, as elected by petitioners, may constitute a composite account. Respondent challenges petitioners' assertion, however, that the Camino Tranquilo composite account constituted a "multiple asset583 account," eligible as such to use the averaging conventions provided for in section 1.167(a)-10(b), Income Tax Regs.Upon examination of the regulatory provisions involved, we are persuaded that a composite account is, by definition, a type of multiple asset account. A composite account, as we have found, is one way of "combining two or more assets in a single account." That such a combination gives rise to a "multiple asset account" is suggested, not only by the manifest meaning of the terms, but also by the reference in section 1.167(a)-10(b), Income Tax Regs., as excerpted above, to example (3) under section 1.167(b)-1(b). The cited example illustrates the use of straight-line depreciation for group, classified and composite accounts, clearly linking those terms to the concept of a multiple asset account under section 1.167(a)-10(b). It follows, then, that petitioners' grouping of the building, appliances, and carpets and drapes at their Camino Tranquilo property, gave rise to a multiple asset account of the composite type. Respondent suggests additionally, however, that the Camino Tranquilo account could not584 be a multiple asset account because petitioners failed to show that they had made or intended to make additions to the account. We cannot agree. For their tax year 1979, petitioners established the subject account, concurrently adding to it during that year the building, appliances and the carpets and drapes at their Camino Tranquilo property. We believe that whether such assets were added to petitioners' account simultaneously or sequentially is irrelevant to our determination of whether a multiple asset account was established. 5 Furthermore, contrary to respondent's objections, it is also irrelevant whether or not petitioners planned to add later-acquired assets to their Camino Tranquilo account, since under section 1.167(a)-7(c), Income Tax Regs., a taxpayer may establish as many accounts for depreciable property as he desires. 585 The final issue for determination herein is whether the averaging convention utilized by petitioners resulted in a substantial distortion of the depreciation allowance for their taxable year ending December 31, 1979, within the meaning of section 1.167(a)-10(b), Income Tax Regs. While petitioners first urge that we measure such distortion against their gross or taxable income for the tax year in issue, the regulation refers, not to a distortion of income, but to a distortion of depreciation. We accordingly believe that the appropriate measure of depreciation distortion pursuant to the regulation requires a comparison of the depreciation claimed for the subject multiple asset account, under the averaging convention elected, with the depreciation otherwise allowable for such account, without reference to such averaging convention. Before turning to an examination of this distortion factor in light of the present facts, however, we must first determine whether such depreciation otherwise allowable, as suggested by petitioners, should be computed with reference to depreciation allowable, not only under section 167, but also under section 179. For586 taxable year 1979, section 179(a) provided for certain additional first-year depreciation, as follows: (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. Additional first-year depreciation under section 179 was available only for qualifying tangible personal property, which, according to petitioners, included the appliances and the carpets and drapes at their Camino Tranquilo property. Such an additional allowance was available for qualifying property, however, only if the taxpayer elected it. Section 179(c). See Sharon v. Commissioner,66 T.C. 515">66 T.C. 515, 533 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978). This election was required to be made by showing as a separate item on the taxpayer's return the total additional first-year depreciation claimed with respect to587 the section 179 property selected. Section 1.179-4(a), Income Tax Regs. It is uncontroverted herein that petitioners failed to make this election on their tax return for 1979. Petitioners' contention that the additional allowance should nonetheless be considered as part of their depreciation allowance for 1979, within the meaning of section 1.167(a)-10(b), Income Tax Regs., apparently rests upon the conclusion that their decision to group real and personal property into a multiple asset account, precluded their election of section 179 depreciation for any part of that account. We disagree. The regulations under section 179 address the treatment of a taxpayer electing to use both an averaging convention and additional first-year depreciation, indicating the compatability of these two depreciation concepts. Section 1.179-1(e), Income Tax Regs. Furthermore, while a taxpayer might choose to account separately for personal property for which section 179 depreciation might be available, and real property, for which it would not, we are aware of nothing under sections 167 or 179 which would prevent588 a taxpayer from accounting for both types of property in a multiple asset account, and claiming additional depreciation as to only the qualified portion of that account. While we therefore conclude that petitioners could have elected additional first-year depreciation without compromising their eligibility to use an averaging convention, they chose not to do so. 6589 Thus, as we have indicated, we think the correct standard for testing for substantial distortion, within the meaning of the applicable regulation, is to measure the depreciation under section 167 actually produced for the year by petitioners' use of the averaging convention against the depreciation which would have been produced if the averaging convention had not been elected, with respect to the particular multiple asset account in question, and without considering depreciation deductions otherwise available to petitioners under other Code sections or from other assets. 7Having thus determined the appropriate basis upon which to measure590 the distortion of depreciation under section 1.167(a)-10(b), Income Tax Regs., we turn, finally, to an examination of the substantiality of the distortion reflected in this case. In view of the absence of a regulatory definition of "substantial distortion," within the meaning of section 1.167(a)-10(b), Income Tax Regs., we begin this examination with a consideration of the purposes underlying the averaging conventions provided for in that section. In this regard, an observation by the Court of Appeals for the Fifth Circuit, facing the meaning of the term "substantial" as used in the context of the collapsible corporation provisions of the Code, is appropriate: In contrast to a fixed relative term, such as twenty percent, expressing the same proportional relationship in every context, "substantial" my indicate a certain proportion in one instance, a different proportion in another.To ascertain its meaning in any particular context one must examine the frame of reference and the purpose intended by use of the term. Heft v. Commissioner,294 F.2d 795">294 F.2d 795, 797 (5th Cir. 1961), affg. 34 T.C. 86">34 T.C. 86 (1960).591 As acknowledged by both parties herein, it is the purpose of the regulatory averaging conventions to simplify depreciation accounting where multiple assets are acquired or disposed of during the taxable year. Since a taxpayer may aggregate multiple assets into a group, classified or composite account with or without electing use of an averaging convention, section 1.167(a)-7(a), Income Tax Regs., it is clear that the additional simplicity attained by use of such a convention results, not solely from the combination of multiple assets in one account, but from the consistent treatment of multiple transactions under one chosen averaging assumption. 8 Thus, where a taxpayer simultaneously adds multiple assets to an account, the date that such assets were placed in service is no less fixed than is the date derived from application of an averaging convention. The purpose underlying the averaging convention is therefore most clearly served where, unlike the present case, additions to a multiple asset account are made, not simultaneously, but sequentially over the taxable year. 592 With this analysis of the purposes underlying the averaging convention in mind, we turn to a quantitative assessment of the depreciation distortion occasioned by petitioners' election to utilize an averaging convention for their taxable year 1979. We have already found that petitioners claimed depreciation for their Camino Tranquilo account with reference to an averaging convention which resulted in a straight-line depreciation allowance for 1979, in the amount of $1,557. We have also found that, but for their use of said averaging convention, petitioners were entitled to depreciate the assets in their Camino Tranquilo account only as of the date they were placed in service, or as of December 21, 1979, for a total depreciation otherwise allowable (applying the same depreciation rate to an eleven-day period) of $94. A comparison of these figures clearly demonstrates that the averaging convention utilized by petitioners resulted in a substantial distortion of their depreciation allowance for the Camino Tranquilo property for 1979. 9 As such, petitioners' use of such averaging convention for that year must be disallowed. Consistent with our finding that the property was acquired*593 on December 21, 1979, and was placed in service by petitioners on that day, however, we hold that petitioners were entitled to a depreciation deduction for that eleven-day period of $94. Kern Co. v. Commissioner,1 T.C. 249">1 T.C. 249 (1942); section 1.167(a)-10(b), Income Tax Regs.To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All statutory references herein are to sections of the Internal Revenue Code of 1954, as amended and in effect for the year in issue, and all references to Rules are to the Tax Court Rules of Practice and Procedure, unless otherwise stated.↩2. Neither the number nor the nature of such appliances is disclosed on this record.↩3. The deficiency notice additionally adjusted the allocation between land and building of the purchase price of the Camino Tranquilo property, as reflected on petitioners' return. By stipulation of the parties, however, this issue was conceded by respondent. Other adjustments in the notice of deficiency relating to a separate property in another account, owned by petitioners and located at 10565 El Comal Drive, were settled by agreement of the parties prior to the trial in this matter. A medical expense adjustment also determined by respondent will be determined as an automatic adjustment under sec. 213 when the remaining issue for 1979 is resolved herein.↩4. In addition, respondent contends that petitioners did not compute the composite life of the assets correctly. This issue was first raised by respondent on brief, is manifestly unfair to petitioners, and we will not consider it. Philbrick v. Commissioner,27 T.C. 346">27 T.C. 346↩ (1956). We further note that the same composite life used by petitioners was used in respondent's statutory notice, clearly indicating that petitioner was on no notice that respondent intended to raise such an issue.5. Indeed, faced with a taxpayer who simultaneously placed into service in a purported multiple asset account, a "large unusual purchase" of several units of machinery, respondent disallowed use of an averaging convention on the grounds that it resulted in a substantial distortion of the taxpayer's depreciation allowance for the taxable year in issue, and not on the basis that the taxpayer failed to establish a qualifying multiple asset account. Rev. Rul. 73-202, 1 C.B. 81">1973-1 C.B. 81↩.6. Petitioner testified, and argued on brief, that, in addition to his belief that use of the averaging convention precluded an election under sec. 179, he did not make such election because the cost of obtaining expert appraisals of the cost bases of the personal property elements of the Camino Tranquilo property would have been excessive. Even if we accept this argument, it would not advance petitioners' cause, since the cost of obtaining such appraisals would be the same whether petitioner elected the averaging convention or not, so that, in either case, we must presume that petitioner would not have elected the benefits of sec. 179↩, and no additional first-year depreciation would have been available to him in 1979. We further note that the parties were able to stipulate the correct cost bases of the various elements of the Camino Tranquilo property in this case, apparently without the benefit of such expert appraisal.7. To decide otherwise on this question might allow a taxpayer using straight-line depreciation, like petitioners, to claim that a chosen averaging convention failed to substantially distort the depreciation allowance which might have been available to him if he had chosen some accelerated depreciation method instead. See secs. 167(b) and (j). Petitioners have failed to convince us that such conjectural considerations were contemplated by the regulatory test under sec. 1.167(a)-10(b), Income Tax Regs.↩8. Since petitioners were free to use a composite account, regardless of their election to use an averaging convention, their observation that "the computation of depreciation for one account is about three times easier than the computation for three accounts," has little to do with such election.↩9. Compare Rev. Rul. 73-202, 1 C.B. 81">1973-1 C.B. 81↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619223/	R. C. Harvey Company, Petitioner, v. Commissioner of Internal Revenue, RespondentR. C. Harvey Co. v. CommissionerDocket No. 3600United States Tax Court5 T.C. 431; 1945 U.S. Tax Ct. LEXIS 124; July 16, 1945, Promulgated 124 Decision will be entered under Rule 50. Where in determining the excess profits net income for one of the base period taxable years under code section 711 (b) (1), as amended, preparatory to determining the excess profits credit under section 713, as amended, petitioner in its excess profits tax return for the taxable year made an adjustment under section 711 (b) (1) (H), as amended, for an amount paid to a former employee in settlement of a claim, and the evidence shows that the amount was paid the former employee as a consequence of a dispute which arose between petitioner and the employee, resulting in a cancellation of a contract of employment between petitioner and the employee and a threatened suit by the employee for breach of contract, held, that the deduction taken by petitioner in the said base period taxable year for the amount so paid to the employee was attributable to a "claim" against petitioner and was "abnormal for the taxpayer" as those terms are used in code section 711 (b) (1) (H), as amended; that the said abnormality was not a consequence of one or more of the factors enumerated in section 711 (b) (1) (K) (ii), as amended; and that, therefore, the said125 adjustment made by petitioner was proper; held, further, section 711 (b) (1) (J) (ii) has no application to this proceeding. Philip A. Hendrick, Esq., for the petitioner.Joseph D. Donohue, Esq., for the respondent. Black, Judge. BLACK 432 The respondent determined deficiencies in income tax, declared value excess profits tax, and excess profits tax, of $ 282.06, $ 83.04, and $ 4,261.87, respectively, against petitioner for the fiscal year ended August 31, 1941. Petitioner has paid the deficiencies in income tax and declared value excess profits tax and has waived any contention relative thereto. As to the deficiency in excess profits tax of $ 4,261.87, petitioner assigns but one error, namely:The determination that the payment of $ 15,000 made to one Gordon under a contract of employment be not allowed for excess profits tax purposes126 in the base period year 1939 on the ground that the payment did not constitute the payment of a "claim" within the intendment of the Internal Revenue Code.In a statement attached to the deficiency notice the respondent explained the adjustment thus contested as follows:The disallowance for excess profits tax purposes in the base period year 1939, of a payment of $ 15,000.00 made to one Gordon under a contract of employment, has been reversed, on the ground that the payment did not constitute the payment of a "claim" within the intendment of section 711 (b) (1) (H) of the Internal Revenue Code. Moreover, if the payment did constitute a claim within the meaning of said section, then the abnormality alleged by reason of such payment was a consequence of a decrease in the amount of some other deduction (commissions) in the base period (year 1939) and the disallowance of the deduction is precluded by the provisions of section 711 (b) (1) (K) (ii). Furthermore, it is held that the payment was made pursuant to your contract with the said Gordon which provided for commissions to be paid to Gordon for services rendered and since the payment of commissions was a normal element of your business127 during the base period years no disallowance is justified under the provisions of section 711 (b) (1) (J) (ii) of the Code, since the deduction for commissions in 1939, including the payment in question, was not in excess of 125 per cent of the average amount of deductions of such class for the four preceding taxable years.FINDINGS OF FACT.Petitioner is a corporation, duly organized under the laws of the Commonwealth of Massachusetts. Its place of business is Waltham, Massachusetts. The purpose for which the corporation was organized was to engage in the business of dealing in garnetted wool and similar products.Petitioner filed with the collector at Boston, Massachusetts, for the fiscal year ended August 31, 1941, a corporation income, declared value 433 excess profits, and defense tax return and also an excess profits tax return.Upon its organization petitioner issued 1,000 shares of cumulative 6 percent preferred nonvoting stock of the par value of $ 100 per share and 500 shares of common stock of the par value of $ 100 per share, the total authorized capital stock being $ 100,000 preferred and $ 50,000 common.After the organization, Arthur L. Norton was treasurer 128 and the holder of 750 shares of preferred and 249 shares of common stock; Ralph C. Harvey was president and the holder of 250 shares of preferred and 249 shares of common; and Harry E. Waldron was a clerk and the holder of two shares of common. These three were the directors of the corporation.Petitioner started to do business immediately after its incorporation and has so continued uninterruptedly to the present time.On May 7, 1935, a contract was entered into between petitioner, Norton, individually, and one Jacob Gordon. Gordon was neither an officer nor a stockholder of the petitioner at that time.The Charles River Garnetting Co. Inc., sometimes hereinafter referred to as "Charles River," was a subsidiary corporation, organized by petitioner on April 1, 1934, for the purpose of processing materials for petitioner. Petitioner was the sole owner of all the corporate stock of Charles River except for three qualifying shares held by the officers of petitioner. Charles River was liquidated on March 31, 1938, and the assets were taken over and the liabilities assumed by petitioner.At a stockholders' meeting held November 12, 1935, article III of the bylaws of petitioner was amended129 by adding thereto the following sentence: "A director need not be a stockholder of the corporation."On November 12, 1935, the common stock of petitioner was authorized to be changed and was changed from par value to no par value stock, and 500 shares were authorized and issued, of which Norton and Harvey each held 249 shares and Gordon held two shares.On December 6, 1937, a new contract was entered into in which petitioner, Charles River, Norton, and Gordon were principals. Under this contract the parties mutually agreed as follows:1. The said Jacob Gordon hereby agrees to act as purchasing agent for the corporations for the term of three years and six months from December 15, 1937. He is to be the sole buyer of all raw stock during that term, provided, however, that before consummating any purchase involving more than One Thousand ($ 1000.) Dollars, he is to obtain the approval of the Treasurer of the R. C. Harvey Company.2. The said corporations agree to pay the said Jacob Gordon for his services as aforesaid, a sum equal to three-quarters of one cent per pound on all purchases of stock or textile material made by them respectively, whether said purchases be made by the said130 Jacob Gordon or otherwise. All commissions are to be paid to the said Jacob Gordon monthly.434 In addition, the said Jacob Gordon is to receive as compensation for his services, a sum equal to twenty (20%) per cent of the net earnings of the corporations before dividend, which shall be paid to him on or before September 15th of each year, covering earnings to August 31st of that year.It is expressly agreed and understood that the first accounting and payment to said Jacob Gordon after December 15, 1937, shall include earnings and compensation due him as hereinbefore set forth, between the date as of which the last accounting to him was made by both corporations, to December 15, 1937, to date when the term of this agreement is to commence.3. The corporations further agree that during the term of this agreement, they will not, without the consent of the said Jacob Gordon:(a) Make any extraordinary purchases.(b) Make any change in the present manner or method of conducting the business or affairs of the corporations which will in any way affect their earnings.(c) Increase the present compensation of any of their officers.(d) Increase the present rate of compensation of 131 any of the employees, or add to their regular stipulated salaries or commissions.(e) Change in any way to affect the earnings of the corporations, the value of inventory, real estate, or any other assets of the corporations.4. During the term of this agreement the said Jacob Gordon shall not be obliged to devote his entire time in the interests of the said corporations, but may conduct or be affiliated with any other business.5. The said Arthur L. Norton agrees for himself, his heirs and assigns, that during the term of this agreement, he will not withdraw from the corporations any of the money now invested in or loaned by him to them, without the consent of the said Jacob Gordon.On December 7, 1937, Waldron resigned as a director of petitioner and Gordon was elected a director to fill the vacancy caused by the resignation of Waldron.No purchases of material were made directly by Charles River, all materials to be garnetted being purchased by petitioner and forwarded to Charles River for processing; after processing, the goods were then delivered to petitioner and part of the payment to Gordon on the material purchased was charged against Charles River.During the period from 132 May 7 to August 31, 1935, the total amount paid Gordon for commissions was $ 2,905.12, all paid by petitioner. During the fiscal year ended August 31, 1936, the total amount paid Gordon as commissions on purchases was $ 20,229.75, of which $ 13,086.12 was paid by petitioner and $ 7,143.63 by Charles River. During the fiscal year ended August 31, 1937, the total amount paid Gordon on these commissions was $ 18,549.20, of which $ 13,725.77 was paid by petitioner and $ 4,823.43 by Charles River. For the next fiscal year ended August 31, 1938, the total amount paid Gordon on commissions was $ 9,018.52, of which $ 6,686.25 was paid by petitioner and $ 2,332.27 by Charles River. From September 1 to October 27, 1938, the amount paid Gordon for commissions was $ 2,500, all paid by petitioner on October 27, 1938.435 In connection with the provisions of the various contracts for the payment of 20 percent of earnings before dividends, nothing was paid to Gordon from May 7 to August 31, 1935. During the fiscal year ended August 31, 1936, Gordon was paid $ 19,233.98 by reason of this provision, of which $ 16,295.75 was paid by petitioner and $ 2,938.23 by Charles River. In the fiscal133 year ended August 31, 1937, Gordon was paid $ 18,432.36 on this item, of which petitioner paid $ 13,849.66 and Charles River was paid $ 4,582.80. In the fiscal year ended August 31, 1938, Gordon was paid nothing on this item by petitioner and $ 2,023.28 by Charles River. From September 1 to October 27, 1938, nothing was paid to Gordon on account of this item.Norton died on May 29, 1938. After the death of Norton, Gordon assumed, or attempted to assume, authority beyond the duties specified in the contract of December 6, 1937.During the summer of 1938 differences arose between Harvey and Gordon as to the extent and classes of the merchandise inventory purchased by Gordon, there being an excess poundage of undesirable material. As early as August 12, 1938, Gordon employed counsel, who was later reinforced with other counsel, with particular reference to the acquisition by Gordon of the stock held by Norton in the petitioner corporation. On August 17, 1938, there was further controversy between petitioner and Gordon in regard to the amount of undesirable inventory of merchandise purchased by Gordon and also in regard to unnecessary purchases of shoddy material being made by Gordon. 134 On or about September 12, 1938, the president of petitioner (Harvey) notified Gordon to cease and desist from acting under his contract and the contract was declared by the president to be inoperative and at an end.Between September 12 and September 20, 1938, there were various conferences with and threats of litigation by Gordon. On September 20, 1938, there was a conference at the office of David Stoneman, one of Gordon's counsel, at which were present the president of petitioner, its treasurer, and counsel representing it, Gordon, and two of the counsel representing him. The subject matter of the conference was Gordon's claim that there was a breach of contract by petitioner and his threat that he would claim damages, but petitioner declined to retreat from its position and notified Gordon to that effect.On October 23, 1938, Gordon announced to Harvey that legal proceedings would be started against petitioner on the following day. Following that threat of litigation, various other conferences between counsel representing petitioner and counsel representing Gordon were had, which resulted on October 27, 1938, in the making of a settlement with Gordon for his claim for damages135 for breach of the contract of December 6, 1937.436 Counsel for Gordon was paid a total sum of $ 17,500, of which $ 2,500 was admitted to be the amount earned by Gordon under his contract for commissions on the purchases of material from September 1 to October 27, 1938, and $ 15,000 was paid in settlement of his claim for damages for the breach of the contract. Releases were signed and delivered by Gordon to petitioner, the two shares of common stock held by him were turned over to petitioner, and he resigned as a director. The payment of $ 17,500 was entered on the books of petitioner as $ 2,500 due Gordon on account of materials purchased in September and October, 1938, and $ 15,000 as "settlement of contract with purchasing agent."The pounds of material purchased by petitioner during the fiscal years ended August 31, 1936, to August 31, 1940, inclusive, were as follows:19362,495,77619372,280,26619381,085,16219391,687,93219402,089,052For the period from September 1, 1940, to June 15, 1941, the date Gordon's contract would have expired by limitation, petitioner purchased approximately 2,040,000 pounds of material. During the months of September and136 October, 1938, petitioner purchased 301,729 pounds of material, on which Gordon would have been entitled to a commission of $ 2,263.The total net sales of the petitioner for the fiscal years ended August 31, 1936 to August 31, 1941, inclusive, were as follows:1936$ 1,373,904.0919371,413,118.841938488,650.711939$ 799,281.6619401,174,710.9319411,769,627.69The auditor's report for the fiscal year ended August 31, 1939, shows a deficit of $ 4,242.05 before dividends. That includes the deduction of $ 15,000 paid to Gordon. The auditor's report shows a profit of $ 47,701.84 before dividends for the full fiscal year ended August 31, 1940, and of $ 47,253.25 for the full fiscal year 1941.R. Wallace Mollison was employed by petitioner from August 15, 1938, to November 30, 1939. From October 27, 1938, the date Gordon's employment was terminated with petitioner, to November 30, 1939, Mollison performed some of the duties previously performed by Gordon. Throughout this period Mollison continued to perform duties originally assigned to him prior to Gordon's departure from the company. Mollison was paid $ 7,166.53 during the fiscal year ended August 31, 1939, and137 $ 2,003.41 for the period of September 1 to November 30, 1939. None of the above amounts paid to Mollison represents 437 any increase due to performing duties previously performed by Gordon.Beginning November 2, 1938, and continuing to June 15, 1941, Earle G. Farnsworth, who was previously employed by petitioner at a salary of $ 2,600 per annum, was given authority, in addition to Mollison, to make purchases of material. His salary was increased $ 375 in the fiscal year ended August 31, 1939; $ 1,300 in the fiscal year ended August 31, 1940; and $ 920.79 for the period ended June 15, 1941, such increases being due to the additional duties of purchasing materials formerly performed by Gordon. Mollison and Farnsworth were the only persons employed by petitioner to perform the duties previously performed by Gordon.The books of petitioner are kept on an accrual basis.Petitioner in schedule A of its excess profits tax return for the taxable year ended August 31, 1941, reported an excess profits net income of $ 10,299.09 for the base period year ended August 31, 1939, computed as follows:Line12Normal-tax (or special-class) net income($ 4,700.91)17 (c)Other abnormal deductions (attach statement)15,000.00 27Excess profits net income$ 10,299.09 138 Petitioner attached to its return the following statement in explanation of line 17 (c):The expense deductions for this year on federal form 1120 included an item of $ 15,000 which represented a payment to the purchasing agent, in November, 1938, to obtain cancellation of a contract between the corporation and said purchasing agent for the services of the latter, from which the company was thus relieved.The respondent, in the statement attached to the deficiency notice, determined a deficit in excess profits net income of $ 5,967.22 for the base period year ended August 31, 1939, computed as follows:Excess profits net income * * as disclosed by return$ 10,299.09 As corrected(5,967.22)Net adjustment as computed below (a)16,266.31 (a) Adjustment year ended August 31, 1939:1. Payment to Jacob Gordon under a contract of employment15,000.00 2. Small machine parts erroneously credited to income, August31, 19391,266.31 Total adjustment year ended August 31, 1939$ 16,266.31 Petitioner agrees that adjustment (a) 2 was proper, but contests adjustment (a) 1.The deduction attributable to the payment of the $ 15,000 claim by Gordon against139 petitioner was an "abnormal" deduction for petitioner 438 as that term is used in code section 711 (b) (1) (H), as amended. The said abnormality is not a consequence of an increase in the gross income of petitioner in its base period or a decrease in the amount of some other deduction in the base period, and is not a consequence of any change in the type, manner of operation, size, or condition of the business engaged in by petitioner.Any part of the stipulation not specifically set forth herein is incorporated herein by reference and made a part of these findings of fact.OPINION.The question presented involves petitioner's excess profits tax liability for the fiscal year ended August 31, 1941, under subchapter E of chapter 2 of the Internal Revenue Code, which subchapter was inserted in the code by Title II, section 201, of the Second Revenue Act of 1940, and is sometimes cited as the "Excess Profits Tax Act of 1940." These provisions of the code have been amended from time to time. Only those amendments which are here material will be noted.Under section 710 (a) (1) 1 the tax is imposed on the "adjusted excess profits net income" as defined in section 710 (b) as140 meaning "the excess profits net income (as defined in section 711) minus the sum of" (1) a specific exemption of $ 5,000; (2) the "excess profits credit" allowed under section 712; and (3) an item not present in this proceeding. The question here arises in connection with the computation of the excess profits credit, which in turn involves the application of section 711 (b) (1) (H) and (K), as will more fully appear below.Under section 711 (a), the determination of the "excess profits net income" depends in part upon whether the "excess profits credit" is computed under section 713 or section 714. Section 712 (a), as amended by sections 13 and 17 of the Excess Profits Tax Amendments of 1941, provides in part that:In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall be an amount computed under section 713 or section 714, 141 whichever amount results in the lesser tax under this subchapter for the taxable year for which the tax under this subchapter is being computed.The excess profit credit when computed under section 713 is based on income, and when computed under section 714 it is based on invested capital. In the statement attached to the deficiency notice the respondent, among other things, said:Inasmuch as you are a domestic corporation and were in existence prior to January 1, 1940, your credit has been computed under section 713 (the income 439 credit method) for the purpose of this determination of tax liability, due to the fact that the credit so computed results in a lesser excess profits tax as contemplated by section 712 of the said Code. It follows, therefore, that your excess profits net income for the year in question has also been computed under the income credit method herein in accordance with the provisions of section 711 (a) (1) of the above-mentioned Code.Petitioner does not contest the respondent's method of computation mentioned in the last sentence of the above quotation from the deficiency notice. As previously stated, the contest arises in connection with the computation142 of the excess profit credit.One of the many steps which the parties agree must be taken in the determination of petitioner's excess profits credit under section 713, as amended, is to determine under section 713 (f) (1) "for each of the taxable years of the taxpayer in its base period, the excess profits net income for such year, or the deficit in excess profits net income for such year." The parties agree that the "taxable years of the taxpayer in its base period" are the fiscal years ended August 31, 1937, to August 31, 1940, both inclusive. See section 713 (b) (1) (A), as amended. They disagree only as to the "excess profits net income" or the "deficit in excess profits net income" for the fiscal year which began September 1, 1938, and ended August 31, 1939. See sec. 713 (c), as amended.The determination of whether petitioner had an excess profits net income or a deficit in excess profits net income for the base period year ended August 31, 1939, depends upon the proper application to the facts herein of section 711 (b) (1), as amended by sections 3 and 17 of the Excess Profits Tax Amendments of 1941, the material provisions of which are set forth in the margin. 2143 440 The respondent in his brief contends that his determination should be sustained for the same reasons as are given in the statement attached to the deficiency notice, which statement we have set out at the beginning of this report. Petitioner contends that its treatment of the $ 15,000 item in its excess profits tax return was proper as falling within the provisions of section 711 (b) (1) (H); that the facts show that the payment of the $ 15,000 to Gordon was "not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period," and was "not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer" as the quoted matter is used in section 711 (b) (1) (K) (ii); and that section 711 (b) (1) (J) (ii) has no application to this proceeding.We agree with the petitioner's contentions, and shall consider first the application of section 711 (b) (1) (H). We think the payment of $ 15,000 to Gordon was attributable to a "claim" by Gordon for damages due to a breach of contract by petitioner. In his 144 brief the respondent argues that the said payment "was not the payment of a claim but merely the payment of anticipated commissions and share of net profits." We do not agree. On or about September 12, 1938, when petitioner's president declared its contract with Gordon to be inoperative and at an end, the contract had several years yet to run. Gordon immediately threatened to sue petitioner for damages for breach of contract and engaged counsel for that purpose. As a result a settlement was reached on October 27, 1938, whereby petitioner paid Gordon the $ 15,000 in question, plus $ 2,500 on account of purchases of materials covering the period September 1 to October 27, 1938. Thereupon Gordon executed a complete release to petitioner of all demands against it. It is our opinion that the payment of the $ 15,000 was in settlement of Gordon's "claim" for damages for breach of contract, and we have so found as a fact.Was the deduction attributable to the claim "abnormal for the taxpayer" as that term is used in section 711 (b) (1) (H)? We think it was. Webster's New International Dictionary, Second Edition, Unabridged, defines abnormal as "Deviating from the normal condition; 145 not corresponding to the type; markedly or strangely irregular." 441 We are of the opinion that the claim in question comes within this definition. The respondent cites section 30.711 (b)-2 of Regulations 109, inserted by paragraph 10 of T. D. 5045, Cumulative Bulletin 1941-1, p. 69, which, among other things, provides that "A class of deductions is abnormal only if the taxpayer had no deductions of that class in the taxable years prescribed for determining average deductions." (Emphasis supplied.) From this citation the respondent in effect argues that our holding should be against the petitioner for lack of proof, since "It is submitted that nowhere in the record of this case has petitioner established that it had no other deductions in other years of the base period for obtaining cancellation of contracts." In schedule A of its excess profits tax return for the taxable year in question, which was introduced in evidence by respondent, petitioner did not claim on line 17 (c) or elsewhere any similar adjustment for any other taxable year of the base period. This schedule A is headed "Excess Profits Credit Based on Income" and covers the years146 ended August 31, 1937, to 1940, inclusive, and line 17 thereof is divided as follows: "(a) Abnormal judgment liabilities." Of these none are shown for any of the base period years. "(b) Abnormal expenditures for intangible drilling and development costs." Of these none are shown for any of the base period years. "(c) Other abnormal deductions." Of these none are shown for any of the base period years, except the $ 15,000 here in question for the fiscal year ended August 31, 1939. This evidence being in the record, we can not sustain respondent's contention that petitioner has failed to prove that the deduction which it claims was an abnormal one.The respondent also argues that the payment of $ 15,000 to Gordon was not an abnormal deduction for petitioner because petitioner, as the respondent contends, was the real party benefited, in that it was released from certain dictatorial control given Gordon by the contract and was further benefited by not having to pay such large sums to Gordon for the remaining years of the contract. In determining whether a deduction attributable to a claim against the taxpayer is "abnormal for the taxpayer" we do not regard as material the factor 147 as to whether the taxpayer was or was not benefited by the payment of the claim. We find no such requirement in the statute itself. We think the payment of the $ 15,000 in question was such a deviation from the normal conduct of petitioner's business that the deduction attributable thereto was "abnormal for the taxpayer" as that term is used in section 711 (b) (1) (H). It follows that the adjustment provided for under this subparagraph (H) must be made unless petitioner has failed to establish what is required of it under subparagraph (K) (ii) of section 711 (b) (1).442 The fact to be established by petitioner under section 711 (b) (1) (K) (ii) is a negative fact. William Leveen Corporation, 3 T. C. 593. In that case, among other things, we said:To establish such a negative may be a difficult task, and how it is to be accomplished can not be formulated in a rule. Perhaps the proof is best made by proving affirmatively that the abnormal deduction is a consequence of something other than the increase in gross income and that such proven cause is the converse or opposite of an increase in gross income and could not be identified148 with an increase in gross income. But, difficult as the proof of the negative may be, it is what the statute requires; and, since it is required in clear and express terms, its rigors may not be abated by softening construction.The respondent in the instant proceeding does not contend that the abnormality is a consequence of an increase in the gross income of petitioner in its base period. He does contend, however, that if we should find for the petitioner under section 711 (b) (1) (H), then "the facts in the case affirmatively establish that the payment was a consequence of a decrease in another deduction (commissions for materials purchased) in the base period, and the disallowance of the deduction is precluded by the provisions of Section 711 (b) (1) (K) (ii) of the Code."The decrease in commissions referred to by the respondent is the decrease that occurred after the payment of $ 15,000 to Gordon had been made. The respondent points out that if Gordon had continued his contract he would have been entitled to receive from petitioner $ 62,877.10 for the period from October 27, 1938, the date the $ 15,000 payment was made, to June 15, 1941, the date his contract 149 would have expired, whereas it only cost petitioner $ 2,595.79, the total additional amount paid Farnsworth for performing the duties formerly performed by Gordon. From this the respondent argues that the payment of the $ 15,000 to Gordon was a consequence of a decrease in commissions. We think the respondent has a misconception of the word "consequence" as used in the statute. In his reply brief the respondent quotes the following definition of the word from Webster's New International Dictionary, Second Edition:Consequence * * * 1. That which follows something on which it depends; that which is produced by a cause or ensues from any form of necessary connection, or from any set of conditions; a natural or necessary result; -- contrasted with mere sequence; as, the consequences of one's acts.Immediately following the quoted definition the respondent makes this statement: "Respondent does not believe the above definition of the word or its use in the statute warrants the conclusion that where a relationship is shown between an abnormal deduction and a decrease in another deduction Section 711 (b) (1) (K) (ii) is ineffective unless the abnormal deduction follows rather 150 than precedes the decrease in the other deduction." We must construe the statute as we find it. The decrease in commissions as argued by the respondent may have 443 been the consequence of the termination of the contract with Gordon, but it is difficult to see how the termination and payment of damages to Gordon could be a consequence of the subsequent reduction of commissions. The respondent seems to have placed "the cart before the horse."All of this, however, does not relieve petitioner of the burden of establishing the "crucial though negative fact" required by section 711 (b) (1) (K) (ii). William Leveen Corporation, supra. We think that petitioner has successfully shown that the abnormality in question was the direct consequence of the differences between petitioner (through Harvey) and Gordon that arose shortly after the death of Norton and was not the consequence of one or more of the factors enumerated in section 711 (b) (1) (K) (ii). We have so found as an ultimate fact and, therefore, we sustain the petitioner on this point.Having found that the $ 15,000 payment in question falls within the provisions of section 711 (b)151 (1) (H), we also agree with the petitioner that section 711 (b) (1) (J) (ii) has no application to this proceeding.Decision will be entered under Rule 50. Footnotes1. All references to section numbers are sections of the Internal Revenue Code unless otherwise indicated.↩2. SEC. 711. EXCESS PROFITS NET INCOME. * * (b) Taxable Years in Base Period. --(1) General rule and adjustments. -- The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain reorganizations, see section 742 (e)): * * (H) Payment of Judgments, and So Forth. -- Deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest on any of the foregoing, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess; * * (J) Abnormal Deductions. -- Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph, of the classification of deductions --(i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, and(ii) If the class of deductions was normal for the taxpayer, but the deductions of such class were in excess of 125 per centum of the average amount of deductions of such class for the four previous taxable years, they shall be disallowed in an amount equal to such excess.(K) Rules for Application of Subparagraphs (H), (I), and (J). -- For the purposes of subparagraphs (H), (I), and (J) -- * * *(ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality or excess is not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, and is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619224/	Estate of George H. Moses, Deceased, Dudley W. Orr, Administrator, d.b.n. v. Commissioner.Estate of George H. Moses v. CommissionerDocket No. 19640.United States Tax Court1949 Tax Ct. Memo LEXIS 131; 8 T.C.M. (CCH) 641; T.C.M. (RIA) 49171; June 30, 1949131 Robert H. Reno, Esq., for the petitioner. Leo C. Duersten, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $915.01 in estate tax. The only issue is whether he erred in disallowing deductions for four charitable bequests in the total amount of $2,868.75. Findings of Fact The decedent died on December 20, 1944. An estate tax return was filed with the collector of internal revenue for the district of New Hampshire. The decedent provided in his will that the residue of his estate be placed in trust "to pay the net income and so much of the principal part thereof as my trustee shall find to be necessary to or for the benefit of my wife, Florence G. Moses, for and during the term of her natural life." The trustee was to deliver 125 shares of preferred stock of Continental Baking Company, or other stock or cash, to four relatives of the decedent after the death of Florence and at that same time was to deliver to the four admitted $100charties in cash and 25 shares of the preferred stock of Continental Baking Company, or other stock or cash. The remaining trust property was to be held in trust for132 a son for life. The parties are agreed that the total amount of the bequests to charties is $2,868.75 and that the specific bequests to the four relatives amounted to $13,843.75. Florence G. Moses was born on May 11, 1870 and her life expectancy on December 20, 1944 was 6.27 or 7.61 years. She has continued to occupy, since his death, the nine room dwelling in Concord which she owns and where she and the decedent had resided. It was worth about $15,000 on December 20, 1944. She owned on that date securities having a value of about $27,000 from which she had annual income of about $1,250. Florence's sister lives with her and contributes to the expenses of the household. Florence maintains her household and lives in the same manner as before her husband died. She employs one servant and a chauffeur. Her living expenses and expenditures have been less than her total income from the trust and her own securities since December 20, 1944. The value of the residuary trust corpus on December 20, 1944 was about $82,000 and it produced annual income of over $5,000. The charitable bequests in the amount of $2,868.75 were deducted on the estate tax return. The Commissioner disallowed the133 deduction in determining the deficiency because the entire corpus of the trust was subject to exhaustion by being used for the widow. Opinion MURDOCK, Judge: The Commissioner takes the position in this case that the decedent, in providing that so much of the principal of the trust as the trustee "shall find to be necessary to or for the benefit of my wife" did not fix any standard capable of being stated in definite terms of money, some or all of the principal which would otherwise go to the charities might be used for the wife's benefit, and, therefore, no reliable appraisal of the value of the charitable bequests can be made. The petitioner, on the other hand, takes the position that the words used by the decedent mean "necessary to support and maintain the widow in a manner fitting to her station and consistent with the standard of living which she enjoyed during the last years of the testator's life." Many cases on this subject have been decided by the courts and it is not easy to reconcile all of them. If the words used by the decedent are to be interpreted in the way in which the petitioner intends, then, of course, this case would fall within ,134 and the question would be whether the evidence showed that in all reasonable probability the bequests to charity would not have to be touched in order to maintain the widow consistent with the standard of living which she enjoyed during the last years of the testator's life. The evidence, although rather meager, preponderates slightly in favor of the petitioner that the charitable bequests would probably not be touched. The Supreme Court of New Hampshire has considered the interpretation of this very will, , and has held: "* * * The testator intended payments from principal to be restricted to those which the trustee finds to be necessary to the beneficiary's accustomed way of life: to support and maintenance, not merely 'comfortable' in a physical sense, but fitting to her station, and consistent with the standard of living which she enjoyed during the testator's later years." That being so, the case falls squarely within . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669044/	4 E-Filed for Record 3/1/2021 2:58 PM Crockett County District Clerk , TX By: Ninfa Preddy NO. 19-02-07955-CV EVELYN GARZA, INDIVIDUALLY, AND ON BEHALF OF RUBEN ROBERTO GARZA, DECEASED, MALORIE ELISSA GARZA, VALERIE MARIE GARZA, AND ALICE HERNANDEZ GARZA Plaintiffs, v. ADRIAN DARIUS SAMUEL, RDL ENERGY SERVICES, LLC AND JPH HOLDINGS, LLC Defendants. FILED IN IN THE DISTRIGL BIRKS 3/15/2021 3:41:42 PM ELIZABETH G. FLORES Clerk 11274 JUDICIAL DISTRICT CROCKETT COUNTY, TEXAS PLAINTIFFS’ NOTICE OF APPEAL TO THE HONORABLE COURT: Now come Plaintiffs—Evelyn Garza, Individually, and on Behalf of Ruben Roberto Garza, Deceased, Malorie Elissa Garza, Valerie Marie Garza, and Alice Hernandez Garza, and hereby give notice of their desire and intent to take appeal, before the Eighth Court of Appeals—E] Paso, of the following Orders: 1. The Court’s Order Granting Court’s Order Granting Defendant JPH Holding, LLC’s Traditional and No Evidence Motion for Summary Judgement, entered on January 28, 2021, and disposing entirely with Plaintiffs’ claims against Defendant,! and ' Plaintiffs received notice of the Court’s ruling and entry of this Order on March 1, 2021. 1 2. The Court’s Order Granting Court’s Order Granting Defendants RDL Energy Services, LP and RDL Energy, LLC’s Traditional and No Evidence Motion for Summary Judgement, entered on January 28, 2021 and re-entered on February 25, 2021, and disposing entirely with Plaintiffs’ claims against Defendant.” Respectfully submitted, EAB PATRICK BALLANTYNE Texas Bar No. 24053759 LaHood Norton Law Group 40 N.E. Loop 410, Ste. 525 San Antonio, Texas 78216 210°797°7700 patrick@lahoodnorton.com DESI I. MARTINEZ Texas Bar No. 24053342 desi.martinez@martinez-law.com MARTINEZ & ASSOCIATES, PLLC 2828 Goliad Road, Suite 125 San Antonio, Texas 78223 ATTORNEYS FOR PLAINTIFFS ? Plaintiffs received notice of the Court’s ruling and entry of this Order on February 26, 2021. 2 CERTIFICATE OF SERVICE The undersigned attorney certifies that a true and correct copy of this Notice was transmitted to the following attorneys of record for the parties in this cause, concurrently with the filing of this Notice, by electric transmission through a court- approved e-filing service: RONALD E. MENDOZA remndoza@lawdcm.com ATTORNEYS FOR RDL ENERGY, LLC WILLIAM R. MOYE wmoye@thompsoncoe.com MOLLY L. PELA mpela@thompsoncoe.com ATTORNEYS FOR JPH HOLDINGS, LLC ANDREW L. PETERSEN apetersen@hbdblaw.com ATTORNEY FOR ADRIAN DARIUS SAMUEL be PATRICK BALLANTYNE CERTIFICATE OF SERVICE ON TRIAL COURT REPORTER The undersigned attorney here by certifies that a true and correct copy of this Notice was served on the trial court’s reporter, Ms. Elizabeth Lusk, CSR, concurrently with the filing of this notice, in compliance with section 51.017 of the Civil Practices and Remedies Code, by electronic service to TEs PATRICK BALLANTYNE brandonlusk70@yahoo.com.	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619226/	Joseph Garrison and Ida Garrison, Petitioners v. Commissioner of Internal Revenue, RespondentGarrison v. CommissionerDocket No. 5405-67United States Tax Court52 T.C. 281; 1969 U.S. Tax Ct. LEXIS 132; May 15, 1969, Filed 132 Decision will be entered under Rule 50. Petitioner Joseph Garrison was the principal stockholder-officer-employee of a corporation and received a purported $ 40,000 bonus for his services. The bonus was authorized and paid after the corporation had determined to liquidate, ceased doing business, and sold its operating assets. On audit of the corporation's return, respondent disallowed $ 15,000 of the bonus as excessive compensation and the corporation conceded the disallowance. Held, on the particular facts, the $ 15,000 constituted a distribution in complete liquidation in respect of petitioner's stock within the meaning of sec. 331(a), I.R.C. 1954. Nathan D. Rollins, for the petitioners.Harvey N. Shapiro, for the respondent. Tannenwald, Judge. TANNENWALD282 Respondent determined a deficiency in petitioners' income tax for the year 1964 in the amount of $ 4,474.82. The sole issue for our determination is whether $ 15,000 of a bonus paid by Garrison Produce Co. to petitioner Joseph M. Garrison, which was admittedly excessive compensation, is taxable as compensation or as a liquidating distribution. Certain other adjustments on which the parties have reached agreement will be reflected in the Rule 50 computation.FINDINGS OF FACTAll of the facts are stipulated and are found accordingly.Petitioners (hereinafter referred to individually as Joseph or Ida) are husband and wife, who had their legal residence in University Heights, Ohio, at the time 134 of filing the petition herein. They filed an initial and an amended joint Federal income tax return for the taxable year 1964 with the district director of internal revenue, Cleveland, Ohio.Joseph and one Joseph Fisher formed a partnership known as Garrison Produce Co. (hereinafter referred to as Produce) in 1947 to engage in the wholesale egg, produce, paper bag, and packaging business. They formed a corporation of the same name in 1951, which issued 75 shares of stock to each of the former partners in exchange for the net assets of the partnership.In 1953, Joseph Fisher retired from the business, and thereafter the 150 outstanding Produce shares were held as follows: Joseph, 115 shares; Ida, 30 shares; and Murray B. Garrison (hereinafter Murray), petitioners' son, 5 shares. Joseph continued as president and general manager; Ida became a director and was elected secretary and treasurer but took no active part in the business and received no salary; Murray became a director and vice president and participated in the daily operation of the business.Throughout its existence, Produce engaged in the candling and processing of eggs and, at the height of its operations, employed 30135 to 35 persons. Joseph's compensation, which consisted of a fixed salary plus a bonus of 2 percent of annual sales, increased periodically, although prior to 1963 he never received the full bonus. Produce's sales for the year 1963 were $ 1,864,521.23.On October 26, 1963, Produce adopted a plan to liquidate within 12 months. It ceased business on November 1, 1963, and all of its operating assets were sold in that month. Notice of the plan of liquidation was filed with the Internal Revenue Service on November 20, 1963.For the year 1963, Joseph received a salary of $ 15,000 and Murray received a salary of $ 11,600. Bonuses were voted for Joseph and Murray in the amounts of $ 40,000 and $ 22,000, respectively, for the year 283 1963 at the annual shareholders meeting on January 27, 1964. These were not paid until March 9, 1964, when Joseph received $ 40,000 and Murray only $ 20,000. The liquidation of Produce was completed on July 31, 1964, when Joseph received $ 36,685 in cash and property, Ida, $ 9,570, and Murray, $ 1,595, for a total of $ 47,850, or $ 319 per share. Petitioners' basis in their 145 shares of Produce stock was $ 28,000.For Federal income tax purposes, 136 petitioners reported the $ 40,000 payment as compensation received in 1964 and Produce deducted the bonus as accrued compensation for the year 1963.Upon audit of Produce's 1963 tax return, Produce and respondent agreed that $ 15,000 of the amount received by Joseph and $ 11,600 of the amount received by Murray as bonuses constituted excessive compensation and were accordingly not deductible.Petitioners thereafter amended their 1964 income tax return and filed a claim for refund, characterizing the $ 15,000 of concededly excessive compensation as a "liquidating dividend," and therefore taxable as capital gain. 1ULTIMATE FINDING OF FACTThe $ 15,000 disallowed as a deduction to Produce was a distribution in liquidation to Joseph.OPINIONThis case presents the question whether a purported compensatory bonus payment to the principal137 stockholder-officer-employee of a closely held corporation in liquidation, which the respondent and the corporation subsequently agreed was excessive in part, may be treated as a distribution in liquidation and therefore entitled to capital gains treatment under section 331(a)(1). 2 The precise issue herein has not been previously litigated.Petitioner Joseph Garrison was the principal stockholder, officer, and employee of Produce. By the taxable year involved, Produce had ceased doing business and was being completely liquidated. In the course of that liquidation, Joseph was voted and was paid the sum of $ 40,000 as "a bonus for services * * which shall include the 2% of sales due him." Produce deducted that amount as compensation paid. Upon the subsequent audit of the corporation's Federal income tax return, it was agreed that $ 15,000 of that amount was excessive and a corresponding deduction was disallowed. Petitioners now contend that, 138 as a result of such disallowance, the $ 15,000 should be considered as having been received by Joseph as a distribution in liquidation 284 of his stock interest in Produce. Respondent contends that the disallowance did no more than indicate that the $ 15,000 was not "a reasonable allowance for * * * compensation for personal services" under section 162(a)(1) and that, against the factual background of this case, the amount should be treated as the parties originally characterized it and not as a distribution in liquidation.Initially, petitioners assert that, by reason of the prior disallowance, respondent is estopped from claiming that the excessive payment did not constitute a liquidating distribution. We find this contention to be without merit. In the instant case, different parties are involved and respondent's determination has not been the subject either of prior litigation or of a binding agreement to which the corporation or petitioners were parties. Under these circumstances, the doctrine of equitable estoppel -- which, in any event, has found scant acceptance in the field of taxation -- is inapplicable. Guenzel's Estate v. Commissioner, 258 F. 2d 248139 (C.A. 8, 1958), affirming 28 T.C. 59">28 T.C. 59 (1957); Powers Photo Engraving Co. v. Commissioner, 197 F. 2d 704 (C.A. 2, 1952), affirming per curiam as to this issue 17 T.C. 393">17 T.C. 393 (1951); Smale & Robinson, Inc. v. United States, 123 F. Supp. 457">123 F. Supp. 457 (S.D. Cal. 1954); William Fleming, 3 T.C. 974">3 T.C. 974, 984 (1944), affd. 155 F. 2d 204 (C.A. 5, 1946). Compare Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180 (1957). Accordingly, we turn to a determination of the substantive issue confronting us.Various unsuccessful attempts have been made to characterize amounts disallowed as excessive compensation as nontaxable receipts in the hands of the recipients. Thus, such amounts have been refused the status of gifts. Lengsfield v. Commissioner, 241 F. 2d 508 (C.A. 5, 1957); Smith v. Manning, 189 F. 2d 345 (C.A. 3, 1951); Stanley B. Wood, 6 T.C. 930">6 T.C. 930 (1946). Similarly, such payments have not been considered140 repayments of loans. D. J. Jorden, 11 T.C. 914 (1948). Likewise, an attempt to classify such a payment by one subsidiary corporation to a second subsidiary corporation as a constructive dividend to the parent and a contribution to capital of the second subsidiary has also failed. Sterno Sales Corporation v. United States, 345 F. 2d 552 (Ct. Cl. 1965); cf. Zeunen Corporation v. United States, 227 F. Supp. 952 (E.D. Mich. 1964). 3141 285 A careful reading of these cases reveals that excessive compensation does not, as a matter of law, retain that characterization for tax purposes in the hands of the recipient. Nor must it necessarily be considered something other than compensation. Neither the label initially affixed by the taxpayer nor the failure of the respondent to provide an alternative label for the disallowed payment is conclusive. 4 The touchstone for decision is a factual determination as to the actual nature of the payment in question under all the circumstances, free from any compulsory inhibitions stemming from the designations of the parties. As the Court of Appeals stated in Lengsfield v. Commissioner, supra:Whether or not a corporate distribution is a dividend or something else, such as a gift, compensation for services, repayment of a loan, interest on a loan, or payment for property purchased, presents a question of fact to be determined in each case. * * * [See 241 F. 2d at 510.]142 Respondent's regulations recognize the factual foundation for such a determination in the case of distributions by an ongoing corporation. Secs. 1.162-7(b)(1) and 1.162-8, Income Tax Regs.5 We perceive no valid reason for not applying the rationale of those regulations in a situation involving the liquidation of a corporation. Cf. Robert Gage Coal Co., 2 T.C. 488">2 T.C. 488, 500-502 (1943); Jas J. Gravley, 44 B.T.A. 722">44 B.T.A. 722, 728 (1941). The standard to be applied is not unlike the "net effect" test employed in determining whether distributions are essentially equivalent to a dividend. Cf. e.g., Woodworth v. Commissioner, 218 F. 2d 719286 (C.A. 6, 1955), affirming a Memorandum Opinion of this Court; Flanagan v. Helvering, 116 F. 2d 937 (C.A.D.C. 1940), affirming a Memorandum Opinion of this Court; see Levin v. Commissioner, 385 F. 2d 521, 524 (C.A. 2, 1967), affirming 47 T.C. 258">47 T.C. 258 (1966).143 Produce adopted the plan of liquidation on October 26, 1963, sold its operating assets on November 5, filed the plan of liquidation with the Internal Revenue Service on November 20, voted to pay the amounts in question on January 27, 1964, made payment therefor on March 9, and completed the process of liquidation on July 31. This sequence of events leaves no doubt that Produce embarked upon and continued to conclusion a bona fide process of complete liquidation, during the period relevant to the transaction involved herein, and that any distribution during that period to Joseph, in his capacity as a shareholder, would have been treated as a distribution in liquidation under section 331(a)(1). Kennemer v. Commissioner, 96 F. 2d 177 (C.A. 5, 1938), affirming 35 B.T.A. 415">35 B.T.A. 415 (1937); Estate of Charles Fearon, 16 T.C. 385">16 T.C. 385 (1951); S. J. Blumenthal, 12 B.T.A. 1205">12 B.T.A. 1205 (1928); S. B. Dandridge, Et Al., 11 B.T.A. 421">11 B.T.A. 421 (1928). Cf. sec. 1.332-2(c), Income Tax Regs; compare Herbert A. Nieman & Co., 33 T.C. 451 (1959).144 We recognize that neither the full bonus payments nor the amounts determined to be excessive bear a clearly discernible relationship to the stockholdings of Joseph and Murray in Produce. Nevertheless, in the context of dealings between the members of a family and their closely held corporation, the non-prorata character of a payment to the shareholders does not, standing alone, preclude characterization of the payment as a dividend. Lengsfield v. Commissioner, 241 F. 2d at 510; Barbourville Brick Co., 37 T.C. 7 (1961); William C. Baird, 25 T.C. 387">25 T.C. 387, 397 (1955).In the instant case, the recipients of the payments were father and son, the son receiving more than his prorata share. The petitioners herein were the owners of 96 percent of the outstanding stock of Produce and holders of two of the three seats on the board of directors. Under such circumstances, acceptance of the suggestion that the payments lack the characteristics of a distribution in liquidation, because not pro rata with respect to the stock, when the shareholders and directors are all members of an immediate family, 145 would require us to fly in the face of a "pattern of family solidarity" which so often affects the conduct of closely held family corporations. See Lengsfield v. Commissioner, 241 F. 2d at 510. We see no reason why Joseph's receipt of less than a protata share should, in itself, taint the distribution he did receive by making it inappropriate for treatment as a liquidating distribution 287 if the distribution was in fact paid to him because he was a stockholder. 6We are also not unaware of the fact that the payments in question were treated by both Produce and petitioners as compensation. But it is important to note that we are not confronted with a situation where respondent has accepted the compensation classification for all purposes and petitioners are now trying to disavow the consequences of the form of the transaction146 which they have chosen. Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 477-478 (1940); Television Industries, Inc. v. Commissioner, 284 F. 2d 322, 325 (C.A. 2, 1960), affirming 32 T.C. 1297">32 T.C. 1297 (1959); New England Tank Industries, Inc., 50 T.C. 771">50 T.C. 771, 776-777 (1968), on appeal (C.A. 1, Dec. 26, 1968); Estate of Rudolph F. Rabe, Sr., 25 B.T.A. 1242">25 B.T.A. 1242 (1932). Here, respondent, albeit with some ambiguity, 7 disputed the tax consequences to Produce flowing from the compensation designation and the petitioners promptly acceded to his position. 8 Under these circumstances, we think it proper to disregard the labels and determine the substantive character of the payment involved.147 Only after Produce had determined to liquidate, ceased doing business, and sold its operating assets was it determined that any bonuses should be paid. Moreover, there was obviously very little, if any, correlation between the bonus paid to Joseph in 1964 and the bonus shortages for prior years: Joseph's bonus was on its face related only to 1963 and, in terms of 1963 standing alone, the bonus was in excess of the amount applicable to that year. Although the record herein is not entirely satisfactory, we are persuaded on the basis of the facts before us and the reasonable inferences to be drawn therefrom that Produce designated the payment involved herein as salary simply "in order to lessen its income tax," when it was not in fact salary. See Bone v. United States, 46 F. 2d 1010, 1011 (M.D. Ga. 1931). We therefore conclude that, under the particular circumstances of this case, the payment was made to Joseph because of his status as a controlling shareholder. Consequently, it constituted an amount distributed 288 in complete liquidation of Produce within the meaning of section 331(a)(1).To reflect the other items disposed of by agreement148 between the parties,Decision will be entered under Rule 50. Footnotes1. The issue covered by this claim for refund arises herein as a cross-claim by petitioners against respondent's deficiency, which is based on other items not contested herein. See sec. 6512.↩2. All references are to the Internal Revenue Code of 1954, as amended.↩3. There is a further line of cases denying the recipient of excessive compensation a deduction of an equivalent amount in the year of receipt. Healy v. Commissioner, 345 U.S. 278">345 U.S. 278 (1953); Fleischer v. Commissioner, 158 F.2d 42 (C.A. 8, 1946); Mary B. Brauer, Et Al., Executors, 6 B.T.A. 579">6 B.T.A. 579 (1927). These decisions, and the accompanying insistence that the compensation categorization remains valid, were made in the context of the "claim of right" doctrine and the application of the annual accounting concept. North American Oil v. Burnet, 286 U.S. 417↩ (1932). They have no application to a situation such as is involved herein where the issue is whether the amount should properly be considered in another category of taxable income.4. Indeed, even if the respondent had characterized the disallowance as a dividend, we would not be bound thereby. Cf. Livingston v. United States, 67 Ct. Cl. 536 (1929); George M. Hayner v. United States, 62 Ct. Cl. 189↩ (1926).5. Sec. 1.162-7 Compensation for personal services.(b) * * *(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services and the excessive payments correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. [Emphasis added.]Sec. 1.162-8 Treatment of excessive compensation.The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payor, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be a distribution of earnings or profits, the excessive payments will be treated as a dividend↩. If such payments constitute payment for property, they should be treated by the payor as a capital expenditure and by the recipient as part of the purchase price. In the absence of evidence to justify other treatment, excessive payments for salaries or other compensation for personal services will be included in gross income of the recipient. [Emphasis added.]6. Respondent has not argued that for tax purposes a prorata amount might be taxable to Joseph as a liquidating distribution, with a resulting gift to Murray.↩7. The stipulation of facts simply states that the $ 15,000 "was excessive compensation and therefore not deductible." Petitioners on brief assert that the report of examination of Produce's tax return labeled this amount as a dividend, but that report is not in evidence.↩8. This is to be contrasted with the situation that existed in Bone v. United States, 46 F. 2d 1010 (M.D. Ga. 1931↩), where an ongoing corporation was involved and the taxpayer consistently maintained throughout the litigation that the payments were compensation, arguing only alternatively for dividend treatment in the event that the court disagreed with his primary position.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619228/	EDWARD STEPHEN HARKNESS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EDWARD STEPHEN HARKNESS, EXECUTOR, ESTATE OF ANNA M. HARKNESS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Harkness v. CommissionerDocket Nos. 30472, 30473.United States Board of Tax Appeals21 B.T.A. 1068; 1931 BTA LEXIS 2259; January 7, 1931, Promulgated 2259 Basis for computation of profit from the sale of stock subscription rights determined. Harrison Tweed, Esq., and John E. Lockwood, Esq., for the petitioners. R. W. Wilson, Esq., for the respondent. MURDOCK 1069 OPINION. MURDOCK: For the year 1923 the Commissioner determined a deficiency in income-tax liability of $130,736.46 as to Edward Stephen Harkness (Docket No. 30472), and a deficiency of $150,934.63 in the case of the estate of Anna M. Harkness (Docket No. 30473). The cases were duly consolidated. The petitioners have assigned as error the action of the Commissioner (1) in computing the profit upon the sale of certain stock subscription rights, and (2) in determining the credit of 25 per centum provided in subdivisions (a) and (f) of section 1200 of the Revenue Act of 1924 by computing the amount of this credit after the allowance of the credit for income taxes paid to Great Britain. The petitioner Edward Stephen Harkness in Docket No. 30472 also assigned as error the failure of the Commissioner to compute the profit on the sale of the aforesaid stock subscription rights in accordance with the provisions of section 206(b) of2260 the Revenue Act of 1921. The respondent has confessed error as to this last assignment. In each case the parties have filed a paper entitled "Agreed Statement of Facts." This agreed statement of facts is not set forth in full here because, in our opinion, a large part of the statement is unnecessary to a decision of the case, in view of certain conclusions which are thereafter set forth in that statement. Edward Stephen Harkness is an individual and is also executor of the estate of Anna M. Harkness, who died on March 27, 1926. In each capacity he is a petitioner herein. In various ways, including the declaration of stock dividends, Edward Stephen Harkness acquired common stock of the standard Oil Co. of California, hereinafter called the Standard Oil Co. He was the owner and record holder of 241,680 of these shares on March 26, 1923. As we understand from their statement, the parties have agreed that 90,264 of these shares were derived from and are directly traceable and attributable to certain shares owned by him on March 1, 1913, and these 90,264 shares represent a continuing interest in the corporation which on March 1, 1913, had a value of $1,054,283.52. In other words, 2261 the March 1, 1913, value of the interest which persisted fundamentally unchanged from that date until March 26, 1923, when it was evidenced by 90,264 shares, was $1,054,283.53. The March 1, 1913, value of this interest was greater than cost. The remaining 151,416 shares are attributable to and derived from shares purchased after March 1, 1913, at a total cost of $3,615,789.49. Thus, the basis for gain resulting from the disposition of these shares was the sum of $1,054,283.52 and $3,615,789.49, or $4,670,073.01. In March, 1923, the Standard Oil Co., by appropriate action, gave to each stockholder of record on March 26, 1923, the right to subscribe 1070 at $25 per share for additional shares of stock in the proportion of one share for every eight shares held. Thus, the petitioner acquired 241,680 rights. The owner of these rights could subscribe for 30,210 shares of stock at $25 per share. The petitioner sold 127,760 of these rights during the year 1923 for $410,153.61, or for an average price per right of $3.21+. March 14, 1923, was the first day on which the shares of stock and the rights were sold separately on the New York Stock Exchange. On that day the market2262 price of a share of Standard Oil stock was 62 5/8 dollars and the market price of a right to subscribe to 1/8 of a share of stock was 4 1/4 dollars. The Commissioner computed a profit to the petitioner from the sale of these rights in excess of the full amount realized from such sale, but in computing the deficiency he used only the actual amount realized from the sale of these rights as the profit. He computed the profit in accordance with Regulations 62, article 39 (as amended by Treasury Decision 3403) and Treasury Decision 4018. The petitioner suffered losses of $334,870 in 1923 from the sale of securities. The Government of Great Britain assessed and collected an income tax of $28,677.07 during the year 1923 on dividends paid to Edward Stephen Harkness by the Anglo-American Oil Co.Anna M. Harkness was the owner and record holder of 173,312 shares of the stock of the Standard Oil Co. on March 26, 1923. As we understand from their statement, the parties have agreed that 152,640 of these shares were derived from and are directly traceable and attributable to certain shares owned by her on March 1, 1913, and these 152,640 shares represent a continuing interest in the2263 corporation which on March 1, 1913, had a value of $1,783,980. In other words, the March 1, 1913, value of the interest which persisted fundamentally unchanged from that date until March 26, 1923, when it was evidenced by 152,640 shares, was $1,783,980. The March 1, 1913, value of this interest was greater than cost. The remaining 20,672 shares are attributable to and derived from shares purchased after March 1, 1913, at a total cost of $129,617.06. Thus, the basis for gain resulting from the disposition of these shares was the sum of $1,783,980 and $129,617.06, or $1,913,597.06. The Standard Oil Co. gave the petitioner, as a stockholder of record on March 26, 1923, 173,312 rights. The holder of these rights was entitled to subscribe for 21,664 shares of stock at $25 per share. Anna M. Harkness sold 125,310 of these rights during 1923 for $402,492.35, or for an average price of $3.21+ per right. The commissioner computed the profit of Anna M. Harkness and determined the deficiency with respect thereto in the same way as he did in the case of Edward Stephen Harkness. 1071 The Government of Great Britain assessed and collected an income tax of $26,601.75 on dividends2264 paid to Anna M. Harkness by the Anglo-American Oil Co.The Supreme Court of the United States, in Miles v. Safe Deposit & Trust Co.,259 U.S. 247">259 U.S. 247, said in regard to stock subscription rights: The right to subscribe to the new stock was but a right to participate, in preference to strangers and on equal terms with other existing stockholders, in the privilege of contributing new capital called for by the corporation - an equity that inheres in stock ownership under such circumstances as a quality inseparable from the capital interest represented by the old stock, recognized so universally as to have become axiomatic in American corporation law. [Cases cited]. Evidently this inherent equity was recognized in the statute and the resolution under which the new stock here in question was offered and issued. The stockholder's right to take his part of the new shares therefore - assuming their intrinsic value to have exceeded the issuing price - was essentially analogous to a stock dividend. So far as the issuing price was concerned, payment of this was a condition precedent to participation, coupled with an opportunity to increase his capital investment. 2265 In either aspect, or both, the subscription right of itself constituted no gain, profit or income taxable without apportionment under the Sixteenth Amendment. Eisner v. Macomber,252 U.S. 189">252 U.S. 189, is conclusive to this effect. But in that case it was recognized that a gain through sale of dividend stock at a profit was taxable as income, the same as a gain derived through sale of some of the original shares would be. In that as in other recent cases this Court has interpreted "income" as including gains and profits derived through sale or conversion of capital assets, * * . Hence the District Court rightly held defendant in error liable to income tax as to so much of the proceeds of sale of the subscription rights as represented a realized profit over and above the cost to it of what was sold. * . To treat the stockholder's right to the new shares as something new and independent of the old, and as if it actually cost nothing, leaving the entire proceeds of sale as gain, would ignore the essence of the matter, and the suggestion can not be accepted. The District Court proceeded correctly in treating the subscription rights as an increase inseparable2266 from the old shares, not in the way of income but as capital; in treating the new shares if and when issued as indistinguishable legally and in the market sense from the old; and in regarding the sale of the rights as a sale of a portion of a capital interest that included the old shares. * * * This decision of the Supreme Court does not prescribe in detail the method of computing gain from the sale of stock rights, but the decision did affirm the decision of the District Court. The method used by the District Court in that case arrived at a satisfactory result for that case, but a proper result in the present case can not be reached by applying the method used by the District Court in the Miles case. The respondent, by blindly adhering to a formula, has computed a profit in each of these cases in excess of the actual sale price of the rights. Such a result is manifestly wrong and in conflict with the decision of the Supreme Court above referred 1072 to. The deficiency determined by using, as a profit from the sale of these rights, the entire amount of the purchase price is in error. That which is not income is taxed as if it were. By the issuance of the stock2267 rights the corporation carved something out of the interest which theretofore was represented by each share of stock. The thing carved out was called a right, and the question is, what portion of the old share was carved out in the right. If this be known, then the cost or basis applicable to the old share can be divided accordingly between a share after the rights have been separated and the right. When either is sold, the amount of gain can be separately computed. However, it is difficult to determine exactly the proportion of the basis for gain or loss of the old share which should be assigned to the right and that which should be assigned to a share after the rights have been separated. The Commissioner later provided by regulations (Regulations 69, article 39, and Regulations 74, article 58) that this allocation should be made in proportion to the respective values of the rights and the shares exclusive of the rights at the time the rights were issued, but he refused to apply this method in the present case because he says such an application would be a retroactive one, and he has decided that these regulations should not be applied retroactively. He insists upon applying2268 a method provided in his old regulation, as modified by a Treasury Decision, which in this case would allocate to thr rights no part of the old share basis. This old modified regulation has nothing to recommend it for use in this case. It never would have reached the proper result in a case such as this, and for current years its use has been abandoned by the Commissioner and he has adopted, for making similar allocations, a new method which, the petitioner concedes, is convenient, practical and fair. No better method has been suggested. We hold that the profit in each of these cases should be computed by apportioning to the rights that part of the total basis applicable to the old shares which bears the same ratio to the total basis as the market price of the rights on March 14, 1923, bears to the total market price of the rights on that day plus the market price of the stock after the rights had been separated. On the question of the credit provided by section 1200 of the Revenue Act of 1924, our judgment is for the respondent. 2269 John Moir et al.,3 B.T.A. 21">3 B.T.A. 21; David A. Cunningham,9 B.T.A. 1050">9 B.T.A. 1050; Stover v. McCaughn, 28 Fed.(2d) 1005. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619229/	J. Melvin Boykin, Petitioner, v. Commissioner of Internal Revenue, RespondentBoykin v. CommissionerDocket No. 65605United States Tax Court29 T.C. 813; 1958 U.S. Tax Ct. LEXIS 268; January 31, 1958, Filed 268 Decision will be entered for the respondent. Exclusion From Gross Income -- Lodging Occupied by Employee for Convenience of Employer -- Sec. 119, I. R. C. 1954. -- Veterans' Administration employee-physician required to occupy quarters at hospital for convenience of his employers and to pay fair rental therefor by deduction from his basic salary, held not entitled to exclude the rental from his gross income under section 119, I. R. C. 1954. Roger V. Dickeson, Esq., for the petitioner.Nelson P. Rose, Esq., for the respondent. Murdock, Judge. MURDOCK 813 OPINION.The Commissioner determined deficiencies of $ 305.49 for 1954 in the income tax of the petitioner and of his wife, Laura. Laura has filed no petition with this Court which would make 814 her a party to these proceedings. The Commissioner also determined a deficiency of $ 365.65 in the petitioner's income tax for 1955. The facts are found as stipulated.The petitioner contends that the Commissioner erred in failing to exclude from his gross income under section 119, I. R. C. 1954, the amount of the rent for his house and for his garage.The petitioner filed a joint 1954 Federal income tax return and a separate 1955 return with the district director of internal revenue for the district of Nebraska.The petitioner is a physician and during 1954 and 1955 was employed by the Veterans' Administration. He was a member of the medical staff of the hospital at Richmond, Virginia, as chief of professional services, for the month of January 1954. He was manager and chief of professional services at the Veterans Hospital at Lincoln, Nebraska, 270 from February 1, 1954, to December 31, 1955.The petitioner occupied personal living quarters during all of 1954 and 1955 on the grounds of those hospital stations. The quarters were owned and rented to the petitioner by the Veterans' Administration. The petitioner was required to live on the hospital grounds in order properly to perform the duties of his employment. He maintained no other residence in 1954 or 1955.The petitioner's salary under his civil service grade amounted to $ 11,300.12 during 1954 and $ 12,130.38 during 1955. Those amounts constituted his full official basic salary before payroll deductions, and were the amounts reported by the Veterans' Administration on the petitioner's withholding statements (Form W-2) for 1954 and 1955.The Veterans' Administration withheld from the petitioner's salary payments on account of his income tax for 1954 and 1955. It also withheld monthly during 1954 and 1955 rental charges for the quarters occupied by the petitioner on the hospital premises. The total amount of rent withheld was $ 1,147.46 for 1954 and $ 1,188.86 for 1955. The amount of rent charged was fixed for each facility by local appraisals of the fair and reasonable271 rental value of the quarters in question.The petitioner was assigned to his quarters and the deductions therefor were made from his salary under the authority of VA Manuals MDC-7 and M4-3 which provided, inter alia, as follows:[MDC-7]4. ASSIGNMENTS: VA EMPLOYEES * * * e. Occupancy of Housekeeping Quarters by Station Employees(1) Key Employees Required to Occupy Housekeeping Quarters. It has been administratively determined that certain officers in hospitals and domiciliaries and in hospital and domiciliary activities at centers must be assigned to quarters and live on the station. Therefore, the following officers will be assigned to housekeeping quarters in accordance with the priority indicated below.815 (a) Manager.(b) Chief, Professional Services, or Clinical Director. * * The rental charge for these * * housekeeping quarters will be considered as part of the employee-occupant's compensation (salary deduction).* * * 14. METHODS OF COLLECTION a. Salary Deduction. When quarters are authorized as a part of compensation (salary deduction) payment will be effected and collections made in accordance with the provisions of VA Manual272 M4-3.[M4-3]23. QUARTERS AND SUBSISTENCE a. The VA is required to fix charges for quarters and/or subsistence which are appropriate in terms of costs incurred incident to the furnishing of such quarters and/or subsistence (act of March 5, 1928, 45 Stat. 193, 5 U. S. C. 75A). The Comptroller General has specifically ruled that the approximate cost of meals and quarters furnished to employees shall be "recovered" by the VA. (1) All employees subsisting regularly at a VA field station are required to serve under contract of employment providing for reimbursement to the VA by means of payroll deductions. At stations where quarters and/or subsistence are furnished employees, the value thereof will be specified in the contract of employment; and the monetary equivalent will be deducted from the compensation of such employees. The copy of SF 50, Notification of Personnel Action, furnished the finance office as notice of employment sets forth, where applicable, the annual rate of deductions for quarters and/or subsistence. * * The petitioner also made direct payments of $ 27.50 in 1954 and $ 30 in 1955 as rent for a garage on the hospital273 premises.$ 1,174.96 for 1954 and $ 1,218.86 for 1955, representing the total rental charges and payments for quarters and garage, were subtracted from the total salaries in showing adjusted gross income on the returns for those years. The Commissioner, in determining the deficiencies, regarded those amounts as unallowable deductions and explained:This amount represents the total payments that you made to your employer in order to pay him for a share of the lodging that he rented to you.We are disallowing this deduction because you did not make these payments to your employer out of a cash allowance that you specifically received for lodging.The parties agree that the petitioner was required, by reason of his position with the Veterans' Administration, to live in the quarters assigned to him on the hospital grounds for the convenience of his employer. The petitioner argues, therefore, that the amount withheld from his salary for the value of those quarters is to be excluded from his taxable income under section 119 of the Internal Revenue Code of 1954.816 The solution of the question presented here requires some consideration of the past history of a related but somewhat274 different problem which arose in a situation which, for convenience, will be called type A. The facts were that A was paid a regular salary of X and, in addition, his employer furnished him without charge the use of a house having a rental value for A's purposes of Y. It was recognized that A was better off financially for having received free lodging from his employer, and the fair rental value of such free lodging was regarded as additional compensation and included in his taxable income. Charles A. Frueauff, 30 B. T. A. 449; Percy M. Chandler, 41 B. T. A. 165, affd. 119 F.2d 623">119 F. 2d 623.The Court of Claims, however, in Jones v. United States, 60 Ct. Cl. 552">60 Ct. Cl. 552, drew a distinction between allowances and compensation to an Army officer and held that the rental value of Army quarters occupied by him rent free and cash paid him as commutation of quarters did not constitute taxable income. The Commissioner, following this decision, promulgated regulations providing that if living quarters were furnished free to an employee for the convenience of the employer their value275 was not to be added to his cash compensation for income tax purposes, but if the employee received both salary and living quarters as compensation for services then the fair rental value of the quarters was taxable income. See Regs. 94, art. 22 (a)-3; Regs. 111, sec. 29.22 (a)-3. See also Arthur Benaglia, 36 B. T. A. 838, appeal dismissed 97 F. 2d 996; Joseph L. Doran, 21 T. C. 374; Charles A. Brasher, 22 T. C. 637; Leslie Dietz, 25 T.C. 1255">25 T. C. 1255.It is apparent that "convenience of the employer" and "compensation for services" in this connection are not mutually exclusive in that free lodging, regardless of why furnished, relieves the taxpayer of expenses which otherwise would be nondeductible family expenses under section 24 (a) (1), I. R. C. 1939, and section 262, I. R. C. 1954. It is not surprising that the problem was troublesome. One decided case was of a different type, herein referred to for convenience as type B, in which the employee was charged for his meals and lodging on his employer's premises, but no exclusion of the276 value of those meals and lodgings was allowed. Herman Martin, 44 B. T. A. 185. The present case is likewise a type B case. All of the other decided cases were of type A, involving meals or lodging, or both, furnished to the taxpayer without charge by the employer. There is no indication in the regulations prior to the 1954 Code that they refer to other than the type A situation, although the distinction between the two types is not readily apparent if the taxpayer was required to live on the employer's premises primarily for the convenience of the employer, the benefit to the employer usually being the presence of the employee at the work site for more of each 24-hour period than he would otherwise be there.817 Section 119 of the Internal Revenue Code of 1954 contained the first specific provisions relating to this problem. That section is as follows:SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE EMPLOYER.There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if -- (1) In the case of meals, the meals are277 furnished on the business premises of the employer, or(2) In the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.The legislative history of section 119 gives no indication that Congress gave any thought to the exclusion from income of the value of lodgings for which the employer charged the employee the fair rental value, type B. The legislative history of section 119 indicates rather clearly that Congress was thinking only about the exclusion from income of the value of meals and lodgings furnished without charge to the employee by the employer, type A. Congressman Daniel A. Reed, Chairman of the House Ways and Means Committee, in introducing this legislation in H. R. 8300, said:Under present law, if an employer furnishes an employee meals or lodging, the employee may have to include their value in his income even though278 they are furnished for the convenience of the employer if there is any evidence that they were taken into account in computing the amount of the employee's wages. The new code will remove this inequity. Under the new code the employee will not be taxed on the value of his meals or lodging if they are received at his place of business, and he is required to accept them in connection with his job.See 100 Cong. Rec. 3423 (1954). Such language seems obviously to refer to meals and lodgings furnished by the employer to the employee without charge. Similar language is contained in H. Rept. No. 1337, 83d Cong., 2d Sess., p. 18. See also the same report, page A38, where in example 2 the use of words "free of charge" appears to make it clear that Congress was thinking only of meals and lodgings furnished free of charge. See also S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 19, 190, where it is pointed out that the exclusion applies only "if the employee is required to accept the lodging * " and where in the second example attention is called to the fact that the meals or lodging are furnished "free of charge." See also Conference Rept. No. 2543 (to accompany H. R. 8300), 83d Cong., 279 2d Sess., p. 26.Section 1.119-1 of the Income Tax Regulations was promulgated as authorized under the 1954 Code and in (c) (2) thereof it is provided that the exclusion "applies only to meals and lodging furnished 818 in kind, without charge or cost to the employee" and "[if] the employee * * is required to reimburse the employer for meals or lodging furnished in kind, the value of such meals and lodging furnished in kind is not excluded from gross income." The lodging in question was not furnished to the petitioner without charge or cost but, instead, the petitioner was charged the fair rental value of the lodgings and that amount was withheld by the employer out of the petitioner's legally established salary to reimburse the employer for the lodgings which the petitioner was thus allowed to occupy. These provisions of the regulations are reasonable under the words of section 119 and in the light of its legislative history and background in which only type A and not type B was involved. Those provisions have the force and effect of law and are directly opposed to the contention of this petitioner that exclusion was intended in a type B situation. The slight difference*280 that the petitioner in renting the garage paid the rent directly out of his own pocket instead of having it withheld from his salary is in no way more favorable to the petitioner. No part of the items in question may be excluded from income or deducted from the basic salary which the petitioner is required to report for income tax purposes.Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619231/	CARL W. VAN ROEKEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentVan Roekel v. CommissionerDocket No. 31448-86.United States Tax CourtT.C. Memo 1989-74; 1989 Tax Ct. Memo LEXIS 74; 56 T.C.M. (CCH) 1297; T.C.M. (RIA) 89074; February 23, 1989; As amended February 28, 1989 Robert D. Howard and Kenneth A. Lapatine, for the petitioner. Michael D. Wilder, Roland Barral, and Gina A. Makoujy, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency in petitioner's Federal income tax for 1982, additions to tax, and additional interest as follows: Additions to Tax and Additional InterestSec.Sec.Sec.Sec.Sec.Deficiency6653(a)(1) 16653(a)(2)665966616621(c)$ 38,978.58$ 1,948.93 $ 11,693.57 * **After concessions, the issues for decision are generally (1) whether petitioner, as78 a grantor/beneficiary of the Capital Equipment Trust 1982 (the Trust), is entitled to a loss claimed with respect to the Trust's purchase and lease of certain computer equipment; and (2) whether petitioner is liable for additions to tax under sections 6653(a), 6659, and 6661 and for additional interest under section 6621(c). FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Pasadena, Texas, when the petition was filed. BackgroundThe principal actors in the purchase and leaseback transactions at issue were Capital Associates International, Inc. (CAI) and its subsidiary Capital Equipment Corporation (CEC), NIS Corporation (NIS), Kidder, Peabody & Co. (Kidder Peabody), and the Trust. CAI, CEC, and NIS were at all relevant times engaged in the business of equipment leasing, remarketing, or financing. Kidder Peabody was an investment banking firm. For 30 years prior to and through the trial of this case in March 1988, petitioner was personally engaged in the sale and leasing of construction equipment. In 1970 petitioner established and incorporated Vermeer Sales79 of Texas, Inc. (Vermeer), of which he was president and sole shareholder. From the time of its incorporation, Vermeer was engaged in the business of purchasing, selling and leasing trenching machines, primarily to contractors and municipalities. As president, petitioner was involved in purchasing the equipment, negotiating the leases, and determining the rental rates charged by Vermeer for its equipment. In determining the rental rates, petitioner would estimate the useful life and take into account the residual value of the item of equipment. In October 1982, L. Burke Crouse (Crouse) of CAI contacted Kenneth F. Seplow (Seplow) of Kidder Peabody about a proposed sale of certain computer equipment to Kidder Peabody. Under Crouse's proposal, Kidder Peabody would resell the equipment to retail investors, who would then lease the equipment back to CAI. The subject equipment consisted of six IBM mainframe computer processors and collateral support equipment (the initial equipment) from the IBM 3081 series. The computers were 3081-D and 3081-G models, which in terms of capacities were at the lower end of the 3081 series. As of October 1982, CAI had purchased five of the computers, 80 and had arranged to purchase the sixth, for a combination of cash and nonrecourse financing to third-party lenders. CAI leased for 60-month terms two of the computers to Standard Oil Company of Indiana (Standard Oil), two to Deere & Company (Deere), and one each to Harris Corporation (Harris) and American Broadcasting Company (ABC) (collectively, the end-users). The Standard Oil, Harris, and Deere leases commenced on particular dates between May 1 and December 1 of 1982. The ABC lease commenced on April 1, 1983. IBM technology permitted the capacities of the Model 3081-D and Model 3081-G to be upgraded to what was labeled the Model 3081-K. Kidder Peabody declined to serve the dual role of seller of the equipment and agent for the placement of the equity interests. Seplow proposed, however, introducing NIS as the intermediary between CAI and an investor trust to be formed by Kidder Peabody. The investor trust would hold title to the equipment for the investors and lease it back to CAI or an affiliate of CAI. It was the intention of CAI and Kidder Peabody that, after the back-to-back sales and leaseback of the initial equipment, the equipment would be upgraded to the Model 3081-K. 81 Kidder Peabody retained International Data Corporation (IDC) to perform an appraisal of the subject equipment. IDC was a research and consulting firm specializing in the high technology and third-party leasing industries. Kidder Peabody knew that IDC rendered consulting services both to investors in high technology equipment and to end-users of equipment. Because more of IDC's clients were users of equipment than were investors, Seplow believed that IDC's evaluation of the equipment would be conservative. IDC regularly published equipment valuation projections, which were analyzed by Kidder Peabody and determined to be conservative in light of Kidder Peabody's view that future changes in IBM equipment would be evolutionary rather than revolutionary. IDC's appraisal, dated November 18, 1982, was prepared by Charles Greco (Greco), who was then manager of IDC's Leasing Planning Service. Greco determined that the fair market values on November 15, 1982, of the 3081 series of computers were the following percentages of IBM list prices: ModelPercentage3081-D90-100%3081-G100%+3081-K100% Greco determined that computer equipment of the same type82 as the appraised equipment "will continue to be used by users for at least another 8.5 years and it would not be unreasonable to assume such use for 10 years." The appraisal indicated that the equipment would have the following residual values, in terms of percentages of IBM list prices as of November 15, 1982, at (a) January 1, 1987 (the year of the expiration of the initial term of five of the six end-user leases) and (b) January 1, 1989 (the year of the expiration of the proposed leaseback): 19871989ModelResidualResidual3081-D17%4%3081-G21%9%3081-K21%9%The appraisal also set forth a schedule of "Release Forecasts." The Release Forecasts were determined for the 2-year period between the expiration of the end-user leases and the expiration of the proposed leaseback (i.e., the period 1987-1989), and set forth possible combinations of two 1-year releases or one 2-year re-lease of the equipment. The Release Forecasts set forth "Low," "Medium," and "High" values for the various machines, with and without upgrading. Kidder Peabody used the appraisal to prepare a series of profit projections to determine whether an investment in the equipment83 would produce an economic profit to the Trust investors. The projections were prepared by William P. Short, III (Short), an assistant vice president of Kidder Peabody and a member of its Project and Lease Finance Group. The projections set forth three alternative cases of the leasing and ultimate sale of the equipment, assuming that the equipment was upgraded to 3081-K: (a) a "Base Case" - which assumed that the Trust would receive 70 percent of the 24-month "medium" re-lease rents projected by the appraisal, and that the equipment would be sold at the 1989 residual values set forth in the appraisal; (b) a "Zero Percent Residual Value Case" - which assumed that no re-lease rents or sales proceeds would be received; and (c) an "Upside Residual Value Case" - which assumed that the Trust would receive 70 percent of the rentals from two 12-month re-leases of the equipment and that the equipment would be sold at the 1989 residual values set forth in the appraisal. The projections also set forth the same alternatives on the assumption that the equipment was not upgraded to 3081-K. Under the "Zero Percent Residual Value Case," a one-unit investor would not receive any cash distributions84 from the Trust and would therefore lose his entire investment. Under the "Base Case," assuming the equipment was upgraded, an investor purchasing one unit in the Trust for $ 52,390 would receive, beginning in 1987, total cash distributions from the Trust of $ 59,952. Under the "Upside Residual Value Case," a one-unit investor would receive, beginning in 1987, $ 87,218. In November 1982, Kidder Peabody and CAI, as co-sponsors, began offering investments in the Trust. The offering literature for the Trust, which Kidder Peabody furnished prospective investors, essentially consisted of a Private Placement Memorandum, together with exhibits. The Private Placement Memorandum advised prospective investors in the Trust: Although the tax benefits anticipated from the Trust could be said to have the effect of providing a return on investment in the earlier years, tax obligations will arise in later years; the ultimate success of the Trust will therefore depend upon the profitability of its business which will, in turn, depend upon the Residual Value of the Equipment at the end of the User Leases and the Main Lease, including Additional Rent, if any. [Emphasis in original.] The85 Private Placement Memorandum stated that, as part of the cost of a unit in the Trust, each investor was required to assume personal liability for his or her proportionate share of the indebtedness to be incurred by the Trust in connection with its purchase of the equipment, amounting to $ 132,164 per Trust unit. In addition, the Private Placement Memorandum stated that the investors in the Trust would not be entitled to any investment tax credit in connection with their investment. The Private Placement Memorandum included a copy of IDC's appraisal of the equipment and Kidder Peabody's profit projections with respect to investments in the Trust. A memorandum describing the investment in the Trust was prepared by the Kidder Peabody "Tax Incentive Group" entitled "Summary of Capital Equipment Trust 1982" dated November 22, 1982 (the Summary). The Summary was prepared for the use of the Kidder Peabody retail sales force. The following paragraph appeared on page 2 of the Summary: NIS Corp. will purchase the equipment from CAI subject to the user leases and financing. The role of NIS Corp. in this sequence of transactions is to create an arm's length intermediate sale between CEC86 and the Trust so that the recourse to the investors on the Trust's financing will have substance for tax purposes. NIS Corp. has no other role of substance in the transaction. In late November 1982, petitioner's investment advisor brought to his attention the opportunity of investing in the Trust. Petitioner obtained and read the Private Placement Memorandum and understood the appraisal and the projections contained therein. The Declaration of TrustThe Trust was formed pursuant to a Declaration of Trust (the Declaration) dated December 1, 1982. Its stated purposes were generally to acquire, own, lease, and dispose of the initial equipment and K upgrades. The Declaration stated that the Trust would terminate no later than 9 years and 11 months from its formation. The Trust was a grantor trust. Article III, section 2, of the Declaration stated that each unit owner (Owner) would be liable for additional contributions to the Trust as necessary to pay a pro rata share of the amounts due under the Trust's purchase notes. The additional contributions would be payable in installments equal to the Owner's share of any amount then due under the notes. Article V, section 1, 87 required the Trustees to apply all receipts from the lease or sale of the equipment in the following order of priority: (a) to pay installments of principal and interest on the notes to be issued to NIS in connection with the purchase of the equipment; (b) to pay the Trust's administrative costs; and (c) to pay any excess not otherwise committed or reserved as a distribution to the Owners in proportion to each Owner's beneficial interest. The TransactionsOn December 1, 1982, CAI assigned the initial equipment, subject to the end-user leases, to CEC, its wholly owned subsidiary organized exclusively for the transactions. On the same date (a) CEC sold the initial equipment to NIS, which (b) sold the same to the Trust, which (c) leased the initial equipment to CEC. The relevant terms of these transactions are described below. a. The Sale from CEC to NISUnder the purchase agreement between CEC and NIS (the NIS Purchase Agreement), CEC sold the initial equipment to NIS, subject to the end-user leases and to the obligations to third-party lenders, for a price of $ 21,900,578, payable as follows: Cash, due at time of sale$ 1,121,029Promissory Note20,779,54988 The NIS Purchase Agreement stated that, upon NIS's sale of the equipment to the Trust, CEC would recognize the Trust as the owner of the equipment. It further stated that, in the event NIS failed to make payments due under the NIS note, the Trust had an absolute right to cure the default of NIS, and CEC would recognize and accept the Trust's exercise of any right inuring to NIS under the NIS Purchase Agreement. Pursuant to the terms of the NIS Purchase Agreement, NIS paid the downpayment and executed a nonrecourse, nonnegotiable promissory note dated December 1, 1982, in the amount of $ 20,779,549 (the NIS note). The NIS note expressly indicated that CEC would look solely to the initial equipment for all payments and obligations due under the NIS note and that NIS would not be personally liable for any deficiency thereunder. The NIS note bore annual interest of 13.4 percent and was to mature on November 30, 1989. The NIS note called for payments by NIS to CEC as follows: On execution$ 2,738,971.00(prepaid interestfor 1982 and 1983)February 28, 1983$ 696,114.89(representing interestonly)27 Quarterly Paymentsbeginning May 31, 1983each in the amount of$ 1,181,432.3089 The $ 2,738,971 payment due on execution included the $ 696,114.89 due on February 28, 1983, and the interest portion of the quarterly payments due for 1983. NIS granted CEC a security interest in the initial equipment, or its replacements, and all rents and proceeds therefrom. By March 1983, NIS paid the $ 2,738,971 in interest due pursuant to the terms of the NIS note. As discussed below, the NIS Note was replaced in 1983 by the NIS Replacement Note and the NIS Second Replacement Note in connection with NIS's purchase of certain upgrade equipment. b. The Sale from NIS to the TrustUnder the purchase agreement between NIS and the Trust, dated December 1, 1982 (the Trust Purchase Agreement), NIS sold the initial equipment to the Trust, subject to the end-user leases and the obligations to CEC and the third-party lenders, for a purchase price of $ 21,920,578. The purchase price was payable as follows: Cash, due at time of sale$ 1,141,029Promissory note20,779,549Petitioner and respondent agree that the Trust purchased the equipment for its fair market value. Pursuant to the Trust Purchase Agreement, the Trust paid NIS $ 1,141,029 and90 issued a "recourse" promissory note to NIS (the Trust note). The Trust secured the Trust note by granting NIS a security interest in the initial equipment, or its replacements, and the rents and other proceeds therefrom. The Trust note was nonnegotiable, bore interest at 13.425 percent per annum, and was to mature on November 30, 1989. The Trust note called for payments by the Trust to NIS as follows: On execution$ 2,738,971.00(prepaid interestfor 1980282 and 1983)February 28, 1983$ 697,413.61(representing interestonly)27 Quarterly Paymentsbeginning May 31, 1983each in the amount of$ 1,182,291.70The $ 2,738,971 payment due on execution included the $ 697,413.61 due on February 28, 1983, and the interest portion of the quarterly payments due for 1983. The Trust paid $ 1,008,092 of this sum on December 1, 1982, and the balance of this sum on or before March 1, 1983. Under the terms of the Trust note, the principal amount and accrued interest would become immediately due in the event of the Trust's default. Notwithstanding anything to the contrary under the Trust note or the security agreement, NIS would be required to91 proceed first against the collateral under the security agreement prior to exercising any other remedy it would have against the Trust in the event the Trust did not pay NIS as required under the Trust note. The Trust note required NIS to remit, when due, from installment payments made by the Trust to NIS thereunder, all installments and charges due to CEC under the NIS note. The Trust note stated that each owner-beneficiary of the Trust would be personally liable for a pro rata share of the payments due thereunder. As discussed below, the Trust note was later replaced by the Trust Replacement Note and the Trust Second Replacement Note in connection with the Trust's purchase of the upgrade equipment. c. The Lease Between the Trust and CEC, the Guaranty and the Remarketing AgreementPursuant to an Agreement of Lease dated December 1, 1982 (the Main Lease), the Trust net leased the initial equipment to CEC for an 84-month term beginning on December 1, 1982, for the following quarterly rentals (the Fixed Rent): Quarter 1-0- Quarters 2-4$ 502,572.00Quarters 5-281,182,891.70In addition to the Fixed Rent, CEC agreed to pay the Trust92 "Participation Rent" equal to 70 percent of all re-lease rents in excess of $ 5,000 in each lease year derived from leasing or subleasing the initial equipment after the expiration of the initial term of the end-user leases, less marketing expenses. Under the Main Lease, CEC's obligation to pay rent to the Trust was absolute; however, in the event NIS failed to make any installment payments when due under the NIS note, CEC would have the option to set off, or defer, against its payment of rent to the Trust, the amount which NIS owed. The Main Lease entitled CEC to replace any item of the equipment with any like kind equipment; it required that such substitute equipment be reasonably satisfactory to the Trust, free of encumbrances, and equal or greater in fair market value and have a 5-year recovery period for tax purposes. The Main Lease stated that neither the Trust nor CEC could sell, assign, transfer, or encumber the equipment without first obtaining the written consent of the other party. Pursuant to a Guaranty dated December 1, 1982, CAI guaranteed CEC's performance of all obligations to the Trust under the Main Lease as follows: FOR VALUE RECEIVED AND IN CONSIDERATION93 for Capital Equipment Trust 1982, a New York Grantor Trust (the "Trust") entering into that certain Lease dated as of December 1, 1982 (the "Agreement") with Capital Equipment Corporation ("CEC"), the undersigned ("Guarantor") hereby unconditionally and irrevocably guarantees to the Trust the performance by CEC of all obligations (the "Obligations") on its part to be performed under the Lease, that certain Purchase Agreement dated as of December 1, 1982 between CEC and NIS Corp. relating to the equipment which is the subject of the Lease (the "Purchase Agreement") and all documents and instruments executed pursuant to the Purchase Agreement (the "Other Documents"). The Guarantor further agrees to pay all expenses (including attorneys fees and legal expenses) paid or incurred by the Trust in endeavoring to enforce this guaranty. The Guarantor agrees that, in the event of the dissolution of the Guarantor, or the inability of the Guarantor for the benefit of creditors, or the institution of any proceeding by or against the Guarantor alleging that the Guarantor is insolvent or unable to pay debts as they mature, and if such event shall occur at a time when any of the Obligations94 may not then be due and payable, the Guarantor will upon demand by Trust pay to Trust forthwith the full amount which would be payable hereunder by the Guarantor if all Obligations were then due and payable. * * * No delay on the part of the Trust in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Trust of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action of the Trust permitted hereunder shall in any way impair or affect this Guaranty. For the purpose of this Guaranty, Obligations shall include all obligations of CEC to the Trust, notwithstanding any right or power of CEC or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall impair or affect the obligations of the undersigned hereunder. This is a continuing, absolute and unconditional Guaranty irrespective of the validity, regularity or enforceability of the Lease, the Purchase Agreement, the Other Documents, or any provision thereof, and regardless of any setoff, counterclaim, or any other circumstances95 which might constitute a legal or equitable defense or discharge of a guarantor or surety and the undersigned * * (iv) agrees that the obligation of the undersigned shall not be affected or decreased by any amendment, termination, extension, renewal, waiver, or any modification of said Lease, the Purchase Agreement, the Other Documents. This Guaranty shall inure to the benefit of the successors and assigns of the Trust and shall be binding upon the successors and assigns of Guarantor and shall be governed and construed in accordance with the laws of the State of New York. The Trust and CEC executed a Remarketing Agreement dated December 31, 1982, whereby the Trust appointed CAI as its agent to remarket or sell the initial equipment. The term of the Remarketing Agreement was to commence on December 1, 1989, the expiration date of the Main Lease, and expire November 30, 1991. Under the Remarketing Agreement, the Trust would pay CAI a fee of 30 percent of gross re-lease proceeds and 20 percent of gross proceeds generated by virtue of sales of the equipment, plus CAI's remarketing costs. d. Petitioner's Acquisition of the Trust UnitOn December 8, 1982, petitioner96 executed a "Subscription Agreement and Power of Attorney" (the Subscription Agreement), subscribing to one unit of beneficial interest in the Trust. Each unit represented a 1-percent beneficial interest in the Trust. The purchase price of the unit was $ 52,390, payable by $ 8,800 in cash, an interest-bearing promissory note for $ 35,200, and a noninterest-bearing note for $ 8,390. The interest-bearing note was payable to the extent of $ 21,100 on March 1, 1983. The balances of the interest-bearing note and the noninterest-bearing note were payable on March 1, 1984. The notes were to be secured by letters of credit. Under the Subscription Agreement, petitioner granted the trustees a power of attorney to execute and deliver on his behalf the Declaration of Trust and granted Kidder Peabody a power of attorney to complete the Declaration of Trust and to execute various instruments on his behalf in connection with his acquisition of a Trust unit. Petitioner paid the cash due under the Subscription Agreement and executed the notes on December 15, 1982. Petitioner ultimately paid a total of $ 49,455, plus interest, for his unit in the Trust. The difference between $ 52,390 and $ 97 49,445 represented a refund to him of $ 2,945 which was attributable to the Trust acquiring less upgrade equipment (discussed below) than originally anticipated. Post-Taxable Year ActivityIn an agreement dated December 1, 1983, CEC sold to NIS equipment (the mandatory upgrades) to upgrade, from 3081-D to 3081-K, the computers leased to Deere and Harris. The agreement required NIS to pay $ 2,414,040 for the mandatory upgrades by a cash payment of $ 449,550 and the balance by nonrecourse promissory note. NIS executed a nonrecourse promissory note (the NIS Replacement Note) dated December 30, 1983, payable to CEC in the amount of $ 21,238,768 and scheduled to mature on November 30, 1989. This note replaced the NIS Note which had been delivered to CEC in connection with NIS's purchase of the initial equipment. By an agreement dated December 30, 1983, NIS sold the mandatory upgrades to the Trust for $ 2,414,040, payable by cash in the amount of $ 449,550 and the balance by promissory note. The Trust thereby executed a "nonrecourse" promissory note dated December 30, 1983 (the Trust Replacement Note), payable to NIS in the amount of $ 21,240,037 and maturing November 30, 1989. 98 This note replaced the Trust Note which had been delivered to NIS in connection with the Trust's purchase of the initial equipment. Pursuant to an Amendment to Lease dated December 30, 1983, the Trust leased the mandatory upgrades to CEC, which had leased them to the end-users. In an agreement dated December 30, 1983, CEC sold to NIS additional upgrades (the Optional Upgrades) for the computers leased to Harris and ABC for $ 320,000. The purchase price was payable by cash in the amount of $ 40,500 and the balance by nonrecourse promissory note. NIS executed a nonrecourse promissory note (the NIS Second Replacement Note) dated December 30, 1983, payable to CEC in the amount of $ 21,518,268, which superseded the NIS Replacement Note. Under the NIS Second Replacement Note, payments were due by NIS to CEC as follows: February 29, 1984$ 1,231,684.2723 Quarter Paymentsbeginning May 31, 1984in the amount of$ 1,322,911.70At the same time, NIS sold the Optional Upgrades to the Trust for $ 320,000, payable by $ 40,500 in cash and the balance by promissory note. The Trust thereby executed a "nonrecourse" promissory note (the Trust Second Replacement Note) 99 dated December 30, 1983, payable to NIS in the amount of $ 21,519,537 and maturing November 30, 1989, which superseded the Trust Replacement Note. Pursuant to the Trust Second Replacement Note, payments were due by the Trust to NIS as follows: February 29, 1984$ 1,232,638.8423 Quarterly paymentsbeginning May 31, 1984,each in the amount of1,323,862.10Except for the amounts of payments due, the terms of the Trust Second Replacement Note were the same as those of the Trust note. Pursuant to a Second Amendment to Lease dated December 30, 1983, the Trust leased the Optional Upgrades to CEC. The Fixed Rent payable under the Main Lease by CEC to the Trust was increased as follows: Quarter 5$ 1,232,638.84Quarters 6 through 28,each in the amount of1,323,862.10After the closing of the Trust's purchase of the initial equipment in 1982, Kidder Peabody provided the services of Short to assist CEC, NIS, and the Trust in keeping track of the various payments due. During the years 1983, 1984, and 1985, several weeks before each payment date, Short prepared a memorandum of the amount due by each party in the transaction. Short then100 spoke to a representative of each party to verify that his memorandum had been received and understood, and that the payment would be made. All of the payments were effected by wire transfer. Short stopped issuing the memoranda after 1985. During 1986 and 1987, none of the payments due on the Main Lease, the Trust Second Replacement Note, and the NIS Second Replacement Note were made. On December 30, 1987, after this case was set for trial, CEC paid to the Trust the past due Main Lease payments for 1986 and 1987; the Trust paid to NIS the past due installments on the Trust Second Replacement Note for 1986 and 1987; and NIS paid to CEC the past due installments on the NIS Second Replacement Note for 1986 and 1987. None of the parties to the transactions requested or paid additional interest or late penalties in connection with the late payments. Tax TreatmentOn his 1982 return, petitioner claimed depreciation on the computer equipment of $ 32,897.37 and interest and operating expenses in the amounts of $ 2,324.71 and $242.88, respectively, for a net loss of $ 35,464.96. Petitioner computed his depreciation deduction in issue using a recovery period of 5 years and a101 basis in the equipment of $ 219,315.78. Petitioner also claimed an investment tax credit of $ 22,028.38, reporting a basis in the equipment for investment credit purposes of $ 220,283. OPINION I The first issue for decision is whether petitioner is entitled to a loss in 1982 with respect to the Trust's equipment leasing activity, and if so, to what extent. Respondent argues that the loss should be disallowed entirely because (1) the sale and leaseback transactions at issue were shams devoid of economic substance, (2) the Trust did not acquire the benefits and burdens of ownership with respect to the computer equipment and cannot be considered the owner for tax purposes, and (3) petitioner did not enter into the investment with the objective of making an economic profit. Alternatively, respondent argues that petitioner's losses are limited by the at-risk provisions of section 465. Respondent first raised these arguments in either his amended answer or trial memorandum. 2 He thus bears the burden of proof as to these allegations. Rule 142(a), Tax Court Rules of Practice and Procedure; Larsen v. Commissioner,89 T.C. 1229">89 T.C. 1229, 1251 (1987); Torres v. Commissioner,88 T.C. 702">88 T.C. 702, 718 (1987).102 Sham TransactionWe first address whether the form of the transaction should be respected or whether its substance requires that it be treated differently for Federal income tax purposes. While we do not hesitate to require transactions to be taxed in accordance with their true nature, the form given a transaction by the parties will be respected where: there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued103 with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached * * * [Frank Lyon Co. v. United States,435 U.S. 561">435 U.S. 561, 583-584 (1978).] In such cases, "the Government should honor the allocation of rights and duties effectuated by the parties." Frank Lyon Co. v. United States,435 U.S. 561">435 U.S. 561, 584 (1978). In the context of a sale and leaseback transaction, the transaction is disregarded for Federal income tax purposes if it is determined "that the taxpayer was motivated by no business purposes other than obtaining tax benefits in entering the transaction, and that the transaction has no economic substance because no reasonable possibility of a profit exists." Rice's Toyota World, Inc. v. Commissioner,752 F.2d 89">752 F.2d 89, 91 (4th Cir. 1985), affg. in part and revg. in part 81 T.C. 184">81 T.C. 184 (1983); Levy v. Commissioner,91 T.C. 838">91 T.C. 838, 854 (1988). Based on this standard, a determination that the transaction is an economic sham is inappropriate if either a business purpose or a reasonable possibility of profit, apart from expected tax benefits, is found104 to have been present. Torres v. Commissioner,88 T.C. at 718. Prefatorily, respondent contends that the transaction does not qualify as a "genuine multiple-party transaction" under Frank Lyon Co. Respondent asserts that NIS was inserted into the transaction merely to create the appearance of a multiple-party transaction. We address this point at length subsequently in this opinion and agree with respondent that NIS's participation served no business purpose. Nevertheless, we agree with petitioner that, while the presence of multiple parties is a factor in determining economic substance, it is not essential. See Bussing v. Commissioner,88 T.C. 449">88 T.C. 449 (1987), supplemental opinion 89 T.C. 1050">89 T.C. 1050 (1987); Mukerji v. Commissioner,87 T.C. 926">87 T.C. 926 (1986). We are satisfied that objectively there was a reasonable possibility that the Trust's leasing activity would be profitable. Prior to selling units in the Trust, Kidder Peabody projected that an investor could realistically expect to earn an economic profit apart from tax benefits. The projections were based on Greco's appraisal of the fair market value of the equipment105 around the time of purchase, the expected residual values as of January 1, 1987, and January 1, 1989, and the expected re-lease rentals following the expiration of the end-user leases. It is undisputed that the Trust purchased the computer equipment for its fair market value. At trial, three expert witnesses offered their opinions as to the residual value of the equipment. Petitioner called Greco as well as Robert A. Jones of Arthur D. Little Evaluations, Inc., who essentially corroborated Greco's conclusions. Greco testified that the projected re-lease rentals in the 1982 appraisal were based in part on the projected residual values. Respondent called S. Paul Blumenthal (Blumenthal), a senior vice president and appraiser of computer equipment for American Computer Group, Inc. Although Blumenthal's projections of the equipment's residual value were lower than Greco's, he admitted at trial that Greco's projections "were well within the realm of reasonability." Blumenthal did not discuss re-lease rentals in his pre-trial report and thus was precluded from testifying as to projected re-lease rentals pursuant to Rule 143(f), Tax Court Rules of Practice and Procedure.Respondent106 asserts that the 1982 IDC appraisal was too inaccurate and unreliable to be a basis for a reasonable possibility of profit from the transactions because (1) IDC projected the residual values of the equipment as of dates long before the equipment could actually be resold under the terms of the end-user leases and the Main Lease, and (2) the appraisal contains no explanation of methodology for the re-lease forecasts in the 1982 report. The IDC appraisal, like the others, is not without infirmities. The dates for which Greco appraised the equipment's residual value (January 1, 1987, and January 1, 1989) preceded the expiration of the end-user leases (certain dates between April 1987 and March 1988) and the Main Lease (December 1989) by several months. Nevertheless, we are not persuaded that a more precise appraisal would have materially diminished the likelihood of economic profit with respect to this investment. Thus, we cannot conclude that the transaction was devoid of economic substance. Benefits and Burdens of OwnershipWhether the benefits and burdens of ownership passed is a question of fact that must be ascertained in light of all of the relevant facts and circumstances. 107 Levy v. Commissioner,91 T.C. 838">91 T.C. 838, 859 (1988); Grodt & McKay Realty, Inc. v. Commissioner,77 T.C. 1221">77 T.C. 1221, 1237 (1981). In the equipment purchase and leaseback context, the following facts are relevant to determining whether a sale has occurred: (1) the potential for realizing a profit or loss on the sale or re-lease of the equipment; (2) the payment of fair market value for the equipment; (3) a useful life of the equipment that extends beyond the lease term; (4) the investor's initial equity interest in the equipment as a percentage of the purchase price; (5) lease renewal or purchase options at the end of the lease term based on fair market value of the equipment at that time; (6) whether the projected residual value of the equipment plus the cash flow generated by the rental of the equipment allows the investors to recoup at least their initial cash investment; (7) whether at some point a "turnaround" is reached whereby depreciation and interest deductions are less than income received from the lease; and (8) whether the net tax savings for the investors are less than their initial cash investment. Levy v. Commissioner,91 T.C. at 860;108 Torres v. Commissioner,88 T.C. at 721. We generally consider as neutral factors in this context: (1) the use of a net lease; (2) the absence of significant positive net cash flow during the lease term; and (3) the fact that the rental income stream during the initial lease term is tailored to or matches interest and debt payments that are due. Larsen v. Commissioner,89 T.C. 1229">89 T.C. 1229, 1267 (1987); Estate of Thomas v. Commissioner,84 T.C. 412">84 T.C. 412, 433-438 (1985). We have already concluded that the Trust had a reasonable possibility of realizing a profit on the sale or re-lease of the equipment. Our determinations in connection with the economic substance of the transactions also lead us to conclude that the projected useful life of the property extended beyond the term of the leaseback, that the projected residual value of the equipment plus the cash flow generated by the rental of the equipment would allow each investor to recoup the initial cash investment, and that a turnaround would ultimately be reached whereby rental income would exceed allowable deductions. Moreover, the parties agree that the Trust purchased the equipment for109 its fair market value. Respondent argues that CEC was the true owner of the equipment for tax purposes because (1) CEC held a right of substitution under the Main Lease with respect to the equipment, (2) the Trust could not sell the equipment without the written consent of CEC, and (3) the Main Lease was a net lease and thus shifted the risk of loss to CEC. Respondent's arguments are unpersuasive on the evidence of this case. Generally, we have not regarded the right of substitution in computer equipment leasing cases as indicative of a lack of ownership for tax purposes. See, e.g., Torres v. Commissioner,88 T.C. 702">88 T.C. 702 (1987). Sun Oil Co. v. Commissioner,562 F.2d 258">562 F.2d 258 (3d Cir. 1977), relied on by respondent, involved a lessee's right of substitution with respect to certain unimproved service station sites, i.e., unique property. The equipment in issue here, by contrast, is fungible. Respondent's assertion with respect to CEC's consent to sell ignores that CEC and the Trust each had to get the written consent of the other before selling or encumbering the equipment. Respondent has not proven that the Trust did not acquire the sufficient benefits110 and burdens of ownership to be recognized as the owner of the equipment for tax purposes. Profit ObjectiveSection 183(a) provides that "if * * [an] activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section." A determination of whether the requisite profit objective exists is to be made on the basis of all the surrounding facts and circumstances of the case. Section 1.183-2(b), Income Tax Regs. The expectation of realizing a profit need not be a reasonable one, but there must be an actual and honest profit objective. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). Respondent argues that petitioner did not invest in the Trust with an actual and honest profit objective. In support of his arguments, respondent asserts that, although petitioner was experienced in equipment leasing, he lacked expertise in main frame computer leasing activities and spent no time in carrying on the activity. We are not persuaded by respondent's arguments. Section 183 does not require the level of business expertise111 that respondent suggests. In view of the use of a net lease in the transactions, petitioner's failure to spend time with the leasing activity does not establish a lack of profit objective. The Trust entered into the transactions following Kidder Peabody's extensive analysis of the economics of the transaction and its negotiation with CAI of the leaseback terms. Petitioner obtained, reviewed, and understood the Private Placement Memorandum, the terms of the agreements, and the profit projections. He was experienced and apparently successful in other equipment leasing activity. The preponderance of the evidence does not negate an actual and honest profit objective of petitioner or the Trust. Amount At RiskRespondent argues that, if the transactions had economic substance, passed the benefits and burdens of ownership to the Trust, and were entered into for profit, petitioner's loss is nonetheless limited by section 465 because petitioner was not at risk with respect to the Trust note. Respondent first asserts that the Trust note was not genuine indebtedness because NIS had no substance in the transactions and must be disregarded. Second, respondent asserts that, because112 the real lender to the Trust was CEC, the Trust note was substantively owed to a party which had an interest in the activity other than as a creditor. Third, respondent asserts that petitioner was protected against loss with respect to the Trust note. Section 465 provides that, where an individual invests in certain activities, including the leasing of section 1245 property, any loss from such an investment shall be allowed only to the extent that the taxpayer is at risk with respect to the activity at the close of the taxable year. Section 465(a)(1); section 465(c)(1)(C). Borrowed amounts are considered to be at risk where, among other requirements, the amounts have been borrowed for use in the activity, and the taxpayer is personally liable for the repayment of the borrowed amounts or has pledged property, other than property used in the activity, as security for the borrowed amounts. Section 465(b)(2). Borrowed amounts are not at risk, however, insofar as such amounts are protected against loss through "nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements." Section 465(b)(4). As stated in Levy v. Commissioner,91 T.C. at 863:113 With respect to particular debt obligations, investors will be regarded as personally liable for such obligations within the meaning of section 465(b)(2)(A) if they are ultimately, economically liable to repay the obligations in the event funds from the investment activities are not available to repay the obligations. The critical inquiry is who is the obligor of last resort, and "the scenario that controls is the worst case scenario, not the best case." The fact that other investors or entities remain in the "chain of liability" does not detract from the at-risk amount of investors who have the ultimate liability. In determining which investors are ultimately financially responsible for the obligations, the substance of the transactions controls. Melvin v. Commissioner,88 T.C. 63">88 T.C. 63, 75 (1987), on appeal (9th Cir., Aug. 7, 1987) * * Respondent relies on Bussing v. Commissioner,88 T.C. 449">88 T.C. 449 (1987), supplemental opinion 89 T.C. 1050">89 T.C. 1050 (1987), for the assertion that the Trust note was invalid for tax purposes. If the note is not valid, petitioner's interest deduction will be disallowed to the extent not actually paid. Rice's Toyota World, Inc. v. Commissioner,752 F.2d 89">752 F.2d 89 (4th Cir. 1985),114 affg. in part and revg. in part 81 T.C. 1984">81 T.C. 1984 (1983); Rose v. Commissioner,88 T.C. 386">88 T.C. 386 (1987), on appeal (6th Cir., Dec. 14, 1987). A distinction must be made, of course, between a substantively nonrecourse note, the interest on which may be deductible notwithstanding the protection against personal liability, and an illusory note for tax purposes. Bussing v. Commissioner, supra, involved a wraparound lease transaction structured similarly to the transaction in issue. In Bussing, the original owner sold certain computer equipment, then on lease to end-users, to an intermediate party, which simultaneously sold the equipment to a group of investors, including the taxpayer. The investors then leased the equipment back to the original owner. We determined that the intermediate party was inserted merely to satisfy the at-risk provision of section 465 and served no valid business purpose. In determining the substance of the leasing transaction between the taxpayer and the lessee, we thus disregarded the participation of the intermediate party. We further determined that the taxpayer's long-term promissory note did not represent valid indebtedness115 for tax purposes. For this reason, we ultimately concluded that the taxpayer was not at risk to the extent of the long-term note. We indicated in the supplemental opinion that our disregarding the intermediate party was intertwined with our determination that the taxpayer's purchase note was not valid indebtedness for tax purposes. Bussing v. Commissioner, 89 T.C. at 1056. We commented, however, that the long-term note was not genuine because (1) after closing, the intermediate party disappeared entirely from the transaction; (2) the respective obligations between the lessee, which we determined to be the true lenders, and the taxpayer canceled each other out; (3) there was no evidence that any payments on the note were ever made; and (4) in the event of a default by the lessee under the lease, the taxpayer's principal obligation under his note was deferred until approximately 12 years after issuance of the long-term note. In view of all of the evidence, we do not believe that NIS's participation served any valid business purpose. Crouse of CAI initially proposed that the equipment be sold directly to Kidder Peabody. Kidder Peabody, however, wanted to promote116 the transaction for investors in the Trust and did not want to appear to be directly involved as a party in the sale-leaseback transaction. Kidder Peabody proposed instead that a subsidiary of CAI (CEC) sell the equipment to NIS and that NIS sell the equipment to the Trust. After the deal was arranged, Kidder Peabody prepared a summary of the transactions for its retail sales force, which summary clearly and explicitly stated that the exclusive role of NIS was to give substance to the Trust's putative recourse financing for tax purposes. At trial Seplow unpersuasively attempted to explain away this document by stating that "it was appropriate to have a sale of equipment * * through an intermediary" and that he "felt it was essential to have a substantial independent company in the transaction * * ." Seplow gave no credible nontax-motivated purpose, however, for NIS in this transaction. The very terms of the agreements covering the transactions suggest NIS's participation was not compelled by business reasons. The NIS note was nonrecourse. The terms of the NIS Purchase Agreement allowed the Trust to cure any default of NIS under the NIS note. If the Trust did not cure the117 default, CEC was entitled to apply the rent otherwise owed to the Trust against the amounts owed to it by NIS. Further, NIS had no involvement in negotiating the terms of the transaction. NIS's function in the transactions was nothing more than "window dressing" to enable the Trust investors to avoid the at-risk provisions of section 465 and to make the transaction appear to be a genuine multiple-party transaction for purposes of applying Frank Lyon Co. v. United States,435 U.S. 561">435 U.S. 561 (1978). We disagree, however, with respondent's assertion that, by virtue of Bussing, the Trust note was invalid for tax purposes merely because NIS served no business purpose in the transaction. Although in that case our disregard of the intermediate party and our determination that the note at issue was not genuine for tax purposes were intertwined, we nonetheless looked to all the facts and circumstances surrounding the note before concluding that the note was not genuine. The preponderance of the evidence here, unlike in Bussing, does not establish that the Trust note was not genuine for tax purposes. The Trust purchased the equipment at its fair market value. Under118 the terms of the secured Trust note, it was unconditionally responsible for timely quarterly payments on the indebtedness, i.e., it was liable whether CEC paid its quarterly rent or defaulted. The Trust respected the formalities of its note through 1985. While the cessation of installment payments during 1986 and 1987 without apparent business reason is troublesome, that alone does not render the note not genuine. Accord Packard v. Commissioner,85 T.C. 397">85 T.C. 397, 421-422, 427-428 (1985). This is a close case, but respondent fails to satisfy his burden of proof on this matter. We agree with respondent, however, that petitioner was protected against loss with respect to the Trust note. When viewed together, the terms of the various documents of the sale-leaseback transaction indicate that petitioner was guaranteed from having to pay any portion of the Trust note, notwithstanding its ostensible recourse provisions. The Trust note stated that each owner-beneficiary of the Trust would be personally liable for a fractional share of the payments due under the Trust note, as and when such payments would become due. In the event of the Trust's default, however, the Trust119 note required NIS to proceed against the equipment and all rents and other proceeds therefrom prior to exercising any other right or remedy. The quarterly rental payments due under the Main Lease equaled or exceeded the quarterly installments due under the Trust note for the note's entire duration, except for the Trust's prepayment of interest for 1982 and 1983 due at closing on December 1, 1982. In the worst scenario, CEC would breach its obligations under the Main Lease, rendering the collateral (the equipment only) possibly insufficient to satisfy the Trust's obligations under the Trust note. In this event, however, the Trust would have a claim against CAI pursuant to CAI's absolute and unconditional guarantee of all rental payments due under the Main Lease. By enforcement of the Guaranty, the collateral (the equipment and rental payments) was certain to equal or exceed in value the amount of the Trust's obligations for the duration of the Trust note. The Trust beneficiaries thus were not the obligors of last resort. There was no apparent business purpose for the putative recourse liability of the Trust note, and petitioner does not suggest one. CAI originally purchased120 the equipment with cash and a nonrecourse note. It assigned the equipment to its subsidiary CEC, which sold the equipment to NIS for cash and a nonrecourse note. The indebtedness underlying the Trust note thus was nonrecourse. Furthermore, it is significant that the Trust replacement notes, issued approximately 1 year after the Trust note and containing the same personal liability language, were labeled "nonrecourse." Petitioner argues that the Guaranty of CAI should not be considered a "guarantee" within the meaning of section 465(b)(4). According to petitioner, the clear purpose of the CAI Guaranty was to place the parties in the same position as if the Main Lease had been entered into between the Trust and CAI, being the parent of CEC, directly. Petitioner contends that, had that been done, the Main Lease would not be considered to constitute a "guarantee" and cites Gefen v. Commissioner,87 T.C. 1471">87 T.C. 1471, 1503 (1986). Petitioner asserts that the result should be no different where the lease is entered into by the subsidiary and guaranteed by the parent. Petitioner does not assert that the Guaranty was invalid under New York law. In deciding the tax consequences121 of this transaction, we can only consider how the transaction was structured, not how it might have been. Corporate law generally recognizes separate legal identities for the parent corporation and subsidiary, each responsible for its own debts even though both are part of a single business enterprise. Likewise, jurisdictions widely sanction the parent corporation's guarantee of its subsidiary's obligations, a credit device deemed to be in furtherance of the parent corporation's purposes because of its stock ownership. E.g., N.Y. Bus. Corp. Law sec. 202(a)(7) (McKinney 1988); Chester Airport, Inc. v. Aeroflex Corp.,37 Misc. 2d 145">37 Misc.2d 145, 237 N.Y.S.2d 752">237 N.Y.S.2d 752 (Sup. Ct. 1962), modified 18 App. Div.2d 998, 238 N.Y.S.2d 715">238 N.Y.S.2d 715 (1963). Thus, for purposes of applying section 465(b)(4), there is no reason for distinguishing a valid guarantee where the guarantor and principal debtor are parent corporation and subsidiary from one where the guarantor and principal debtor are not related. Petitioner argues that the appropriate scenario for deciding the amount of his personal economic exposure under the Trust note is the possible bankruptcy of NIS. 122 Petitioner contends that the bankruptcy trustee would have the duty, pursuant to 11 U.S.C. sec. 704(1) 3 (1982), to enforce the Trust note against the Trust and its beneficiaries. Petitioner alternatively argues that if the Court decides that the participation of NIS should be disregarded, then CEC and/or CAI is the "real lender" in this transaction by virtue of Bussing v. Commissioner,88 T.C. 449">88 T.C. 449 (1987), supplemental opinion 89 T.C. 1050">89 T.C. 1050 (1987); thus, if CEC and/or CAI were to file a petition in bankruptcy, the bankruptcy trustee could disavow the Main Lease under 11 U.S.C. sec. 365(a) 4 (1982) and still enforce the Trust note against the Trust and its beneficiaries. Consequently, petitioner would be personally liable for his share of the debt service payments without the benefit of the corresponding Main Lease rental payments. 123 There are three serious weaknesses in petitioner's arguments. First, while a bankruptcy trustee has the duty to assert all claims of the estate arising from the estate's contracts, such contracts remain enforceable only pursuant to their terms. Thus, under the scenarios presented by petitioner, the bankruptcy trustee would stand in no better position to enforce the Trust note against the Trust beneficiaries than NIS would under normal circumstances. As previously discussed, such enforcement would entail proceeding against the guaranteed collateral. Second, it is not apparent that CEC, CAI, or their bankruptcy trustees would even have standing to sue the Trust beneficiaries under the Trust note. Petitioner assumes that if we treat CEC or CAI as the "real lender" in this transaction for tax law purposes, we must deem CEC or CAI as capable of enforcing the Trust note under contract law. This assumption is incorrect. Neither CEC nor CAI had privity of contract with the Trust under the Trust note, and there is no evidence that any rights thereunder were assigned to them. The Trust note did require NIS to use all installments received from the Trust to pay its obligations to CEC124 under the NIS note. Assuming arguendo that CEC was an intended beneficiary under the Trust note, there is still no evidence that the Trust and NIS contemplated benefiting CEC any more than what CEC would be entitled to receive under the nonrecourse NIS note, i.e., the value of the equipment. Third, we do not believe that Congress intended the insolvency of the guarantor (CAI) to be considered in determining whether the taxpayer was protected against loss. When section 465 was promulgated, Congress commented on the application of the at-risk rules to section 464 as follows: <7>For purposes of this rule, it will be assumed that a loss-protection guarantee, repurchase agreement or insurance policy will be fully honored and that the amounts due thereunder will be fully paid to the taxpayer. The possibility that the party making the guarantee to the taxpayer, or that a partnership which agrees to repurchase a partner's interest at an agreed price, will fail to carry out the agreement (because of factors such as insolvency or other financial difficulty) is not to be material unless and until the time when the taxpayer becomes unconditionally entitled to payment and, at that time, 125 demonstrates that he cannot recover under the agreement. [H. Rept. No. 94-658 (1975), 1976-3 C.B. (Part 4) at 801.] We conclude that petitioner was not at risk with respect to his share of the Trust note. II Section 6653(a) provides that an addition to tax shall be imposed if any part of an underpayment is due to negligence or intentional disregard of rules and regulations. Generally, the duty of filing accurate returns cannot be avoided by placing responsibility on an agent, Pritchett v. Commissioner,63 T.C. 149">63 T.C. 149, 174 (1974); however, reasonable reliance on the advice of an expert suffices to avoid the addition for negligence. Industrial Valley Bank & Trust Co. v. Commissioner,66 T.C. 272">66 T.C. 272, 283 (1976). Petitioner bears the burden of proving that respondent's determination of the additions to tax is erroneous. Neely v. Commissioner,85 T.C. 934">85 T.C. 934, 947-948 (1985). Petitioner conceded at trial that he was not entitled to the investment tax credit claimed on his 1982 return with respect to the transaction at issue. Petitioner contends that the section 6653(a) addition does not apply because he relied on his accountant126 to prepare his return and the accountant erred. We do not believe that petitioner's reliance on the accountant's advice in this instance could have been reasonable or in good faith. Petitioner has urged us to find, and we did, that he reviewed and understood the Private Placement Memorandum, a finding which supported petitioner's positions with respect to other issues in this case. The Private Placement Memorandum explicitly stated that no investment credit would be allowed for this transaction. Accordingly, petitioner must have also understood that no credit would be allowed. There is no evidence that he ever questioned the accountant's judgment in claiming the credit. We sustain respondent's determination in connection with this addition. We do not sustain the addition to tax under section 6659 because we have not concluded that any portion of petitioner's underpayment is attributable to a valuation overstatement. Section 6661(a) imposes an addition to tax for substantial understatements of income tax. This addition is normally not applicable to the extent the tax treatment of an item is supported by substantial authority. Section 6661(b)(2)(B)(i). Petitioner maintains127 that he is not subject to section 6661 because the authority supporting his tax treatment of his investment was substantial. With respect to the at-risk issue, petitioner contends that "a well-reasoned construction of Section 465" and the cases of Mukerji v. Commissioner,87 T.C. 926">87 T.C. 926 (1986), and Lansburgh v. Commissioner,T.C. Memo 1987-491">T.C. Memo. 1987-491, constitute substantial authority. We disagree. Petitioner's tax treatment of this transaction does not comport with section 465(b)(4), as discussed above. Lansburgh is obviously distinguishable from this case on its facts. The relevant question there was whether the taxpayer was at risk with respect to promissory notes which, by their terms, converted upon passage of time from recourse to nonrecourse. The Commissioner alleged unsuccessfully that the potential tax deductions of the transaction at issue constituted a "guarantee" or "other similar arrangement," protecting the taxpayer against loss on his promissory notes while they were recourse. The guarantee in this case, by contrast, was not merely an economic one, but one created under New York law. In Mukerji, we did not even discuss the amount128 at which the taxpayer was at risk on his investment. Thus, to the extent petitioner's understatement constitutes a substantial understatement under section 6661(b), this addition should be imposed. Antonides v. Commissioner,91 T.C. 686">91 T.C. 686, 702-703 (1988). Finally, the increased rate of interest under section 6621(c) applies here to the underpayment attributable to that portion of the loss disallowed by section 465(a). Section 6621(c)(3)(A)(ii). Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code as amended and in effect during the year in issue. 50 percent of the interest due on $ 38,978.58. 10 percent of the understatement of $ 38,978.58. * 120 percent of the interest accruing after December 31, 1984, on the entire underpayment of tax.↩2. In his notice of deficiency, respondent determined that petitioner was not entitled to a depreciation deduction because "it has not been established that this constitutes an ordinary and necessary business expense or was substantiated pursuant to section 167." Respondent determined that petitioner was not entitled to either an interest expense or an operating expense deduction because "it has not been established that * * * [the respective] amount constitutes an ordinary and necessary business expense, was expended, was expended for the designated purpose, or was substantiated pursuant to Section 274." Respondent did not rely on these theories at trial or on brief.↩3. Sec. 704. Duties of trustee. The trustee shall -- (1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest; ↩4. Sec. 365. Executory contracts and unexpired leases. (a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619232/	OTTO T. BREHMER ET AL., EXECUTORS, ESTATE OF AUGUST F. W. BREHMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brehmer v. CommissionerDocket No. 5844.United States Board of Tax Appeals9 B.T.A. 423; 1927 BTA LEXIS 2596; November 29, 1927, Promulgated 2596 ESTATE TAX. - The property described in the transfers involved in this proceeding were not made in contemplation of, nor intended to take effect at or after grantor's death, and may not be included in a computation of either gross or net estate of decedent. W. Carey Martin, Esq., for the petitioners. John W. Fisher, Esq., for the respondent. TRUSSELL 423 This proceeding is for a redetermination of a deficiency in the amount of $1,357.17 in estate tax asserted against the estate of August F. W. Brehmer, deceased, by the respondent in his letter dated May 29, 1925. The petitioners allege that the respondent erred in his determination (1) that certain transfers of real property made by the decedent prior to his death, were made in contemplation of death; (2) that the transfers did not take effect until or after decedent's death, and (3) that the said property was included in decedent's estate. FINDINGS OF FACT. The petitioners, Otto T. Brehmer and Albert A. Brehmer, are the executors of the estate of August F. W. Brehmer, who died testate on September 13, 1923, a resident of Cass County, Iowa. In 1914, the decedent was a retired farmer, 2597 residing at Atlantic, Iowa, but prior to that time he had been a practical farmer for many years. In 1914, the decedent and his wife executed and delivered to each of their six children warranty deeds conveying to each child a certain parcel of farm land for and in consideration of "one dollar and love and affection and other valuable considerations." Each deed was the usual warranty deed and contained the following reservations: That the grantors, who are the father and mother of the grantee in each deed, reserve for the life of each grantor, or survivor thereof, the use, occupancy, possession, control, rents and profits, of the land so transferred. There is no controversy as to the land deeded to Emma, Emil A., and Bertha W. Brehmer, for as to those transfers, no subsequent deeds were given to the said grantees. The deeds executed in 1914 and conveying the parcels of land here in controversy contained the following descriptions: In the deed to Albert, the southeast quarter of section 23-76-38, 160 acres, Pottawattamie 424 County, Iowa; in the deed to August, the northeast quarter of section 9-76-37, 160 acres, Cass County, Iowa; and in the deed to Otto, the west2598 one-half of the northeast quarter of section 17-76-37, 80 acres, Cass County, Iowa. In order to equalize the distributions, the decedent required August to give Bertha and Otto notes for $5,500 secured by mortgage on his 160 acres, and he also required Albert to give Bertha and Otto notes for $2,000, secured by mortgage on his 160 acres. Bertha and Otto each received 80 acres of land. The amounts of these notes were paid to Bertha and Otto personally, they exercised complete control over them, and the decedent neither received nor controlled any portion of the said funds. At the time the said deeds were given in 1914 it was understood and agreed that there should be paid annually to the decedent and his wife or the survivor for the rest of their lives and/or life, $350 by August; $350 by Albert and $300 by Otto. The agreed payments commenced in 1915 and the said amounts or the amounts which the children were able to pay have been paid regularly each year and were at the date of the hearing on this proceeding, being paid regularly to decedent's widow. The decedent collected the rents from the farms and paid the taxes for the year 1914. Possession was delivered to the children2599 in 1915. From the time the children gained possession of their respective farms, they had complete control over them and either occupied them or rented to tenants; received or collected and controlled the profits or rents from their respective farms; paid the taxes thereon and paid for all expenses, repairs, and improvements. Each of the three sons, August, Albert, and Otto paid their parents the above-described agreed annual amounts, without regard to the amounts of their profits derived from their respective farms. The amounts were fixed and not in any relation to earnings. August had lived on the 160-acre farm deeded to him in 1914, for five or six years prior to that time and had rented from the decedent. From 1915 on, he occupied the farm and paid no rent, but did pay annually the agreed $350. Albert had lived on the 160-acre farm deeded to him in 1914, from 1902 to 1912, and had bought the farm from decedent under a contract, not in evidence, but that contract was canceled when the transfers were made in 1914. Albert rented his farm until 1917, in which year he moved back on that farm and he was living there at the time of decedent's death. During 1915, Otto was employed2600 in the Farmers Bank at Atlantic, and he never occupied the 80-acre farm deeded to him in 1914, but he did rent it to a cash tenant and collected and controlled the rents. In 1919, Albert was indebted to a bank in the amount of about $10,000, an unsecured loan, on which he was paying 8 per cent interest 425 and he desired to mortgage his 160-acre farm at a 6 per cent rate of interest, pay off his debt at the bank, pay off the balance he owed Bertha and Otto on his notes and have a little working capital. Albert went to decedent's home at Atlantic and asked him for a quit claim deed to clear his title so that he could secure a mortgage loan and on or about January 25, 1919, decedent and his wife gave Albert an ordinary quit claim deed. A mortgage loan was secured, Albert had complete control over the funds, and decedent received no portion thereof. August was greatly indebted and desiring to secure a mortgage loan, asked decedent for a quit claim deed to clear his title on his 160-acre farm. On or about January 15, 1920, decedent and his wife, executed and delivered to August an ordinary quit claim deed. August secured a mortgage loan of $16,000, most of which he used2601 to pay off his debts, but decedent controlled no portion of it. In 1920, Otto desired to sell his 80-acre farm and invest the proceeds and he asked the decedent for a quit claim deed to clear his title. On or about April 12, 1920, decedent and his wife executed and delivered to Otto and ordinary quit claim deed. Shortly thereafter Otto sold the said farm to Rollin E. King. In each instance the decedent gave the quit claim deed without any discussion at all, but each of the sons continued to pay the fixed annual amounts agreed upon in 1914. Aside from the property deeded to his children the decedent was worth about $10,000 in personal property. The decedent had always been in very good health until after an hernia operation in November, 1920, which left him weak. He owned a half block of ground in Atlantic, on one-half of which his home was situated, surrounded with trees, flowers, and lawn, and the other half was a truck garden. He kept a cow, bought hay and stowed it away in the barn. He did all the work around his own place, and each year would go out and help his sons thresh and do other manual labor, just because he enjoyed the work. He helped to thresh during the2602 summers of 1919 and 1920. The decedent also owned about 10 acres of timber near Atlantic and each year he cut out the dead wood and hauled it to town for firewood. In September or October of 1920 the decedent, without any assistance, used an axe to cut the dead timber, which was mostly oak, and used a hand saw to saw it up. In November, 1920, the decedent had his first operation for hernia after which he was not very strong. Prior to that operation decedent was very robust and never mentioned any fear or thought of death. 426 He had a second operation in December, 1920, after which there developed a malignant growth. After these operations, decedent confided in Otto that he did not expect to live long because he was so weak. The decedent died of heart failure on September 13, 1923, at the age of about 72 or 73. The respondent included in the decedent's gross estate the value of the three tracts conveyed to August, Albert, and Otto on the ground that they were transferred by decedent in contemplation of, and were intended to take effect in possession or enjoyment at, or after, his death. OPINION. TRUSSELL: The testimony in the record of this case convincingly2603 establishes that in the years 1914 and 1919 and 1920, when the transactions herein described took place, the grantor, August F. W. Brehmer, at such times a retired farmer, was still in good health; that he had up to 1920 no thought of approaching death, and that up to the time of these transactions there had occurred no incident which, in the ordinary course of life, should or could have caused him any apprehension of impending death. We are, therefore, satisfied that the transfers here in question were made not in contemplation of death. In the original grants made in 1914 the instruments of conveyance were in the form of ordinary warranty deeds but contained reservations respecting the income and profits from the farms and required that such income and profits should accrue to the grantor and his wife during their respective lives, or the survivor. In the instruments of conveyance made in the years 1919 and 1920 the reservations respecting rents and profits were specifically relinquished and thereupon the grantees acquired an absolute and indefeasible title to their respective parcels of land and subject to no encumbrance other than such mortgage liens as the grantees had themselves2604 placed upon their land. We can not escape the conclusion that the grantor in these transactions intended to and did convey to the grantees the entire interest in the property conveyed and that the grantor after giving the deeds in 1919 and 1920, retained no interest in nor claim upon lands conveyed, and that the grantees then took complete possession and enjoyment of their respective farms. We are thus brought to the conclusion that the transfers were not intended to take effect in possession or enjoyment at or after the grantor's death. The situation in respect to these transfers is somewhat analogous to the trust described in the case of , 427 and under the decision of the Supreme Court in that case the value of the properties described in the case here at bar can not be included in the gross estate of the decedent. The deficiency in estate tax should be computed in accordance with the above findings of fact and opinion. Order of redetermination will be made upon 15 days' notice, under Rule 50.Considered by LITTLETON, SMITH, and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619235/	NATIONAL HOME OWNERS SERVICE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Home Owners Service Corp. v. CommissionerDocket No. 91445.United States Board of Tax Appeals39 B.T.A. 753; 1939 BTA LEXIS 986; April 12, 1939, Promulgated 986 GAIN AND LOSS; CORPORATION DEALING IN ITS OWN STOCK. - A regulation of the Commissioner provided that a corporation realizes no gain and sustains no loss from purchases and sales of its own stock. It was given the force of law through repeated reenactments by Congress of the definition of gross income. The Commissioner changed the regulation by a Treasury decision dated one day prior to the enactment of the Revenue Act of 1934. Held, that the Treasury decision is not applicable and the petitioner realized no gain from sales of its own stock in 1934 and 1935. Robert F. Skutch, Jr., Esq., and Herbert C. Moore, Esq., for the petitioner. Clay Holmes, Esq., for the respondent. MURDOCK 753 The Commissioner determined deficiencies in the petitioner's tax as follows: YearIncome taxExcess profits tax1934$407.83$148.3119351,097.34399.03The issues are whether the petitioner realized taxable gain from the sale and exchange of its own stock, and, if so, the amount. FINDINGS OF FACT. The petitioner is a Delaware corporation organized in 1926. It filed its tax returns for 1934 and 1935 with the collector987 of internal revenue at Baltimore, Maryland. The stock of the petitioner consisted of class A 7 percent preferred, and class B no par common. There were about 845 shares of the former and about 5,687 of the latter outstanding at the beginning of 1933. The petitioner then held 2,313 of its class B shares as treasury stock at a cost of 87 cents per share. 754 A group of stockholders, owning a large majority of the outstanding stock of the petitioner, late in 1933, purchased from an estate 235 class A and 426 1/2 class B shares for $10,000. In order to divide their purchase in the ratio of seven B shares to one A share, and also to give the corporation a profit, they surrendered 135 of their class A shares to the petitioner in exchange for 273 1/2 class B shares. The petitioner took the 273 1/2 class B shares from its treasury and placed the 135 class A shares in its treasury. It also acquired 10 class A shares in 1933 from a source and for a consideration not shown in this record. It placed those 10 shares in its treasury. Certain stockholders agreed late in December 1933 that they would pay $100 for units of one class A and seven class B shares as called upon by988 the corporation when, as, and if it needed additional funds. The corporation, in order to pay off its bank loans during inactive periods, made calls, issued stock, and received the agreed payments therefor as follows: DateClass A shares involved1/3/3453/1/34258/1/34512/31/3451/15/35101/22/35201/31/3555Dividends were paid regularly on the class A shares. The book value of the class B shares was about 20 cents per share at the close of 1933. The book value of the class A shares at that time was $100 per share. The petitioner did not report any profit from the sale of its stock either in 1934 or 1935. The Commissioner added $2,966.04 to the net income reported for 1934, representing a profit on the sale of capital stock computed as follows: Sale price 40 shares capital stock$4,000.00Cost-purchase price 10 shares$755.8330 shares at $1.76 each through exchange52.80Cost of common given as bonus225.331,033.96Profit2,966.04He added a profit of $7,980.65 from the sale of capital stock to the net income reported for 1935. He computed that profit as follows: Sale price of stock$8,500.00Cost-Price of 85 shares at $1.76 through exchange$149.60Cost of common given as bonus369.75519.35Profit7,980.65989 755 OPINION. MURDOCK: The first question is whether the petitioner realized any gain from the transactions in 1934 and 1935 whereby it received $100 per unit for units consisting of one class A share and seven class B shares of its own stock. The Supreme Court recently reviewed this question in Commissioner v. Reynolds Tobacco Co.,306 U.S. 110">306 U.S. 110, affirming 97 Fed.(2d) 302, which reversed 35 B.T.A. 949">35 B.T.A. 949. See also First Chrold Corporation v. Commissioner,306 U.S. 117">306 U.S. 117, reversing 97 Fed.(2d) 22, which had affirmed an unpublished decision of the Borad. The Court stated in the Reynolds case that the statutory provisions of section 22(a) were so general in their terms as to render an interpretative regulation appropriate. The regulations of the Treasury Department up to May 2, 1934, had uniformly held that a corporation realized no gain and sustained no loss from purchases and sales of its own stock. The Board had consistently followed those regulations, but on April 7, 1932, the Circuit Court of Appeals for the First Circuit reversed the decision of the Board in 990 Commissioner v. Woods Machine Co., 57 Fed.(2d) 635, reversing 21 B.T.A. 818">21 B.T.A. 818. Certiorari was denied, 287 U.S. 613">287 U.S. 613. The Commissioner thereafter issued T.D. 4430, approved May 2, 1934, reported in C.B. XIII-1, p. 36. That Treasury decision amended the regulations to provide that gain or loss might result from the acquisition or disposition by a corporation of its own shares, depending "upon the real nature of the transaction"' no gain or loss was to result from the original issuance of stock, "But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another." Although there might be some question whether this petitioner was dealing in its own stock as to all of the shares involved within the meaning of the language just quoted, nevertheless, the Treasury decision seems clearly to cover some of the transactions. The Court in the Reynolds case pointed out that the administrative construction embodied in the regulation had been uniform for a great many years during which991 Congress had reenacted without alteration the definition of gross income, and the Court said: * * Under the established rule Congress must be taken to have approved the administrative construction and thereby to have given it the force of law. It held that the tax liability for the year 1929 was to be determined in conformity to the regulation then in force. The transactions involved in the present case took place in 1934 and 1935, some of them before and others after the change in the regulation of May 2, 1934. The bill which formed the basis of the Revenue Act of 1934 passed the House on February 21. The Senate 756 made some changes and passed the bill on March 28. The final changes were agreed to by both Houses on May 3, 1934. The act was approved on May 10, 1934. The legislative history does not indicate that the change in the regulation of May 2 was ever brought to the attention of Congress. Congress, in enacting that act, can not be presumed to have had in mind the regulation as amended. Since Congress had given the old administrative construction the force of law, the question arises whether the Commissioner could change the law by amending his regulation992 or whether a change in the law would have to come from the legislature. Cf. Squibb & Sons v. Helvering, 98 Fed.(2d) 69. The following is from the opinion of the Court in the Reynolds case: Section 605 of the Revenue Act of 1928 provides that "In case a regulation or Treasury decision relating to the internal-revenue laws is amended by a subsequent regulation or Treasury decision made by the Secretary or by the Commissioner with the approval of the Secretary, such subsequent regulation or Treasury decision may, with the approval of the Secretary, be applied without retroactive effect". It is clear from this provision that Congress intended to give to the Treasury power to correct misinterpretations, inaccuracies, or omissions in the regulations and thereby to affect cases in which the taxpayer's liability had not been finally determined, unless, in the judgment of the Treasury, some good reason required that such alterations operate only prospectively. The question is whether the granted power may be exercised in an instance where, by repeated reenactment of the statute, Congress has given its sanction to the existing regulation. Since the legislative993 approval of existing regulations by reenactment of the statutory provision to which they appertain gives such regulations the force of law, we think that Congress did not intend to authorize the Treasury to repeal the rule of law that existed during the period for which the tax is imposed. We need not now determine whether, as has been suggested, the alteration of the existing rule, even for the future, requires a legislative declaration or may be shown by reenactment of the statutory provision unaltered after a change in the applicable regulation. As the petitioner points out, Congress had, in the Revenue Acts of 1936 and 1938, retained Section 22(a) of the 1928 Act in haec verba. From this it is argued that Congress has approved the amended regulation. It may be that by the passage of the Revenue Act of 1936 the Treasury was authorized thereafter to apply the regulation in its amended form. But we have no occasion to decide this question since we are of opinion that the reenactment of the section, without more, does not amount to sanction of retroactive enforcement of the amendment, in the teeth of the former regulation which received Congressional approval, by the passage994 of successive Revenue Acts including that of 1928. The above quotation rather indicates that the Supreme Court agreed with Judge Learned Hand who said in the Squibb case that only legislative enactment could change the well established rule of law, and that there was no change, at least until 1936. Even then the Commissioner could not point back to consistent regulations on the subject. We hold that the Treasury Decision of May 2, 1934, is not applicable in the present case and the petitioner realized no gain 757 from the transactions of 1934 and 1935. Squibb & Sons v. Helvering, supra.1 This makes unnecessary any decision as to the amount of the gain. Reviewed by the Board. Decision will be entered for the petitioner.TURNER TURNER, concurring: While I agree with the conclusion reached by majority of the Board, I am unable to agree with the reasons expressed therefor. 995 As I read the facts, the petitioner was not dealing in its own shares "as it might in the shares of another corporation" but, to the contrary, the only purpose sought and accomplished was the adjustment of its capital. In my opinion, therefore, the conclusion reached falls within the wording and spirit of the regulation and there is no occasion here for declaring the regulation invalid. I am further of the opinion that we may not conclude, nor even presume, that, at the time the bill which became the Revenue Act of 1934 was drafted and considered by Congress and enacted into law, both houses of Congress through their committees were not fully aware of the impending regulation which became Treasury Decision No. 4430 and of its actual promulgation prior to the enactment of the Revenue Act of 1934. SMITH, VAN FOSSAN, LEECH, HARRON, KERN, and OPPER agree with the above. Footnotes1. The second opinion of the Circuit Court of Appeals for the Second Circuit in the Squibb↩ case (decided March 27, 1939) changes only the final paragraph of the first opinion, which was not relied upon by the Board in the present proceeding.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619236/	JAMES P. COLEMAN AND MARY R. COLEMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentColeman v. CommissionerDocket No. 8884-77.United States Tax CourtT.C. Memo 1979-255; 1979 Tax Ct. Memo LEXIS 270; 38 T.C.M. (CCH) 1020; T.C.M. (RIA) 79255; July 9, 1979, Filed James P. Coleman and Mary R. Coleman, pro se. Albert L. Sandlin, Jr., for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Francis J. Cantrel, 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. 272 OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: Respondent, in his notice of deficiency dated July 22, 1977, determined a deficiency of $569.72 in petitioners' Federal income tax for the year 1975. In fact, the total amount includes an income tax deficiency of $479.72 and an excise tax deficiency of $90 on "excess contributions" made to the individual retirement account e8IRA) of James P. Coleman (hereinafter referred to as petitioner) under the provisions of section 4973. 3There are two issues for decision: (1) Whether petitioners are entitled to a deduction of $1,500 for a contribution to an IRA under section 219, and (2) whether petitioners are liable for an excise tax of six percent (i.e., $90) for an "excess contribution" to an IRA under section 4973. 4273 The petition was filed under the small tax case procedures provided for in section 7463. However, since one of the disputed issues (the excise tax issue) involves a tax imposed by subtitle D of the Internal Revenue Code of 1954, it is not within the category of cases covered by section 7463 (i.e., income, estate, and gift tax cases). Accordingly, an order was issued removing this case from the procedures applicable to small tax cases. 5FINDINGS OF FACT Petitioners resided at 8 Sandhill Crane, Hilton Head Island, South Carolina, at the time they filed their petition herein. They filed a joint 1975 Federal income tax return with the Internal Revenue Service. On that return they claimed a deduction of $1,500 for a contribution made to an IRA. On or about July 10, 1970, Sea Pines Plantation Co. (Sea Pines) of Hilton Head Island, South Carolina, a corporation engaged in the real estate business, filed an Application for Determination with the Internal Revenue Service. Thereby said corporation sought to obtain initial qualification for a retirement plan (plan) for its employees. 274 The name of the plan was "Group Annuity Contract Number GR-1473" and the trustee thereof was the Travelers Insurance Co. of Hartford, Connecticut. The plan, effective on September 1, 1969, was formally adopted by Sea Pines on September 25, 1969, and thereafter executed by two corporate officers on November 18, 1969. Sea Pines was notified by the Internal Revenue Service that the plan met the requirements of the Internal Revenue Code (section 401). The plan provided, in pertinent part, that-- 2.1 Each Employee will be included in this Plan on the first September 1, commencing September 1, 1969, coincident with or next following the date he has completed three years of Continuous Service. * 10.4 No contribution shall be required of any Employees. The Company shall pay the full cost of providing the benefits under this Plan and shall pay any and all other costs incident to the operation hereof. * 12.1 The Company intends to continue this Plan and payment of contributions therefor indefinitely; but continuance of this Plan is not assumed as a contractual obligation, or other obligation, of the Company and the right is reserved by the Company to reduce, 275 suspend, or discontinue its contributions hereunder at any time. * * By letter dated December 17, 1975, Sea Pines advised the Internal Revenue Service in relevant part as follows-- The purpose of this letter is to inform you of our objective and commitment to modify the present Sea Pines Company Retirement Program as of December 31, 1975.The current and short term cash and cash flow positions of the Company do not permit continuation of the attached program in its present form. Specifically, we intend to terminate coverage for those salaried exempt employees with base salaries of $18,000 or higher. * * (Emphasis added.) Petitioner, along with all other employees of Sea Pines, was advised of the modification of its plan, and he had a base salary considerably in excess of $18,000 in 1975. On December 31, 1975, petitioner personally established an IRA at the South Carolina Federal Savings and Loan at which time he tendered a check in the amount of $1,500. Petitioner was covered by or included in the Sea Pines' plan in 1975. OPINION Petitioners, in essence, maintain that they had no vested interest in any retirement plan prior to the end of 1975 and276 the establishing of an IRA on the last day of that year was within the spirit of the law. Accordingly, they urge they are entitled to the disputed deduction. 6 Respondent, on the other hand, maintains that they are not so entitled because petitioner was an active participant in the plan "at some time" in 1975. We agree with respondent. Petitioner commenced his employment as a full time employee with Sea Pines277 in "either '72 or '73" and was continuously so employed up to and including May 12, 1977, at which time he was vice-president in charge of sales. His imprecise testimony that he was employed in "either '72 or '73" is of his own making and leaves us without a certain employment date. In that posture and based upon the record as a whole we hold that petitioner had completed three years of continuous service with Sea Pines at September 1, 1975, and, thus, we have found as a fact that he was included in the plan in that year. Our holding is buttressed by other factors. Petitioner admitted on cross-examination that he was covered under the plan from January 1, 1975, through December 31, 1975, and that had he died prior to December 17, 1975, his widow would have received benefits under the plan. 7Generally, section 219(a) allows a deduction from gross income for cash contributions made to an IRA. However, section 219(b)(2) states in pertinent part: * * * No deduction is allowed under subsection (a) for278 an individual for the taxable year if for any part of such year--(A) he was an active participant in-- (i) a plan described in section 401(a) * . (Emphasis added.) Section 219 does not advise us as to what an "active participant" means. Nonetheless, we are aided in that respect by the report of the Ways and Means Committee of the U.S. House of Representatives which relates: An individual is to be considered an active participant in a plan if he is accruing benefits under the plan even if he only has forfeitable rights to those benefits. Otherwise, if an individual were able to, e.g., accrue benefits under a qualified plan and also make contributions to an individual retirement account, when he later becomes vested in the accrued benefits he would receive tax-supported retirement benefits for the same year both from the qualified plan and the retirement savings deduction. * * H. Rept. 93-807, 93d Cong., 2d Sess., 1974-3 C.B. (Supp.) 236, 364. 8279 The record herein clearly shows that petitioner was an employee included in Sea Pines' plan during 1975 and, hence, an active participant in its qualified plan for at least some part of that year. Petitioners, therefore, are not entitled to deduct the IRA contribution made in that year. 9Section 4973 imposes an excise tax of six percent on any "excess contributions" made during the taxable year to an IRA. Since under section 219, as applicable in 1975, petitioner was entitled to no deduction, the entire contribution was in excess of the amount deductible for that year and, consequently, on the facts extant in this case, the six percent excise tax is clearly280 applicable. Orzechowski v. Commissioner,69 T.C. 750">69 T.C. 750 (1978), affd. 592 F.2d 677">592 F.2d 677 (2d Cir. 1979). 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. Respondent incorrectly characterized the entire $567.72 as an income tax in his notice of deficiency. Only $479.72 represents the income tax deficiency. The remainder ( $90) is an excise tax deficiency. See sec. 6211(a)(1), I.R.C. 1954↩, as amended, for the definition of a deficiency.4. This issue was never formally argued or briefed by the parties. Nonetheless, it is part of respondent's determination and we will decide it. Argument and briefing thereon are unnecessary since imposition of the excise tax liability follows directly from an adverse determination of the contribution issue. There is no stipulation of facts. The evidence consists entirely of testimony and exhibits.↩5. See Historic House Museum Corp. v. Commissioner,70 T.C. 12">70 T.C. 12↩ (1978).6. In that connection, petitioner testified "My position, Your Honor, is very simply that at the end of 1975, having been informed by my company that I had no retirement benefits with the company any longer. During the -- 1975 I think, is the year Congress passed the Individual Retirement Account Law and I simply took advantage of the intention and spirit of that law which was to provide for retirement benefits, for persons not otherwise covered, and as of -- during that year, as of the last day of the year, I was not covered in any way, by any retirement plan." We are further advised by petitioner (ex. 7-G), "At the beginning of 1975 my employer, Sea Pines Company, had a retirement program in which I participated↩ but was not yet vested in." (Emphasis added.)7. December 17, 1975, is the date of Sea Pines' letter to the Internal Revenue Service, parts of which are noted in this opinion, advising of the modification of its plan.↩8. We note that on March 23, 1979, the Internal Revenue Service, upon completion of its reconsideration of its regulations defining an "active participant", issued revised proposed regulations (44 Fed. Reg. 17754↩) defining the term "active participant" for those individuals who participate in retirement plans described in section 219(b)(2). The provisions of those regulations, which are not final, are effective for taxable years beginning after December 31, 1978.9. See 6 rzechowski v. Commissioner,69 T.C. 750">69 T.C. 750 (1978), affd. 592 F.2d 677">592 F.2d 677 (2d Cir. 1979), where such a deduction was not allowed; Pervier v. Commissioner,T.C. Memo. 1978-410, where a deduction was denied to an IRA contributor under section 219 because he became an active participant in a qualified plan on the last day of the taxable year; Goldstein v. Commissioner,T.C. Memo. 1978-480; Foulkes v. Commissioner,T.C. Memo. 1978-498↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619237/	Lee Johns v. Commissioner. Ruby Johns v. Commissioner.Johns v. CommissionerDocket Nos. 52611, 52612.United States Tax CourtT.C. Memo 1956-119; 1956 Tax Ct. Memo LEXIS 176; 15 T.C.M. (CCH) 603; T.C.M. (RIA) 56119; May 17, 1956176 Amos E. Jackson, Esq., 238 Royal Palm Way, Palm Beach, Fla., for the petitioners. Lee C. Smith, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion In these proceedings, consolidated for trial and opinion, the respondent has determined deficiencies in the Federal income tax of each petitioner for the year 1946 in the amount of $2,877.33. Some of the issues raised by the pleadings herein have been settled by stipulation. The issues remaining for our decision are: (1) whether payments received in 1946 by a partnership composed of the petitioners, pursuant to yacht charter parties which were to be performed in 1947 constitute income in 1946 as respondent has determined, or in 1947 as petitioners contend, and (2) whether the sales price of the yacht "Nicoya," which was sold in 1946 pursuant to an option in a charter party, was $67,500 as reported in the partnership's income tax return for that year, or was $86,250, as now contended for by petitioners on the ground that the consideration of $18,750 which the charterer agreed to pay for the hire of the yacht should be considered as part of the purchase price for the sale later made pursuant to the option. 177 Findings of Fact The parties herein have filed a stipulation of facts together with a number of exhibits identified therein. We find the facts to be as stipulated and incorporate herein by this reference the stipulation and the exhibits. The petitioners, Lee Johns and Ruby Johns, are husband and wife who lived during the year 1946 in Miami, Florida. The petitioners filed separate individual Federal income tax returns on the cash basis for the taxable year 1946 and a partnership return in the name of Lee Johns Motors, a partnership, for the taxable year 1946 with the collector (now district director) of internal revenue, Jacksonville, Florida. The partnership return stated that it was prepared on the accrual basis. The Lee Johns Motors is a family partnership, sometimes referred to herein as the partnership, composed of Lee Johns and his wife, Ruby Johns, each owning one-half of the partnership. The activities of this partnership are varied, including the purchase, sale and rental of used automobiles, yachts, construction equipment, barges and junk. This partnership began in June 1933 and throughout its existence, to and including 1946, when an accountant was employed, its178 books of account consisted solely of a cash journal which was kept by Ruby Johns and Tillie Royal. On November 9, 1946, the petitioners, Lee and Ruby Johns, and Hugh J. Chisholm entered into an agreement to charter the yacht "Masquerader" to the latter for the period February 15, 1947, to April 15, 1947, at which time $2,500 of the total charter hire sum of $16,200 was paid, but not reported as taxable income in the year 1946 by the partnership, Lee Johns Motors. On December 21, 1946, the petitioners, Lee and Ruby Johns, and Ernest L. Woodward (now deceased) entered into an agreement to charter the yacht "Captiva" to Woodward for the period February 1, 1947, to March 31, 1947, at which time $5,000 of the total charter hire sum of $17,700 was paid, but not reported as taxable income in the year 1946 by the partnership, Lee Johns Motors. Although the $5,000 was paid to petitioners on December 21, 1946, the charter party was not actually signed by Woodward until February 11, 1947. The petitioners, Lee and Ruby Johns, received payments from Howard Gould of New York City, under a charter agreement executed April 9, 1946, for the charter of the yacht "Nicoya" for the period April 19, 1946, to179 July 3, 1946, as follows: Date of PaymentAmountMarch 30, 1946$ 5,000April 9, 194613,750The petitioners, Lee and Ruby Johns, received payments from Herbert Hoover of New York City, under a charter agreement executed on October 2, 1946, for the charter of the yacht "Masquerader" for the period December 23, 1946, to January 15, 1947. These payments were reported as taxable income in the respective year of receipt by the petitioners, as follows: Date of PaymentAmountOctober 9, 1946$1,800January 2, 19475,400The payments received by petitioners in 1946 under the charter parties above referred to were called for and specified in the provision of the charter parties covering "Term, Hire and Payment" which reads in blank as follows: "In consideration of the covenants hereinafter contained, the said Owner agrees to let and the said Charterer agrees to hire the said Yacht from on the day of 19 to on the day of 19 for the total sum of Dollars, of which amount Dollars shall be paid on the signing of this Agreement and the balance thereof in advance payments as follows:" The yacht charter party agreements entered into by petitioners with180 Chisholm, Woodward, Gould and Hoover, contain identical provisions relative to the return of any of the charter fees by the owner to the charterer, which provisions are as follows: "Delivery "2. The Owner agrees to deliver the yacht at on the day of 19 in full commission and in proper working order, outfitted as a yacht of her size, type and accommodations, with full equipment, inclusive of that required by law, and fully furnished including china, linen, glass and silverware, staunch, clean and in good condition throughout and ready for service; and agrees to allow demurrage pro rata to Charterer for any delay in delivery. "But should it be impossible for the Owner to make delivery as stipulated through causes beyond his control and should such delivery be not made within days thereafter then this Agreement may be cancelled by the Charterer and any charter money paid in advance shall be returned to him. "Accidents "5. The Owner agrees that should the yacht after delivery sustain breakdown of machinery or be disabled or damaged by fire, grounding, collision or other cause so as to prevent the use of181 the vessel by the Charterer for a period of not less than * consecutive hours at any time, the same not being brought about by any act or default of the Charterer, the Owner shall make a pro rata return of hire to the Charterer for such period in excess of the said * hours the yacht shall be disabled or unfit for use. "Provided, however, that in case the yacht be lost or said damage be so extensive that the yacht cannot be or is not repaired within * days, then the charter price shall be abated pro rata and charter money paid in advance shall be rebated pro rata from the time of such damage, and the Charterer shall have the right to terminate this charter. "Usually 3 days for each month of charter time "Usually 24 hours on charters for one month or less "*Usually one-quarter of the charter term." In a space provided in the charter party with Howard Gould covering the yacht "Nicoya" for "Conditions Additional (if any)" there appears the following language: "It is further agreed by the parties hereto that the charterer [Gould] shall have the option to purchase the yacht at any time before June 10, 1946, for the sum of $67,500." On June 11, the partnership gave Gould182 a receipt reading as follows: "Received of Howard Gould Sixty seven thousand five hundred Dollars for purchase of Yacht Nicoya. Lee Johns Motors by Tillie Royal" In the charter party with Gould covering the yacht "Nicoya", as in the other charters above referred to it was provided: "The owner agrees to keep the yacht fully insured against Fire, Marine and Collision risks, and with Protection and Indemnity coverage, for the term of this charter, the policy to be held by him as full protection for any and all loss or damage that may occur to, or by, the yacht during the charter period * * ." Petitioner, Lee Johns, can read and write only his own name. During the taxable year he wished to realize around $85,000 from the yacht "Nicoya". He was not conscious of any income tax problems and consulted no attorneys. He was not interested in whether his receipts in connection with this transaction were in return for the charter of the yacht or were in consideration for its sale. He had no intent contrary to the provisions of the charter party. In the partnership's Federal income tax return for the year 1946, signed by Lee Johns and Ruby Johns, there was included in "Schedule of Boat183 Sales" the sum of $67,500 as the "Sale Price June 11, 1946" of the yacht "Nicoya". The partnership return filed by Lee Johns Motors, a partnership, for the year 1946, indicates that expenses of conducting the business operations of the partnership were deducted in the year in which incurred. The partnership did not keep its books on an accrual basis of accounting. Opinion KERN, Judge: The first issue herein is whether payments made to petitioners' partnership in 1946 upon the signing of charter parties covering certain yachts constitute income in the year of receipt or in the immediately following year when the charter parties were performed. These charter parties covered the letting and hiring of yachts and required petitioners to furnish the crews required for their operation. Thus, so far as petitioners were concerned, they were contracts which were part leases and part contracts for personal services. Upon certain specified contingencies outlined in our findings the payments might have been refundable to the charterers, but until those contingencies occurred (and in the instant case they did not occur), petitioners' partnership held them of right and without any restriction184 as to their use or application. Under the rationale of ; and , we decide this issue in favor of respondent. This case is distinguished from , in that in the latter case the payment in question was an advance deposit on an executory contract of sale. See . In the instant case there is not involved the question of "gross income." The second issue must also be decided against petitioners. We are not convinced by the record herein that the transaction involving the sale of the yacht "Nicoya" was not accurately delineated in the written documents in evidence and was not correctly reflected in the income tax return of petitioners' partnership. The case of , relied upon by petitioners is distinguishable in at least three important respects: (1) there is no convincing evidence in the instant case that petitioners intended the transaction to be other than that described in the written contract; (2) the amount185 recited in the charter party as being paid for the hire of the yacht for the period involved appears to be a fair rental in the light of the other charter parties here in evidence; and (3) petitioners, not Gould, were the insurers of the yacht during the period of the charter. Decision will be entered under Rule 50. Footnotes*. Footnotes to charter provisions appear on the following page.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619239/	Ambassador Hotel Company of Los Angeles, Petitioner, v. Commissioner of Internal Revenue, RespondentAmbassador Hotel Co. v. CommissionerDocket No. 33123United States Tax Court23 T.C. 163; 1954 U.S. Tax Ct. LEXIS 51; October 29, 1954, Filed 51 Decision will be entered under Rule 50. 1. Excess Profits Tax Income -- Exclusion -- Profit on Purchase of Own Bonds -- Sec. 711 (a) (2) (E). -- Profits made by the petitioner on the purchase of its own bonds during the taxable year were excluded from excess profits net income under the provisions of section 711 (a) (2) (E).2. Consents -- Corporate Seal -- Sec. 22 (b) (9). -- A consent under section 22 (b) (9) is not invalid because of the absence of the corporate seal, particularly where the consent was bound as a part of the return to which the seal was affixed, although the instructions on the back of the consent were that such seal should be affixed thereto.3. Consents -- Signatures of Officers -- Sec. 22 (b) (9). -- A consent under section 22 (b) (9), on which the name of the corporation had been typed, was not invalid because unsigned, where the consent was bound to and made a part of the return which was signed by two officers of the corporation and impressed with the corporate seal.4. Net Operating Loss Deduction Adjustment -- Interest Deduction -- Sec. 711 (a) (2) (L) (i). -- The operating loss for 1940 is not reduced by one-half of the interest on borrowed money52 under section 711 (a) (2) (L) (i) since no excess profits credit is computed or allowed for that year.5. Amortization of Bond Discount -- By Corporation Not Obligated -- No Merger or Consolidation. -- A new corporation to which some assets of an insolvent corporation were transferred, freed of all liens and claims of the creditors of the insolvent corporation, by bondholders of the insolvent corporation in exchange for bonds of the new corporation in a proceeding under section 77B of the National Bankruptcy Act, which proceeding was in no way similar to a merger or consolidation and under which the new corporation did not become liable for the obligation of the insolvent on its bonds, is not entitled to deductions for unamortized bond discount on the bonds of the insolvent corporation. John E. Hughes, Esq., for the petitioner.Robert G. Harless,53 Esq., and Donald P. Chehock, Esq., for the respondent. Murdock, Judge. MURDOCK 164 OPINION.The Commissioner determined deficiencies as follows for fiscal years ended January 31:DeclaredExcessYear endedvalueprofitsIncome taxexcess profits taxtax1944$ 2,235.44$ 92,000.04194572,821.2819462,799.5251,072.921947$ 22,893.15The issues for decision are:(1) Whether profits on purchases by the petitioner of its own bonds should be included in excess profits income;(2) Whether consents filed by the petitioner under section 22 (b) (9) were sufficient to exclude from its gross income the income attributable to the discharge of its indebtedness;(3) Whether the net operating loss for the year ended in 1940 must be reduced by interest in the computation of the unused excess profits credit carry-over to the year ended in 1944; and(4) Whether the petitioner is entitled to a deduction for the unamortized bond discount of its predecessor's. The facts have been presented by a stipulation which is adopted as the findings of fact.The returns for the taxable years were filed with the collector of internal revenue for the sixth district54 of California.The petitioner contends that profits which it realized during the taxable years on purchases of its own bonds are not to be included in 165 its excess profits tax income. The Commissioner concedes that the profit made by the petitioner on the purchase of its own bonds during the taxable years was included in excess profits net income and states: "It appears that under Section 711 (a) (2) (E) such profit is not includible for excess profits tax purposes." The profits in question are excluded from excess profits net income for each year under the provisions of section 711 (a) (2) (E) as they applied to the taxable years and the first issue is decided for the petitioner.Section 22 (b) (9) of the Internal Revenue Code, as it applied to the taxable years, provided that the income of a corporation attributable to the discharge within the taxable year of any indebtedness of the taxpayer shall not be included in gross income and shall be exempt from income tax "if the taxpayer makes and files at the time of filing the return, in such manner as the Commissioner, with the approval of the Secretary, by regulation prescribes, its consent to the regulations prescribed under55 section 113 (b) (3) then in effect." Section 113 (b) (3) provided that the basis of any property held by the taxpayer should be reduced by any amount excluded from gross income under section 22 (b) (9). Regulations 111, section 29.22 (b) (9)-2, state that a consent to have the basis of its property adjusted as provided in the sections of the Internal Revenue Code referred to "shall be made by or on behalf of the taxpayer corporation in duplicate on Form 982, in accordance with these regulations and the instructions on the form or issued therewith" and the original and duplicate "shall be filed with the return." The instructions on the back of Form 982 stated in paragraph 3 that it "shall be signed with the corporate name, followed by the signature and title of at least two officers of the corporation * , in addition to which the corporate seal shall be affixed."The return of the petitioner for the year ended in 1944 was signed and sworn to by its president and by its treasurer, and was impressed with the corporate seal. A filled-in Form 982 was signed by those same two officers and was bound to that return, along with a number of schedules and other papers. It did not bear 56 the corporate seal of the petitioner.The return of the petitioner for the year ended in 1945 was signed and sworn to by its president and by its treasurer and was impressed with the corporate seal. A filled-in Form 982 was bound to that return, along with a number of schedules and other papers. The Form 982 was unsigned and was not impressed with the seal. The name of the taxpayer was typed on the form immediately above the place provided for signatures, and immediately above that the following was typed in: "The attached statement marked 'Form 982 Statement' is an integral part of this consent." The statement referred to was bound to the return. Its effect was to state the taxpayer's belief 166 that it was not in receipt of any taxable income from the discharge of its bond indebtedness and, therefore, was not required to have the basis of its property reduced, but the consent was filed because the Commissioner had not yet acted upon this contention and the consent was to be effective if it should be determined finally that the provision of section 22 (b) (9) applied.The return of the petitioner for the year ended in 1946 was signed and sworn to by its vice president and57 by its treasurer and was impressed with the corporate seal. A filled-in Form 982, signed by those same two officers and impressed with the corporate seal, was bound to the return along with a number of schedules and other papers. It bore a reference to a statement and had a statement attached to it similar to those described for 1945.The return of the petitioner for the year ended in 1947 was signed and sworn to by its vice president and by its treasurer and was impressed with the corporate seal. A filled-in Form 982 was signed by those same two officers and was bound to that return along with a number of schedules and other papers. It did not bear the corporate seal of the petitioner. It bore a reference to a statement and had a statement attached to it similar to those described for 1945.The Commissioner, in determining the deficiencies, held that the taxable income attributable to the discharge of indebtedness could not be excluded from taxable income and applied to reduce the basis of assets because of the petitioner's "failure to properly execute and file unconditional consents on Form 982 in accordance with Regulations 111, Section 29.113 (b) (3)."The Commissioner, in58 his brief, does not refer to section 29.113 (b) (3) of Regulations 111. He makes no real argument based upon the conditions attached to the consents but merely says "the consents contain a condition which may very well have the effect of rendering them invalid." There was no statement attached to the 1944 consent. The statements do not render the other consents invalid. They merely call attention to the fact that if the gain on the redemption of the bonds is not income, there is no occasion for any consent or adjustment to the base, but clearly disclose that if there is any occasion for the consents, the petitioner wants them to be effective. The Commissioner makes no argument in his brief that the petitioner failed to file duplicates of Form 982, although the stipulation does not show that duplicates were filed. The petitioner in his requests for findings of fact states that "Form 982 in duplicate" was filed with and securely annexed to its returns for each of the taxable years. The Commissioner does not object to the quoted part of the request.The Commissioner states that "The principal objection to the validity of the consents is that the forms were not executed by and on59 167 behalf of the corporation in accord with the instructions contained in paragraph 3 printed on the back of the form." The form filed for the year 1946 met all of those requirements and the Commissioner makes no valid argument to support his determination on this point for that year. The forms for the other taxable years were not impressed with the corporate seal and that for 1945 was not signed by any officer. The petitioner argues that the forms filed for those years were sufficient to advise the Commissioner that it was making the election and consenting to the adjustment to the basis of its property, as it was allowed to do under sections 22 (b) (9) and 113 (b) (3), since any defects in the forms themselves were made up by the fact that those forms were securely bound into and made a part of the returns and the returns themselves were signed by two officers and impressed with the corporate seal, thus the signatures and seals on the returns were sufficient compliance with the requirements of the regulation and the instructions on the back of Form 982.Obviously these forms were not executed in strict conformity with the instructions on the back of the forms. None bore60 the corporate seal, but it has been held that the absence of a seal from similar documents does not render them invalid. Pictorial Printing Co., 12 B. T. A. 1407, reversed on other grounds 38 F. 2d 563; William S. Doig, Inc., 13 B. T. A. 256; Athens Roller Mills, Inc., 46 B. T. A. 1012, reversed on other issues 136 F.2d 125">136 F. 2d 125. One bore no signature whatsoever. However, each served to put the Commissioner clearly on notice that the petitioner was claiming the benefits allowed it under section 22 (b) (9) and was consenting to the disadvantages imposed upon it under section 113 (b) (3). He points to no disadvantage to him or the revenues which has resulted or can result from the failure of the petitioner to comply strictly with the instructions. These Forms 982 were not filed separately with the Commissioner but were bound with the returns, and the intention of the petitioner was to make them a part of the returns. The returns were signed by two officers, were impressed with the seal, and also were sworn to by the officers who stated in61 the oath on each that that return, "including any accompanying schedules and statements," has been examined by him and was made in good faith pursuant to the Internal Revenue Code and the regulations issued thereunder. The objections of the Commissioner appear to be purely technical, they do not go to the substance of the consents, and no good purpose would be served by disregarding the consents. It is held, after taking into consideration all of the circumstances, that the consents were effective, as intended by the taxpayer, to exclude from its gross income the income attributable to the discharge of its indebtedness and to reduce the basis of its property by corresponding amounts.168 The parties have stipulated that the operating loss for the year 1940 was omitted in computing the unused excess profits tax carryover to 1943. They disagree on the third issue only with respect to whether the agreed loss for the year ended in 1940 should be reduced by one-half of the interest on borrowed money. The Commissioner, relying upon section 711 (a) (2) (L) (i), argues that the loss should be reduced by 50 per cent of the interest charges. This same argument of his has been twice62 rejected by this Court, Flory Milling Co., 21 T. C. 432, North Star Woolen Mill Co., 22 T. C. 1237, in which it has respectfully declined to follow the decision in National Fruit Products Co. v. United States, 105 F. Supp. 658">105 F. Supp. 658, affirmed per curiam 199 F. 2d 754, certiorari denied 345 U.S. 950">345 U.S. 950, relied upon by the Commissioner. No adjustment to the interest deduction is proper in computing the net operating loss of the year ended in 1940 since no excess profits credit is computed or allowed for that year.The petitioner was incorporated in December 1934 under the laws of California and acquired its property on June 1, 1935, pursuant to a court decree in a proceeding under section 77B of the National Bankruptcy Act. The proceeding was in the United States District Court for the Southern District of New York. The debtor, the Ambassador Hotel Corporation, was adjudged insolvent. Claims and demands in the total amount of $ 24,735,447.53 were filed against it. Claims were allowed without objection based upon indentures securing so-called63 Los Angeles Bonds, Eastern Bonds, and Debentures. The debtor had issued at a discount in 1927 $ 6,000,000 principal 6 per cent bonds, due March 21, 1943, secured by the Los Angeles property. The claims filed on those bonds in the court proceeding consisted of $ 5,820,000 of principal, $ 785,990.89 of accrued interest, and $ 10,476 of interest on interest. The Eastern Bonds were secured by two eastern hotel properties. The Debentures were unsecured. The Los Angeles property was not subject to the lien of the Eastern Bonds and the eastern properties were not subject to the lien of the Los Angeles Bonds. The court approved a plan of reorganization dealing only with the Los Angeles property. It held that the value of the Los Angeles property was substantially less than the amount of the indebtedness represented by the Los Angeles Bonds and the claims of other creditors on that property were worthless. The petitioner acquired the Los Angeles properties free of all prior liens and claims by issuing to the holders of the Los Angeles Bonds of Ambassador Hotel Corporation $ 5,820,000 principal amount of its 5 per cent bonds secured by the Los Angeles property and 58,200 shares of its64 stock under a voting trust agreement. The record does not show what became of the Ambassador Hotel Corporation and of its other properties, stockholders, and creditors.169 The petitioner contends that it acquired the Los Angeles properties in a 77B proceeding under which no gain or loss was recognized under section 112 (b) (10) (B) and, consequently, it is entitled to deductions for the unamortized discount on the bonds of Ambassador Hotel Corporation, the debtor in the 77B proceeding. That reasoning is faulty. It has been held that a corporation receiving properties of another and becoming liable for the obligations of that other under the law as a result of a merger, consolidation, or the equivalent thereof, may deduct the unamortized discount at which the other corporation previously had issued bonds, the obligation of which was one of those for which the successor became liable. Helvering v. Metropolitan Edison Co., 306 U.S. 522">306 U.S. 522; American Gas & Electric Co. v. Commissioner, 85 F. 2d 527; New York Central Railroad Co. v. Commissioner, 79 F. 2d 247, certiorari denied65 296 U.S. 563">296 U.S. 563. The Ambassador Hotel Corporation which issued the bonds at a discount was not merged or consolidated into the petitioner. The petitioner did not result from a merger, a consolidation, or anything resembling either one. The petitioner did not assume the obligation on the bonds of Ambassador Hotel Corporation by operation of law or otherwise. It issued its own bonds as a part of the consideration for the transfer to it of the Los Angeles properties which the court in effect had held belonged to the holders of the Los Angeles Bonds of the Ambassador Hotel Corporation as opposed to ownership by the Ambassador Hotel Corportion, its stockholders, or other creditors. The petitioner is not claiming amortization of discount on its own bonds. The cases cited above are authority for the rule that the petitioner, under the circumstances here present, is not entitled to a deduction for the unamortized portion of the discount at which the Ambassador Hotel Corporation originally issued its bonds in 1927.The petitioner cites and relies upon Peabody Hotel Co., 7 T.C. 600">7 T. C. 600. It was stated therein that one of the issues was66 whether the Commissioner had erred in disallowing claimed deductions for amortization of bond discount. However, the parties stipulated the amounts of the deductions for amortization of bond discount if it should be determined that the petitioner acquired its assets pursuant to a nontaxable reorganization or exchange, and that latter was the only question considered by the court. Furthermore, the petitioner in that case did not issue its bonds but assumed the obligation of the former debtor on the bonds which the former debtor had issued at a discount. That case is thus distinguishable from the present case, and if it is contrary in any way to the other cases cited above on this point it would be in error in varying from them. Decision on this point is for the Commissioner.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619241/	RALPH BORCHERT AND MARTHA BORCHERT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBorchert v. CommissionerDocket No. 5370-78.United States Tax CourtT.C. Memo 1982-379; 1982 Tax Ct. Memo LEXIS 364; 44 T.C.M. (CCH) 376; T.C.M. (RIA) 82379; July 7, 1982. Gloria T. Svanas, for the petitioners. Cynthia J. Olson, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: This case was assigned to and heard by Special Trial Judge John J. Pajak pursuant to the provisions of section 7456(c) of the Internal Revenue Code366 of 1954, 1 and Rule 180. 2 The Court agrees with and adopts the Special Trial Judge's Opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE PAJAK, Special Trial Judge: Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax under section 6653(a) as follows: YearDeficiencies in TaxAdditions to Tax1974$5,123.00$256.1519755,752.00287.60197612,505.00625.25The issues for decision are: (1) whether certain income is taxable to the petitioners or to a so-called family trust; and (2) whether petitioners have established that underpayments of tax for the years 1974 through 1976 were not due to negligence or intentional disregard of rules and regulations under section 6653(a). 367 FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time the petition in this case was filed, petitioners resided in Benton Harbor, Michigan. Petitioners filed joint income tax returns for the taxable years 1974 through 1976. In 1974, petitioner Ralph Borchert (Ralph) was an innkeeper and one of three shareholders of a company engaged in the development of a Holiday Inn. In 1974, petitioner Martha Borchert (Martha) was a clerical employee of the State of Michigan. In 1974, Ralph purchased documents from Educational Scientific Publishers (ESP) for the purpose of creating the "Ralph Borchert Family Estate (A Trust)." Ralph consulted an attorney in Michigan prior to establishing the trust. The attorney discouraged Ralph from going forward. This advice was disregarded. On July 18, 1974, Ralph executed, as grantor, a preprinted ESP from entitled "Declaration of Trust Of This Pure Trust" for the Ralph Borchert Family Estate (A Trust) (hereinafter referred to as the Trust). The purpose of the Trust was set forth as follows: THE DECLARED PURPOSE OF THE TRUSTEES368 OF THIS TRUST shall be to accept rights, title and interest in real and personal properties conveyed by THE CREATOR HEREOF AND GRANTOR HERETO. Included therein is the exclusive use of h lifetime services and ALL of h EARNED REMUNERATION ACCRUING THEREFROM, from any current source whatsoever, so that Ralph Borchert (Grantor-Creator's Name) can maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare, all of which Ralph Borchert (Grantor-Creator's Name) feels he will achieve because they are sustained by his RELIGIOUS BELIEFS. Thereafter, Martha transferred property to her husband. Then Ralph executed deeds and other documents purporting to convey all his real and personal property to the Trust. The deeds to the real property were dated in 1974 and, with one possible exception, none of these were recorded with the Register of Deeds, Berrien County, Michigan, until 1979. Ralph testified that petitioners' personal residence was located in the Ralph Borchert River Bow Subdivision. Included in the properties369 purportedly transferred were petitioners' personal residence, household furnishings, promissory notes, United States Government bonds, shares of stock and the "Exclusive use of [Ralph's] lifetime services including ALL of his earned remuneration accruing therefrom." The Trust was to be administered by its Trustees, with a majority vote of the Trustees required for expenditures (including compensation of the Trustees). The Trust was established for a period of 25 years. However, at their discretion the Trustees by unanimous vote could liquidate the Trust at any time "because of threatened depreciation in values, or other good and sufficient reason * * ." Upon liquidation, the assets of the Trust were to be distributed pro rata to its beneficiaries. From the time the Trust was created, and continuing throughout the periods here at issue, both petitioners were Trustees of the Trust. During these periods Ralph held the position of Executive Trustee and Martha was the Executive Secretary of the Trust. Although Richard W. Geipel signed the original Trust document as a Trustee and his name is on some of the other 1974 documents, he appears to have been used merely to establish370 the Trust. On January 1, 1975, petitioners' daughter, Janice A. Sundheim (Janice), was appointed a Trustee of the Trust. It is clear that petitioners at all time retained full control over the assets of the Trust, and as Trustees of the Trust, were empowered to "do anything any individual may legally do." The preprinted ESP Trust states that the beneficial interests in the Trust were divided into 100 units in "certificate form hereto attached." These certificate forms were not submitted into the record. Ralph received the original 100 units. Thereafter various transfers of the units were made and certificates issued in the names of members of petitioners' family, including their grandchildren. After creation of the Trust, petitioners reported income from the properties purportedly conveyed to the Trust on the Forms 1041 filed by the Trust. Petitioners reported on their individual income tax returns alleged consulting fees and capital gains distributions received from the Trust. Petitioners opened a checking account for the Trust. Both petitioners had signature authority on the Trust checking account and wrote checks on the Trust account. Petitioners used the Trust to pay371 their personal expenses, such as the upkeep expenses of their personal residence and the real estate taxes on that residence. Despite the alleged transfer of petitioners' property, including their home and personal household goods, petitioners continued to live in their home and the use of these personal items must have remained unchanged. 3Ralph disregarded his purported assignment of his lifetime services and disregarded the Trust itself by reporting on petitioners' joint returns income which the Trust designated "Consultant fees" when deducting the same amounts. He also received capital gains distributions from the Trust of $4,000.00, $6,000.00, and $6,000.00 in 1974, 1975, and 1976, respectively. Martha received capital gains distributions from the Trust of $7,000.00, $10,500.00, and $10,500.00 in 1974, 1975, and 1976, respectively. The Trust made distributions of $6,000.00 each to petitioners' three grandchildren in 1974, $3,000.00 each to those grandchildren in 1975 and 1976, and $4,500.00 to their372 daughter, Janice, in 1975 and 1976. Respondent disregarded the Trust and made adjustments in order to tax petitioners as if it had not been created. Respondent attributed interest income, capital gain income and contract income to petitioners. Respondent subtracted from those amounts the 50 per cent capital gains deduction, real estate taxes and trust income reported. 4 Automatic sales tax adjustments decreased income in 1974 and 1975, whereas there was an increase in income in 1976 because petitioners failed to substantiate any amount greater than that allowed by the sales tax tables. Accordingly, respondent determined that during 1974, 1975, and 1976, petitioners earned the net amounts of $10,997.00, $12,590.00, and $22,090.00, respectively, which was not reported by them and was improperly reported by the Trust. Respondent also determined that petitioners were subject to a minimum tax of $1,288.00 in 1976 and that petitioners were not liable for self-employment tax for 1975 and 1976 on alleged consultant fees from the Trust, thereby reducing their tax by $445.00 for 1975 and $50.00 for 1976. 373 OPINION At the outset, we again find it necessary to enunciate some basic principles regarding the burden of proof. 5 Petitioners contend in their brief that respondent did not meet "his burden of proof," referring to section 482. 6 Petitioners failed to show that they came within any of the exceptions to the general rule set forth in Rule 142(a). Thus, under the general rule the burden is upon petitioners to prove that respondent's determinations are wrong. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). The petitioners' adherence to and claimed reliance on form does not avoid the substance of this Court's consistent rulings that ESP trusts do not shelter taxpayers from taxation.7 Yet we are faced with another ESP family trust case. We again sustain respondent's determinations for the reasons set forth below. 374 Ralph ostensibly transferred his "lifetime services" and "ALL of his earned remuneration accruing therefrom" to the Trust. Yet, Ralph disregarded the Trust by accepting payment of consulting fees from the Trust. It is absurd to believe that Ralph considered this assignment valid. This is evidenced by the fact that it would have been ridiculous to have the Trust pay such fees to him if the assignment had been valid because the fees would have had to have been returned immediately to the Trust. See Ferguson v. Commissioner,T.C. Memo. 1982-251. Petitioners obviously attempted to use their ESP family Trust to avoid taxation by having the Trust pay for personal, living and family expenses which are nondeductible under section 262. Our review of the record compels us to conclude that the Trust lacked economic substance, was a sham, and was a nullity for Federal income tax purposes for the reasons so carefully set forth in Markosian v. Commissioner,73 T.C. 1235">73 T.C. 1235 (1980). 8 As the Court there stated at 1241, even assuming the validity of the trust under State law, the trust "cannot be recognized as a separate jural entity for Federal income tax375 purposes." There is another basis for sustaining respondent's determinations. Repeatedly, grantors of ESP family trusts have been unable to escape taxation because of the grantor trust provisions of sections 671 through 677. See, e.g. Vnuk v. Commissioner,T.C. Memo. 1979-164, affd. 621 F.2d 1318">621 F.2d 1318 (8th Cir. 1980); Vercio v. Commissioner,73 T.C. 1246">73 T.C. 1246 (1980); Wesenberg v. Commissioner,69 T.C. 1005">69 T.C. 1005 (1978); Snyder v. Commissioner,T.C. Memo. 1982-258; Basham v. Commissioner,T.C. Memo 1980-545">T.C. Memo. 1980-545. We continue that repetition here. Petitioners are taxable on the income of the Trust since they retained the power to control it and in fact made substantial distributions from the Trust to themselves in each year. Moreover, it would be totally unrealistic to assume that anyone, including Ralph, would transfer his lifetime services to an ESP family trust without having such control. However, 376 petitioners claim that in 1975 and 1976, Janice, as a trustee, a holder of units of beneficial interest, and the representative of her children, was an adverse party for purposes of sections 671 through 677. We do not agree. Whether the economic arrangement of a trust cause a trustee to be an adverse party is a factual question dependent on the merits of each case. Paxton v. Commissioner,520 F.2d 923">520 F.2d 923 (9th Cir. 1975), affg. 57 T.C. 627">57 T.C. 627 (1972). Petitioners have failed to prove that the interest of Janice was a "substantial beneficial interest" and on this record we find to the contrary. Even if her interest could be characterized as substantial, the record does not indicate in any way that Janice was an adverse party. Sections 672 and 674. See Wesenberg v. Commissioner,supra;Broncatti v. Commissioner,T.C. Memo. 1981-452; and Antonelli v. Commissioner,T.C. Memo. 1980-544. Rather, there is nothing in the record to show by a preponderance of the evidence that this adult child of petitioners was anything but a related or subordinate party presumed to be subservient to the grantor under section377 672(c) for purposes of sections 674 and 675. It is clear that petitioners were not adverse parties to each other. Vercio v. Commissioner,supra.Based on the application of the grantor trust provisions, we sustain respondent's determinations. Petitioners have the burden of proving that their underpayments of tax were not due to negligence or intentional disregard of rules and regulations within the meaning of section 6653(a). Vnuk v. Commissioner,supra; see Crowley v. Commissioner,T.C. Memo. 1982-211. Not only have petitioners not met this burden, but we believe the record is clear that the petitioners were negligent and intentionally disregarded the rules and regulations. Ralph claimed at trial that he set up the trusts for estate planning purposes for his family. We are not required to believe unsupported self-serving statements made by a petitioner without evaluating it in light of all the facts and circumstances in the record. Anderson v. Commissioner,55 T.C. 756">55 T.C. 756, 758 (1971). Based upon this record, we are convinced that the primary, if not sole, purpose of the petitioners was to disregard the tax laws in their378 attempt to avoid application of the law to them.Petitioners argue on brief that the standard of care was vastly different in 1974. In answer, we turn to the atatement in Harris v. Commissioner,T.C. Memo 1981-46">T.C. Memo. 1981-46: "To anyone (and we would include petitioners) not incorrigibly addicted to the 'free lunch' philosophy of life, the entire scheme had to have been seen as a wholly transparent sham." Apparently this was the reaction of the attorney in Michigan who tried to discourage Ralph from going forward with his scheme. Yet, in his attempt to get a free lunch, Ralph disregarded this advice. Ralph was an intelligent, sophisticated businessman when he formed the Trust in 1974 and his wife was then employed by the State of Michigan. Petitioners knew what they were doing and intentionally disregarded the tax laws. Petitioners also contend on brief that they relied on ESP's representations. Balderdash! Ralph's testimony is to the contrary. The five per cent addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations in the family trust cases in situations similar to the one before us has been upheld by this Court in*379 virtually every case. Wesenberg v. Commissioner,supra.9 We consider the five per cent addition to tax a modest penalty to impose on someone engaged in a "flagrant tax avoidance scheme." Wesenberg v. Commissioner,supra at 1015. We agree that the additions to tax should be imposed. With respect to 1976, petitioners failed to prove that they were not subject to the minimum tax and that they incurred sales tax greater than the amount allowed by respondent. Welch v. Helvering,supra; Rule 142(a). Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954 in effect during the taxable years, unless otherwise indicated. All references to Rules are to the Tax Court Rules of Practice and Procedure. ↩2. Pursuant to the order of the Chief Judge, on the authority of the "otherwise provided" language of Rule 182, the post-trial procedures set forth in that rule are not applicable in this case.↩3. Among the items transferred were beds, chairs, tables, china, bedspreads, hair dryers, Christmas lights, "comp. fishing equip. 4 rods, 5 reels," diamond rings, etc.↩4. This did not include the capital gains distributions reported by petitioners on Schedule D of their own returns. When added for each year, the capital gains distribution and the additional amount of capital gain attributed to petitioners equals the total capital gains income reported by the Trust for that year.↩5. See Gibson v. Commissioner,T.C. Memo. 1982-374↩. 6. Since respondent did not rely on section 482 in this case, we will not mention it further other than to observe that section 482 does not shift the burden of proof to respondent.↩7. See Antonelli v. Commissioner,T.C. Memo. 1980-544; Basham v. Commissioner,T.C. Memo. 1980-545; and Dombrowski v. Commissioner,T.C. Memo. 1980-261. We are aware of over fifty decisions of this Court and the Courts of Appeals which have reached this result. See, Vnuk v. Commissioner,621 F.2d 1318">621 F.2d 1318 (8th Cir. 1980), affirming T.C. Memo 1979-164">T.C. Memo. 1979-164; and Gran v. Commissioner,664 F.2d 199">664 F.2d 199 (8th Cir. 1981), affirming T.C. Memo. 1980-558↩.8. See e.g., Ferguson v. Commissioner,T.C. Memo. 1982-251; Neve v. Commissioner,T.C. Memo. 1981-39; and Antonelli v. Commissioner,supra.↩9. See Broncatti v. Commissioner,supra;Corcoran v. Commissioner,supra; Basham v. Commissioner,supra; and Antonelli v. Commissioner,supra.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619245/	J. B. DORTCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dortch v. CommissionerDocket No. 13806.United States Board of Tax Appeals19 B.T.A. 159; 1930 BTA LEXIS 2459; February 28, 1930, Promulgated 2459 1. FRAUD. - In 1918 petitioner sold at a profit certain stock in a Norwegian steamship corporation. In making his 1918 tax return petitioner reserved 20 per cent of the sale price for Norwegian taxes which might be assessed against the corporation for the period prior to the sale and also upon the sale of the stock. Held that petitioner did not file a false and fraudulent return with intent to evade tax. 2. STATUTE OF LIMITATIONS - WAIVER. - After the lapse of the 5-year statutory period and pursuant to the provisions of the Revenue Act of 1924, the petitioner and respondent executed a waiver extending the period for assessment and collection until March 8, 1925, held that such waiver is valid. 3. Id. - BOND TO STAY COLLECTION UPON JEOPARDY ASSESSMENT. - Held not to effect an extension of the period of limitations. 4. Id. - PROOF OF ASSESSMENT. - Petitioner filed his 1918 return on March 8, 1919, a valid waiver extended the period for assessment and collection until March 8, 1925, the deficiency letter was mailed on January 9, 1926, and a jeopardy assessment was made subsequent to January 9, 1926, but no proof adduced as to any assessment prior to2460 March 8, 1925. Held that, there being no fraud, petitioner has made prima facie showing that assessment and collection was barred prior to January 9, 1926, and that the burden of proof as to the date of a timely assessment is upon respondent. Held, further, that the assessment and collection being barred, there is no deficiency. 5. OVERPAYMENT. - After the assessment and collection of the deficiency was barred, petitioner paid $14,585.82 thereof. Held, that such payment constitutes an overpayment of tax for 1918 within the meaning of section 607 of the Revenue Act of 1928. George E. H. Goodner, Esq., and Walter K. Smith, Esq., for the petitioner. J. E. Marshall, Esq., for the respondent. TRUSSELL 160 This proceeding has been initiated from respondent's 60-day deficiency notice dated January 9, 1926, which asserted a deficiency in the amount of $17,772.06 and a fraud penalty in the amount of $8,886.03 for the calendar year 1918. The total amount is in controversy. Petitioner alleges that he did not file a false and fraudulent return with intent to evade tax; that respondent has erroneously assessed additional taxes2461 after the statute of limitations barred such assessment and without any valid waiver having been filed; and that assessment and collection being barred, there is no deficiency and the amount of $14,585.82 paid subsequent to January 9, 1926, is an overpayment and should be refunded. FINDINGS OF FACT. Petitioner is a resident of Mobile, Ala. Prior to 1918 petitioner purchased 50 per cent of the stock of the Fort Gaines Steamship Corporation, a Norwegian corporation, at a cost of $57,000. One A. B. Orr, of New Orleans, La., owned the other half of the stock except for one share nominally held by a resident in Norway. The corporation owned one steamship, the Fort Gaines.In 1918 petitioner and Orr sold all of their stock in the said corporation for $360,000, each receiving one-half thereof, or $180,000, and they paid a total commissioner of $18,000. The contract of sale provided that petitioner and Orr should pay all taxes and claims of any kind assessed by the Norwegian Government against the said corporation or its ship, up to the date of the sale. The amount of such taxes or claims could not be determined at that time and petitioner and Orr executed a surety bond2462 in the penal sum of $50,000 as a guarantee. At the time petitioner filed his return for 1918 he was not able to determine the amount of Norwegian taxes which might be assessed 161 against him on the sale of the Fort Gaines Steamship Co. stock and he did not know the exact amount of profit derived from the sale. Orr had managed the corporation's affairs and kept its books of account, and petitioner sought his advice as to how he should report the profit on the transaction. Orr wrote petitioner that the return was so complicated he was enclosing a copy of his own return which was represented as made out with the aid of a Government revenue agent and suggested that petitioner make out his return in the same manner. Orr advised petitioner that the profit to be reported was computed in the following manner: Sale price of Fort Gaines Steamship Co. stock$180,000Less:Commissions$9,000Expenses1,27410,274169,726Cost of stock57,000112,726Reserve for Norwegian taxes on sale of stock (20 per cent of $180,000)36,00076,726Loss on Orr-Laubenheimer stock50,000Net profit reported26,726The Orr-Laubenheimer2463 Co. was engaged in the business of transporting tropical fruits and it leased the ship owned by the Fort Gaines Steamship Co. Orr and petitioner each owned 50 per cent of the stock of the Orr-Laubenheimer Co. but in 1918 they were still indebted to the United Fruit Co., from which they had purchased the controlling interest at $1,000 per share. When Orr and petitioner sold their stock in the Fort Gaines Steamship Co. the Orr-Laubenheimer Co. lost the use of the steamship Fort Gaines, and not being able to charter another ship, due to war-time conditions, it discontinued business and was liquidated. Petitioner and Orr sustained a loss upon their stock in the Orr-Laubenheimer Co. Petitioner accepted and acted upon the advice of Orr, and in making out his income-tax return for 1918 he reported the amount of $26,726 under the heading "Other Income (2) Interest on Bonds of Foreign Countries and Corporations and Dividends on Stock of Foreign Corporations." In 1922 petitioner paid $2,534.71 as his half of certain Norwegian taxes assessed for 1917. No further assessment has been made by that Government, either as to the corporation tax or the profit derived upon sale of the stock. 2464 162 In 1924 a revenue agent examined petitioner's books and in his report computed a profit on the sale of the Fort Gaines Steamship Co. stock as follows: Sale price$180,000.00Less:Cost$57,000.00Commissions9,000.00Norwegian taxes paid 19222,534.7168,534.71Net profit111,465.29Petitioner willingly furnished the revenue agent with all the data and information pertaining to his income for the year 1918, and after the examination was completed, he expressed his willingness to pay any additional tax due to the inclusion in income of the amount of $36,000 reserved for Norwegian taxes. In determining the deficiency of $17,772.06 as set forth in the 60-day deficiency letter, respondent included in gross income the amount of $111,465.29 as the profit from the said sale of stock and he allowed as a deduction from gross income the loss sustained on the stock of the Orr-Laubenheimer Co. Respondent also included in gross income an additional amount of $7,000, but he has admitted that the fraud penalty asserted is not based upon petitioner's failure to report that amount. Petitioner admits that the respondent's final determination2465 of January 9, 1926, of the amount of income tax due for the year 1918 is correct. Petitioner's 1918 tax return was filed on March 8, 1919. After the revenue agent completed his examination of petitioner's books in 1924 and reported that additional taxes were due, petitioner executed the following waiver: MARCH 13, 1925. INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of existing Internal Revenue Laws, J. B. Dortch a taxpayer, of Mobile, Ala., and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the years 1918 and 1919 under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory2466 period of limitation within which assessments of taxes may be made for the year or years mentioned, 163 or the statutory period of limitations as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. J. B. DORTCH, Taxpayer.By D. H. BLAIR, Commissioner.Respondent's final determination of petitioner's tax liability for 1918 was set forth in the deficiency letter dated January 9, 1926, which asserts the deficiency and penalty in controversy, and also states that petitioner might appeal to this Board pursuant to section 274 of the Revenue Act of 1924. Subsequent to January 9, 1926, respondent made a jeopardy assessment, and within 10 days thereof petitioner paid the amount of $14,585.82 and filed with the collector a bond to stay the collection of the balance of the deficiency in the amount of $3,186.24, and the penalty of $8,886.03. Petitioner's appeal was filed on April 21, 1926. OPINION. TRUSSELL: The respondent, proceeding under section 601 of the Revenue Act of 1928, produced testimony showing that the return made by the petitioner for the year 1918 was erroneous in respect to both the deduction2467 claimed for the purpose of meeting unknown demands for foreign taxes and the amount of losses sustained in connection with the disposition of stock of the Orr-Laubenheimer Co. These errors, however, appear to be in no way inconsistent with a purpose on the part of the petitioner to make a true return for income-tax purposes. The petitioner admits that the respondent's final computation is correct, but denies that he omitted any items from his return with the intent to evade tax. The respondent has agreed that petitioner's failure to include the amount of $7,000 in income is not the basis for asserting fraud. It appears that the respondent has determined fraud for the reason that petitioner reserved $36,000 for Norwegian taxes without so stating in his return and that the profit which was reported was entered in the wrong place on the return. The record in this proceeding convinces us that petitioner acted in good faith and conscientiously made his return in a manner which he believed reflected his taxable income. Petitioner reserved $36,000, or 20 per cent of $180,000, for Norwegian taxes which might be assessed upon the sale of the stock and upon the corporation for any2468 taxes due prior to the sale of the stock. Petitioner did not know the exact amount of taxable income derived from the said sale and be merely sought to protect himself from making an overpayment 164 of tax which any reasonable and prudent business man would do. The fact that the profits as computed by him were reported in the wrong place on the return is immaterial, and while petitioner made a mistake in taking the loss deduction without setting it up in the return, such mistake does not show any intent to evade tax, for the loss was not fictitious and respondent has allowed a loss deduction in his final computation. We are of the opinion that petitioner did not file a false and fraudulent return with the intent to evade tax for the year 1918, and that respondent erred in asserting a fraud penalty in the amount of $8,886.03 for that year. The second issue is whether the assessment and collection of the deficiency is now barred by the statute of limitations. Petitioner filed his 1918 tax return on March 8, 1919, and pursuant to section 250(d) of the Revenue Acts of 1918 and 1921 and sections 277 and 278 of the Revenue Act of 1924, the respondent had five years from2469 that date or until March 8, 1824, to determine, assess and collect the tax due. One year and five days after the assessment and collection of any additional tax for 1918 had been barred by the statute of limitations, and, pursuant to the provisions of the Revenue Act of 1924, the petitioner and the respondent executed a waiver dated March 13, 1925, extending the period for assessment and collection of taxes for 1918 until March 8, 1925. The said waiver was executed prior to the enactment of the Revenue Act of 1926, and at a date when although the assessment and collection of the tax was barred the liability was not extinguished. The Board has previously held that such a waiver is valid and operates to extend the statute of limitations for the period agreed upon. Panther Rubber Mfg. Co.,17 B.T.A. 310">17 B.T.A. 310; Merchants Transfer & Storage Co.,17 B.T.A. 290">17 B.T.A. 290; Thiel Service Co.,17 B.T.A. 1114">17 B.T.A. 1114; Wells Brothers Co. of Illinois,16 B.T.A. 79">16 B.T.A. 79; and Friend M. Aiken,10 B.T.A. 553">10 B.T.A. 553, affd., 2470 Aiken v. Commissioner of Internal Revenue, 35 Fed.(2d) 620. The filing of a bond to stay collection upon the jeopardy assessment in 1926 did not effect a further extension of the period of limitation for assessment and collection. See Guardian Trust Co. et el.,15 B.T.A. 1256">15 B.T.A. 1256; H. W. Lieber et al.,13 B.T.A. 1175">13 B.T.A. 1175. The said waiver being valid, the respondent had until March 8, 1925, to assess the additional tax for 1918, and if the assessment had been made prior to the enactment of the Revenue Act of 1924, the period for collection extended only until March 8, 1925, the six-year collection period provided for in that act not being retroactive. Russell v. United States,278 U.S. 181">278 U.S. 181. On the other hand, if the assessment had been made subsequent to the enactment of the Revenue Act of 1924, and prior to the expiration of the waiver, 165 respondent would have six years from date of such assessment within which to collect the tax pursuant to section 278(d) of the 1924 Act. S. A. Apple,17 B.T.A. 1047">17 B.T.A. 1047; 2471 T. B. Floyd,11 B.T.A. 903">11 B.T.A. 903. The record establishes that the return was filed on March 8, 1919, that a waiver extended the period for assessment and collection until March 8, 1925, that the deficiency letter was mailed on January 8, 1926, and that a jeopardy assessment was made subsequent to January 9, 1926, but no proof has been adduced as to whether any assessment was made prior to March 8, 1925. In the case of Frank E. Harris Co.,16 B.T.A. 469">16 B.T.A. 469, the Board held that, where the taxpayer had shown that the return for 1917 was filed on a certain date, the five-year period had elapsed and that collection had not been made, a prima facie showing had been established that collection was barred and that the burden of proof was upon the Commissioner to establish the exception, namely, that assessment had been timely made. See also Carnation Milk Products Co.,15 B.T.A. 556">15 B.T.A. 556; H. G. Stevens,14 B.T.A. 1120">14 B.T.A. 1120; Bonwit Teller & Co.,10 B.T.A. 1300">10 B.T.A. 1300. There being no fraud, petitioner has made a prima facie showing that assessment and collection was barred after March 8, 1925, and upon the record as established2472 and upon authority of above-cited Board decisions, we must hold that assessment and collection of the deficiency in the amount of $17,772.06 was barred prior to the issuance of the deficiency letter dated January 9, 1926. Pursuant to section 906(e) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, there is no deficiency for the year 1918. The last issue is whether petitioner has made an overpayment of tax for 1918 in the amount of $14,585.82, that amount having been paid after assessment and collection thereof was barred. In the case at bar, the deficiency letter was issued pursuant to section 274 of the Revenue Act of 1924 and dated January 9, 1926. Within 60 days from that date the Revenue Act of 1926 was enacted, on February 26, 1926, and this proceeding was initiated subsequent thereto on April 21, 1926. Section 283(c) of the Revenue Act of 1926, provides: If before the enactment of this Act the Commissioner has mailed to any person a notice under subdivision (a) of section 274 of the Revenue Act of 1924 (whether in respect of a tax imposed by Title II of such Act or in respect of so much of an income, war-profits, or excess-profits2473 tax imposed by any of the prior Acts enumerated in subdivision (a) of this section as was not assessed before June 3, 1924), and if the 60-day period referred to in such subdivision has not expired before the enactment of this Act and no appeal has been filed before the enactment of this Act, such person may file a petition with the Board in the same manner as if a notice of deficiency had been mailed after the enactment of this Act in respect of a deficiency in a tax imposed by this title. In such cases the 60-day period referred to in subdivision (a) of section 274 of 166 this Act shall begin on the date of the enactment of this Act, and the powers, duties, rights, and privileges of the Commissioner and of the person entitled to file the petition, and the jurisdiction of the Board and of the courts, shall, whether or not the petition is filed, be determined, and the computation of the tax shall be made, in the same manner as provided in subdivision (a) of this section. Section 284(e) of the Revenue Act of 1926, as amended by section 507 of the Revenue Act of 1928, provides: If the Board finds that there is no deficiency and further finds that the taxpayer has made an2474 overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer as provided in subdivision (a). Unless claim for credit or refund, or the petition, was filed within the time prescribed in subdivision (g) for filing claims, no such credit or refund shall be made of any portion of the tax paid more than four years (or, in the case of a tax imposed by this title, more than three years) before the filing of the claim or the filing of the petition, whichever is earlier. Section 607 of the Revenue Act of 1928 provides: Any tax (or any interest, penalty, additional amount, or addition to such tax) assessed or paid (whether before or after the enactment of this Act) after the expiration of the period of limitation properly applicable thereto shall be considered an overpayment and shall be credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim. 2475 Petitioner paid the amount of $14,585.82 in 1926, after the period of limitation for the assessment and collection thereof, and that amount constitutes an overpayment within the meaning of section 607 of the Revenue Act of 1928. Cf. Morris Metcalf,16 B.T.A. 881">16 B.T.A. 881. Judgment will be entered pursuant to Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619247/	JOHN G. PASCHAL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPaschal v. CommissionerDocket No. 5202-91United States Tax CourtT.C. Memo 1994-380; 1994 Tax Ct. Memo LEXIS 389; 68 T.C.M. (CCH) 366; 94-2 U.S. Tax Cas. (CCH) P47,942; August 15, 1994, Filed 389 Decision will be entered under Rule 155. John G. Paschal, pro se. For respondent: Daniel K. O'Brien. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows: Additions To TaxSec.Sec.Sec.YearDeficiency1 6653(b) 6653(b)(2)66611980$ 34,186$ 17,093--198169,51034,755--19825,8322,9162$ 1,458The issues for decision are: 1. Whether increases in petitioner's net worth were due, as petitioner contends, to the following nontaxable sources of income: (1) Seventy-five thousand dollars in loans from his sister, (2) $ 50,000 buried in his back yard, (3) $ 35,000 from the sale of two Corvettes, and (d) $ 20,000 from the sale of a bulldozer. We hold that they were not. 2. Whether respondent's determination that petitioner had unreported income of $ 121,158 for 1980, $ 128,764 for 1981, and $ 17,857 for 1982, by use of the net worth plus expenditures method, was correct. We hold that respondent's determination was correct, except390 as respondent concedes below. 3. Whether petitioner is collaterally estopped from denying that the addition to tax for fraud applies to the deficiency in income tax for the year 1981. We hold that he is. 4. Whether petitioner is liable for the addition to tax for fraud for 1980, 1981, and 1982 pursuant to section 6653(b) and 6653(b)(1) and (2). We hold that he is. 5. Whether petitioner has shown any impropriety in the handling of his case by respondent's agents. We hold that he has not. Respondent concedes that $ 17,500 of petitioner's net worth increase for 1981 was from nontaxable sources. Thus, respondent now contends that the deficiency in income tax is $ 60,178 and the addition to tax for fraud under section 6653(b) is $ 30,089. Respondent made no argument at trial or on brief with respect to the section 6661 addition to tax, which is therefore deemed abandoned. We find for petitioner on this issue. Section references are to the Internal Revenue Code of 1954 in effect during the years at issue. Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. 1. Petitioner391 Petitioner resided in Mine Hill, New Jersey, when he filed his petition. Petitioner filed joint income tax returns for 1977 to 1982 with his then wife, Thelma Paschal. Petitioner executed Forms 872 extending the period to assess income tax for 1982 to December 31, 1989. From 1980 to 1982, petitioner had checking and savings accounts but kept no formal books and records for his Schedule C businesses. He commingled personal and business funds. 2. Petitioner's Financial History and Net Worth on December 31, 19791The parties stipulated the items in the net worth analysis except for petitioner's opening net worth. We find that petitioner's opening net worth as of December 31, 1979, was $ 15,000 (as determined by respondent), and that he did not have as nontaxable sources392 of income a $ 75,000 loan from his sister, Mary Ann Brinkley, $ 50,000 from his father, $ 35,000 from the sale of two Corvettes, or $ 20,000 from the sale of a bulldozer. Petitioner's contentions to the contrary are discussed below. a. Pre-1979From 1954 to 1978, petitioner's net income as shown on income tax and Social Security records was less than $ 10,000 each year, except for 1 year in which he reported $ 11,150. In May 1976, petitioner borrowed $ 60,000 from his father, George Paschal. Petitioner has not repaid this loan. In June 1979, petitioner borrowed $ 27,000 from the New Jersey National Bank to buy a 1979 Ford truck. From 1973 to 1979, petitioner spent $ 452,229. His reported income for that period was $ 309,258. From 1976 to 1979, petitioner's yearend bank account balances increased or decreased as follows: 1976197719781979$ 16,790.79$ 25,060.09$ 62,740.93($ 10,425.66)On November 27, 1979, petitioner invested $ 30,000 in certificates of deposit at the Morris County Savings Bank. On November 21, 1979, petitioner invested $ 25,000 in a commercial paper investment at the United Jersey Bank. On November 28, 1980, petitioner rolled393 over the latter amount to another commercial paper investment at United Jersey Bank. From September to December 1979, petitioner rolled over $ 61,024 from matured certificates of deposit to other certificates of deposit at the Morris County Savings Bank and the Lakeland Savings and Loan Bank. In 1979, petitioner received an $ 81 insurance premium refund from Traber, Vreeland and Barnett, Inc. Petitioner had cash on hand of $ 15,000 or less on December 31, 1979. b. 1979 to 1982From 1979 to 1982, petitioner received no gifts in excess of $ 1,000. From 1979 to 1982, petitioner did not maintain any bank accounts or hold any property as trustee or agent for anyone. From 1979 to 1982, petitioner's then wife, Thelma Paschal, provided none of the funds that petitioner acquired after January 1, 1979. The most likely source of petitioner's net worth increases from 1980 to 1982 was interest income and income from his auto parts business. c. Petitioner's Bank AccountsPetitioner provided the funds for all bank accounts held in his name and his children's names from 1980 to 1982. Petitioner had money at three different banks in more than 20 checking, savings, and money market394 accounts and certificates of deposit. Some were held in his name, and some were held in the names of members of his family. d. Petitioner's Real EstateOn May 22, 1967, petitioner and his then wife, Thelma Paschal, bought a house in Mine Hill, New Jersey, for $ 20,000. On February 9, 1973, petitioner bought a farm in Troupsburg, New York, for $ 10,000. In February 1976, petitioner bought 20 acres of land near his home in Mine Hill, New Jersey, for $ 65,000. On December 7, 1976, petitioner bought two tax liens totaling $ 924.63 from the municipality of Mine Hill. On August 1, 1980, petitioner bought five tax liens totaling $ 15,913.08 from the municipality of Randolph Township. On November 25, 1981, petitioner bought a house in Taylors, South Carolina, for $ 62,000 in cash. e. Petitioner's AutomobilesPetitioner bought the following automobiles and other vehicles: YearVehicle Price Comments1972wrecked 1971$ 1,400stolen in 1980 and Panteranever recovered 19721972 Ford backhoe4,500-owned through 1982 5,0001974 or1970 Ski Doo400-owned through 1982 1975snowmobile5001977Ford tractor12,29419781978 Mercedes26,1001979wrecked 1979 Ford1,000sold in 1983 pickup truck1979Ford truck33,500$ 6,500 downpayment, 27,000 financed 1979wrecked 1978500given to petitioner's Chevrolet Camaroson in 1981 1979-1971 GMC pickup1,0001982truck1979-1967 amphibious1,2001982vehicle1980wrecked 19793,000sold in 1981 Corvette19811977 Chevrolet7,000owned through 1982 Corvette19811981 Corvette14,350395 In May 1981, petitioner sold a GMC Rollback truck to his brother-in-law John Pederson (Pederson) for $ 10,000. In 1981, Pederson made payments of about $ 6,750 on the truck. 3. Petitioner's Tax ReturnsAlbert J. Lusardi (Lusardi), a part-time income tax preparer, prepared petitioner's income tax returns for 1980, 1981, and 1982 based on summary figures petitioner gave him. Petitioner reported Schedule C income from Nick's Auto Parts on his 1980 and 1981 income tax returns. He skimmed money from Nick's Auto Parts and did not report all of the income he received from the business. He reported Schedule C income from John Paschal mortgages on his 1981 and 1982 returns, and he reported Schedule C income from the business of selling hay on his 1982 return. Petitioner did not deduct depreciation for bulldozers on his 1980 or 1981 income tax returns. In 1987, petitioner pleaded guilty to willful attempted evasion of his individual income tax for 1981 in violation of section 7201. 4. Petitioner's Auto Salvage BusinessIn 1980, petitioner operated a sole proprietorship, Nick's Auto Parts, an auto salvage business that specialized in Corvettes. Nick's Auto Parts was396 primarily a cash business. Petitioner operated Nick's Auto Parts on a tract of land about 190 feet by 290 feet adjoining his residence. In 1976, he obtained 20 more acres nearby. In 1979 and 1980, the town of Mine Hill required petitioner to move auto parts which he had stored on the 20 acres to his salvage yard, and to enclose the salvage yard with a 10-foot fence. On July 15, 1980, agents from the New Jersey Department of Motor Vehicles (DMV) came to petitioner's place of business with a search warrant and removed three wrecked automobiles. In 1981, petitioner was arrested for, and in June or July, criminally charged with, misrepresenting title to the three cars that were removed by the DMV. The DMV charges were administratively dismissed late in 1981. These events created tremendous pressures on petitioner and his family. Petitioner's wife left him and moved to South Carolina. Later she decided to divorce petitioner. They signed a settlement agreement in January 1982. Petitioner decided in 1980 to get out of the auto salvage business. He began advertising and making bulk sales of the equipment and parts in 1980 and 1981. In September 1980, petitioner agreed to sell397 the salvage business to Michael Homza (Homza). In early 1982 when petitioner had complied with all that the town required (i.e., renewing his junk license, putting up the fence, and getting rid of the inventory), Homza agreed to buy the property. Petitioner sold inventory to prepare for the 1982 closing. Homza agreed to take the auto parts left at that time. Before the closing, some neighbors sued the mayor, the town council and petitioner, seeking the removal of the 10-foot fence. Petitioner ultimately prevailed, but the litigation delayed the sale to Homza. In October 1982, Homza died. His widow later voided the contract. 5. Petitioner's Mortgage Lending ActivityIn 1980, petitioner was also in the business of making mortgage loans to property owners. Petitioner's mortgage loans receivable were $ 57,390 in 1979, $ 295,630 in 1980, $ 413,973 in 1981, and $ 333,374 in 1982. All the mortgage money petitioner lent from 1979 to 1982 was from his funds. 6. Hay Fire on Petitioner's Property -- 1981On November 18, 1981, a fire destroyed a lean-to on petitioner's property which contained bales of hay. Petitioner filed a claim with W.H. Anderson Insurance Agency, 398 Dover, New Jersey, on a home insurance policy which provided coverage up to $ 6,500 for out-buildings on the property. On December 2, 1981, petitioner received a $ 1,170 check for this claim. Petitioner also filed a claim relating to this fire with Farm Family Insurance Co., Hackettstown, New Jersey. This insurance policy provided coverage up to $ 7,500 for hay and $ 7,000 for the hay barrack. Petitioner received $ 14,500 for this claim. 7. Petitioner's Sister, Mary Ann BrinkleyMary Ann Brinkley is petitioner's sister. She was married to William Brinkley from 1964 to 1971. In 1964, William Brinkley's net worth was more than $ 500,000. During their marriage, William Brinkley did not give money to Mary Ann Brinkley other than for regular living expenses. William Brinkley instituted divorce proceedings against Mary Ann Brinkley late in 1970. Mary Ann Brinkley received $ 500, a Ford Falcon, and some furniture from Sears in the divorce. William Brinkley died in July 1980. In 1982, petitioner made a $ 15,000 mortgage loan to the Norwood Inn and recorded it in Mary Ann Brinkley's name to conceal the transaction from his then wife, Thelma Paschal. Between 1983 and 1985399 petitioner transferred title to 20 acres of land and a house on Lake Hopatcong to his father. By early 1991, title to the house on Lake Hopatcong had passed to Mary Ann Brinkley, and title to the 20 acres of land had passed to a corporation of which she was the sole stockholder. Petitioner's claim that his sister lent him $ 75,000 is discussed below in the opinion. 8. Respondent's Investigation and Audit of Petitionera. Criminal InvestigationSpecial Agents Alan Tunkavige and Jack Holland came to petitioner's home in February 1984 and told him that he was the subject of a criminal investigation. They told petitioner he had a right to legal counsel, but petitioner did not request counsel. Petitioner complied with the special agents' requests during at least eight interviews and many telephone conversations. Respondent began to investigate petitioner's income tax liabilities as a result of information respondent's Criminal Investigations Division's Organized Crime Project for North New Jersey received from Detective Charles Canfield of the Mine Hill Police Department. Respondent's investigation was not based on information obtained from Lt. Bernard Kelly or from400 any other representative of the New Jersey State Police. Special Agent Tunkavige has never met or spoken with Lt. Kelly. During Special Agent Tunkavige's investigation petitioner never claimed that he: (1) Had $ 50,000 buried in his backyard at the end of 1979; (2) received loans totaling $ 75,000 from his sister or her husband, William Brinkley; or (3) had $ 50,000 of U.S. Treasury securities on December 31, 1979. Petitioner told Special Agent Tunkavige that he did not own a bulldozer during the relevant time period. b. Examination DivisionFrom April 1988 to early 1989, petitioner attended conferences in the Examination Division, Newark District Office, relating to his 1980 to 1982 tax years. At those conferences, petitioner said that he had $ 50,000 cash buried on his property on December 31, 1979. However, petitioner did not say that his sister had lent him $ 75,000 or that he had $ 50,000 in U.S. Treasury securities at the end of 1979. c. Appeals OfficeFrom March to October 1990, petitioner attended conferences in respondent's Appeals Office relating to his 1980 to 1982 tax years. At those conferences, petitioner contended that he had $ 50,000 cash on hand401 on December 31, 1979, in addition to the $ 15,000 that he had previously claimed he had at the end of 1979 in an affidavit he submitted to respondent's Criminal Investigations Division. Petitioner did not claim that his sister had lent him $ 75,000 or contend that he had $ 50,000 in U.S. Treasury securities at the end of 1979. Based on an analysis of assets acquired and expenditures made by petitioner from 1980 to 1982, respondent determined that petitioner failed to report taxable income of $ 121,158 for 1980, $ 128,764 for 1981, and $ 17,857 for 1982. OPINION 1. Respondent's Use of the Net Worth MethodRespondent used the net worth method to determine petitioner's income for the years in issue. Under the net worth method, income is computed by determining a taxpayer's net worth at the beginning and end of a year. The difference between the two amounts is the increase or decrease in net worth. This difference is increased by adding nondeductible expenditures, including living expenses, and decreased by subtracting gifts, inheritances, loans, and the like. ; ,402 affg. . An increase in a taxpayer's net worth, plus his nondeductible expenditures, less nontaxable receipts, may be considered to be taxable income. In a net worth case, the Commissioner must: (a) Establish, with reasonable certainty, an opening net worth, and (b) either (i) show a likely income source, or (ii) negate possible nontaxable income sources. ; (Court reviewed), affd. ; , affd. without published opinion . The Commissioner must also investigate all leads presented by the taxpayer which are reasonably susceptible of being checked. . Petitioner agrees to respondent's net worth analysis, except petitioner contends that respondent failed403 to include certain items, discussed below, in his opening net worth. Petitioner also asserts that respondent failed to adequately investigate leads provided by petitioner relating to his cash accumulations as of December 31, 1979. 2. Opening Net WorthPetitioner contends that respondent failed to include the following items in his opening net worth as of December 31, 1979: (1) A $ 75,000 loan from petitioner's sister, Mary Ann Brinkley; (2) U.S. Treasury securities totaling $ 50,000, purchased in part with funds provided by petitioner's father; (3) two Chevrolet Corvettes, which he contends he sold in 1980 for $ 35,000; and (4) a bulldozer, which he contends he sold in 1980 for $ 20,000. a. $ 75,000 Brinkley LoanPetitioner contends, and Mary Ann Brinkley testified, that during her marriage to William Brinkley he gave her about $ 75,000 in gifts. She said William Brinkley suggested that she give the money to petitioner to buy property in New Jersey. As a result, she said she gave $ 40,000 to petitioner in 1968 or 1969, and an additional $ 35,000 in the early 1970s. Petitioner contends that these amounts were delivered to him in cashier's checks in small amounts. 404 Petitioner has not repaid any of the $ 75,000 which he purportedly received from his sister. We are not convinced that Mary Ann Brinkley lent petitioner $ 75,000. First, petitioner's explanation was not credible. For example, petitioner testified that he received the $ 75,000 from his sister, but in May 1991, at the trial of an equitable distribution suit brought by petitioner's former wife, Thelma (the State court trial), he said that the $ 75,000 came from William Brinkley. He also testified that he did not know if the $ 75,000 loan was a part of the divorce agreement between Mary Ann and William Brinkley; in contrast, at the State court trial, he testified that he did not owe $ 75,000 to the estate of William Brinkley because the debt was transferred to his sister in consideration of the divorce. Second, there is no contemporaneous documentary evidence that there was a loan. Third, petitioner contends that, to secure this loan, he prepared, at his sister's request, a new will naming her as the beneficiary, but neither he nor his sister had a copy of the purported will at trial. Fourth, we do not believe William Brinkley gave Mary Ann Brinkley $ 75,000 as claimed. Michael405 Brinkley, who represented his father in the divorce proceedings against Mary Ann Brinkley, testified that his father gave no money to Mary Ann Brinkley except money for groceries and regular living expenses. Petitioner argues that Michael Brinkley's claim that he regularly reviewed his father's books is not credible, and that it is possible that he missed some of his father's expenses. Petitioner argues that Mary Ann Brinkley was a credible witness and Michael Brinkley was not. We disagree. Fifth, before their divorce, petitioner sought to place a $ 15,000 mortgage loan made to the Norwood Inn and title to 20 acres of land and a house at Lake Hopatcong beyond the reach of his estranged wife, Thelma Paschal, and used his sister and father as nominees to achieve that purpose. At the State court trial, petitioner said that he transferred this real estate because he owed his sister $ 75,000 and wanted to secure her interest. At that trial, petitioner introduced into evidence a letter to him from his sister dated April 30, 1991, 6 days before the start of the State court trial. Mary Ann Brinkley's testimony about the loan differs from that letter. In the letter, she said that her406 former husband gave petitioner $ 75,000 to make investments in New Jersey real estate for her. In contrast, at trial she testified that she gave the $ 75,000 to him from the proceeds of money that her husband gave her during their marriage. Sixth, petitioner did not mention the purported $ 75,000 loan to any representative of respondent before 1990. Finally, even if we accepted petitioner's claim that Mary Ann Brinkley lent him $ 75,000, this would not affect petitioner's increases in net worth during the years at issue. That is because the $ 75,000 would be added to his starting net worth for 1980 (and later years), but would be offset by a $ 75,000 increase in liabilities for 1980 (and later years). b. $ 50,000 in U.S. Treasury Securities and Purported Gift From Petitioner's FatherPetitioner testified that his father gave him $ 50,000 in keeping with a Greek tradition to pass family money to the oldest son and that his father got the money from some gold and $ 20,000 in cash. His brothers and sisters did not know about this gift. Petitioner testified that in 1979 he bought $ 50,000 in Treasury securities at a high interest rate at the Federal Reserve Board in New York407 City. Petitioner said he went there with a Mr. Genute and his son Michael. Petitioner contends that he sold the Treasury securities for $ 50,000 after 1979 and used the proceeds for his mortgage business. Petitioner points out that Special Agent Tunkavige acknowledged in his February 22, 1984, memo that petitioner told him that he had bought Treasury securities when they were paying around 19 percent. We are not convinced that petitioner had $ 50,000 of U.S. Treasury securities on hand at the end of 1979. First, there is no documentary evidence that shows that petitioner bought these securities. Second, there is no evidence corroborating that petitioner's father gave him $ 50,000. Lusardi testified that in 1981 or 1982 petitioner said that his father had sold gold and given him the money. However, we are not convinced that petitioner's explanation to his accountant was true. Third, although petitioner testified at trial that he bought these securities in increments of $ 30,000 and $ 20,000 in 1979, there were no disbursements in these amounts from any of the checking accounts he used in 1979. Petitioner's 1979 and 1980 income tax returns show no interest income earned from408 U.S. Treasury securities. Fourth, petitioner did not call Mr. Genute or his son Michael as witnesses, and he did not represent to the Court that they were unavailable to testify. The failure to call one or both of the Genutes to give testimony gives rise to the presumption that, if called, the witnesses would testify unfavorably. ; , affd. ; , affd. . Fifth, petitioner was under investigation by the Criminal Investigations Division from January 1984 to April 1986. He attended conferences in respondent's Examination and Appeals Divisions from April 1988 to October 1990, but never mentioned the $ 50,000 in Treasury securities allegedly on hand at the end of 1979. Petitioner argues that he did not mention the Treasury securities because he did not understand the tax impact of his claim that his father gave him money. 409 Petitioner also argues that he did not consider Treasury securities to be cash on hand. In the context of the other evidence (or lack thereof) on this issue, we are not convinced by these claims. c. Two Chevrolet CorvettesPetitioner contends that in 1980 he sold a 1960 and a 1965 Corvette which he had restored years earlier and was keeping as an investment. Petitioner contends that the purchaser agreed to pay $ 35,000 for these cars, subject to petitioner's painting them. Petitioner contends that he used the $ 35,000 payment for the Corvettes in his mortgage business. We are not convinced that petitioner sold two Chevrolet Corvettes for $ 35,000 in 1980. There is no documentary evidence of when and to whom the Corvettes were purportedly sold. The only documentary evidence on this issue in the record is an invoice from petitioner's brother-in-law addressed to Nick's Auto Parts, dated October 14, 1980, stating that petitioner had a 1960 and a 1965 Corvette painted at a body shop in Cambridge, New York. Petitioner contends that he did not tell Special Agent Tunkavige about the two Corvettes because he thought Special Agent Tunkavige was asking only about his personal 410 cars, or cars he had registered and insured at the time. He claims that the invoice is the only evidence of the existence of the two cars because the DMV cannot provide records for vehicles after 8 years. We find petitioner's explanations to be unconvincing. Petitioner testified that the two Corvettes were part of his stock-in-trade. As stock-in-trade, respondent included them in the year end inventory of petitioner's auto parts business ($ 4,150 for 1979 and $ 1,300 for 1980). In the absence of evidence to the contrary, we find that respondent correctly accounted for the two Corvettes in the net worth analysis. d. BulldozerPetitioner contends that he bought a bulldozer in 1976 for $ 16,000 to clear his 20 acres, that he improved the bulldozer by adding tracks, and that Bill Benkendorf (Benkendorf) bought it in 1980 for $ 20,000. Petitioner contends that Benkendorf did not pay for the bulldozer on delivery; rather, petitioner retained a mortgage against property Benkendorf owned to secure a prior loan of $ 20,000 which Benkendorf paid in full just before he bought the bulldozer. We are not convinced that petitioner bought a bulldozer in 1976 and sold it for $ 20,000 411 in 1980. First, there is no documentary evidence to support petitioner's claim that he bought the bulldozer in 1976 or sold it in 1980. Second, petitioner deducted depreciation on his 1979 and 1980 returns for various property, but not for a bulldozer. Third, during respondent's investigation, petitioner told Special Agent Tunkavige that he did not own a bulldozer during the years at issue. Fourth, petitioner relies on a memorandum from Benkendorf to show that he did not release Benkendorf's first mortgage because petitioner retained a mortgage on the bulldozer; however, the memorandum does not refer to a bulldozer. Finally, petitioner did not call Benkendorf as a witness or contend that he was unavailable. The failure of petitioner to call Benkendorf as a witness to give testimony, which, if true, would be favorable to petitioner, gives rise to the presumption that the witness, if called, would testify unfavorably. . e. Capital Gains Net Worth AnalysisPetitioner argues that the gain he claims to have from the sale of the 1960 and 1965 Corvettes is capital gain because they412 were not part of his inventory. Petitioner also testified that the two Corvettes were part of his stock-in-trade. We need not decide this issue because we have found that petitioner did not sell the two Corvettes in 1980 for $ 35,000. Petitioner contends that he had about $ 100,000 in new parts that he held for investment and that the gain on the sale of these parts is capital gain. There is no documentary evidence that petitioner held $ 100,000 in new auto parts, and we are not convinced by his testimony. 3. Likely Sources of Income and Investigation of Leads Provided by Petitionera. Likely Sources of IncomePetitioner contends that respondent failed to adequately investigate leads provided by petitioner relating to his cash accumulations as of December 31, 1979. Petitioner points out that respondent did not introduce any evidence relating to any illegal activities by petitioner in Sarasota, Florida, or New Jersey. Petitioner contends he was never charged with any offense in Florida. Petitioner mistakenly believes that, to prevail, respondent must show that his likely source of income was illegal. The Commissioner may prove an underpayment by proving a likely413 source of the unreported income, ; , or where the taxpayer alleges a nontaxable source, by disproving the specific nontaxable source so alleged, . Petitioner also argues that respondent introduced no evidence about any likely sources of income. We disagree. Petitioner's auto salvage and mortgage lending businesses were likely sources of income. b. Leads DoctrinePetitioner argues that respondent failed to check with petitioner's former counsel, Bill Seed, regarding whether the sale of Treasury securities provided the funds for petitioner's mortgage lending business. The evidence does not support petitioner's claim that he told Special Agent Tunkavige that he used the Treasury securities proceeds to fund his mortgage lending business. Also, Special Agent Tunkavige contacted Seed in an attempt to investigate petitioner's mortgage business but was unable to trade specific items because petitioner's records were in disarray. The Commissioner must414 investigate all leads presented by the taxpayer which are reasonably susceptible of being checked. . Petitioner did not offer any information which respondent failed to investigate. A taxpayer cannot complain about the insufficiency of an investigation where he has offered no leads or leads not reasonably susceptible of being checked. ; . We conclude that leads provided by petitioner were not reasonably susceptible of being checked any more than respondent did; thus respondent adequately investigated leads. c. ConclusionPetitioner maintained no formal books and records, gave his accountant the figures to be reported from those businesses, admitted that he skimmed some income from his auto salvage business, and during the special agents' investigation, admitted that his net worth increases were due to his mortgage and auto salvage businesses. Respondent thoroughly documented all of the increases to net worth. Petitioner415 has not supplied evidence that refutes the net worth analysis. Thus, we hold that respondent's reconstruction correctly determined petitioner's corrected taxable income as $ 131,671.51 for 1980, $ 157,463.03 for 1981, and $ 28,711.17 for 1982. 4. Whether Petitioner Is Collaterally Estopped To Deny Fraud for 1980Respondent contends that petitioner is collaterally estopped to deny fraud for 1980 because he pleaded guilty to one count of tax evasion for 1980. Petitioner argues that he should not be collaterally estopped to deny fraud for 1980 because he pleaded guilty only because he faced enormous pressure from an indictment in Morris County (which was later dismissed), litigation with his wife, and problems with the town involving his auto parts yard, and because he had been assured that he would receive only 6 months' probation and $ 5,000 fine. A tax evasion conviction under section 7201, whether by trial or guilty plea, estops the taxpayer from denying that the return for that year is fraudulent under section 6653(b). , affd. . Collateral416 estoppel applies if the issues presented are in substance the same as those previously decided, the controlling facts and legal principles have not changed, and there are no special circumstances warranting an exception to the normal rules of issue preclusion. ; . Trial courts have discretion to not apply collateral estoppel if special circumstances so warrant. However, the fact that a taxpayer faced numerous personal and legal problems when he pleaded guilty is not a sufficient special circumstance for us to not apply collateral estoppel. ; , affd. . We conclude that no special circumstances are present here to warrant a decision to not apply collateral estoppel and that petitioner is collaterally estopped to deny fraud for his 1980 tax year. 5. Additions to Tax for Fraud Under Section 6653(b)a. Background417 Respondent determined that petitioner is liable for the additions to tax for fraud under section 6653(b). Respondent has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). The existence of fraud is a question of fact to be decided by consideration of the entire record. ; , affd. without published opinion . First, the Commissioner must prove the existence of an underpayment. Respondent may not rely merely on the taxpayer's failure to carry the burden of proof for the underlying deficiency. ; . Second, the Commissioner must show that the taxpayer intended to evade taxes by conduct intended to conceal, mislead, or similarly prevent tax collection. .418 b. UnderpaymentThe Commissioner may prove an underpayment by proving a likely source of the unreported income, ; ; ; or, where the taxpayer alleges a nontaxable source, by disproving the alleged nontaxable source, ; , affg. ; Petitioner's auto salvage and mortgage lending businesses are likely sources of his income for the years in issue. Also, several nontaxable sources alleged by petitioner have been disproved: $ 50,000 from petitioner's father, $ 75,000 from petitioner's sister, and $ 55,000 in proceeds from sales of a bulldozer and two Corvettes. Thus, respondent meets this requirement. c. Fraudulent IntentRespondent must also prove by clear and convincing evidence that petitioner419 had fraudulent intent. . For purposes of section 6653(b), fraud means "actual, intentional wrongdoing", , revg. ; or the intentional commission of an act or acts to evade a tax believed to be owing, , affg. . Fraud may be proven by circumstantial evidence because direct evidence of the taxpayer's intent is rarely available. , affg. ; , affg. a Memorandum Opinion of this Court; , affd. . Courts have developed several objective indicators, or "badges", of fraud. .420 Badges of fraud present in this case are petitioner's: (1) Failure to give complete information to his tax return preparer, , affg. per curiam ; (2) dealings in cash, ; (3) inadequate records, , affg. ; , affg. ; (4) implausible and inconsistent explanations of behavior; (5) concealment of assets; and (6) large understatements of income, . i. Incomplete Information to Tax Return PreparerPetitioner gave Lusardi, his tax return preparer, only summary information. He concealed his 1980 mortgage lending activity from Lusardi by giving him only income figures from his auto salvage business. He was evasive when Lusardi asked him about421 the source of funds for his mortgage lending business. ii. Dealing in CashPetitioner dealt primarily in cash. His dealings in currency gave him ample opportunity to skim unreported income from his businesses. We believe he took advantage of that opportunity. iii. Inadequate RecordsPetitioner had no contemporaneous books or records. iv. Implausible or Inconsistent ExplanationsWe found petitioner's claims about loans from his sister, cash from his father, and the bulldozer and Corvette sales to be implausible. Petitioner changed his claims during the years respondent was investigating him about his cash on hand and his tax-free sources of cash. Petitioner had a ready supply of excuses for why he did not tell respondent about these things earlier. We also find petitioner's argument that he did not report interest income from his mortgages because he was a novice in the mortgage business, and he did not know if he was required to report it if he faced actual and threatened mortgage foreclosures due to defaults, to be unbelievable. v. Concealment of AssetsPetitioner concealed assets from respondent and his former wife. vi. Large Understatements of422 IncomePetitioner admitted skimming money from his auto salvage business. Petitioner failed to report a significant amount of income from his auto salvage and mortgage lending businesses. d. ConclusionPetitioner points out and respondent concedes that he cooperated throughout respondent's investigation. Petitioner cites: (taxpayer regularly failed to report income, had a predilection for undocumented cash transactions, and had a pattern of registering assets in the name of an intimate friend; taxpayer liable for attempted evasion of income tax); , affg. (the burden is on the Government to prove fraud; fraud is never presumed); (the mere understatement of income alone is not enough to establish fraud); (taxpayer not liable for fraud addition; taxpayer cooperated with police and did not make misleading statements423 to the Internal Revenue Service or conceal assets); and (taxpayers' poor recordkeeping was due to their limited education and lack of business sophistication; taxpayers' practice of dealing in cash was consistent with unusual nature of their scrap metal business; taxpayers were credible witnesses and not liable for fraud addition). The fact that petitioner cooperated during the investigation favors petitioner, but does not outweigh the many badges of fraud we have found above. Thus, we hold that petitioner is liable for the additions to tax for fraud for 1980, 1981, and 1982. 6. Special Agent's Investigation of PetitionerPetitioner asks that respondent's net worth method be disregarded or that petitioner be given the benefit of the doubt in this case because, petitioner contends, Special Agents Tunkavige and Thomas Egan, and perhaps others, conducted themselves improperly during the investigation of the case. We disagree. There is no credible evidenced in the record that any Government employees conducted themselves improperly during the investigation of this case. Thus, we reject petitioner's424 contentions that: (1) Respondent's original information about this case came from Lt. Bernard Kelly, who was (or had been) in charge of the Organized Crime Unit for Northern New Jersey, and who petitioner also says was advising him on how to proceed at every step of the investigation; (2) Special Agent Tunkavige urged petitioner to rely on Lt. Kelly; and (3) Lt. Kelly worked closely with the Internal Revenue Service. Petitioner did not call Lt. Kelly or Special Agent Egan to testify, and did not show that they were unavailable. Petitioner's failure to call these witnesses leads to the presumption that, if called, the witnesses would testify unfavorably to him. ; . . For the foregoing reasons, Decision will be entered under Rule 155. Footnotes1. Sec. 6653(b)(1) for 1982.↩2. Fifty percent of the interest due on $ 5,832.↩1. Petitioner conceded that respondent's net worth analysis is correct except for four disputed items and a capital gains issue. Thus, we need not make findings of fact about petitioner's net worth except as they pertain to disputed items.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619248/	Dudley G. Seay and Sybil R. Seay, Petitioners v. Commissioner of Internal Revenue, RespondentSeay v. CommissionerDocket No. 2906-70United States Tax Court58 T.C. 32; 1972 U.S. Tax Ct. LEXIS 150; April 10, 1972, Filed 150 Decision will be entered under Rule 50. P made claims against his former employer for breach of contract and personal injuries arising out of the termination of his employment. He received $ 105,000 in settlement of his claims. At the time of the settlement, both the attorney for P and the employer's attorney agreed in writing that $ 45,000 had been allocated to the personal injury claim. Held, P has shown that $ 45,000 of the payment was made on account of personal injuries and exempt from taxation under sec. 104(a)(2), I.R.C. 1954. John M. Byers and Gerald J.151 Kahn, for the petitioners.Denis J. Conlon and Robert F. Brunn, for the respondent. Simpson, Judge. SIMPSON32 The respondent determined a deficiency of $ 26,066.60 in the petitioners' 1966 Federal income tax. The only issue for decision is whether $ 45,000 of a $ 105,000 payment, which one of the petitioners received in settlement of claims against his former employer, is excludable from gross income as damages received on account of personal injuries.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners, Dudley G. Seay and Sybil R. Seay, are husband and wife and maintained their residence in Minneapolis, Minn., at the 33 time their petition was filed in this case. They filed their 1966 joint Federal income tax return with the district director of internal revenue, Milwaukee, Wis. Mr. Seay sometimes will be referred to as the petitioner.From 1960 until the beginning of 1965, the petitioner was president of the Basic Products Corp. (Basic). In 1965, the petitioner undertook to acquire the financial backing necessary to purchase two divisions of that corporation. Mr. Dwayne Andreas, representing the Farmers152 Union Grain Terminal Association (GTA), learned of Mr. Seay's efforts to acquire such financing and contacted him. As a result of negotiations between Mr. Seay and Mr. Andreas, an agreement was reached under which GTA purchased the assets of the two divisions. The assets of one of these divisions were then leased by GTA to a corporation called the Froedtert Malt Corp. (Froedtert). This corporation was to be operated by the petitioner as president, Robert R. Ollman as vice president and treasurer, and Gordon D. Foster as executive vice president. According to oral employment contracts, their respective salaries were to be $ 60,000 per year, $ 30,000 per year, and $ 25,000 per year, and they were to share in the profits of the enterprise. The employment contracts were each for a period of 5 years and were renewable for a like period of time. In order to become president of this new corporation, Mr. Seay resigned his former position as president of Basic. The newspaper publicity regarding his resignation did not indicate that he had been given the opportunity to purchase two divisions of Basic and was somewhat embarrassing to him.In 1966, a dispute arose between Mr. Seay, Mr. 153 Ollman, and Mr. Foster (the Seay group) and the management of GTA. On May 25, 1966, the board of directors of Froedtert dismissed the petitioner, Mr. Ollman, and Mr. Foster and terminated their employment. The specific reason given for the petitioner's dismissal was that the corporate bylaws required the president to be a director and he was not a director. Each member of the Seay group was notified of the board's termination of his employment by a letter of May 27, 1966, and was therein informed that Mr. Thomas R. Gettelman would arrive on June 1, 1966, to assume control of the operations of Froedtert. Each letter concluded by stating that Mr. Max Kampelman had been retained to resolve the question of the management fee due to the Seay group. Acting on the advice of counsel, the Seay group refused to vacate the premises when Mr. Gettelman arrived.On June 7, 1966, Froedtert filed a complaint in the Circuit Court of Milwaukee County, Wis., which recited the events of May 25, 1966, to June 1, 1966, alleged that the refusal of the Seay group to vacate the 34 premises constituted trespass, and sought an order permanently restraining the members of the Seay group from occupying154 the premises, managing Froedtert, or causing that corporation to pay them any compensation for the period after June 1, 1966.The filing of the complaint received publicity in the Milwaukee Journal, Milwaukee Sentinel, and The Wall Street Journal. Each article repeated the basic recitations and allegations of the complaint and referred to the petitioner's having been replaced as president of Basic in 1965. The petitioner believed that the publicity was a source of personal embarrassment and damaging to his personal reputation but, on the advice of counsel, he did not reply to the publicity. However, counsel was instructed to file a counterclaim for damages arising both from the adverse publicity and from the alleged breach of the oral employment contracts. The counterclaim was never prepared, as a settlement was signed on June 24, 1966. Previous to the settlement, the corporation had obtained a restraining order and a show cause order, and the Seay group had vacated the premises. After the suit was settled, the petitioner released a statement to the press claiming that the entire dispute had arisen over the question of how to operate Froedtert.The negotiations leading to the155 settlement were mainly conducted by Mr. Orin Purintun, as counsel for the Seay group, and Mr. Max Kampelman, for both GTA and Froedtert. GTA was involved as it owned the assets of Froedtert and as the oral employment contracts were originally negotiated with it. Mr. M. W. Thatcher, the chief executive officer of GTA, and his assistant, Mr. Malusky, were given the authority by the board of directors of GTA to take the steps necessary to effect a settlement. In turn, Mr. Thatcher authorized Mr. Kampelman to settle the dispute. The only limitations that Mr. Thatcher placed on Mr. Kampelman's authority were that the settlement should not exceed $ 300,000 in cash plus 5 percent of the profits. The claims of the Seay group that there had been a breach of contract and that they had been damaged by the publicity were a part of the settlement negotiations between Mr. Purintun and Mr. Kampelman.On June 23, 1966, a lump-sum settlement of $ 250,000 was accepted by Mr. Purintun on the understanding that it consisted of 1 year's salary for each member of the group, or $ 115,000, plus $ 45,000 for each member as damages caused by the newspaper publicity. On June 24, 1966, a settlement agreement156 was signed by the members of the Seay group, the new president of Froedtert, and a representative of GTA. The agreement stated that the sum of $ 250,000 had been paid to the Seay group, but did not allocate that sum in any way. On that same day, the suit by Froedtert was dismissed by mutual stipulation. On 35 June 27, 1966, the proceeds of the settlement were distributed as follows:Legal fees$ 25,272.86Out-of-pocket expenses (Dudley G. Seay)560.00Dudley G. Seay:Salary equivalent60,000.00Additional36,389.04Robert R. Ollman:Salary equivalent30,000.00Additional36,389.05Gordon D. Foster:Salary equivalent25,000.00Additional36,389.05Total250,000.00On June 28, 1966, Mr. Purintun prepared and sent to Mr. Kampelman a letter which was directed to Mr. Purintun, to be signed by Mr. Kampelman, confirming that they had agreed on the following allocation of the $ 250,000 payment:SalaryAdditionalTotalequivalentMr. Seay$ 60,000$ 45,000$ 105,000Mr. Ollman30,00045,00075,000Mr. Foster25,00045,00070,000The letter stated that the additional sums were "as compensation for such personal157 embarrassment, mental and physical strain and injury to health and personal reputation in the community" as the members of the Seay group had suffered. Mr. Kampelman signed the letter on July 1, 1966, because he thought it reflected the understanding he had with Mr. Purintun.On November 6, 1969, Mr. Malusky, who had become the chief officer of GTA, signed a letter which he authorized the petitioner to show to the Internal Revenue Service and which had been prepared by the general counsel of GTA. The letter stated that the allocation of the settlement payment was correctly stated in the letter which Mr. Kampelman had signed on July 1, 1966.The petitioner, on his 1966 joint Federal income tax return, reported the $ 60,000 salary equivalent less $ 8,610.96 in legal fees as ordinary income. In his notice of deficiency, the respondent increased the petitioner's income by the $ 45,000 "additional" payment and a $ 1,255.01 item not contested in this case.OPINIONThe issue for decision is whether $ 45,000 of a $ 105,000 payment which the petitioner received in settlement of claims against his 36 former employer is excludable from gross income as damages received on account of 158 personal injuries.The petitioner contends that he made a bona fide claim for personal injuries; that his claim was part of the settlement negotiations; and that it was satisfied by the payment of $ 45,000. The petitioner, thereby, concludes that the $ 45,000 payment was made on account of personal injuries and is exempt from taxation under section 104(a)(2), I.R.C. 1954. 1The respondent contends that the petitioner has failed to prove that he suffered any personal injuries for which he could recover damages in the courts, and therefore, section 104(a)(2) is inapplicable. In the alternative, the respondent contends that even if the petitioner has suffered such injuries, the $ 45,000 payment was not in settlement of a claim for such injuries. Finally, the respondent contends that even if a portion of the $ 45,000 payment was in satisfaction of a claim for personal injuries within the meaning of section 104(a)(2), part of such payment was for other159 purposes, and because the petitioner has failed to show what portion of the payment was made for such personal injuries, no part of the payment is excludable under section 104(a)(2). Only the taxability of $ 45,000 of the total $ 105,000 payment made to the petitioner is in question, as the petitioner reported $ 60,000 of the payment as ordinary income.As the parties are in disagreement concerning not only what the petitioner has proved, but also what he is required to prove, we must first discuss the burden of proof which the petitioner has in this case. The petitioner's position is not that he does not have the burden of proof, but, rather, that the burden of proof does not require him to show that he had a valid claim for damages.Section 104(a)(2) provides that damages received in a settlement agreement "on account of personal injuries" are not includable in gross income. However, neither the Code nor the regulations explain what a taxpayer must show in order to prove that he has received damages "on account of personal injuries." The petitioner urges us to apply a standard like that used in Tygart Valley Glass Co., 16 T.C. 941 (1951). In that160 case, the petitioners contended that the amounts received in a settlement were made in payment of a fraud claim and taxable at capital gain rates, and the respondent claimed that the amounts received were in payment of a royalties' claim and taxable at ordinary income rates. Although both parties presented evidence on the validity of each claim, the Court declined to decide whether the claims were valid and simply stated at page 949 that:we consider it unnecessary to decide upon such validity, * * * for our question is not * * * [the] validity, but the nature, for tax purposes, of an amount received 37 in settlement, which rests not upon the validity but upon the nature of the matter settled. * Although Tygart Valley Glass Co. and similar cases do not involve section 104(a)(2), they do involve the question of what the petitioner is required to prove to establish the nature of the payments received in settlement of a claim. See, e.g., Spangler v. Commissioner, 323 F. 2d 913, 916 (C.A. 9, 1963), affirming a Memorandum Opinion of this Court; Carter's Estate v. Commissioner, 298 F. 2d 192, 194161 (C.A. 8, 1962), affirming 35 T.C. 326">35 T.C. 326 (1960), certiorari denied 370 U.S. 910">370 U.S. 910 (1962); Sanders v. Commissioner, 225 F. 2d 629, 635 (C.A. 10, 1955); Morse v. United States, 371 F. 2d 474, 482-483 (Ct. Cl. 1967); Chalmers Cullins, 24 T.C. 322">24 T.C. 322, 327 (1955). See also United States v. Safety Car Heating Co., 297 U.S. 88">297 U.S. 88, 98 (1936); Anchor Coupling Co. v. United States, 427 F. 2d 429, 433 (C.A. 7, 1970). As such, these cases are in general agreement in holding that the petitioner does not have to prove the validity of his claim; rather, he must show the nature of the claim which was the actual basis for the settlement.Since there is nothing in either section 104, the regulations thereunder, or the legislative history of the section to indicate that Congress intended to make the petitioner's burden of proof in a section 104 settlement case any greater than that which he has in other settlement cases, we hold that the determination of whether a settlement payment is exempt162 from taxation depends on the nature of the claim settled and not on the validity of the claim. This holding is also supported by the general approach of two circuit Courts of Appeals in dealing with the question of a settlement and the applicability of section 104(a)(2). In both cases, the court did not evaluate the validity of the claim, but attempted to determine the actual reason for the making of the settlement payment. Knuckles v. Commissioner, 349 F. 2d 610, 613 (C.A. 10, 1965), affirming a Memorandum Opinion of this Court; Agar v. Commissioner, 290 F.2d 283">290 F. 2d 283, 284 (C.A. 2, 1961), affirming per curiam a Memorandum Opinion of this Court.Having decided that the taxability of the settlement payment depends upon the nature of the claim settled, we now reach the question of whether the petitioner has shown that such claim was a claim for personal injuries. This determination is a factual one (see Knuckles v. Commissioner, supra), and, based on an examination of all the evidence, we find that the $ 45,000 payment was received "on account of personal injuries" within the meaning163 of section 104(a)(2).Mr. Seay believed that the publicity concerning his dismissal from employment was a source of personal embarrassment and damaging to his personal reputation, and we have no reason to doubt the bona fides of this belief. Compare Knuckles v. Commissioner, supra. Mr. Purintun, who represented the petitioner in the settlement negotiations, 38 stated that he believed the publicity resulted in personal injury to the petitioner, and Mr. Kampelman, who represented GTA, knew of the petitioner's claim for damages on account of personal embarrassment and harm to personal reputation. Both negotiators testified that this claim was a part of the settlement negotiations and that the acceptance of the agreement by Mr. Purintun was conditioned on an allocation of part of the settlement proceeds being made to such claim. Finally, both Mr. Purintun and Mr. Kampelman testified that the letter of July 1, 1966, which was prepared by Mr. Purintun and signed by Mr. Kampelman, accurately reflected the allocation of the payment. This letter clearly designated the $ 45,000 payment "as compensation for such personal embarrassment, mental and 164 physical strain and injury to health and personal reputation in the community" as the petitioner had suffered. Three years later, the general manager of GTA signed a letter stating that the nature of the $ 45,000 was correctly designated in the 1966 letter by Mr. Kampelman. Moreover, even though each member of the Seay group received a different salary, the letter indicated that each received the same amount for personal embarrassment and injury to his personal reputation. Under these circumstances, where the chief negotiator for each party has testified that the payment was for personal injuries and where there is a letter which has been acquiesced in by the parties and which states that the payment was for personal injuries, the petitioner has successfully established that the nature of the claim was for personal injuries and that the payment was for settlement of such claim. See Knuckles v. Commissioner, supra;Agar v. Commissioner, supra.In view of that conclusion, this case is distinguishable from Knuckles and Agar, which were cited by the respondent. In Agar, it was found that although the petitioner165 may have made a claim for personal injuries, the company did not make any payment in settlement of that claim. In Knuckles, the court found that the tort claim was not part of the settlement negotiations, but, rather, an after-thought based on the tax consequences of the claim.In addition to questioning the bona fide nature of the petitioner's claim, the respondent also argued that GTA did not agree that the $ 45,000 was to be in settlement of a claim for personal injuries, and that the letter signed by Mr. Kampelman is inadmissible because of the parol evidence rule.The contention that GTA did not agree that the $ 45,000 was in settlement of a personal injury claim is based on the allegation that Mr. Kampelman did not have the authority to make such an allocation. This lack of authority is said to exist because Mr. Kampelman was allegedly only a mediator for GTA, because neither Mr. Kampelman 39 nor Mr. Thatcher could recall discussing the allocation when Mr. Thatcher approved the settlement, and because it is not clear that the board of directors of GTA was aware of the allocation. Yet, after initially being informed that he was only a mediator, Mr. Kampelman was 166 told by Mr. Thatcher, who had been authorized by the board of directors of GTA to take steps necessary to effect a settlement, to make a settlement. At that time, Mr. Kampelman became the agent of GTA in settling the claim, and an agent's agreements are generally binding on his principal where they are within either the actual or apparent scope of his authority. Seavey, Agency, sec. 75 (1964); see Grummitt v. Sturgeon Bay Winter Sports Club, 197 F. Supp. 455">197 F. Supp. 455, 458-459 (E.D. Wis. 1961). The only limit on Mr. Kampelman's authority was as to the amount that would be paid by GTA, and this limit was apparently not communicated to Mr. Purintun. Because we believe that the allocation of damages is not so unusual a part of settlement negotiations as to be beyond both the apparent and actual scope of Mr. Kampelman's authority, we find that such allocation is binding on GTA. Furthermore, in 1969, the general counsel, Mr. Clark, prepared a letter, which Mr. Malusky signed, stating that GTA had indeed agreed to pay the petitioner $ 45,000 on account of a claim for personal injuries. Mr. Malusky testified that he recalled Mr. Thatcher discussing the allocation; 167 and Mr. Kampelman testified that, although he was not sure, he did believe that the allocation had been discussed between him and Mr. Thatcher. Even Mr. Thatcher, who like Mr. Clark and Mr. Malusky, was a witness for the respondent, testified that he would have approved the allocation if it had been presented to him, but that he simply did not recall discussing it. For these reasons, we have rejected the respondent's argument that the allocation was not approved by GTA.We also reject the respondent's contention that the letter signed by Mr. Kampelman which designated the $ 45,000 payment as being in settlement of a claim for personal injuries is inadmissible under the parol evidence rule. This Court has generally held that the parol evidence rule is not applicable in proceedings between a taxpayer and the Commissioner, since the Commissioner was not a party to the written agreement. See, e.g., J. Leonard Schmitz, 51 T.C. 306">51 T.C. 306 (1968), on appeal (C.A. 9, May 2, 1969); Walter Lacy, 39 T.C. 1100">39 T.C. 1100 (1963), affd. 341 F. 2d 54 (C.A. 10, 1965). Even if the rule were applied in these proceedings, it168 would not be applicable to the letter, because it tends to explain the settlement agreement, and not to contradict it. 2 Jones, Evidence, sec. 466, p. 888 (5th ed. 1958). The letter not only designated the amount paid on account of the claim for personal injuries, but it also explained how the total payment was to be allocated 40 among the members of the Seay group. It does not contradict the agreement, as the agreement made no allocation of the payment. Finally, the letter was not a device thought of after the settlement to enable the petitioner to attain tax advantages; rather, it was to confirm in writing that, as an important part of the settlement negotiations, Mr. Kampelman and Mr. Purintun had agreed to the allocation set forth therein.The respondent's final ground for taxing the entire payment received by the petitioner is based on his argument that part of the payment was for the petitioner's embarrassment, that damages for embarrassment are not excludable under section 104(a)(2), and that since there is no allocation of the payment between the amount paid for embarrassment and the amounts paid for other purposes, the entire payment is taxable. Mr. Kampelman's169 letter stated that the payment was to settle a claim for "compensation for * * personal embarrassment, mental and physical strain and injury to health and personal reputation in the community." The regulations under section 104(a)(2) provide that:The term "damages received (whether by suit or agreement)" means an amount received * * * through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. [Sec. 1.104-1(c), Income Tax Regs.]Similarly, both this Court and the respondent have long recognized that amounts received in settlement of claims arising out of the alienation of affection or defamation of character are exempt from taxation. See C. A. Hawkins, 6 B.T.A. 1023">6 B.T.A. 1023 (1927), acq. VII-1 C.B. 14 (1928), cited in Rev. Rul. 58-418, 2 C.B. 18">1958-2 C.B. 18, 19; Sol. Op. 132, I-1 C.B. 92 (1922). This Court has also held that damages received in a breach-of-contract-to-marry suit were exempt from taxation, even though the jury in the tort case was instructed to consider the "distress of mind" suffered by the petitioner*170 in computing the damages. Mrs. Lyde McDonald, 9 B.T.A. 1340">9 B.T.A. 1340 (1928). Thus, the respondent does not contend that any of the personal injuries in the present case, other than embarrassment, are not included within the scope of section 104(a)(2). Under these circumstances, we believe that the "personal embarrassment" was incidental to or in aggravation of section 104(a)(2) personal injuries and that the entire $ 45,000 payment is, therefore, excludable under section 104(a)(2). In reaching this conclusion, we have found it unnecessary to decide whether damages received in settlement of a claim based solely upon personal embarrassment would be excludable under section 104(a)(2).Because of another uncontested adjustment,Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619250/	Constantine Thomas and Marie Thomas v. Commissioner. Constantine Thomas v. Commissioner.Thomas v. CommissionerDocket Nos. 47178, 47179.United States Tax CourtT.C. Memo 1957-244; 1957 Tax Ct. Memo LEXIS 2; 16 T.C.M. (CCH) 1123; T.C.M. (RIA) 57244; December 31, 19572 Held: Deficiencies determined by net worth method, and additions to tax for fraud not sustained. Charles H. Morin, Esq., for the petitioners. Paul J. Henry, Esq., and Chester M. Howe, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: In a Memorandum Findings of Fact and Opinion filed February 24, 1955, (T.C. Memo. 1955-46) [14 TCM 156,] we sustained with minor adjustments, deficiencies for the years 1943 to 1948, inclusive, determined by the net worth method, and held that the taxpayers' returns were false and fraudulent with intent to evade tax. The Court of Appeals for the First Circuit reversed on April 12, 1956, (232 Fed. (2d) 520), and remanded the cases for the admission of further evidence, for findings as to the petitioners' cash on hand at the commencement and termination of each of the taxable years, for findings of a likely source of taxable income, and for other proceedings not inconsistent with its opinion. Further evidence was introduced at hearings in March 1957. For the sake of clarity we will restate the findings of fact originally made with such additions or changes3 as appear necessary from the additional evidence. The computation of net worth was agreed upon, except for the amount of cash on hand at the beginning and end of each of the taxable years 1943 to 1948. Findings of Fact The petitioners are husband and wife. They reside in Chelmsford, Massachusetts. During the taxable years 1943 to 1948, inclusive, Constantine Thomas, sometimes known as Charles Thomas, owned 97 per cent, and Marie Thomas owned 2 per cent of the stock of Thomas, The Master Cleaner, Inc., hereinafter referred to as the corporation, a Massachusetts corporation doing business in Lowell, Massachusetts. Thomas was president and treasurer of the corporation and in complete control of the business carried on, which was dry cleaning and the repair, storage and sale of furs. The corporation filed Federal income tax returns with the collector of internal revenue at Boston upon an accrual basis and covering calendar years. Constantine Thomas was born in about 1894 and came to the United States from Greece at the age of 10 years. He has since resided in the United States. From about 1918 until about 1932 he engaged in various business ventures including the taxicab business, 4 dealing in used cars, operating a restaurant, and investing in a hotel. About 1929 he started a dry cleaning business under the name of Highland Cleaners and Dyeing. He sold this after operating it for a year or two. He also worked in a brokerage firm and in a foreign exchange bank. Thomas also invested in stocks on margin or on borrowed funds and had an account with a brokerage firm in Boston. He borrowed from the Union Bank of Lowell, or its predecessor. In 1932 he had collateral on deposit with the bank as security for a loan. The bank asked for more collateral but Thomas refused to furnish it at the market and advised the bank to sell the collateral held. Thereafter the market broke and the value of the collateral fell. The bank then sold the collateral and charged off $8,926.85 as a loss. In about 1932 Thomas started his present dry cleaning business. It was incorporated in February 1935. Constantine and Marie were married in 1938. Marie's father, Christo Vangos, was manager of a confectionery establishment in Easthampton, and Marie's mother worked in that business. At the time of the marriage of the petitioners, Vangos gave them money to assist in buying a home. Marie helped5 Constantine in his business for about a year after their marriage. In 1940 the corporation sought a loan for $4,500 from the Reconstruction Finance Corporation (hereinafter referred to as the R.F.C.) to provide improvements and expand fur storage facilities. Thomas considered that an R.F.C. loan could be had at a low interest rate. The Union National Bank of Lowell agreed to participate up to 20 per cent in the loan, provided the bank receive a compromise offer of $400 in full payment of the loan to Thomas charged off in 1932 in the amount of $8,926.85. Thomas paid the amount of $400 in installments at the rate of $7 per month beginning in June 1940 and making a final payment of $148 in December 1943. The corporation's loan was reduced by installment payments to $3,586.83 on July 13, 1941. On that date, a new loan of $5,400 was made absorbing the balance due on the old. This new loan was reduced by November 1942 to $2,070.30 which was paid December 7, 1942. Thomas, individually, borrowed $800 from the same bank in May 1940 and paid the loan in January 1942. In April 1941, the corporation applied to the R.F.C. for a loan of $1,800 for the purchase and installation of two pieces6 of equipment. The application contained a balance sheet of the corporation as of December 31, 1940, and was accompanied by a statement of Thomas' personal assets. The corporation's financial statement showed cash on hand $1,272.81, total assets $22,353.02, current liabilities of $3,837.37 and a chattel mortgage to the R.F.C. for $3,960. Net sales for the five preceding years were stated as ranging between $25,000 and $27,000 annually. Thomas' salary was stated to be $2,500 a year. The ownership interest was shown as common stock $5,000; surplus, donated, $8,438.36; and undivided profits, $1,117.29. The statement purporting to show as of April 26, 1941, all assets and liabilities of Thomas, other than his interest in the corporation, shows cash on hand $200; securities $1,660; real estate valued at $11,000 (having an assessed value of $7,000); furniture $3,000; cash surrender value of life insurance, $647; and shows liabilities of $5,150. Thomas filed an income tax return for 1940 showing no tax due. He filed no return for 1941. His return for 1942 showed a tax of $33, of which two quarterly installments were paid in March and June 1943. His return for 1943 reported total income of7 $2,658 consisting of salary of $2,550 and dividends of $108. Tax withheld was greater than the tax due and a refund was made. His return for 1944 reported income of $2,652.50, consisting of salary $2,550 and interest $102.50. The petitioners' joint return for 1945 reported salary of $5,000 and dividends or interest of $500.62. Their joint return for 1946 reported salary $5,200, dividends $579.40 and interest $213.44. Their joint return for 1947 reported salary $5,100, dividends $957.50 and interest $613.47. Their joint return for 1948 reported salary $4,940, dividends $1,186.61, interest of $669.80, and long-term capital gain of $80. In December 1943 Vangoes made two gifts of $3,000 each for the benefit of the petitioners' two children. $2,900 of each gift was deposited in a savings account for the benefit of the child. It is stipulated that at the beginning of 1943, Constantine Thomas had the following assets, other than cash on hand: ASSETSBank Accounts - Central Savings Bank#107875$ 50.54Bonds5,000.00Securities -5 shares Radio Corp. of America56.2514 shares Wright Aeronautical Corp.992.2590 shares Maraceabo Oil Ex. Co.1,242.29Loans Receivable3,002.45Real Estate5,500.00Equity in corporation - Thomas, TheMaster Cleaner, Inc.5,000.008 During the year 1943 Thomas' personal and living expenditures amounted to $2,779.40. At the end of 1943 he had assets to the value of $28,940.71, other than cash on hand, and no liabilities. During the year 1944, Thomas' personal and living expenditures amounted to $2,629.08. At the end of 1944 he had assets of $34,059.44, other than cash on hand, and liabilities of $1,494.50. At the beginning of 1945 assets of Constantine and Marie Thomas amounted to $34,059.44, other than cash on hand, and their liabilities amounted to $1,494.50. During the years 1945 to 1948, inclusive, their living expenses were as shown below and their assets, other than cash on hand, and their liabilities as of the end of each year were as follows: LivingEnd of YearExpensesYearDuring YearAssetsLiabilities1945$5,500.62$ 51,222.5519465,992.8458,101.72$ 282.3419476,671.0782,274.715,000.0019486,836.41104,497.205,000.00Thomas' interest in the corporation is valued at $5,000 in the foregoing computations of assets. At the end of 1943 his assets included loans receivable from the corporation of $1,794.86. At the end of 1944 his liabilities9 included loans payable to the corporation amounting to $1,494.50. At the end of 1945 the petitioners had loans receivable from the corporation of $1,128.79. At the end of 1946 loans payable to the corporation by the petitioners amounted to $282.34. The petitioners had loans receivable from the corporation amounting to $19,868.74 at the end of 1947, and $41,325 at the end of 1948. On March 26, 1946, and on August 29, 1949, the petitioners submitted net worth statements to the Department of State, Visa Division, for the purpose of satisfying the immigration authorities as to the ability of Thomas to provide financially for a relative whom he brought to the United States from Greece. The statement submitted in 1946 showed assets of a market value of $86,978.56, including $29,211.72 as book value of 99 per cent of stock of the corporation on December 31, 1945, and $1,128.79 as accounts receivable from the corporation, and no liabilities. Income for 1946 from all sources was estimated as salary of $5,000, share in profits of the corporation of $6,930, and investment income of $973.90. The statement submitted in 1949 showed assets of a market value of $123,290.47, including $25,894.0410 as book value on December 31, 1948, of 99 per cent of the stock of the corporation, and $41,325 as accounts receivable from the corporation, and no liabilities. Income from 1949 from all sources was estimated as salary $5,000, and interest or dividends amounting to $1,809.61. In 1944 Vangos and his wife came to live with the petitioners. In the petitioners' income tax returns for 1946, 1947 and 1948, Christo and Jatina Vangos, parents of Marie, were claimed as dependents. Vangos engaged in no income producing activities in those years. Vangos died in 1953. In Probate Court his estate was appraised at $45,209.84, consisting of cash $2,733.92; Baltimore & Ohio Bonds $4,505; Government bonds $30,617.50; Notes $6,143.42 and personal property $1,110. In 1947 Thomas purchased 15 Bendix automatic washing machines and opened a laundromat operation as an addition to the corporation's business. The investment in these machines was not entered on the corporation's books until the end of 1948. The amount of $2,936.25 was then added to the machinery account. These were coinoperated machines. A girl was placed in charge of them who turned over to the bookkeeper the receipts from this operation. 11 Opinion The Court of Appeals remanded this proceeding for the determination of two principal issues: (1) The amount of cash on hand (as distinguished from cash on deposit in banks) held by the petitioners as of the beginning of each taxable year, and (2) whether the evidence shows a likely source from which the increases in the petitioners' net worth were derived. In view of our conclusion upon the second point stated, we find it unnecessary to discuss the first. In its reversal of our opinion the Court of Appeals stated: "A further contention of the taxpayers which merits consideration is that the respondent has not properly satisfied the requirement established by the Supreme Court in Holland v. United States, 1954, 348 U.S. 121">348 U.S. 121, 75 S. Ct. 127">75 S. Ct. 127, 136, 99 L. Ed. 150">99 L. Ed. 150, that there must be '* * * proof of a likely source, from which the jury could reasonably find that the net worth increases sprang * * .' Respondent contends that this rule has no application in cases involving the civil fraud penalty or routine cases of deficiency. We do not agree. We think it is of equal importance in a civil case to show that the taxpayer's net worth increases are attributable to12 currently taxable income. It seems to us more reasonable to view this particular requirement as an indispensable element of the net worth method in any of its applications rather than as an additional safeguard superimposed upon the net worth method for the sole benefit of defendants in criminal cases - particularly in view of the very favorable position which such persons already enjoy with respect to the burden of proof. "Respondent further contends that in any event the requirement has been met because the taxpayers' corporation is a possible source of taxable income which could account for the net worth increases. We think this argument assumes the very fact to be proved. There must be some independent showing that the corporation might be the source of the unreported income, not merely a negative inference arising from the prior assumption that the increases were taxable and therefore must derive from the corporation since no other taxable source is apparent. "In United States v. Johnson, 1943, 319 U.S. 503">319 U.S. 503, 63 S. Ct. 1233">63 S. Ct. 1233, 87 L. Ed. 1546">87 L. Ed. 1546, the taxpayer concealed his ownership in various enterprises which were possible sources of the unreported income. In the13 Holland case the business was proven to be capable of producing much more income than was reported and in an amount sufficient to account for net worth increases. "No such showing has been made in the instant case. The books of the corporation are admittedly consistent. Of course this does not prove they are honest, but in the absence of some independent evidence to the contrary, we believe that respondent has not indicated a likely source of taxable income. There can be no presumption that the books of the corporation are wrong, for any such approach would render entirely nugatory this particular safeguard against abuses of the net worth method." [Italics supplied.] In Massei v. United States (C.A. 1, 1957) 241 Fed. (2d) 895, certiorari granted, 353 U.S. 964">353 U.S. 964, the Court of Appeals for the First Circuit referred to its opinion herein, stating: "Recently, in reviewing a civil tax deficiency case, we interpreted the above language as meaning that proof of a likely source is 'an indispensable element of the net worth method in any of its applications.'" We take this to mean that under the remand it is incumbent on the respondent to prove here a likely14 source of taxable income by affirmative evidence independent of the fact that the taxpayers' net worth has increased, and that in the absence of such a showing the petitioners are not obliged to prove that the increases are from nontaxable sources. In Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954) there was evidence that not all the income of a hotel business had been included in its books. In United States v. Calderon, 348 U.S. 160">348 U.S. 160, the records of the receipts of a coin-operated machine business were shown to be incomplete. In these cases convictions involving use of the net worth method were upheld. The respondent contends that the increases in the net worth of these petitioners came from unreported income derived from the corporation. We have examined the evidence concerning the corporation and its books. On the original record herein the Court of Appeals commented that the "books of the corporation are admittedly consistent. Of course this does not prove they are honest, but in the absence of some independent evidence to the contrary, we believe that respondent has not indicated a likely source of taxable income." The additional evidence introduced*15 at the rehearing is not sufficient to warrant a finding that the books of the corporation misrepresented its income. Nor is it shown that this kind of business venture must necessarily have been vastly more profitable than as represented in the corporation's tax returns. Under these circumstances we are unable to find that the corporation was the source of unreported income. This is an "indispensable" element in the case and the consequence of this is that the deficiencies and additions to tax determined may not be sustained. The question of the amount of cash on hand at the beginning of each of the taxable years becomes moot and we make no new findings on this point. Decisions will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619251/	Beryl Hillyard v. Commissioner.Hillyard v. CommissionerDocket No. 108838.United States Tax Court1942 Tax Ct. Memo LEXIS 107; 1 T.C.M. (CCH) 22; T.C.M. (RIA) 42584; October 30, 1942107 R. B. Cannon, Esq., and Claude Collard, C.P.A., 403 Petroleum Bldg., Fort Worth, Tex., for the petitioner. D. D. Smith, Esq., for the respondent. OPPERMemorandum Opinion OPPER, J.: This proceeding seeks a redetermination of deficiency in income tax of $2,446.81 for the year 1939. Various concessions having been made, the only question remaining is whether petitioner is taxable upon income realized on the sale of oil and gas in 1938 from properties in which petitioner, together with others, had an interest, the actual receipt of her share thereof having been denied her until 1939. [The Facts] Petitioner is an individual residing in Denver, Colorado. Her income tax return for the year in question was filed with the collector of internal revenue for the second district of Texas at Dallas. In 1926 Luther C. Turman (who was then petitioner's husband) and J. C. Maxwell owned certain oil and gas properties located in Crane County, Texas. They assigned an undivided one-half interest in these properties to the Tidal Oil Company and at about the same time entered into two agreements in writing with respect to the development and operation of the properties. Under the agreements 108 Tidal Oil Company was constituted operating lessee and was given exclusive charge and control over the development, operation, and maintenance of the properties. After certain specified initial expenditures had been made by the operating lessee, all of the expenses of operation and maintenance were to be borne by the parties in proportion to their respective interests in the property. The operating lessee was given a first lien upon the interests of Turman and Maxwell on certain of the property to secure the payment to it of any sums expended in connection with the property. A detailed monthly statement to Turman and Maxwell of all expenditures was required of the operating lessee. The parties were given the right to dispose of their portion of the oil to their best advantage. This was an absolute right under the terms of one of the agreements, and under the other effective only if the price which was to govern was under the prevailing market price as established by major pipeline companies. With that limitation the operating lessee was to "have control over all oil, gas and casinghead gas produced from said property and the right to market the same for and on behalf of the parties109 hereto." The contract contains no express provision as to the manner of payment by the purchaser or of transmission of the proceeds to Turman and Maxwell. No date for the termination of the contract was specified. The agreements were stated to be binding upon the "heirs, legal representatives, successors and assigns" of the parties. On September 1, 1930, petitioner filed suit in the District Court of Tarrant County, Texas, for a divorce from L. C. Turman in which she sought custody of their two children and a division of the common property of the marriage. In the course of extensive litigation which ensued W. E. Allen was appointed receiver of all the properties of petitioner and L. C. Turman. W. E. Allen resigned as receiver in June of 1935 and J. R. Overstreet was appointed substitute receiver. Among the properties coming into the custody and control of J. R. Overstreet as receiver was the interest in the oil and gas properties above-mentioned. The court ultimately awarded the properties to petitioner with Overstreet handling the accounting as receiver. Overstreet was given full authority to conduct the business "and to that end receive rents, tolls, collect royalties, revenue110 and income of whatsoever kind due and to become due, collect, compound and compromise, and demand, bring suits and generally to manage the property, to sell property under appropriate order of * [the] Court, and to hold the proceeds arising from the operation of the properties herein, subject to the orders of * [the] Court, * * ." The court order approving the final report of the receiver, Overstreet, and discharging him and closing the receivership, dated April 28, 1939, ordered all properties in the receivership "restored to and vested in" petitioner. In 1938 the properties in question were operated by the Tidewater Associated Oil Company, successor of Tidal Oil Company under the above-mentioned agreements. As oil was produced it was sold to the Humble Oil & Refining Company or the Humble Pipeline Company, payment being made currently. In 1938 an attorney named Lattimore notified Tidewater Associated Oil Company that the validity of the receivership had been attacked by Turman and that it should not make further payments to petitioner until the case was settled. Lattimore advised that he would seek to hold Tidewater responsible in the event the matter was decided in Turman's111 favor if they continued to make payment to petitioner. The head of the legal department of Tidewater advised its employe in charge of partnership accounting to refrain from making further payment to petitioner until the case had been settled. During 1939 that employe received a release from the legal department and from the crude oil department advising him that it was in order for him to resume making payments to petitioner, which he did. Tidewater Associated Oil Company lodged with the internal revenue agent in charge at Dallas, Texas, six returns on Form 1065 being "Partnership Return of Income" covering the joint operation of the properties in question. The returns were stamped "Received December 20, 1940, Int. Rev. Agt. in Charge, Dallas, Texas." The returns were for the year 1938 and disclosed the undivided interest of Overstreet in the property and his distributive share of the income. They were not executed. Petitioner duly included in her 1938 individual income tax return the item of $21,014.99 which is the amount in question. Respondent determined this amount to be income to her in 1939 when it was received by her in cash. With respect to the $21,014.99 respondent in his112 notice of deficiency stated that there was included in petitioner's taxable income for 1939 "the impounding income released to you in that year." With respect to another adjustment arising out of the transactions in question the notice of deficiency stated: Income is increased $586.54, by your distributive share of income from a joint venture operated with Tidewater Oil Company, which joint venture keeps its records on the accrual basis of accounting. [Opinion] To petitioner's contention that this income was properly taxable to her in the year in which she reported it because as her "distributive" share of the proceeds of a joint venture it was income to her in the year of receipt by the joint venture whether distributed or not, the rejoinder made by respondent is, first, that no such circumstance appears; and, second, that even if it existed, the nature of petitioner's interest makes no difference if in fact she was prevented from actually receiving the income by the act of her co-adventurer in retaining it. It is difficult to discern any foundation for either contention. Not only is it clear from the agreement of the parties that they were engaged in a joint venture in 113 which the profits and expenses of operating jointly owned property were to be shared, limited control was provided, and accountability for the proceeds stipulated, see First Mechanics Bank v. Commission (C.C.A. 3rd Cir.), 91 Fed. (2d) 275; not only was the conduct of those interested consistent solely with such a relationship in that the income of the enterprise was returned as partnership income and the tax computed and paid accordingly; but respondent in the deficiency notice refers to the arrangement as such and designates petitioner's receipts from this very source as "income from a joint venture operated with Tidewater Oil Company, which joint venture keeps its records on the accrual basis of accounting." At best, if the relationship was not one of joint venture it was an agency, with petitioner the owner of the operating proceeds immediately upon receipt by her agent. Julia A. Strauss, 2 B.T.A. 598">2 B.T.A. 598. The second assertion is equally without merit. From the Board's earliest consideration in January, 1925, Robert A. Faesy, 1 B.T.A. 350">1 B.T.A. 350, to disposition by the Supreme Court as recently 114 as 1938, Heiner v. Mellon, 304 U.S. 271">304 U.S. 271, it has apparently never been seriously doubted "that joint venturers were taxable as partners and were taxable upon the income received by the joint venture whether or not such income was distributed." First Mechanics Bank v. Commissioner, supra, 279. In Robert A. Faesy, supra, the Board took the view that "the fact that subsequent disagreement with his partner, and litigation, has precluded him from ever receiving any of this money does not lessen his taxability." And in Heiner v. Mellon, supra, "The Mellons contend that under the law of Pennsylvania no distribution of profits could lawfully have been made by the surviving partners as liquidating trustees until all debts and liabilities, contingent or otherwise, had been paid or satisfied and the partners' capital returned; and that * * their respective shares * * * were not distributable and could not be deemed taxable income of the partners" but the Court pointed to the law and the regulations dealing with the liability of a partner to tax upon his "distributive" or "proportionate" share115 of partnership income whether or not distributed and disposed of the taxpayer's contention with the statement that the "tax is thus imposed upon the partner's proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material." North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417, upon which respondent places his reliance, is distinguishable on the same ground as was United States v. Safety Car Heating & Lighting Company, 297 U.S. 88">297 U.S. 88 in First Mechanics Bank v. Commissioner, supra, 280. "No partnership or joint venture existed in that case and the provisions of the statute making partners liable for their share of the profits received by the partnership, whether or not distributed, were not applicable. In the case at bar the fact that a controversy arose between the joint venturers did not change the fact that profits, taxable income, had been received * * by the partnership." It accordingly appears too clear for serious dispute that the joint venture being a mere tax-computing intermediary, *116 and the real recipients of the income for tax purposes being its members, it made no difference that the managing co-adventurer withheld delivery of petitioner's share during the tax year or whether this was of its own volition or due to a dispute as to ownership or pursuant to the operation of the law. Petitioner's obligation was to report this income when she did and the statute of limitations against respondent began to run at that time. First Mechanics Bank v. Commissioner, supra, 279. We would be the first to complain, and not without justification, if performance of that obligation had been omitted. But we fail to see any ground for his present position. Due to other now undisputed items, Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619253/	Farmers Union Cooperative Exchange v. Commissioner.Farmers Union Coop. Exch. v. CommissionerDocket No. 934.United States Tax Court1944 Tax Ct. Memo LEXIS 29; 3 T.C.M. (CCH) 1258; T.C.M. (RIA) 44384; November 29, 194429 Ernest F. Smith, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent. TURNERMemorandum Findings of Fact and Opinion TURNER, Judge: The respondent has determined a deficiency in income tax against the petitioner of $104.44 for the fiscal year ended April 30, 1941, and a deficiency in excess profits tax for the same period of $46.02. The petitioner claims that it has made an overpayment of income tax for the said year of $187.88. The only question is whether petitioner is entitled to deduct or exclude from income $1,820.56, representing patronage dividends on business done during that year with non-members. Findings of Fact The petitioner is a corporation, with its principal office at Red Rock, Oklahoma. It was organized under the "Cooperative Marketing Association Act", of the Statutes of Oklahoma. The petitioner's authorized capital is $50,000, divided into 500 shares of $100 par value each. No stockholder is allowed to own more than five shares of stock. Any person owning one or more shares of stock is thereby deemed to be a member of the association. Membership is limited to producers of certain agricultural products, particularly wheat, who carry on their30 farming operations in the territory tributary to the shipping points of the association. Irrespective of the number of shares of stock owned, each stockholder is entitled to only one vote at stockholders' meetings. The petitioner's by-laws provide that the affairs of the association are to be managed by a board of directors, consisting of five members elected from among the stockholders. They also provide that the association must operate for the mutual benefit of its members and that it shall not deal in the products of non-members to an amount greater "than such as are handled by it for members." The use and disposition of the earnings of the association are governed by the provisions of Article VI of the by-laws, which reads as follows: "ARTICLE VI Apportionment of Earnings "Section 1. The Directors, subject to revision by the Stockholders in meeting, shall apportion the net earnings at least once each year. Not less than ten per cent (10%) of the net earnings, accruing since the last disbursement shall be set aside in a reserve fund until such reserve fund shall equal the amount of the paid up capital stock. "Section 2. Dividends at a rate not to exceed eight per cent (8%) 31 may be paid upon the paid up capital stock. "Section 3. Five per cent (5%) of the net earnings may be set aside for educational purposes to be used at the discretion of the Directors. "Section 4. The remainder of such net earnings shall be apportioned as the Board of Directors may direct, in conformity with the 1937 Cooperative Law of the State, known as the "Cooperative Marketing Association Act'." It has been the practice of the petitioner to pay 6 percent on its capital stock, and that was the amount paid in the taxable year. It did not in the taxable year, nor in any other year, set aside or accumulate any amount from its net earnings as the reserve required by section 1 of the above article, and it has never established an educational fund, as authorized by section 3. After payment of 6 percent on its capital stock, the petitioner has regularly allocated the remainder of its net earnings to its patrons, members and non-members, according to the business done with each. In the case of members, the patronage dividends have been regularly paid, while in the case of non-members, the amount of patronage dividends allocated to each has been credited to such non-member on petitioner's32 books and the non-member patron has been notified of such credit. The non-member has been notified further that when the total of such credits equals $100, a share of petitioner's stock will be issued therefor and that the non-member will thereby become a member of the association. If the non-member moves from the territory in which the petitioner operates before his credits amount to $100, it is the practice of the petitioner, on application therefor, to pay in cash the amount of such credits. For the taxable year ended April 30, 1941, patronage dividends actually paid to members of the petitioner amounted to $4,181.82. During the same period, patronage dividends credited to non-members in the manner described above amounted to $1,820.56. Opinion The petitioner makes no claim that it is exempt from tax, but does claim that in determining net income, it is entitled to deduct from gross income the patronage dividends credited by it on its books to non-members, on the basis of business done with such non-members during the taxable year. The respondent agrees to the exclusion or deduction from petitioner's gross income of the patronage dividends actually paid to members, but does 33 not agree that the patronage dividends credited to non-members on the petitioner's books, but not actually paid, are to be excluded or deducted in determining net income. The petitioner was organized under the Cooperative Marketing Association Act of the State of Oklahoma, now found in sections 361 through 361 y, Title 2, of Oklahoma Statutes, 1941, and in allocating and distributing its earnings, the petitioner is subject to the requirements of section 361 of that act. 1 In subsection (c) of that section, it is provided that an association "shall limit the interest it pays on membership capital or stock to an amount not greater than eight (8) per cent per annum," but that no apportionment shall be made "until not less than ten (10) per cent of any undistributed balance * * has been set aside in a surplus or reserve fund unless such surplus or reserve funds equal at least one hundred (100) per cent of the paid up membership fees or capital stock." In subsection (d), it is provided that undistributed balances "in excess of additions to reserves and surplus, shall be distributed on the basis of patronage," but that such distribution "may be restricted to members or be made at the34 same rate for members and non-members." It is further provided that the by-laws of the association "may provide that any distribution to a non-member, eligible for membership may be credited to such non-member until the amount thereof equals the value of a membership certificate or a share of the association's common stock," but that such "distribution credited to the account of a non-member shall revert to the reserve fund to be used for educational purposes if, after two years, the amount is less than the value of a membership certificate or a share of common stock." 35 It is to be noted from the facts that, under section 1, Article VI of the petitioner's by-laws, and as required by the above statute, it is mandatory that not less than 10 percent of the petitioner's net earnings "shall be set aside in a reserve fund until such reserve fund shall equal the amount of the paid up capital stock," but that the $1,820.56 here in question was credited by the petitioner on its books to non-members, from the petitioner's net earnings, without a prior crediting of any part of the net earnings to a capital reserve. It is noted also that there is no by-law which requires any allocation and distribution of petitioner's net earnings to non-members by credit or otherwise. By section 4 of Article VI of the by-laws, the allocation of net earnings is left within the discretion of the petitioner's directors so long as they conform their actions to the requirements of the Oklahoma Statute. Inasmuch, therefore, as there was no actual payment of patronage dividends to non-members in the taxable year and, under the statute and the by-laws, it was within the discretion of the directors to restrict the distribution of earnings to members, to the exclusion of non-members, 36 and a part, at least, of the amounts credited to non-members as patronage dividends was credited in direct violation of the provisions of both the Oklahoma Statute and the petitioner's by-laws, we find no basis in law or in fact for allowing the deduction of patronage dividends credited to non-members, but not paid, in determining the petitioner's net income, or for excluding such credits from gross income. It was still within the power of the petitioner to pay or to withhold from the non-members the patronage dividends credited to them. The claim of the petitioner is accordingly denied. See and compare Gallatin Farmers Co. v. Commissioner, 132 F.2d 706">132 F.2d 706; Co-operative Oil Association, Inc. v. Commissioner, 115 F.2d 666">115 F.2d 666; and United Cooperatives, Inc., 4 T.C. 93">4 T.C. 93. We have no question here with respect to any patronage dividends which may have been actually paid to non-members during the taxable year, and express no opinion with respect thereto. Decision will be entered under Rule 50. Footnotes1. Sec. 361.1. Financial statements - Dividends and earnings - Interest on membership capital or stock - Surplus or reserve fund - Undistributed balances. - * * (b) Dividends and Earnings. The directors, subject to the revision by the members or stockholders, at any general or special meeting lawfully called shall apportion the net earnings thereof from time to time at least once in each year. (c) An association shall limit the interest it pays on membership capital or stock to an amount not greater than eight (8) per cent per annum. Such apportionment shall not be made until not less than ten (10) per cent of any undistributed balance accruing since the last apportionment, has been set aside in a surplus or reserve fund unless such surplus or reserve funds equal at least one hundred (100) per cent of the paid up membership fees or capital stock. (d) Undistributed balances from any source, in excess of additions to reserves and surplus, shall be distributed on the basis of patronage, that is according to the amount or value, as the association may decide, of the products sold to or through, and/or purchased from or through, the association by its patrons. The distribution of such balances may be restricted to members or be made at the same rate for members and non-members. The by-laws may provide that any distribution to a non-member, eligible for membership may be credited to such non-member until the amount thereof equals the value of a membership certificate or a share of the association's common stock. Such a distribution credited to the account of a non-member shall revert to the reserve fund to be used for educational purposes if, after two years, the amount is less than the value of a membership certificate or a share of common stock, or in case said person does not accept and exercise his membership privileges. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669043/	El Paso County - 388th District Court Filed 3/12/2021 3:32 PM 08-21-00043-CV Norma Favela Barceleau District Clerk El Paso County 2017DCM0562 In the District Court of El Paso County, Texas 388th Judicial District In the Matter of § FILED IN The Marriage of § 8th COURT OF APPEALS § EL PASO, TEXAS IRMA PEREZ, § 3/15/2021 11:53:00 AM § ELIZABETH G. FLORES Petitioner, § Clerk § and § Cause No. 2017DCM0562 § VICTOR MANUEL PEREZ, JR. § § Respondent, § § and in the Interest of § S.A.P. and A.B.P., § Children § PETITIONER IRMA PEREZ’S NOTICE OF APPEAL OF FEBRUARY 12, 2021 JUDGMENT NUNC PRO TUNC To the Honorable Judge Marlene Gonzalez: Now comes Petitioner Irma Perez, and, pursuant to Texas Rules of Appellate Procedure 25 and 26, files this Notice of Appeal: 1. This Notice of Appeal is filed in the Matter of the Marriage of Irma Perez and Victor Manuel Perez, Jr., and in the Interest of S.A.P. and A.B.P., Children, Cause No. 2017- DCM-0562, In the 388th District Court, El Paso County, Texas. 2. The orders appealed from are the Order Regarding Respondent’s Perez Motion for Judgment Nunc Pro Tunc, which was signed on February 12, 2021, and the Final Decree of Divorce after Motion for New Trial and Judgment Nunc Pro Tunc, entered on March 12, 2021. The Order Regarding Respondent’s Perez Motion for Judgment improperly corrected judicial error beyond the Court’s plenary power. Thus, the Final Decree of Divorce after Motion for New Trial and Judgment Nunc Pro Tunc, entered pursuant to the Court’s order granting Respondent’s Motion for Judgment Nunc Pro Tunc is void, and is also being appealed. 3. Petitioner Irma Perez desires to file her appeal with the Eighth Circuit Court of Appeals for the State of Texas in El Paso, Texas. Respectfully submitted, RAY \| PENA \| McCHRISTIAN, P.C. 5822 Cromo Drive El Paso, Texas 79912 T: (915) 832-7200 F: (915) 832-7333 redwards@raylaw.com ralvarez@raylaw.com March 8, 2021 /s/ Rob Edwards ROB EDWARDS State Bar No. 24058290 REBECCA H. ALVAREZ State Bar No. 24104139 CERTIFICATE OF SERVICE I certify that on this date, a true and correct copy of this instrument was served via electronic mail to: George Mansouraty Attorney at Law 1554 Lomaland El Paso Texas, 79935 georgemansouraty@sbcglobal.net /s/ Rebecca H. Alvarez Rebecca H. Alvarez	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669045/	ACCEPTED 08-20-00217-CR 08-20-00217-CR EIGHTH COURT OF APPEALS EL PASO, TEXAS 3/15/2021 10:34 AM ELIZABETH G. FLORES CLERK No. 08-20-00217-CR FILED IN In the Court of Appeals 8th EL COURT OF APPEALS PASO, TEXAS Eighth District of Texas at El Paso 3/15/2021 10:34:20 AM ELIZABETH G. FLORES Clerk CHRISTOPHER CORTEZ THOMAS, APPELLANT v. THE STATE OF TEXAS ON APPEAL FROM THE CRIMINAL DISTRICT COURT NUMBER FOUR DALLAS COUNTY, TEXAS TRIAL COURT CAUSE NO. F19-51345-K STATE’S RESPONSE TO APPELLANT’S MOTION TO TRANSFER CASE BACK TO THE COURT OF APPEALS-FIFTH DISTRICT AT DALLAS JOHN CREUZOT Criminal District Attorney Dallas County, Texas JESSIE R. ALLEN Assistant District Attorney Bar No. 24040412 133 N. Riverfront Blvd., LB-19 Dallas, Texas 75207 jessie.allen@dallascounty.org (214) 653-3625 (214) 653-3643 fax To the Honorable Court of Appeals: Pursuant to this Court’s March 10, 2021 letter requesting a response from the State of Texas, the State makes this response to Appellant’s March 8, 2021 motion seeking a transfer of this case to the Court of Appeals for the Fifth District of Texas at Dallas. I. On September 30, 2020, Appellant pleaded guilty to the offense of aggravated assault in case number F19-51345-K. He simultaneously pleaded guilty to the offenses of compelling prostitution and trafficking of persons in case numbers F19- 75068-K and F19-75069-K respectively. In each case, the trial court found Appellant guilty and sentenced him to thirty years’ confinement. The same day, Appellant filed notices of appeal in all three cases. On October 13, 2020, pursuant to its authority under section 73.001 of the Texas Government Code, the Supreme Court of Texas issued a transfer order providing that certain cases be transferred from the Fifth Court of Appeals District to this Court: Except as otherwise provided by this Order, the first 12 cases filed in the Court of Appeals for the Fifth Court of Appeals District, Dallas, Texas, on or after October 2, 2020, are transferred to the Eighth Court of Appeals District, El Paso, Texas. ... 2 For purposes of determining the effective date of transfers pursuant to this order, “filed” in a court of appeals means the receipt of notice of appeal by the court of appeals. Transfer of Cases from Courts of Appeals, Misc. Docket No. 20-9117 (Tex. Oct. 13, 2020) (Exhibit A). The transfer order also provided instructions for the transfer of companion cases: In effectuating this Order, companion cases shall either all be transferred or shall all be retained by the Court in which filed, as determined by the Chief Justice of the transferring Court, provided that cases which are companions to any case filed before the respective operative dates of transfer specified above, shall be retained by the Court in which originally filed. Id. On October 14, 2020, the Fifth Court of Appeals received Appellant’s notice of appeal in case number F19-51345-K and docketed that case as No. 05-20-00900- CR. On October 19, 2020, the Fifth Court of Appeals completed its transfer of cases to this Court (Exhibit B).1 Appellant’s case was the 12th case transferred to this Court (Exhibit B). 1 Based on a TAMES search for cases filed in the Fifth Court of Appeals beginning on October 2, 2020, it appears that the court did not transfer the first 12 consecutive cases. The reason the court skipped some cases is immediately apparent. For instance, original proceedings are exempt from transfer, and cases with companions that would have caused the number of cases transferred to exceed 12 are supposed to be retained. 3 On October 28, 2020, after the court had already completed its transfer of cases, it received Appellant’s notices of appeal in his companion cases designated as No. 05-20-00941-CR (F19-75068-K) and No. 05-20-00942-CR (F19-75069-K). II. Because Appellant’s companion cases were not filed in the Fifth Court of Appeals by the time it had completed compliance with the transfer order, it was appropriate to transfer Appellant’s case. That being said, there is a clear design to keep companion cases together under both the Supreme Court’s transfer order and its general order for the transfer of cases. See Policies for Transfer of Cases Between Courts of Appeals, Misc. Docket No. 06-9136 (Tex. Sept. 22, 2006) (Exhibit C). 2 Had the Fifth Court of Appeals known about the companion cases on October 19th, 2020, it probably would not have transferred Appellant’s case to this Court. Accordingly, Appellant’s case should be transferred back to the Fifth Court of Appeals. III. Neither this Court nor the Fifth Court of Appeals has authority to transfer appellate cases. See Miles v. Ford Motor Co., 914 S.W.2d 135, 137 (Tex. 1995) (per 2 Appellant’s cases are “companion cases” because they are appeals arising out of the same trial court proceeding. Misc. Docket No. 06-9136, ⁋ 1.03. 4 curiam); Tex. Gov’t Code Ann. § 73.001. The Supreme Court, however, has provided litigants with the procedures they should follow to seek transfer of a case: 4.01 Any party to a case transferred for docket equalization purposes may file a motion, pursuant to the procedures described in this section, with the court of appeals to which the case has been transferred stating good cause for why the case should be returned to the court of appeals in which the appeal was originally filed. The procedures stated in this subsection shall also govern a party’s motion to transfer a case from one court of appeals to another pursuant to the Supreme Court’s authority under Government Code Chapter 73. 4.02 A motion to transfer or to re-transfer shall be addressed to the Supreme Court, but filed simultaneously in the court in which the case is pending as well as in the court to which the movant requests transfer. The motion should request the Chief Justices of the respective courts of appeals, after considering the transfer request, to forward a copy of the motion to the Supreme Court, along with a letter from each of the two Chief Justices stating his or her concurrence or non-concurrence with the request to transfer the case. Any briefing by a party regarding the transfer motion also should be simultaneously filed in both courts of appeals and forwarded to the Supreme Court. 4.03 The Chief Justices of the two courts of appeals involved should independently consider the transfer request and forward to the Supreme Court a letter commenting thereon within ten business days after receipt of the transfer motion, unless exceptional circumstances require additional time. 4.04 After receipt of a motion and letters from the Chief Justices of both courts of appeals commenting on the requested transfer, along with any briefs of the parties forwarded by the court of appeals, the Supreme Court will consider the motion. Misc. Docket No. 06-9136 (Exhibit C). 5 Appellant’s motion does not appear to comply with the requirements of Misc. Docket No. 06-9136.3 Moreover, as of the filing of this response, it does not appear that Appellant has filed a duplicate motion in the Fifth Court of Appeals. Nonetheless, this Court is not required to wait for Appellant to file a duplicate motion in the Fifth Court of Appeals before it acts in accordance with its duties under Misc. Docket No. 06-9136. IV. In accordance with Misc. Docket No. 06-9136, the State prays the Chief Justice concur with Appellant’s request to transfer this case back to the Court of Appeals for the Fifth District of Texas at Dallas and forward Appellant’s motion, this response, and the Chief Justice’s concurrence to the Supreme Court for consideration. 3 The motion is not addressed to the Supreme Court of Texas and does not request the Chief Justice of this Court to forward the motion to the Supreme Court with a letter stating the Chief Justice’s position on the transfer request. Appellant’s motion appears to ask this Court to take unilateral action to transfer his case back to the Fifth Court of Appeals. 6 Respectfully submitted, JOHN CREUZOT Criminal District Attorney Dallas County, Texas /s/ Jessie R. Allen JESSIE R. ALLEN Assistant District Attorney Bar No. 24040412 133 N. Riverfront Blvd., LB-19 Dallas, Texas 75207 jessie.allen@dallascounty.org (214) 653-3625 (214) 653-3643 fax 7 CERTIFICATE OF SERVICE I certify that I have electronically served this document on John Tatum (jtatumlaw@gmail.com), 8144 Walnut Hill Lane, Suite 1190, Dallas, Texas 75231, lead counsel for Christopher Cortez Thomas, Appellant, by transmitting it to the efile.txcourts.gov electronic filing service provider on March 15, 2021. /s/ Jessie R. Allen Jessie R. Allen 8 Exhibit A Misc. Docket No. 20-9117 Transfer of Cases from Courts of Appeals October 13, 2020 IN THE SUPREME COURT OF TEXAS Misc. Docket No. 20-9117 ________________________________________ TRANSFER OF CASES FROM COURTS OF APPEALS ________________________________________ ORDERED: I. Except as otherwise provided by this Order, the first 38 cases filed in the Court of Appeals for the Third Court of Appeals District, Austin, Texas, on or after September 25, 2020, are transferred to the Court of Appeals for the Seventh Court of Appeals District, Amarillo, Texas, and the next 12 cases filed in the Court of Appeals for the Third Court of Appeals District, Austin, Texas are transferred to the Court of Appeals for the Eighth Court of Appeals District, El Paso, Texas. II. Except as otherwise provided by this Order, the first 13 cases filed in the Court of Appeals for the Fourth Court of Appeals District, San Antonio, Texas, on or after October 2, 2020, are transferred to the Thirteenth Court of Appeals District, Corpus Christi, Texas. III. Except as otherwise provided by this Order, the first 12 cases filed in the Court of Appeals for the Fifth Court of Appeals District, Dallas, Texas, on or after October 2, 2020, are transferred to the Eighth Court of Appeals District, El Paso, Texas. IV. Except as otherwise provided by this Order, the first 15 cases filed in the Court of Appeals for the Tenth Court of Appeals District, Waco, Texas, on or after September 25, 2020, are transferred to the Court of Appeals for the Thirteenth Court of Appeals District, Corpus Christi, Texas, and the next 15 cases filed in the Court of Appeals for the Tenth Court of Appeals District, Waco, Texas are transferred to the Court of Appeals for the Sixth Court of Appeals District, Texarkana, Texas. For purposes of determining the effective date of transfers pursuant to this order, “filed” in a court of appeals means the receipt of notice of appeal by the court of appeals. In effectuating this Order, companion cases shall either all be transferred, or shall all be retained by the Court in which filed, as determined by the Chief Justice of the transferring Court, provided that cases which are companions to any case filed before the respective operative dates of transfer specified above, shall be retained by the Court in which originally filed. It is specifically provided that the cases ordered transferred by this Order shall, in each instance, not include original proceedings; appeals in cases involving termination of parental rights; and those cases that, in the opinion of the Chief Justice of the transferring court, contain extraordinary circumstances or circumstances indicating that emergency action may be required. The transferring Court of Appeals will make the necessary orders for transfer of the cases as directed hereby, and will cause the Clerk of that Court to transfer the appellate record in each case, and certify all orders made, to the court of appeals to which the cases are transferred. When a block of cases is transferred, the transferring court will implement the transfer of the case files in groups not less than once a month, or after all the requisite number of cases have been filed. Upon completion of the transfer of the requisite number of cases ordered transferred, the transferring Court shall submit a list of the cases transferred, identified by style and number, to the State Office of Court Administration, and shall immediately notify the parties or their attorneys in the cases transferred of the transfer and the court to which transferred. The provisions of Misc. Docket Order No. 06-9136 shall apply except those regarding the types of cases subject to transfer that are specifically addressed above. SO ORDERED this 13th day of October, 2020. Misc. Docket No. 20-9117 Page 2 Nathan L. Hecht, Chief Justice Eva M. Guzman, Justice Debra H. Lehrmann, Justice Jeffrey S. Boyd, Justice John P. Devine, Justice James D. Blacklock, Justice J. Brett Busby, Justice Jane N. Bland, Justice Page 2 Misc. Docket No. 20-9117 Exhibit B Transmittal Certification October 19, 2020 In The Court ofAppeals for the Fifth Judicial District of Texas at Dallas TRANSMITTAL CERTIFICATION By order of the Supreme Court of Texas, dated October 13, 2020, the first 12 cases filed on or after October 2, 2020 now on the docket of this Court are transferred to the Court of Appeals for the E ig hth Judicial District, El Paso, Texas, and the undersigned C lerk of this Court certifies that all necessary orders and papers in said cases are herewith transferred to the Clerk of the Court of Appeals for the Eighth Judicial District. NUMBER STYLE OF CASE 1. 05-20-00875-CY In Re: Guardianship of John V. Walter 2. 05-20-00877-CY Felicia Donias v. Old American County Mutual Fire Insurance Co 3. 05-20-00878-CV Biz Friend, LLC and 4555 Beltline, LLC v. Mahaley Transport 4. 05-20-00879-CV Yumin Zhao d/b/a STA Advertising v. Sea Rock Inc. d/b/a Zuki 5. 05-20-00882-CV Zachariah C. Manning v. Dallas Independent School District 6. 05-20-00883-CY Zachariah C. Manning v. Da llas Independent School District 7. 05-20-00885-CY Clu·istine Flores Desio v. Mike DeIBosque d/b/a Injury and Rehab 8. 05-20-00886-CV Carrie Monroe v. Uday Shah 9. 05-20-00888-CR Dalton Dewayne Hunt v. State 10. 05-20-00889-CR Dalton Dewayne Hunt v. State 11. 05-20-00890-CV Pulak K. Barua v. Mabank Independent School District 12. 05-20-00900-CR Christopher Cortez Thomas v. State 1, LISA MATZ, Clerk of the Court of Appeals for the Fifth District of Texas at Dallas, do hereby certify that the foregoing pages contain a true and correct list of the cases transferred to the Court of Appeals for the Eighth District of Texas at El Paso, Texas as previously ordered by the Supreme Court of Texas as the same appears ofrecord in the minutes of this Court. Given under my hand and seal of said Court at office in Dallas, this the 19th day of October, 2020. dN 1lta fs Lisa Matz Clerk Exhibit C Misc. Docket No. 06-9136 Policies for Transfer of Cases Between Courts of Appeals September 22, 2006 IN THE SUPREME COURT OF TEXAS Misc. Docket No. 06-_---.::=:.-'="'-= POLICIES FOR TRANSFER OF CASES BETWEEN COURTS OF APPEALS ORDERED that: The transfer of cases between courts of appeals, for the equalization of dockets as mandated by the Legislature in the General Appropriations Act, and for other good cause pursuant to the Supreme Court's authority under Chapter 73 of the Government Code, will in general be in accordance with these guidelines. This order supercedes and vacates Misc. Docket No. 96-9224 (Oct. 24, 1996) and any other Supreme Court orders regarding policies for the transfer of cases between courts of appeals. General Guidelines for Docket Equalization Transfers 1.01 The decision to transfer cases for docket equalization purposes will be made by the Supreme Court based on the relative number of cases filed in each of the courts of appeals compared to the statewide average per justice of cases filed, adjusted for historical case filing data. Other factors which may be considered include the availability of appropriated funds for reimbursing the travel and living expenses ofthe court to which cases are transferred to hear oral arguments at the location of the transferring court and the past or expected absence of justices from a court due to illness, disqualification, absence, or good cause. 1.02 Cases transferred shall not include original proceedings; appeals from interlocutory orders; appeals from denial ofwrits ofhabeas corpus; appeals in extradition cases; appeals regarding the amount of bail set in a criminal case; appeals from trial courts and pretrial courts in Page 1 of5 - (} v .~. ') '-' multidistrict litigation pursuant to Rule 13.9(b) of the Rules of Judicial Administration; and those cases that, in the opinion of the Chief Justice of the transferring court, contain extraordinary circumstances or circumstances indicating that emergency action may be required. 1.03 Any case that is a companion to a case transferred for docket equalization purposes shall also be transferred to the same court of appeals if, for the case designated for transfer, appeal was perfected prior to appeal being perfected in any companion cases. If the case for which appeal was first perfected was not designated for transfer for docket equalization purposes but one or more later-perfected companion cases is designated for such transfer, the first- perfected appeal and any companion cases shall be retained by the court in which originally filed. For purposes ofthis provision, companion cases are appeals that arise out of the same trial-court proceeding and are not otherwise excluded from docket equalization transfers under §1.02. 1.04 The transferring court, through its clerk, shall transfer the appellate record in each case, and certify all orders made, to the court of appeals to which the cases are transferred. When a block of cases is transferred, the transferring court will implement the transfer of the case files in groups not less than once a month, or after all the requisite number ofcases have been filed, if that number of new filings is reached before 30 days after the transfer is effective. 1.05 The transferring court shall immediately notify the parties or their attorneys in the cases transferred of the transfer and the court to which transferred. 1.06 Upon completion ofthe transfer of a group of the cases ordered transferred, the transferring court shall submit a list ofthe cases transferred, identified by style and number, to the Office of Court Administration. Transfer of Future-Filed Cases for Docket Equalization Purposes 2.01 The Supreme Court may order transferred a block of cases consisting of a specified number of the cases next filed in the transferring court on and after a certain date in the future. The order of the Supreme Court may specify that the cases be all the next civil or all the next criminal cases filed, or all the next cases filed, regardless of whether civil or criminal. When the Supreme Court orders the transfer of any case for which appeal has not been perfected prior to the date of the transfer order, until the transfer of the first group of cases has been completed and the notices required by paragraph 1.05 have been issued, the existence and content of a proposed or final transfer order of the Supreme Court shall be a confidential record of the judiciary until the transfers described therein have been completed, and until Page 2 of 5 the completion of all such transfers no justice or employee ofthe court from which cases are transferred, the court to which cases are transferred, the Supreme Court, the Office of Court Administration, or other employee of the judicial branch of government shall release or divulge any information concerning the transfer, except as necessary to effect transfer ofthe cases. Any order of the Supreme Court ordering transfer of one or more cases next filed in the transferring court on and after a certain date in the future shall be filed separate from any transfer order ordering transfer of one or more cases next filed in the transferring court on and after a certain date in the past, i. e., prior to the date the transfer order is signed. 2.02 The transferring court shall make the necessary orders for the transfer. Transfer of Blocks of Pending Cases 3.01 Upon the agreement of the Chief Justices of two courts of appeals, the Supreme Court may order the transfer of a specified number of cases pending in the transferring court. The Chief Justices shall communicate their agreement to the Supreme Court along with an agreed criteria for the selection ofthe cases to be transferred, such as the oldest pending cases ready for oral argument but not yet set. 3.02 Upon approval by the Supreme Court, the Chief Justice of the proposed transferring court shall communicate to the Office of Court Administration a sequential list beginning with the oldest case meeting the agreed criteria proposed to be transferred, listed by docket number and style. In addition to those cases specified by paragraphs 1.02 and 1.03, cases may not be placed on this list if any of the following criteria apply: 3.021 the case has been set for oral argument within the next thirty days and all parties have been notified of the date of the setting; 3.022 the clerk has been notified by both parties that a settlement has been reached in the case and that an agreed order is being prepared for submission to the court; or 3.023 other similar circumstances exist that counsel against transfer of a particular case which would normally be included in the transfer order. 3.03 The transferring court shall make the necessary orders for the transfer of the specified list of cases. Page 3 of 5 13'3 Procedure for Requesting Re-Transfer of Individual Pending Cases Transferred for Docket Equalization, and for Requesting Transfer of Cases Pursuant to Government Code Chapter 73. 4.01 Any party to a case transferred for docket equalization purposes may file a motion, pursuant to the procedures described in this section, with the court of appeals to which the case has been transferred stating good cause for why the case should be returned to the court of appeals in which the appeal was originally filed. The procedures stated in this section shall also govern a party's motion to transfer a case from one court of appeals to another pursuant to the Supreme Court's authority under Government Code Chapter 73. 4.02 A motion to transfer or to re-transfer shall be addressed to the Supreme Court, but filed simultaneously in the court in which the case is pending as well as in the court to which the movant requests transfer. The motion should request the Chief Justices of the respective courts of appeals, after considering the transfer request, to forward a copy of the motion to the Supreme Court, along with a letter from each of the two Chief Justices stating his or her concurrence or non-concurrence with the request to transfer the case. Any briefing by a party regarding the transfer motion also should be simultaneously filed in both courts of appeals and forwarded to the Supreme Court. 4.03 The Chief Justices of the two courts of appeals involved should independently consider the transfer request and forward to the Supreme Court a letter commenting thereon within ten business days after receipt of the transfer motion, unless exceptional circumstances require additional time. 4.04 After receipt of a motion and letters from the Chief Justices of both courts of appeals commenting on the requested transfer, along with any briefs of the parties forwarded by the courts of appeals, the Supreme Court will consider the motion. SIGNED this 22-~ day of ~2006. Page 4 of5 36 Paul W. Green, Justice Don R. Willett, Justice Misc. Docket No. 06- Page 5 of5 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. Jessie Allen on behalf of Jessie Ray Allen Bar No. 24040412 Jessie.Allen@dallascounty.org Envelope ID: 51466452 Status as of 3/15/2021 10:40 AM MST Associated Case Party: Christopher Thomas Name BarNumber Email TimestampSubmitted Status John Gregory Tatum 19672500 jtatumlaw@gmail.com 3/15/2021 10:34:20 AM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619257/	Raymond C. Awe v. Commissioner. Victor P. Lucia v. Commissioner.Awe v. CommissionerDocket Nos. 13320, 14409.United States Tax Court1948 Tax Ct. Memo LEXIS 129; 7 T.C.M. (CCH) 519; T.C.M. (RIA) 48136; July 29, 1948129 Petitioners Awe and Lucia were sole members of a partnership during the period from April 1, 1942 through December 31, 1943. Awe claimed a deduction on his 1942 individual Federal income tax return attributable to partnership traveling expenses in 1942. Lucia claimed a deduction on his 1943 individual Federal income tax return due to a capital loss suffered in that year. Both Awe and Lucia on their respective 1943 Federal income tax returns claimed a deduction resulting from the partnership's net loss for the year 1943. The Commissioner's determination disallowing these deductions and increasing the net income of Awe for 1942 and increasing the net income of both Awe and Lucia for 1943 is sustained due to a failure of proof on the part of petitioners. Henry P. Rosin, Esq., for the petitioner, Raymond C. Awe. Victor P. Lucia, pro se. Wesley A. Dierberger, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion HILL, Judge: The case of Raymond C. Awe, Docket No. 13320, and the case of Victor P. Lucia, Docket No. 14409, were combined for hearing by the Court. The Commissioner determined a deficiency in the income and victory tax liability of130 petitioner, Raymond C. Awe, for the taxable year ended December 31, 1943, in the amount of $7,992.71, and a penalty of $1,998.18 due to failure to file the 1943 income and victory tax return within the time prescribed by law. The Commissioner determined a deficiency in the income and victory tax liability of petitioner, Victor P. Lucia, for the taxable year ended December 31, 1943, in the amount of $17,944.41, and a penalty of $4,486 due to failure to file the 1943 income and victory tax return within the time prescribed by law. Adjustments were made by the Commissioner in both petitioners' income tax returns for the taxable year ended December 31, 1942, which are reflected in the deficiency determined in the taxable year ended December 31, 1943, in accordance with the provisions of the Current Tax Payment Act of 1943. Petitioner Awe places in controversy: (1) the Commissioner's determination that his distributive share of the net income of the partnership Ajax Engineering & Manufacturing Company was $1,005.92 more than that reported by him in his return for the taxable year ended December 31, 1942; and (2) the Commissioner's determination that his distributive share of the net131 income of the partnership Ajax Engineering & Manufacturing Company was $20,350.97 for the taxable year ended December 31, 1943, instead of a loss of $500 as shown on his return. Petitioner, Lucia, contests: (1) the Commissioner's disallowance of a capital loss deduction of $1,000 in the taxable year ended December 31, 1943; and (2) the Commissioner's determination that his distributive share of the net income of the partnership Ajax Engineering & Manufacturing Company was $20,350.97 instead of a loss of $3,000 as shown on his return for the taxable year ended December 31, 1943. Neither petitioner contests the determination by the Commissioner of the penalty for failure to file his 1943 income and victory tax return within the time prescribed by law. The Federal income and victory tax return of the petitioner Awe for the taxable year ended December 31, 1943, was filed with the collector of internal revenue at Detroit, Michigan, on March 29, 1945. The Federal income and victory tax return of petitioner Lucia for the taxable year ended December 31, 1943, was filed with the collector of internal revenue at Detroit, Michigan, on January 18, 1945. Findings of Fact At the beginning132 of the taxable year 1942 petitioner Awe was a partner with Messrs. Robinson and Wagner in a partnership known as Wagner Engineering & Manufacturing Company. In March 1942 petitioner Awe and Robinson bought out Wagner's interest and continued the partnership under the name of Ajax Engineering Service Company. It operated from March 1942 until July 1942. On July 1, 1942, Robinson and petitioners Awe and Lucia formed a partnership known as Ajax Engineering & Manufacturing Company (hereinafter referred to as Ajax); their interests in this new partnership were, respectively, 50 per cent, 25 per cent and 25 per cent. In December 1942 the three partners organized a corporation known as the Aeronautical Parts Corporation, of which they were the only officers and stockholders. The sole business of the corporation was the manufacture of shells resulting from a contract with Eastman Kodak Company. Most of the partnership's machinery and equipment was moved to the site of the Aeronautical Parts Corporation for the use of the corporation. While the partnership had been producing Halco heads and floating tool holders, it now switched to making tools for the corporation. The amended partnership133 return filed for Ajax covering the period from July 1, 1942, through December 31, 1942, reported sales in the amount of $88,692.26, and a net profit in the amount of $11,367.83. Traveling expenses of $5,265.69 were reported on the return. The division of the profits shown on this return was as follows: Awe$ 2,841.96Lucia2,841.96Robinson5,683.91$11,367.83The partnership return for Ajax filed for the period January 1, 1943 through March 31, 1943, reported sales in the amount of $54,786.87 and a net profit in the amount of $11,481.51. This profit was divided among the three partners as shown on the partnership return as follows: Awe$ 2,870.38Lucia2,870.38Robinson5,740.75$11,481.51In March 1943 the two petitioners bought out Robinson's interest in Ajax and continued the firm as sole partners whereby each increased his interest in the partnership to 50 per cent. In October 1943 the contract between Aeronautical Parts Corporation and Eastman Kodak Company was cancelled, and the former went into bankruptcy in the same month. At that time a large part of the partnership's equipment was moved from the location of the Aeronautical134 Parts Corporation to Ajax's new location on Erskine Street. From October 1943 until June 1944 Ajax continued to do business on a small scale, though there was a drastic reduction in the labor force due to a drop in orders following the bankruptcy of Aeronautical Parts Corporation. Finally, in June 1944, the partnership itself went into voluntary bankruptcy. No partnership returns were filed on behalf of Ajax for the period from March 31, 1943 through December 31, 1943. In the bankruptcy proceeding of June 1944 the partnership books and records were turned over to Earl J. Kuhn, the trustee in bankruptcy. Today the whereabouts of either the trustee or records of the partnership are unknown. Also the records of the purchasers of the partnership assets following the bankruptcy which might have shed light on the financial operations of Ajax in 1942 and 1943 were destroyed by fire. Opinion The following issues are in controversy in this case: (a) Did the Commissioner err in increasing the income of the petitioner, Raymond C. Awe, in the amount of $1,005.92, representing an increase in his distributive share of the net income of the partnership Ajax for the taxable year ended December 31, 1942? 135 (b) Was the petitioner, Victor P. Lucia, entitled to a capital loss deduction of $1,000 in the taxable year ended December 31, 1943? (c) Did the Commissioner err in determining that the distributive share of each of the petitioners, Awe and Lucia, in the net income of the partnership Ajax was $20,350.97 instead of a loss of $500 deducted by Awe and a loss of $3,000 deducted by Lucia on their respective Federal tax returns for the taxable year ended December 31, 1943? 1We think that the Commissioner's determination must be sustained on all three issues due to failure of the petitioners' evidence to rebut the presumption of correctness attaching to facts found by the Commissioner in his notice of deficiency. Wickwire v. Reinecke, 275 U.S. 101">275 U.S. 101; Welch v. Helvering, 290 U.S. 111">290 U.S. 111; Rogers et al. v. Commissioner, 111 Fed. (2d) 987; Estate of Harold W. Grant, 1 T.C. 731">1 T.C. 731. (a) Did the Commissioner err in increasing the income of petitioner Awe in the amount of $1,005.92, representing an increase in his distributive share136 of the net income of the partnership Ajax for the taxable year ended December 31, 1942? 2In Commissioner v. Flower, 326 U.S. 465">326 U.S. 465, 470, the Supreme Court set forth the proof necessary to allow the deduction of traveling expenses under the statute: "Three conditions must thus be satisfied before a traveling expense deduction may be made under § 23(a)(1)(A): "(1) The expense must be a reasonable and necessary traveling expense, as that term is generally understood. This includes such items as transportation fares and food and lodging expenses incurred while traveling. "(2) The expense must be incurred 'while away from home.' "(3) The expense must be incurred while in pursuit of business. This means that there must be a direct connection between the expenditure and the carrying on of the trade or business of the taxpayer or of his employer. Moreover, such an expenditure must be necessary or appropriate to the development and the pursuit of the business or trade." The evidence presented on this issue at the hearing fails completely to satisfy these tests regarding137 traveling expenses reported for Ajax in 1942. The only relevant testimony was petitioner Lucia's legal conclusion that the amounts set forth in the partnership returns for 1942 correctly represented partnership traveling expenses for 1942. Such testimony alone does not serve to disturb the Commissioner's determination. Louis Halle, 7 T.C. 245">7 T.C. 245. No exhibits pertinent to the issue were presented. The only possible conclusion is to sustain the Commissioner's determination as presumptively correct. See Cohan v. Commissioner, 39 Fed. (2d) 540; Maurice P. O'Meara, 8 T.C. 622">8 T.C. 622. (b) Was petitioner Lucia entitled to a capital loss deduction in the amount of $1,000 for the taxable year ended December 31, 1943? No testimony or exhibits were presented at the hearing by petitioner Lucia concerning this capital loss deduction. Even if it is assumed that stock held by Lucia in the Aeronautical Parts Corporation gave rise to the claimed loss due to the bankruptcy of the corporation in October 1943, the number of shares of such stock held by him and the cost basis to him were not shown. The judicial result of such a failure of proof is set forth in Livingston Worsted Company, 14 B.T.A. 700">14 B.T.A. 700, 701:138 "Issue being joined as to the facts alleged by the petitioner and denied by respondent, and error being denied on behalf of respondent, the burden of proof is cast upon the petitioner to establish by proper evidence its allegations. In this case it has submitted no evidence whatsoever and we have, therefore, no alternative other than to approve the deficiency determined by respondent." The Commissioner's determination disallowing the $1,000 capital loss deduction of petitioner Lucia is upheld. (c) Did the Commissioner err in determining that the distributive share of each of the petitioners Awe and Lucia in the net income of the partnership Ajax was $20,350.97 instead of a loss of $500 deducted by Awe and a loss of $3,000 deducted by Lucia on their respective Federal tax returns for the taxable year ended December 31, 1943? At the start of the year 1943 the partnership Ajax consisted of Robinson holding a 50 per cent interest, petitioner Awe holding a 25 per cent interest, and petitioner Lucia holding a 25 per cent interest. The partnership return covering the period from January 1, 1943 until March 31, 1943, showed sales in the amount of $54,786.87 and a net profit in the139 amount of $11,481.51. Testimony reveals this business success was in a large measure due to the partnership's close tie with Aeronautical Parts Corporation which the partners had incorporated in December 1942. In March 1943 petitioners Awe and Lucia bought out Robinson's 50 per cent interest in Ajax and continued the business as sole partners, so that each acquired a 50 per cent interest thereby. Since neither petitioner recalled how this transaction took place and neither presented competent evidence to rebut the Commissioner's determination of these facts, his finding to this effect in the notice of deficiency prevails. Avery v. Commissioner, 22 Fed. (2d) 6; Greengard v. Commissioner, 29 Fed. (2d) 502; Rogers et al. v. Commissioner, supra. There is a total lack of competent evidence by the petitioners concerning the profits or losses of the partnership for the balance of the taxable year 1943 from March 31 to December 31. No partnership return was filed for this period. No books or records of the partnership business' operations were presented at the hearing. Assuming that such evidence either disappeared in the custody of the trustee140 in bankruptcy in 1944 or was destroyed by fire, as contended by petitioners, yet they must bear the onus of such misfortune. Pennant Cafeteria Co., 5 B.T.A. 293">5 B.T.A. 293; Aaron Samuelson, Executor, 10 B.T.A. 860">10 B.T.A. 860. As the Court in Burnet v. Houston, 283 U.S. 223">283 U.S. 223, 228, stated: "We cannot agree that the impossibility of establishing a specific fact, made essential by the statute as a prerequisite to the allowance of a loss, justifies a decision for the taxpayer based upon a consideration only of the remaining factors which the statute contemplates. The definite requirement of * * * the act is not thus easily to be put aside. The impossibility of proving a material fact upon which the right to relief depends simply leaves the claimant upon whom the burden rests with an unenforceable claim, a misfortune to be borne by him, as it must be borne in other cases, as the result of a failure of proof. * * " The only evidence presented concerning the partnership operations was the testimony of petitioners Awe and Lucia. Awe's statement that he knew nothing about the financial operations of Ajax in the taxable year 1943 and that he did not know whether or not the141 partnership made any money renders his testimony valueless. The selfserving statement of Lucia that the partnership suffered a loss of $4,000 in 1943 states a conclusion uncorroborated by competent testimony or records. In view of Lucia's vague and contradictory statements concerning the partnership operations in 1943, the evidentiary value of his testimony is very slight. In evaluating the uncontradicted testimony of these petitioners the comment of the Supreme Court in Quock Ting v. United States, 140 U.S. 417">140 U.S. 417, 420, 421, is very appropriate: "Undoubtedly, as a general rule, positive testimony as to a particular fact, uncontradicted by any one, should control the decision of the court; but that rule admits of many exceptions. There may be such an inherent improbability in the statements of a witness as to induce the court or jury to disregard his evidence, even in the absence of any direct conflicting testimony. He may be contradicted by the facts he states as completely as by direct adverse testimony; and there may be so many omissions in his account of particular transactions, or of his own conduct, as to discredit his whole story. His manner, too, of testifying142 may give rise to doubts of his sincerity, and create the impression that he is giving a wrong coloring to material facts. All these things may properly be considered in determining the weight which should be given to his statements, although there be no adverse verbal testimony adduced." See also Birnbaum v. Commissioner, 117 Fed. (2d) 395, and Andrew Jergens Co., et al. v. Conner, 125 Fed. (2d) 686. From the evidence in the record it appears probable that the financial operations of the partnership were quite successful until the contract between Aeronautical Parts Corporation and Eastman Kodak Company was canceled in October 1943. At that time the partnership's orders fell off to such an extent that it was forced to move to smaller quarters and reduce its working force to a handful of men. Yet petitioners have been unable to present sufficient concrete evidence of partnership losses from October through December 1943 as would rebut the presumption of correctness which attaches to the Commissioner's determination that Ajax realized a net profit in the year 1943. See Avery v. Commissioner, supra; Greengard v. Commissioner, supra;143 Rogers, et al. v. Commissioner, supra.We therefore conclude that the Commissioner did not err in his determination that the distributive share of each of the petitioners Awe and Lucia in the net income of Ajax for the taxable year ending December 31, 1943, was $20,350.97. Decisions will be entered for respondent. Footnotes1. Sections 181, 182 and 183 of the Internal Revenue Code↩ govern these three issues.2. Section 23 (a) (1) (A) of the Internal Revenue Code↩ governs this issue.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619258/	ELWOOD C. GIBERSON AND MARJORIE H. GIBERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; ELWOOD C. GIBERSON CO., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGiberson v. CommissionerDocket Nos. 10106-79, 10107-79.1United States Tax CourtT.C. Memo 1982-338; 1982 Tax Ct. Memo LEXIS 413; 44 T.C.M. (CCH) 154; T.C.M. (RIA) 82338; June 16, 1982. Walter T. Hart, for the petitioners. Christy M. Pendley, for the respondent. SHIELDSMEMORANDUM FINDINGS OF FACT AND OPINION SHIELDS, Judge:* Respondent determined deficiencies in petitioners' Federal income tax as follows: Docket No.YearAmount10106-791976$8,854.0010107-7919764,372.87Due to concessions by petitioners, the issues remaining for our415 decision are: 1. Whether medical reimbursement payments by the Elwood C. Giberson Co., Inc., to Mr. Elwood C. Giberson, its president and 100 percent joint shareholder, were made pursuant to a plan qualifying under section 105; 22. Whether the corporation may deduct such payments as ordinary and necessary business expenses under section 162; and 3. Whether petitioners realized prepaid rental income when they purchased a residence by assuming an outstanding mortgage, paying back real estate taxes, and simultaneously leasing the property back to the seller for five years at a bargain rental rate. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein. Issues 1 and 2.Petitioners Elwood C. Giberson (hereinafter Mr. Giberson) Marjorie H. Giberson (hereinafter Mrs. Giberson) are husband and wife. They resided in Des Moines, Iowa, when they filed the416 petition in Docket No. 10106-79. Mr. Giberson designs and sells ventilation systems primarily to the food processing industry. He and Mrs. Giberson founded the business as a partnership in 1947 and incorporated it in 1959. Mr. and Mrs. Giberson jointly own all of the capital stock of the corporation. Mr. Giberson has been president and Mrs. Giberson the secretary and treasurer of the corporation since incorporation. They alone comprise its board of directors. The corporation's principal place of business was in Des Moines, Iowa, when the petition in Docket No. 10107-79 was filed. On August 1, 1960, the board of directors passed a resolution offering to pay two-thirds of employees' medical insurance premiums after six months' continuous employment with the corporation. The plan was augmented by a second resolution adopted on July 5, 1965. It provided that the corporation would pay for all medical expenses of the president, Mr. Giberson, and his dependents, except for one-third of his insurance premiums which he would continue to pay. Subsequently, on January 7, 1975, the board of directors resolved that the corporation would pay total medical insurance premiums covering Mr. 417 and Mrs. Giberson and their dependents. Mr. Giberson was in good health when the medical reimbursement plan was adopted in 1965. During 1976, the corporation employed six persons, including Mr. Giberson who was designer and salesman; Mrs. Giberson who was bookkeeper, head of collections and chief financial officer; a salesman; a serviceman who also maintained boilers; a secretary and bookkeeper; and a part-time employee whose duties have not been described to the Court. 3On its corporate income tax return for 1976, the corporation deducted medical expenses paid to and for the benefit of Mr. and Mrs. Giberson and their children in the amount of $5,076. 4 In addition, the corporation deducted $2,315.18 for employee health insurance premiums. It paid for the Gibersons' medical insurance in full and covered two-thirds of the cost of insurance of all other employees in that year. 418 In his statutory notice of deficiency, the respondent determined that the amounts the Gibersons received in 1976 in payment of medical expenses were dividends which were includible in their income under section 61. 5 The respondent disallowed the corresponding corporate deductions for medical payments to or for the benefit of the Gibersons because this amount was not paid pursuant to a plan qualifying under section 105. Issue 3.In January 1976 petitioners purchased a residence in Cedar419 Falls, Iowa, from Charlotte Giberson (hereinafter Charlotte), the divorced wife of Elwood Giberson's now-deceased brother. Following the divorce, Charlotte realized she could not afford the carrying costs associated with ownership of the house. 6 Petitioners estimated the fair market value of the Cedar Falls property to be $43,697 7 in January 1976. The parties negotiated at considerable length over420 the sale of the house. The substance of their discussions was committed to paper in a letter from petitioners to Charlotte dated December 27, 1975. Mr. Giberson stated: * * * In this proposed transaction, you are relinquishing your valuable equity to your home to Marjorie and to me in exchange for a five year lease of the home to you at a low rental rate. Now, Marjorie and I are not acting out of a sense of charity. I want you to know how Marjorie and I view the transactions from a strictly business point of view. We expect to profit from the transaction * * . Furthermore, we need your help in keeping down our maintenance cost so we can make the profit we anticipate. 8 * * In addition to421 the anticipated gain of $10,087.00 due to inflation, Marjorie and I gain a reduction in State and Federal income taxes because interest and taxes are deductible. * * On January 8, 1976, Charlotte conveyed the Cedar Falls property to petitioners in consideration of their assumption of the outstanding mortgage on the property of $30,500, payment of back real estate taxes of $1,329.16 and utility and maintenance bills of $725. Simultaneously, petitioners leased the property back to Charlotte for exclusive use as a residence for five years at a monthly rental of $150. The warranty deed conveyed the real estate in fee simple. Its terms did not include the reservation of any estate for years to Charlotte. As part of the deal, petitioners agreed to pay the tax, insurance, and major maintenance costs of the Cedar Falls property during the leasehold, but not the utilities which were borne by the lessee. Petitioners drew the lease on a preprinted Iowa Real Estate Association form. By its terms, use of the premises was restricted to residential purposes. In his statutory notice of deficiency the Commissioner determined that petitioners received prepaid rental income of $13,197422 which represented the excess of the fair market value of the property, $43,697, over the balance of the mortgage assumed, $30,500. On brief, respondent reduced this adjustment to $11,867.84 to include in the purchase price the back real estate taxes of $1,329.16 petitioners paid as part of the consideration tendered for the property. 9ULTIMATE FINDINGS OF FACT 1. The fair market value of the Cedar Falls property was $43,697 in January 1976. 2. Petitioners purchased the Cedar Falls property in fee subject to a five-year lease. OPINION Issues 1 and 2.Petitioners contend that the corporation paid their medical expenses pursuant to a qualified plan, of which the reimbursement provision is founded on Mr. Giberson's role as key employee of the corporation; thus, such payments are excludible from his joint income under section 105(e). Respondent maintains that the corporation had two plans--one providing for payments of medical insurance premiums and a second, supplemental reimbursement plan which benefitted the Gibersons in423 their capacity as owners rather than as employees of the corporation. 10Section 105 provides generally that amounts received under accident and health plans are excludible from gross income.11Section 1.105-5(a), Income Tax Regs., provides definitive guidelines as to what constitutes an accident or health plan. For example, a plan may cover one or more employees and different plans may be established for different employees or classes of employees. An employee's rights need not be enforceable, but if so, he must be covered by a plan and notice or knowledge of such plan must be communicated to him as a definite policy through the plan need not be in writing. Section 1.105-5, Income Tax Regs.Lang v. Commissioner,41 T.C. 352">41 T.C. 352 (1963). In addition, the plan must exist for the benefit of employees, as opposed to shareholders. Larkin v. Commissioner,48 T.C. 629">48 T.C. 629 (1967), affd. 394 F.2d 494">394 F.2d 494 (1st Cir. 1968). 424 Respondent concedes the medical insurance plan established in 1960 is qualified but urges that the existence of the supplemental reimbursement plan was not revealed to employees other than the shareholders and that the failure to include nonshareholder employees constitutes irrational discrimination. It is clear that a plan, as defined in section 1.105-5(a), Income Tax Regs., existed when Mr. Giberson received the reimbursements from his corporation. Although the plan was not in writing, the resolutions adopted by the board of directors were reported in the corporate minutes. The reimbursement provision was known to Mr. Giberson, the only employee it covered. Benefits under the plan were definite in amount and were not paid on an ad hoc basis. Compare Larkin v. Commissioner,supra, and Lang v. Commissioner,supra, with Bogene, Inc. v. Commissioner,T.C. Memo 1968-147">T.C. Memo. 1968-147. Under these circumstances, we hold that a plan, as defined in section 105, existed of which the reimbursement provision formed a part. We are then left with the narrow question whether the plan is "for employees," that is, whether there is some rational425 basis for providing full medical coverage to Mr. Giberson and his dependents, the owner-employee of the business, while only partially covering all other nonshareholder employees. We said in Levine v. Commissioner,50 T.C. 422">50 T.C. 422, 427 (1968): [t]here must be some rational basis other than ownership of the business to justify discrimination among employees; i.e., that the so-called sick pay in question must in fact represent bona fide sick pay for employees rather than distributions to stockholders. * * * [Emphasis supplied.] Mr. Giberson testified that his duties in the corporation included designing ventillation systems for the food processing industry, negotiationg contracts, and, as chief executive of the company, providing direction to it. He was responsible for over 70 percent of the sales realized by the corporation in 1976. With respect to skill and level of responsibility, his duties clearly distinguished him as a key employee. He testified that the genesis of the reimbursement plan was to provide him with a level of benefits commensurate with his responsibilities in the business. 12 He was in good health when the supplemental plan was adopted. 426 13 We find his testimony to be candid and credible. Respondent's reliance on John H. Kennedy, Inc. v. Commissioner,T.C. Memo. 1977-210, and Smithback v. Commissioner,T.C. Memo. 1969-136, is misplaced. These cases are clearly distinguishable. In both cases no other employee received benefits except the sole stockholder of each business. By contrast, the corporation herein paid two thirds of the cost of medical insurance for all nonshareholder employees. Nor do we accept respondent's characterization of the medical reimbursements to petitioners as distributions of corporate dividends. Nothing in section 105 precludes an employee who is also a shareholder and corporate officer from enjoying that section's tax benefits. 14 We find that427 the supplemental plan was established on a reasonable basis for Mr. Giberson's benefit as an employee. 15 On the basis of the record before us, we conclude that medical payments to or for the benefit of petitioners were made under a plan for employees and not for shareholders. Accordingly, amounts received by petitioners under the plan are excludible under section 105(b). A corporation may deduct expenditures for a medical benefit plan if they are ordinary and necessary. Section 1.162-10(a), Income Tax Regs. We find on this record that they were ordinary and necessary. Consequently, the corporation is entitled to a deduction for medical payments as business expenses under section 162 (a). 16428 Issue 3.We must decide whether petitioners received additional income in 1976 when they purchased property under an agreement by which the consideration was substantially below fair market value but the property was leased back to the seller for a fixed term at a rent based on what the seller could afford. Relying on Kreusel v. United States, an unreported case ( D. Minn. 1963, 12 AFTR 2d 5701, 63-2 USTC par. 9714), petitioners contend that less than the fee interest was conveyed and that the parties intended to carve an estate for years out of it. Respondent cites Alstores Realty Corp. v. Commissioner,46 T.C. 363">46 T.C. 363 (1966), in support of his position that the entire fee interest was conveyed because petitioners bore the risks and burdens of ownership during Charlotte's tenancy. The resolution of this issue turns on whether petitioners purchased an entire fee interest without reservation and leased the property back to the vendor for a five-year period, or whether they purchased a remainder interest in it. Cf. Ellerv. Commissioner,77 T.C. 934">77 T.C. 934 (1981). The issue is factual, and petitioners bear the burden of proving429 respondent's determination incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). We have carefully examined the record and authorities cited by petitioners in this case. It presents a close question. However, we conclude that petitioners have not persuasively shown that they purchased no more than a remainder interest. In the form which Charlotte and the petitioners themselves chose, the transaction was cast as a sale and leaseback. This Court requires that a party seeking to upset the form of a transaction furnish strong proof that what occurred, in substance, differs from what the form indicates. Ullman v. Commissioner,264 F.2d 305">264 F.2d 305 (2d Cir. 1959), affg. 29 T.C. 129">29 T.C. 129 (1957); Buffalo Tool & Die Mfg. Co. v. Commissioner,74 T.C. 441">74 T.C. 441, 446 (1980); Hummel v. Commissioner,T.C. Memo. 1970-341. Petitioners have not satisfied this difficult burden. The warranty deed from Charlotte to petitioners is unequivocal on its face. It conveys title to the property in fee simple without reservation. Petitioners' letter to Charlotte, dated December 27, 1975, expressing the underlying agreement between430 the parties, speaks of "the transfer of ownership of your home to us, and our lease back [sic] agreement with you." Finally, paragraph 14 of the lease provides that upon failure of the lessee to observe the terms of the lease, the lessor may declare a forfeiture of the lease and the lessee's rights thereunder. By their terms, these documents do not purport to reserve an estate for years to Charlotte. In addition, petitioners appear to have borne the risks and burdens of ownership during the leasehold. During 1976 and the ensuing three years, they paid the real estate taxes and insurance premiums on the property 17 as well as major maintenance. 18 Petitioners have not demonstrated that these outlays were the subject of negotiations between the holder of an estate for years and the remaindermen. 431 We have also considered the parties' intentions. Mr. Giberson testified that he proposed to "purchase the property for an appraised value of $43,600 with an encumbering lease for five years." Again, in his letter to Charlotte, dated December 27, 1975, he proposed "purchasing your home * * * as per the lease agreement attached and at a rental rate of $150.00 per month." Surely, had Charlotte sold less than the fee interest in her home, she would not have been required to pay rent to enjoy her reserved term. Such a notion flies in the face of an intention to reserve an interest in the seller. We think Kreusel v. United States, an unreported case ( D. Minn. 1963, 12 AFTR 2d 5701, 63-2 USTC par. 9714), is distinguishable. There, taxpayers sold farm property which they owned in fee to a third party but remained on it in accordance with a rent-free right of occupancy for their lives plus six months. The issue was whether the texpayers had sold the fee or only a remainder interest. In holding for the taxpayers, the Court determined that the whole contract of sale, firmly supported by testimony, indicated the parties' intention to reserve an interest in the selling432 party. There is nothing in the record here to suggest that Charlotte wished to preserve her right of occupancy as a reserved term for years rather than a lease, or that petitioner preferred to acquire the house by remainder rather than in fee subject to leaseback. 19Eller v. Commissioner,supra at 960. We decide on this record that the parties intended and effected a sale-leaseback.There remains the onerous task of valuing petitioners' leased fee interest. 20 Respondent contends it should be measured by the difference between the fair market value of the property in January 1976 and the purchase price.Petitioners argue that the price paid was not greater than the value of the leased fee interest. In the alternative, they contend "prepaid rent" should be limited to the difference433 between the fair rental value and the rent received over the leasehold. Petitioners' expert appraiser, James T. Hayes, Jr., defined the leased fee interest as the present worth of the right to receive the net income flow over the period of the lease, coupled with the present worth of the reversionary value of the property at the end of the lease. Applying a cost approach to the reversion component of value, he computed a reversionary value of $28,900.90. 21 Then, without calculating the present worth of the contract rent, he merely asserted that a further reduction in the present value of the property in January 1976 resulted from the fact that annual expenditures for taxes, insurance and maintenance exceeded annual income over the lease. 434 While we agree with his use of the cost approach to value petitioners' leased fee interest, we are struck by three conspicuous omissions in his analysis. First, he did not assign a separate value to the land. Second, he failed to provide for depreciation of the dwelling over the lease. Third, he did not take into account the present value of the contract rent over five years. Without these factors his leased fee interest calculation is meaningless.See American Institute of Real Estate Appraisers, The Appraisal of Real Estate (7th ed., 1978), pp. 473-478. Respondent, on the other hand, presented no expert testimony in support of his valuation. He erroneously relied on the method employed in Alstores Realty Corp. v. Commissioner,supra, in a factual context at odds with that now before the Court. In Alstores Realty the seller enjoyed a rent-free right of occupancy of a portion of the premises for two and one-half years. He recorded on his books prepaid rent435 in an amount equal to 6-1/4 cents per square foot per month which was the same rate the accrual basis purchaser was paying the seller under an existing lease for portions of the building. The respondent determined that the prepaid rent was additional income to the purchaser in the year of the sale. By contrast, we have here cash basis taxpayers who received fixed rental payments over the lease term which were based on the seller's ability to pay rather than what the property might command. We find respondent's determination meritless because of its apparent total reliance on a formula which is not relevant here. We are satisfied that there is enough evidence of record for the parties to make the recessary calculations or otherwise come to an agreement on the value of petitioners' leased fee interest under the factors described on page 18, supra, as well as those set forth in the American Institute of Real Estate Appraisers, The Appraisal of Real Estate,supra, pp. 473-478. Decisions will be entered under Rule 155.Footnotes1. These cases have been consolidated for purposes of trial, briefing and opinion.↩. These cases were tried before Judge Cynthia Holcomb Hall who subsequently resigned from the Court. By order of the Chief Judge dated February 8, 1982, the cases were reassigned to Judge Perry Shields↩ for disposition.2. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year in issue. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩3. The salaries paid to those employees in 1976 were: ↩Elwood C. Giberson$36,500.00Marjorie H. Giberson12,500.00C. Edward Truslow (salesman)23,100.00John Pokos (serviceman)21,706.04Virginia Sissel (secretary and bookkeeper)7,199.59Debra Blake (part-time)3,118.214. This amount comprised $2,748.10 in reimbursements to petitioners for doctors' fees, hospital charges, and eyeglasses and $2,333 paid by the corporation for medical travel expenses. Since petitioners concede $215 of the latter category of expenses were personal and nondeductible, only $4,866.10 of medical payments to or for the benefit of petitioners remain in dispute.↩5. Although the respondent determined in Docket No. 10106-79 that corporate payments of $4,866 for petitioners' medical expenses were includible in their income, the parties stipulated to payments of $4,861. In the absence of any explanation for the $5.00 difference, we find that the latter amount controls.↩6. In a letter to Charlotte dated December 27, 1975, Mr. Giberson estimated she would require a monthly cash flow of $424.93 to remain owner of the property, consisting of: Mortgage principal and interest$242.43Taxes $1,350/year112.5012 months Insurance $240/year20.0012 months Major maintenance, estimated Plumbing, electrical, heating, roof repair, doors, windows, but not including paint and decorating. * Not including utilities.↩50.00 * $424.937. The property had been appraised in June 1974 at $38,500. To this figure petitioners added $5,197.50 based on nine percent "added value due to inflation" for 1-1/2 years to arrive at petitioners' estimate of then-current fair market value.↩8. Petitioners anticipated a gross profit of $10,087.00 on their investment, calculated as follows: ↩Value of property on January 1, 1976$43,697.00 Inflation - 5 percent/yearAnticipated sales price in January 1981$55,769.67 Less mortgage balance due in January 1981( 28,887.00)Less out of pocket cash flow for60 months ($429.93 costs -$150.00 rent) times 60( 16,795.80)Gross profit from sale of property in January 1981$10,087.00 9. There is no explanation in the record why respondent did not include the back paid utility and maintenance bills in the purchase price.↩10. However, respondent concedes that Mrs. Giberson received medical benefits as a dependent of Mr. Giberson rather than directly through a specific plan provision.↩11. Section 105 provides in pertinent part: (a) AMOUNTS ATTRIBUTABLE TO EMPLOYER CONTRIBUTIONS.--Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. (b) AMOUNTS EXPENDED FOR MEDICAL CARE.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(e)) of the taxpayer, his spouse, and his dependents (as defined in section 152). (e) ACCIDENT AND HEALTH PLANS.--For purposes of this section and section 104 (1) amounts received under an accident or health plan for employees, shall be treated as amounts received through accident or health insurance.↩12. Cf. Smithback v. Commissioner,T.C. Memo. 1969-136↩, wherein we found the purpose of the plan to be the avoidance of taxation. 13. Cf. Leidy v. Commissioner,T.C. Memo 1975-340">T.C. Memo. 1975-340. In Leidy↩ a medical plan covering the 100 percent joint shareholders was adopted a few days after petitioner learned from his doctor that he suffered from a serious heart condition.14. Bogene, Inc. v. Commissioner,T.C. Memo. 1968-147↩. However, we draw no conclusion as to whether the medical reimbursement plan would satisfy the nondiscrimination requirement of section 105(h), effective for claims filed and paid in taxable years beginning after December 31, 1979.See sec. 366, Revenue Act of 1978, Pub. L. 96-600, 92 Stat. 2763. 15. See Epstein v. Commissioner,T.C. Memo. 1972-53↩.16. Smith v. Commissioner,T.C. Memo. 1970-243↩.17. Although the insurance policy was not introduced into evidence, from the tenor of the parties' agreement and Mr. Giberson's testimony, we do not doubt that petitioners were the insured. ↩18. The fact that the tenant was responsible for upkeep of the yard and snow shoveling does not change our conclusion. While these chores may be associated with home ownership, they often are performed by lessees.↩19. It is unfortunate that Charlotte was unable to testify for we are left to conjecture how she viewed the transaction and reported the sale. If she sold only a remainder interest, she would have had to allocate the basis between the reserved interest and the remainder. Sec. 1.61-6(a), Income Tax Regs.; Hunter v. Commissioner,44 T.C. 109">44 T.C. 109, 115↩ (1965).20. Respondent's characterization of this value as "prepaid rent" does not bear scrutiny. Petitioners are cash basis taxpayers who negotiated the payment of contract rent over a fixed term as part of the purchase agreement.↩21. This figure represented the present value of the anticipated reversion of the property at the expiration of the lease discounted at the rate of 8-3/4 percent per annum. $43,960 His use of $43,960 rather than petitioners' estimated value of $43,697 was not explained. ** This "reversion factor" reflects the present value of $1.00 to be received in five years.↩ X 0.65743629 * = $28,900.90.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619261/	APPEAL OF EMERSON ELECTRIC MANUFACTURING CO.Emerson Electric Mfg. Co. v. CommissionerDocket No. 1010.United States Board of Tax Appeals3 B.T.A. 932; 1926 BTA LEXIS 2530; February 19, 1926, Decided Submitted November 17, 1925. 2530 1. Commissions paid to brokers for the sale of the capital stock of a corporation are not deductible as ordinary and necessary expenses of carrying on a trade or business. 2. Fees paid to lawyers for negotiating the sale of the capital stock of a corporation and for securing an amendment to its charter to authorize an increase in its capitalization are not deductible as ordinary and necessary expenses of carrying on a trade or business. 3. Fees paid to the State of Missouri for amending taxpayer's charter to increase its capitalization are not taxes deductible under section 234(a)(3), but are capital expenditures. William F. Fahey, Esq., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. ARUNDELL933 Before STERNHAGEN, LANSDON, and ARUNDELL. This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended September 30, 1920, in the amount of $44,394.46. The deficiency arises from the refusal of the Commissioner to allow as deductions the amount of $104,501.25 paid as brokers' commissions, attorneys' fees, and fees to the State of Missouri incident to the increase in2531 the capital stock of the taxpayer and the issue and sale of certain of its preferred stock. FINDINGS OF FACT. The taxpayer was incorporated under the laws of the State of Missouri in September, 1890. Its original capital was $50,000, which was increased to $75,000 in 1892, to $300,000 in 1901, to $600,000, in 1907, to $800,000 in 1917, and to $2,800,000 in November, 1919. Some of the increases in capitalization prior to November, 1919, were due to the issuance of stock dividends. It was the practice of the corporation to charge to expense all expenditures incurred incident to the increase of its capital stock. The greatest expense incident to an increase of its capital stock prior to the increase of November, 1919, did not exceed the sum of $360. The increase authorized in November, 1919, took the form of 20,000 shares of preferred stock of the par value of $100 each, carrying 7 per cent cumulative dividends. The stock was callable at the option of the taxpayer at the price of $115 per share and accrued dividends to the date of redemption. The firm of Spencer Trask & Co., a copartnership, subscribed for 10,000 shares of the authorized increase in the capital stock of2532 the corporation of the par value of $1,000,000. An agreement existed between the taxpayer and the firm of Spencer Trask & Co. whereby the latter agreed to sell and distribute the $1,000,000 of preferred stock. This agreement was fully complied with, and thereafter, during the taxable year, Spencer Trask & Co. paid to the taxpayer $1,000,000 in cash and received from it $100,000 as a commission for selling and disposing of this stock as agreed. The taxpayer, during the same year, paid to the law firm of Koerner, Fahey & Young the sum of $3,500, for legal services rendered in connection with its negotiations with Spencer Trask & Co. and the amendment of its charter authorizing an increase of its capital stock. During the taxable year in question, the taxpayer paid to the State of Missouri, as fees in connection with the amendment of its charter, the sum of $1,001.25, without which payment it would not have been authorized to sell its stock. 934 The business of the taxpayer had increased to such volume that it was necessary and expedient for it to acquire additional capital, and it procured such capital by the sale of its preferred stock on the advice of its bankers, 2533 lawyers, and stockholders. In order to sell such stock, it was necessary for the taxpayer to employ persons engaged in the business of stock selling, as the taxpayer was not familiar with this line of work. Under the laws of Missouri, if the consideration received for stock is cash, cash must be received by the corporation in the full amount of the par value of the stock issued. DECISION. The determination of the Commissioner is approved. OPINION. ARUNDELL: The taxpayer claims as a deduction from its gross income for the fiscal year ended September 30, 1920, the amount of $104,501.25 paid for the purposes set forth in the findings of fact. The major item is the sum of $100,000 paid to Spencer Trask & Co. incident to the marketing of the taxpayer's preferred stock of the par value of $1,000,000. The entire issue of 10,000 shares was subscribed for by Spencer Trask & Co., which paid the taxpayer in payment therefor $1,000,000. Under the laws of Missouri, if stock is issued for cash, it is necessary that the corporation receive cash in an amount not less than the par value of the stock issued therefor. It was by reason of this provision of the statute that the transaction2534 took the form of the payment to the taxpayer by Spencer Trask & Co. of the full sum of $1,000,000 and a check by the taxpayer to the brokers in the sum of $100,000. If the amount so paid to the brokers is deductible, it is by reason of section 234(a)(1) of the Revenue Act of 1918, which provides that there shall be allowed as deductions, "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." The taxpayer contends that, the securing of additional capital in order to efficiently operate its business being absolutely necessary, the expenses incident thereto were not only necessary, but, in the cirmcumstances, ordinary expenses; and, further, that the amount paid to the brokers represented "other compensation for personal services actually rendered" and, therefore, constituted a proper deduction from income. That the amount paid to Spencer Trask & Co. for services rendered in connection with the flotation of the taxpayer's capital 935 stock represented compensation for personal services actually rendered2535 is true, but that does not of itself bring the expenditure within the category of deductible expenses contemplated by the statute. The word "including," as used in the clause "including a reasonable allowance for salaries or other compensation," signifies the intent to include as deductible expenses only such salaries or other compensation as are ordinary and necessary expenses in carrying on a trade or business. The use of capital is ordinarily and generally necessary in the conduct of a business enterprise, but it does not follow that the expense incident to its procurement is an ordinary and necessary business expense within the purview of the statute. Expenses incurred by a corporation in selling its capital stock, the proceeds from which are to be permanently invested in property or otherwise used in the operation of the business, subject to all its risks and hazards, are not deductible expenses, for the reason that such expenses are incurred in connection with a capital transaction. The only effect of expenses of this character, as in the case of discount at which the shares of stock may be sold, is to reduce the capital available to the corporation, and they can not2536 be used to reduce the income from operations. They represent a capital expenditure which should be charged against the proceeds of the stock and not recouped out of operating earnings. Further, it is clear to us that the revenue of a day or a year should not be burdened with the cost of acquiring additional capital, the benefits from which will inure the corporation over a long period of years. This is the doctrine generally recognized and adopted in the treatment of expenses incident to the procuring of temporary capital through the flotation of bonds and other term securities, and in such cases the expenses are written off over the life of the indebtedness. We think it is perfectly clear that the amount received by a corporation in excess of the par value of its stock is not income to the corporation, but is in fact a paid-in surplus, and that the converse is equally true, that when stock is sold for less than its par value the corporation has not suffered a loss. . It is contended, however, that this is not a case where stock is sold for less than par, but that the taxpayer in fact received $1,000,0002537 and thereafter paid out $100,000 as expense incurred in its sale and distribution. Obviously the net result to the corporation is the same whether it sells its stock to a broker at a discount or whether it sells the stock through salesmen employed for the purpose and pays a salary or other compensation for their services. 936 What has been said with reference to the payment of $100,000 incident to the sale of the taxpayer's preferred stock is equally true of the item of $3,500 paid for legal services in connection with the taxpayer's negotiations with the brokers and in the amendment of its charter authorizing the sale of its stock. Such an item is, in our opinion, a capital expediture and not an ordinary and necessary expense of carrying on a business, and is, therefore, not deductible. The fees paid to the State of Missouri, in the amount of $1,001.25, in connection with the amendment of the taxpayer's charter in order that it might increase its capitalization, is not a tax, but is a fee, and as such is deductible only if it falls within the provisions of section 234(a)(1). For the reasons heretofore advanced, we are of the opinion that this item is a capital expenditure*2538 and not an ordinary and necessary expense. .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619262/	WAYNE ARDEN MAHR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMahr v. CommissionerDocket No. 17712-80.United States Tax CourtT.C. Memo 1982-297; 1982 Tax Ct. Memo LEXIS 455; 43 T.C.M. (CCH) 1519; T.C.M. (RIA) 82297; May 26, 1982. Wayne Arden Mahr, pro se. Claire Priestley-Cady, 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 1977 in the amount of $ 2,723. The issues for decision are (1) whether, during the calendar year 1977, petitioner's activities with respect to dog breeding and showing constituted a trade or business or an activity engaged in for profit; (2) if petitioner's activities with respect to his dog breeding and showing constituted a trade457 or business or transaction entered into for profit, whether petitioner is entitled to a deduction for depreciation with respect to dogs which he bred and raised and for a sales tax paid with respect to a motor home he purchased; and (3) whether petitioner is entitled to an investment credit under section 381 on a shipping crate, a dog pen, and a motor home. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, who resided in Newark, California, at the time of the filing of his petition in this case, filed a joint Federal income tax return for the calendar year 1977 with his late wife, Sue L. Mahr. Mrs. Mahr was killed in an automobile accident in 1979. During the entire year 1977, petitioner was employed full time as an administrative analyst by the City of Oakland, California, and received gross income in the amount of $ 19,027.84. He had been employed in this capacity for some years prior to 1977. He was also attending classes in the evening working toward a master's degree458 in Public Administration. During the entire year 1977, Sue L. Mahr was employed full time as an eligibility technician supervisor for the Alameda County Welfare Department. She received gross income from this employment in the amount of $ 15,180.80 in the year 1977. Mrs. Mahr had been employed with the Alameda County Welfare Department for some years prior to 1977. Mrs. Mahr had an interest in animals all her life. In 1966 one of her co-workers who was moving away from the San Francisco, California, area gave Mrs. Mahr her interest in a registered female Afghan hound (Afghan). Mrs. Mahr's co-worker was moving to a home in Phoenix, Arlizona, where she could have only one dog on the premises. At the time she had two Afghan hounds, one of which was a female. After talking with Mrs. Mahr, the co-worker decided that Mrs. Mahr would give a good home to the female Afghan, so she gave the dog to Mrs. Mahr. The dog given to Mrs. Mahr had been shown in dog shows, but petitioner and Mrs. Mahr never showed the dog. After Mrs. Mahr was given the dog, it developed that the co-worker who gave her the dog only owned a part interest in the dog and that the remaining interest was owned by459 a woman who had owned and bred Afghan hounds for many years. The dog given to Mrs. Mahr was registered with the American Kennel Club. This was a requirement for a dog to be shown in shows sponsored by that club. The dog given to Mrs. Mahr was named Shado. In 1969, Shado was bred to a registered male Afghan owned by the individual that owned a part interest in Shado. In 1969 Shado produced five puppies. Shado's co-owner took two of the puppies and petitioner and his wife kept the other three. Two of the puppies kept by petitioner and his wife were male and one was a female. One of the male puppies was mismarked and petitioner and his wife sold that puppy to an individual who wanted it as a pet. They kept one male and the female Afghan puppy. During the period 1970-1972, petitioner and his wife showed these puppies on a number of occasions. They showed the puppies strictly as a hobby and also put the puppies in certain matches. The female was a very good show dog. This female was named Ghahyl Shado's Khassandra (Shado's Khassandra). In 1974 petitioner and his wife bred Shado's Khassandra to a registered Afghan hound named Kismet's Arabian Knight. On April 4, 1974, Shado's460 Khassandra produced a litter of four male and three female puppies. At the same show in which the sire of Shado's Khassandra's litter finished his championship, petitioner and his wife advertised the five puppies they had retained from the litter of Shado's Khassandra for sale. One of the male puppies was sold to a wealthy person who lived in Palo Alto, California, as a pet since petitioner and his wife thought the puppy would have a good life with such an owner. On August 10, 1974, a half interest in a second of the male puppies was sold to an individual who answered the advertisement petitioner and his wife had placed with respect to the puppies. This individual was named Wendy Maher. Ms. Maher was to keep and look after the dog and was to show the dog. A half interest in the third male was sold to an individual named Sharon A. Stivers. He was shown by Ms. Stivers and won several shows. One of the females was sold and petitioner and his wife kept the other female. Of the five puppies kept by Mr. and Mrs. Mahr of Shado's Khassandra's litter, they retained a complete interest in only one. Late in 1973 or early in 1974, when petitioner and his wife arranged to breed Shado's461 Khassandra, they decided that they would go into the dog breeding business. The dog they selected to breed to Shado's Khassandra was considered to be of high quality. They paid a $ 200 stud fee to breed Shado's Khassandra to this dog. The Mahrs began to go to more dog shows. They joined the Monterey Bay Afghan Hound Club in 1975 and the American Dog Owners Association in 1976. They attended several breeders' seminars in 1975 and 1976 and some regional conventions of the American Kennel Club. They began showing their dogs more often. In 1975, petitioner and his wife had been in Phoenix, Arizona, where petitioner was attending a public administration conference. While they were there, they went to an Afghan hound show and met some people interested in Afghans. In 1976 they decided to go to a show in Phoenix and show their dogs in Phoenix and Scottsdale. When they went to dog shows, they would spend most of their time preparing their dogs to be shown and showing the dogs. It was also necessary to train the dogs before they were taken to shows and petitioner and his wife would work with training the dogs and would also take them to training classes. When petitioner and his462 wife got their first Afghan hound, they lived in Oakland, California. In 1972 they moved to Castro Valley, California, where they would have a larger place if they decided to breed Shado's Khassandra. They lived in Castro Valley until 1976. In 1976 petitioner and his wife bought a place in Newark, California. They had seen the place in 1974 which had dog kennels built in the back of it.When they learned in 1976 that this place was for sale, they bought it. Some of the puppies which had been sold to co-owners in 1974 were returned to the Mahrs. Both of the males they sold on co-owner agreements came back to them in 1977 while they still had one male they had retained from Shado's litter born in 1969. The female puppy they sold from the 1974 litter also came back to them, and at one time in 1977 they had four females. Petitioner and his wife did not believe that they should keep over three female dogs and therefore in 1977 gave one of the females to a person they thought would provide a good home for the dog, with the understanding that the female would not be bred. The Mahrs continued to show the dogs they had and in 1977 attended a number of dog shows outside of the San463 Francisco area as well as shows around the San Francisco area. Petitioner's wife, continuing the interest in animals she had always had, became an officer in an Afghan Hound Club and became very interested in rescue work for that club. At that time, abandoned Afghan hounds were becoming a problem. Mrs. Mahr was recognized for her rescue work by the National Afghan Hound Club and at the time of her death in 1979 petitioner and his wife were going to be sponsored for membership in the Afghan Hound Club.It was not recommended that Afghan females be bred more than once every 2 years and, in petitioner's opinion, an Afghan female should not be bred more than twice in her lifetime. The average life of an Afghan female is 11 years. The code of ethics of the Afghan club called for limiting the breeding of Afghan females, but, in spite of that, there were some breeders who turned out a litter of puppies from each female they owned every year. No prize money is given at the showing of Afghan hounds. Although petitioner has on occasion handled a dog for another person at a show, he has never charged a handler's fee. There are individuals who charge a handler's fee of as much as $ 100464 for showing a dog at a show. The area in which petitioner lived in Newark, California, was zoned residential. Certain forms of home occupation would be permitted in the area if a permit was obtained.Petitioner never obtained a permit for operation of his kennel since he did not think the number of dogs he kept required such a permit. The City of Newark had a regulation prohibiting anyone from having a boarding kennel in the area where petitioner lived. Petitioner occasionally boarded a dog for a friend, but he never considered that he operated a boarding kennel. Petitioner intended to make any money he made with respect to his Afghan hounds from stud fees and sales of puppies. The first claim by petitioner and his wife to a loss deduction with respect to their Afghan hound activities was on their 1974 income tax return. The following schedule shows the amounts reported as income and expenses by petitioner and his wife from their dog breeding and showing activities on their tax returns for the taxable years 1974 through 1977: YearGross ReceiptsExpenses and DepreciationLoss1974$304$3,584$ 3,28019755205,1174,59719763506,5036,153197720010,2379,437465 In addition to the $ 200 in gross receipts petitioner and his wife reported in 1977, they also reported income of $ 600 as recapture of depreciation on a dog they gave to their daughter as a gift in 1977. The receipts in 1974, 1975, and 1976 reported by petitioner and his wife were from the sale of puppies. The $ 200 reported in 1977 consisted of a $ 150 stud fee and $ 50 boarding charge. During the period from January 1, 1974, through December 31, 1977, petitioner and his wife had only one of their dogs bred, producing the litter of seven puppies born on April 4, 1974. The only other litter which had been born to their dogs up to the time of the trial of this case was a litter born in 1978.Petitioner and his wife, on their joint 1977 Federal income tax return, claimed a business loss of $ 9,437 which was shown on a Schedule C attached to their return. On this Schedule C they listed various expenses totaling $ 5,609, and claimed a depreciation deduction totaling $ 4,628 consisting of claimed depreciation with respect to their dogs of $ 1,171. In addition, petitioners claimed depreciation with respect to certain fixtures in connection with the kennel. In computing their tax, 466 petitioner and his wife claimed an investment credit of $ 409, which amount was computed on Form 3468 attached to their return. Respondent in his notice of deficiency to petitioner and his wife disallowed the claimed loss deduction with respect to their Afghan hound activities with the following explanation: It has been determined that expenses incurred in connection with your dog breeding activity were not incurred or paid in connection with an activity entered into for profit. Therefore, the $ 9,437.00 shown on your return as a loss is not allowable under section 183 of the Internal Revenue Code. Therefore, your taxable income is increased $ 9,437.00. Respondent, in the alternative, determined that if the dog breeding activity is determined to be an activity entered into for profit, depreciation in the amount of $ 1,171 claimed on the dogs is not allowable since the Mahr's basis in the dogs is zero, and that the sales tax on a motor home in the amount of $ 384.22 deducted by them is a capital expenditure to be amortized over the life of the motor home and a deduction allowable to the extent of $ 18.30. Respondent further determined that the amount467 of $ 409 claimed as investment credit on a shipping crate, a dog pen, and the motor home is not allowable since these items do not qualify for the investment credit under section 38 of the Internal Revenue Code. OPINION It is respondent's position in this case that the dog breeding and showing activities engaged in by petitioner and his wife did not constitute a trade or business or activities engaged in for profit within the meaning of section 212. For this reason respondent contends that petitioner is entitled only to deductions allowed under section 183(b). Section 183(a) provides that if an individual does not engage in an activity for profit, the deduction arising out of that activity shall not be allowed except to the extent provided in section 183(b). 2Section 183(b) provides that, in the case of an activity not engaged in for profit, there shall be allowed the deductions which would be allowable without regard to whether such activity is engaged in for profit and other deductions which would be allowable if the activity were engaged in for profit468 only to the extent of gross income derived from the activity during the taxable year. In effect, this section allows a taxpayer to deduct as itemized deductions such items as taxes and interest which are allowable whether or not connected with a trade or business or an activity engaged in for profit, but does not permit the taxpayer to take a loss deduction from operating expenses, depreciation, and other typical expenses which are allowable only in connection with a trade or business or an activity engaged in for profit. 469 Section 183(c) defines an activity not engaged in for profit as any activity other than one with respect to which deductions are allowable under section 162 or section 212(1) or (2). It is therefore necessary for us to determine whether the activities of petitioner and his wife, with respect to the breeding and showing of Afghan hounds, was a trade or business within the meaning of section 162 or, if not, whether it was an activity engaged in for profit within the meaning of section 212. 3It is well settled that for an activity to constitute the carrying on of a trade or business, such activity470 must be entered into in good faith with the dominant hope and intent of realizing a profit therefrom. Hirsch v. Commissioner,315 F.2d 731">315 F.2d 731, 736 (9th Cir. 1963), affg. a Memorandum Opinion of this Court. Although the profit motive need not be reasonable, it must be bona fide in order for a taxpayer to be entitled to deduct losses arising from the activity. Bessenyey v. Commissioner,45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967), cert. denied 389 U.S. 931">389 U.S. 931 (1970). Since a profit motive is necessary in order for an activity to constitute a trade or business and is also necessary under section 212 for an activity to be engaged in for the production of income, if no profit motive exists with respect to an activity, such activity is neither a trade or business nor an activity engaged in for the production of income within the meaning of section 212. Whether a taxpayer possesses the required profit motive or intent for his activity to either constitute a trade or business or an activity entered into for the production of income is a question of fact to be decided from all the evidence in the particular case. 471 United States v. Pyne,313 U.S. 127">313 U.S. 127 (1941); Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 321 (1976). In making this factual determination, more weight must be given to the objective facts than to the mere statements of the parties. Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 666 (1979); Churchman v. Commissioner,68 T.C. 696">68 T.C. 696, 701 (1977). Section 1.183-2, Income Tax Regs., lists nine factors to be considered in determing whether an activity is engaged in for profit. These factors were derived from cases decided prior to the enactment of section 183 and are factors to be considered along with all other evidence of record. Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 383 (1974). The factors listed in section 1.183-2, Income Tax Regs., are (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in472 the activity may appreciate in value; (5) the success of the taxpayer in carrying on similar or dissimilar activities; (6) the taxpayer's history of income or losses from the activity; (7) the amount of occasional profits, if any, that are earned; (8) the financial status of the taxpayer; and (9) the elements of personal pleasure or recreation. The record here shows that petitioner and his wife did not carry on their dog breeding and showing activities in a businesslike manner. Petitioner testified that they expected to make a profit, both from stud fees and the sale of puppies. However, several puppies were given away and it is clear that the major interest of petitioner and his wife with respect to the puppies was that the dogs have a good home. The record does indicate that petitioner's wife had been interested in animals all her life, but otherwise shows no expertise in either petitioner or his wife with respect to dog breeding and showing. Petitioner testified with respect to the many shows that he and his wife attended and the many people engaged in the raising of Afghan hounds with whom he and his wife visited and talked. However, the clear implication from petitioner's473 testimony is that most of these individuals were dog fanciers engaged in showing Afghan hounds as a hobby. There is no showing of any expectations petitioner and his wife might have had that any assets used in the activity would appreciate in value or that petitioner and his wife had ever carried on any similar activities or any dissimilar activities other than employment.Clearly, the history of the losses from the activity do not indicate any profit motive, nor do the amounts of the occasional profits. The record shows that petitioner and his wife were both gainfully employed and therefore financially able to breed and show Afghan hounds. Although there is nothing in the record to show the amount of time they devoted to their dogs, the indication is that much of their spare time was spent training, showing, or grooming their dogs.It is clear that they received personal enjoyment and gratification from the showing of these dogs. Judged on the factors contained in section 183, the conclusion is inescapable that the activities of petitioner and his wife with respect to the Afghan hounds were not engaged in for profit. We have, however, considered the record as a whole to determine474 whether there are any other objective indications that petitioner and his wife might have been engaged in the activity for profit. Petitioner testified that in an activity such as raising and showing Afghan hounds, you could not expect a profit for approximately 10 years. However, there is nothing in this record to indicate that petitioner's method of pursuing the activity could in any way be expected to result in a profit, even after 10 years. When petitioner and his wife purchased a new home in 1976 that had a kennel connected with it, it was in an area in which they could not have a commercial dog breeding operation and, as petitioner testified, could not accommodate more than three female dogs at any one time. Petitioner testified that he would never breed a female more than twice during her lifetime. He further testified that there was an oversupply of Afghan hounds and the Afghan Hound Club discouraged excessive breeding of Afghans. We have considered this testimony together with all the other evidence of record and petitioner's other statements which indicate a clear hobby activity. Based on the record as a whole, we conclude that petitioner and his wife were not engaged475 in the activities with respect to Afghan hounds during the year 1977 with any profit motive or bona fide intent to make a profit. For this reason, we conclude that petitioner's activities with respect to Afghan hounds in 1977 were not activities with respect to which deductions are allowable under section 162 or under section 212(1) or (2). Having decided that petitioner and his wife are not entitled to any deductions with respect to their activities in connection with Afghan hounds, except as allowed under section 183(b), it is unnecessary to decide the alternative issues raised by respondent with respect to depreciation and the deduction of the sales tax with respect to the mobile home. Likewise, since we have concluded that petitioner and his wife were not engaged in a trade or business or an activity for profit with respect to the Afghan hounds, it is clear that they are not entitled to any investment credit with respect to the mobile home which they used in connection with their Afghan hounds activity or the shipping crate or dog pen used in that activity, regardless of whether these items would qualify under section 38 if the activity were a business or one engaged in for476 profit. A review of the tax return of petitioner and his wife indicates that they did claim the deduction for the sales tax on the mobile home and any interest paid in connection therewith as a deduction on Schedule A of their tax return and not as a part of their claimed business expense deduction on Schedule C. Respondent has only disallowed the loss claimed by petitioner and his wife from their afghan hound activities, thereby in effect allowing a deduction for the expenses incurred with respect to the activity to the extent of the income therefrom reported by petitioner and his wife. Decision will be entered for the respondent.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩2. Sec. 183(a) and (b) provides as follows: SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) General Rule.--In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) Deductions Allowable.--In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed-- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).↩3. Sec. 212(1) and (2) provides as follows: SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-- (1) for the production or collection of income. (2) for the management, conservation, or maintenance of property held for the production of income * * *.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619263/	August Engasser and Emma Engasser, Petitioners, v. Commissioner of Internal Revenue, RespondentEngasser v. CommissionerDocket No. 59546United States Tax Court28 T.C. 1173; 1957 U.S. Tax Ct. LEXIS 89; September 19, 1957, Filed 89 Decision will be entered for the respondent. Petitioner and his son, as equal partners, engaged in the business of constructing houses from 1946 to 1950. In 1950, a corporation, whose stock was held by petitioner, his son, and his wife, was organized to continue the business of the partnership. Improved vacant lots were purchased in petitioner's name. Houses would be constructed thereon by the partnership or the corporation and then the lot and house would be held for sale. In 1949, petitioner purchased about 5 1/2 acres of unimproved land, known as the Amherst property, for the purpose of, and with the intent to, build houses thereon. In 1952, prior to the addition of any improvements, petitioner sold the land to the corporation and returned the gain as long-term capital gain. The corporation purchased the property for the purpose of building houses thereon. The respondent determined that the gain was ordinary income. Held, the Amherst property was held primarily for sale to customers in the ordinary course of trade or business and the gain on the sale of it was ordinary income as determined by the respondent. Israel Rumizen, Esq., for the petitioners.A. Jesse Duke, Jr., Esq., for the respondent. Black, Judge. BLACK 1174 The respondent has determined a deficiency in income tax in the amount of $ 14,288.58 for the taxable (calendar) year ended December 31, 1952. The deficiency is due to one adjustment -- the determination that the gain of $ 44,100 on the sale of real property by petitioner to a corporation, whose stock was solely owned by the petitioners and their son, was ordinary income rather than long-term capital gain as reported by the petitioners.Petitioners, by an appropriate assignment of error, have placed the deficiency in issue.The only question involved is whether the real property, which was sold, was held by the petitioners primarily for sale to customers in the ordinary course of trade or business.FINDINGS OF FACT.A stipulation of facts has been filed, is so found, 91 and is incorporated herein by this reference.August Engasser (hereinafter sometimes referred to as petitioner) and Emma Engasser, husband and wife, are individuals residing at Eggertsville, New York, and filed a joint return for the period here involved with the director for the twenty-eighth district of New York.Prior to 1934, the petitioner was primarily engaged in the business of building and selling homes. During the depression, he held some houses, which he was obligated to reacquire, for rental. From 1934 to 1946, he engaged in the restaurant business.The petitioner's son, Charles, was discharged from the Army in 1946. Petitioner, who was interested in seeing that his son got started in business, sometime in 1946 entered into an informal partnership agreement with him to engage in the home construction business. On January 2, 1948, a partnership known as August Engasser & Son was organized pursuant to a formal partnership agreement between petitioner and his son. This partnership was engaged in the general building and contracting business and continued the business of the informal partnership. Petitioner and Charles shared the profits of the partnership equally as they92 had done under the informal arrangement. 1175 On September 1, 1950, the Layton-Cornell Corporation, hereinafter referred to as the corporation, was organized for the purpose of engaging in the general contracting business. It succeeded to the business of the partnership. The entire outstanding stock of the corporation during 1952, the year in issue, was held as follows:August Engasser49Emma Engasser (wife of August Engasser)2Charles Engasser (son of August Engasser)49Petitioner was president of the corporation and received a salary. During the periods when the partnerships and corporation were operating he was frequently ill. Charles managed the business of the partnerships and of the corporation. He hired the employees, purchased material, supervised the construction work, and sold the completed homes.During the time that the partnerships were operating, improved vacant lots would be purchased in the name of the petitioner. The partnerships would erect a house thereon and then sell it. Title to the land would be conveyed from the petitioner to the purchaser. The partnerships built and sold over 50 houses.When the corporation was formed about 35 93 improved lots were conveyed from the petitioner to the corporation. Houses were built by the corporation on other improved vacant lots which were deeded in petitioner's name. After the houses were erected petitioner, at the time of sale, would convey title to the corporation which would then convey to the purchaser.The land in question (hereinafter referred to as the Amherst property) consisted of approximately 5 1/2 acres of unimproved acreage located between LeBrun Road and Main Street, east of Eggert Road, at the dead end of Layton and Cornell Streets in the town of Amherst, New York. The major portion of the Amherst property was purchased from the Wedekindt estate on December 3, 1949. Two additional lots were purchased from the county of Erie, State of New York, on December 13, 1949. Three remaining lots were purchased from Catherine Mitchell on October 5, 1950. The deeds for all of these lots were recorded in the name of August Engasser.The Amherst property was owned exclusively by petitioner and was not owned or included among the assets of the partnership of August Engasser & Son. This land was different from other land purchased in petitioner's name in that it was 94 not improved vacant land but was unimproved vacant acreage. Petitioner purchased the Amherst property with the hope and intention of building houses thereon. Petitioner and Charles both thought that it would be a good place to build houses.1176 After the acquisition of the Amherst property by petitioner, the town board of Amherst, New York, approved the paving and curbing of two streets running through this property, which action enhanced the value of the land. This was done at the suggestion of the petitioner's attorney.The Amherst property was sold by petitioner to the corporation on August 29, 1952, for the sum of $ 52,500. The corporation purchased the property for the purpose of constructing new houses on the property and selling them during the course of its business. Petitioner's basis for the Amherst property was $ 8,400. The petitioner reported the $ 44,100 ($ 52,500 minus $ 8,400) gain on the sale as long-term capital gain.In addition to this Amherst property, petitioner purchased 3 acres of vacant land from Erie County in 1926, which were returned to Erie County in 1944. He repurchased these 3 acres from Erie County in 1945, and also 5 other lots from Erie95 County in 1947. Two of these lots were later sold by petitioner. The remainder of this property was, as of July 22, 1954, being held for the purpose of building homes thereon.The petitioner never made an attempt to sell the Amherst property to anyone. The petitioner did not have a real estate broker's license during the period in question. In the business operations carried on by petitioner and his son it was not necessary for petitioner to have a real estate broker's license as the partnerships, and later the corporation, were selling property which they owned and therefore such a license was unnecessary. The petitioner listed his occupation on his 1952 income tax return as "Contractor."The petitioner was in the business of buying and selling real estate.The Amherst property was held by petitioner primarily for sale to customers in the ordinary course of trade or business.OPINION.The sole question involved herein is whether the gain of $ 44,100 realized by the petitioner in 1952 on the sale of the Amherst property is ordinary income, as determined by the respondent, or long-term capital gain, as returned by the petitioner. The answer depends on whether the property was96 held by the petitioner primarily for sale to customers in the ordinary course of trade or business. Sec. 117, I. R. C. 1939.The Amherst property was purchased by petitioner in December 1949. 1 It consisted of about 5 1/2 acres of unimproved land located 1177 in a desirable residential area of Amherst, New York. Petitioner made no improvements upon the land. Prior to the sale by petitioner, however, the town of Amherst, after a suggestion by the petitioner's attorney, approved the paving and curbing of two streets running through the land. This action enhanced the value of the land. Petitioner sold the land in August 1952 to the corporation. The corporation's stock was held solely by the petitioner (49 per cent), his wife (2 per cent), and his son Charles (49 per cent). The bona fides of this sale is not questioned and the amount of petitioner's gain from it is not in issue.Petitioner and Charles had, since 1946, engaged in97 the general contracting and home construction business, conducting that business as an informal partnership until January 1948, as a partnership known as August Engasser & Son from January 1948 until September 1950, and as a corporation known as the Layton-Cornell Corporation after September 1950, including the period in question. Petitioner and his son were equal partners in the partnerships, and petitioner was president of the corporation. Petitioner was frequently ill and Charles handled the affairs of the partnerships and the corporation.Improved vacant lots were purchased in petitioner's name. The partnerships or corporation would construct a house thereon. During the periods when the partnerships were in existence it appears that petitioner would convey title to the lot to the purchaser. During the periods when the corporation was in existence the petitioner, after the house was completed and sold, would convey title to the lot to the corporation, which would in turn convey title to the purchaser. The partnerships constructed over 50 houses. It also appears that at the time the corporation was organized, about 35 lots were conveyed to it by petitioner.The record does98 not show whether the numerous lots purchased in petitioner's name and built on by the partnerships and the corporation were purchased with petitioner's funds and by him and, if so, when they were sold, whether petitioner received any gain thereon, and how it was treated. However, the clear unrebutted inference from the record is that the numerous real estate transactions to which he, the partnerships, and the corporation were a party were more than sufficient to place him individually in the business of buying and selling real estate.The fact that petitioner did not have a real estate license and that he made no active effort to sell the Amherst property are not significant under the circumstances. Cf. E. Aldine Lakin, 28 T.C. 462">28 T. C. 462, on appeal (C. A. 4). While there are some differences in the facts in the instant case from those which were present in the Lakin case, 1178 we do not think those differences in facts are sufficient to make the two cases distinguishable. The record shows that petitioner did not need a real estate license to buy and sell on his own account and that the lots were sold by the corporation or partnerships along 99 with the houses built upon them.In Walter H. Kaltreider, 28 T. C. 121, on appeal (C. A. 3), a corporation, the stock of which was held by petitioner and other members of his family, built houses on an acreage which was owned by, and subdivided by, the taxpayers. The lots and the houses built thereon were sold by the corporation for a lump sum. A part of the purchase price was allocated to the houses and the remainder to the lots. The amount allocated to the houses (less cost of houses sold) was returned as ordinary income and the amount allocated to the lots (less the basis of the lots) was returned as capital gain. We held that "whatever was done here by the corporation was done at the instance and for the benefit of the petitioners as their agent," and that the taxpayers were in the real estate business. The factual pattern here is similar to that in the Kaltreider case, supra, and we think that here, as there, the petitioners were engaged in the real estate business.Petitioner also argues that the Amherst property was held for investment and not for sale. He seeks to distinguish the Amherst property from the other properties. He contends100 (1) that the Amherst property was unimproved vacant acreage while the other properties were improved vacant lots, and (2) that the Amherst property was sold prior to any houses being built thereon while the other properties were never sold until after the houses had been built on them.We see no merit in either of these distinctions. The record clearly shows that the Amherst property was purchased, as were all of the other properties, with the intent and purpose of constructing houses for sale thereon. That purpose did not change except that in regard to this property the corporation planned to build houses thereon subsequent, rather than prior, to its acquiring the land. Also the record shows that the other acreage which petitioner had purchased prior to the Amherst property was, as late as July 22, 1954, being held for the purpose of constructing houses thereon.The question here is essentially one of facts that must be determined from the entire record. After considering the facts and circumstances present we have concluded and found as a fact that the property in question was held primarily for sale to customers in the ordinary course of trade or business. The gain on its*101 sale, therefore, is ordinary income. Accordingly,Decision will be entered for the respondent. Footnotes1. Three lots included in the Amherst property were purchased in October 1950.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619265/	JOHN E. TYNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTyner v. CommissionerDocket No. 4838-76.United States Tax CourtT.C. Memo 1977-375; 1977 Tax Ct. Memo LEXIS 61; 36 T.C.M. (CCH) 1526; T.C.M. (RIA) 770375; October 31, 1977, Filed John E. Tyner, pro se. Michael R. McMahon, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows: Addition to Tax 1 YearDeficiencySec. 6651(a)Sec. 6653(a)1972$2,945.00$736.25$147.2519733,134.00783.50156.7062 At issue are (1) the correct amount of petitioner's taxable income for the years 1972 and 1973; (2) whether petitioner is liable for additions to tax undder section 6651(a) for failure to file Federal income tax returns for such years; and (3) whether any part of the underpayment of tax for 1972 and 1973 was due to negligence or intentional disregard of rules and regulations, thus making the petitioner liable for the additions to tax under section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. John E. Tyner (petitioner) was a legal resident of Montesano, Washington, when he filed his petition in this case. Petitioner filed on June 25, 1974, a Form 1040 for each of the taxable years 1972 and 1973 with the Internal Revenue Service Center at Ogden, Utah. On Form 1040 for 1972 he reported on line 9, as compensation, "Approx. 18.00," and 2.16 on line 11 as interest income. On line 12 the words "Object-self incrimination; 5th Amend." appear. And on page 2 of the Form 1040 the words "5th Amend.; U.S. Const." appear63 in several places. On the Form 1040 for 1973 the petitioner reported on line 9, as compensation, "approx. 15.00" and 1.38 on line 11 as interest income. On line 12 the words "Object-self incrimination; 5th Amend." appear. On page 2 of the Form 1040 the words "5th Amend.; U.S. Const." appear. Amended Forms 1040 were filed on February 19, 1975, which are essentially the same as the original Forms 1040. Petitioner is a Doctor of Chiropractic Medicine. He graduated in June 1969 and interned with Dr. Fabianek at Federal Way, Washington. Petitioner established his own practice as a chiropractor on September 1, 1971, in Montesano. He took over the practice of Dr. Randall at that time. He rented his office space and purchased necessary office supplies and equipment. On July 20, 1971, in applying for a loan to purchase a house, the petitioner stated in his application to the Capital Savings and Loan Association of Olympia that he estimated making $20,000 annually. In another application for an automobile loan, which was submitted to the Pacific National Bank of Washington on May 3, 1973, the petitioner estimated that he made about $2,000 per month. Petitioner did not keep64 books and records of his medical practice in 1972 and 1973. He did keep books and records for subsequent years. His Federal income tax returns for 1974 and 1975, which were prepared by a tax consultant, show the following: TotalGrossBusinessNet YearProfitDeductionsProfit1974$20,330$ 9,539$10,791197521,79710,53011,267Petitioner had fewer patients in 1972 and 1973 than he did in 1974 and 1975. His gross income was less for 1972 and 1973. The ordinary and necessary business expenses of the petitioner in 1972 and 1973 were approximately 50 percent of his gross income from his practice. In his notice of deficiency dated March 9, 1976, respondent determined on the basis of petitioner's financial statements and loan applications that his income from his chiropractic business was $24,000 for each of the years 1972 and 1973. His taxable income was increased by $12,000 for each year, after giving effect to the community one-half of such income attributable on a separate return basis to his wife, Judy Tyner, at that time. Respondent did not allow the petitioner any business expense deductions. However, he did allow a standard65 deduction of $1,000 and one exemption of $750. Respondent also determined a self-employment tax of $675 for 1972 and $864 for 1973.ULTIMATE FINDINGS OF FACT 1. Petitioner had gross income of $16,000 in 1972 and $18,000 in 1973. 2. Petitioner had ordinary and necessary business expenses in his practice as a chiropractor of $8,000 in 1972 and $9,000 in 1973. 3. After giving effect to the community one-half of petitioner's income and expenses, the petitioner had adjusted gross income of $4,000 in 1972 and $4,500 in 1973. 4. Petitioner is entitled to a standard deduction in each of the years 1972 and 1973, and one exemption for each year. 5. Petitioner is liable for self-employment tax of $675 in 1972 and $864 in 1973. 6. Petitioner did not file timely Federal income tax returns for the years 1972 and 1973. 7. Part of the underpayment of tax for 1972 and 1973 was due to petitioner's negligence and intentional disregard of rules and regulations. OPINION Issue 1. Taxable IncomeThis issue is factual, and our ultimate findings of facts are dispositive. It would be unconscionable not to allow the petitioner any expenses for conducting his chiropractic66 business during the years in issue. Yet that is what respondent would have us do. Suffice it to say that we have exercised our best judgment and found on this record and under these circumstances what we regard as reasonable amounts of gross income, business expenses and adjusted gross income for the years 1972 and 1973. We are satisfied that the petitioner had less taxable income in 1972 and 1973, the formative years of his practice as a chiropractor, than he did in 1974 and 1975. Issue 2. Delinquency PenaltiesThe petitioner was required by section 6012(a)(1)(A) of the Code to file Federal income tax returns for 1972 and 1973. The law is well settled that a Form 1040 which discloses no information relating to a taxpayer's income and deductions does not constitute a "return" within the meaning of section 6012. Commissioner v. Lane-Wells Co.,321 U.S. 219">321 U.S. 219 (1944); Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 79-80 (1975); Hosking v. Commissioner,62 T.C. 635">62 T.C. 635, 639 (1974); Houston v. Commissioner,38 T.C. 486">38 T.C. 486, 491-492 (1962); United States v. Porth,426 F. 2d 519 (10th Cir. 1970), cert. denied 400 U.S. 824">400 U.S. 824 (1970).67 In Lamb v. Commissioner,T.C. Memo 1973-71">T.C. Memo. 1973-71, and Wallace v. Commissioner,T.C. Memo 1976-219">T.C. Memo. 1976-219, this Court held that the filing of incomplete "return" forms of the type filed in this case was a deliberate and willful act, however honest, which justified the imposition of an addition to tax under section 6651(a). On the authority of the Porth case, we conclude that the Forms 1040 filed by petitioner for the years 1972 and 1973 were not "returns," and the petitioner must be held not to have filed income tax returns for those years. To avoid the imposition of the additions to tax under section 6651(a), petitioner must establish both reasonable cause and lack of willful neglect. He has done neither. He knew of his obligation under the law to file income tax returns for the years in issue, and he apparently knew how to prepare and file them. Instead, he chose a course of action which constituted a failure to file "returns." In our judgment such failure was due to willful neglect. Petitioner urges that his action was based on his good faith belief that the proper filing of returns and the payment of income taxes would undermine the supremacy of68 the Constitution of the United States, and particularly violate his privilege against self-incrimination under the Fifth Amendment. Although the petitioner, on each Form 1040, objected to reporting his income because of possible self-incrimination, he seems to have recanted with respect to such argument at the trial. In any event, it lacks merit because the Fifth Amendment does not excuse any individual from reporting his income and filing an income tax return. United States v. Sullivan,274 U.S. 259">274 U.S. 259 (1927); United States v. Daly,481 F. 2d 28 (8th Cir. 1973), cert. denied 414 U.S. 1064">414 U.S. 1064 (1973); United States v. Porth,supra.Accordingly, we hold that the petitioner is liable for the additions to tax under section 6651(a). Issue 3. Negligence PenaltiesSection 6653(a) provides that if a part of any underpayment of tax is due to negligence or intentional disregard of rules and regulations, an addition to tax equal to 5 percent of the underpayment will be imposed. Respondent's determined underpayments of tax for the years before the Court result, of course, from the same failure to file returns and to pay69 the tax. Petitioner's involvement in raising spurious constitutional objections furnishes no excuse for his failure to pay, which directly resulted in the underpayments here involved. Cf. United States v. Malinowski,472 F. 2d 850 (3rd Cir. 1973). In addition, the failure of petitioner to keep books and records shows negligence and an intentional disregard of rules and regulations. Sutor v. Commissioner,17 T.C. 64">17 T.C. 64, 68-69 (1951). Therefore, we hold that the petitioner is liable for additions to tax under section 6653(a) for both years. Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619267/	LAMARK SHIPPING AGENCY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLamark Shipping Agency, Inc. v. CommissionerDocket No. 12326-79.United States Tax CourtT.C. Memo 1981-284; 1981 Tax Ct. Memo LEXIS 456; 42 T.C.M. (CCH) 38; T.C.M. (RIA) 81284; June 11, 1981456 Hilary G. Lynch, for the petitioner. Stephen R. Takeuchi, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined deficiencies in petitioner's Federal income tax for investment credit recapture tax and accumulated earnins tax in the amounts of $ 286.88 and $ 31,811, respectively, for the taxable year ended September 30, 1976. Petitioner has conceded the correctness of the recapture tax. Thus, the only issue presented for decision is whether petitioner's accumulation of earnings during the taxable year in issue was beyond the reasoable needs of its business and for the purpose of avoiding income taxes with respect to its shareholders under section 532(a). 1 FINDINGS OF FACT Some of the facts have been stipulated, and the stipulation of fact and attached exhibits are incorporated herein by reference. Lamark Shipping Agency, Inc. (sometimes hereinafter referred to as petitioner or the Corporation) is a Pennsylvania corporation with its principal offices located in Pittsburgh, Pennsylvania. 457 Petitioner's income tax return for the taxable year ended September 30, 1976 was filed with the Internal Revenue Service Center in Philadelphia, Pennsylvania. Petitioner reports its income and expenses on the cash method of accounting. The business of petitioner was originally established as a sole proprietorship by Victor A. Lamark (Victor) in 1925, and was operated under the name Lamark Shipping Agency. Albert A. Lamark (Albert), Victor's brother, has been an employee of the business since 1930. The business was incorporated on October 13, 1966. Initially all the outstanding stock (2,000 shares) of the Corporation was held by Victor. Subsequently he transferred 100 shares to Albert, 100 shares to his nephew, Joseph J. Lamark, Jr. (Jay), and 30 shares to his sister, Rose Kozak. In January 1975 75 shares of Albert's stock were redeemed by the Corporation, and in Februry 1975, 10 shares of Rose Kozak's stock were redeemed. Victor was born in 1904 and Albert was born in 1900. Jay, born in 1940, worked for the Lamark Shipping Agency on a part-time basis during high school and college and became a full-time employee of the business in 1962. From October 14, 1966 through December 458 3, 1976, the board of directors of the Corporation consisted of Victor, Albert, and Jay. During this period the officers of the Corporation were Victor, President and Treasurer; Albert, Vice President; Jay, Secretary; and Gerald J. Hickly, Assistant Secretary and also the Corporation's accountant. At all times the business of the Corporation has been the solicitation of contracts for the transport of cargo and passengers in the international shipping trade. The Corporation's principal source of income is commissions paid by various international carriers. The commissions are computed as a percentage, usually 2-1/2 percent, of the total freight charge to the customers solicited by the Corporation for the shipping lines. The agency agreements entered into by the Corporation and the shipping lines have been limited to a specific geographical region in which the corporation is given the exclusive authority to solicit customers. At all relevant times petitioner's territory has been confined to Ohio, Western Pennsylvania, West Virginia, Kentucky, and part of New York. Petitioner is considered to be one of the leading interior shipping agencies in the country. The key to operating 459 a successful shipping agency such as petitioner lies in establishing agency relationships with as many lines as possible. Achieving this objective is difficult because a shipping agency can effectively represent only one line serving a particular global region. If that line chooses to take its business elsewhere or decides instead to open up its own office for handling cargo arrangements and customer solicitation, it often takes years for the agency to secure a new relationship with a competitive line in that region. To be successful the agency must also generate sufficient business to satisfy the principals which it serves. To achieve this end petitioner employs salesmen whose job it is to call on manufacturers and exporters located in the territories specified in the agency contracts and to secure cargo contracts for the lines which petitioner represents. In the vent either of the parties to the agency agreement becomes dissatisfied, the contracts normally allow for unilateral termination of the agreement upon 60 to 90 days notice to the other party. To maintain uniformity and stability in the rates charged by American and foreign lines, it is the general custom in the international 460 shipping industry for competing lines serving the same trade route to form an association known as a conference. Members of the conference are required to post a bond to insure their compliance with conference rules and regulations. All of the lines represented by the Lamark Shipping Agency prior to 1976 were conference lines. During the early 1970's the Corporation's major account was the Prudential-Grace line, which the Corporation and its predecessor had served since 1932. The line was originally know as the Grace line until it was sold to the Prudential line in 1970. Soon after the sale the new management informed the Corporation that it intended to phase out the line's agencies and establish its own offices in the United States and abroad to solicit business. In accordance with this plan the Prudential-Grace line terminated its agency relationship with the Corporation on March 31, 1975. On January 20, 1975, after receiving advance notice of the proposed termination, the directors of the Corporation held a special meeting to discuss the financial ramifications of losing the Prudential-Grace account. The minutes of that meeting are as follows: LAMARK SHIPPING AGENCY, INC. 461 Special Directors Meeting January 20, 1975 V. A. Lamark called the meeting to order and stated that the reason for the meeting was to discuss the fact that on January 15, 1975 they received a notice from Prudential Lines that our agency agreement would be terminated on March 31, 1975. This action they claimed was in line with their new policy to establish their own offices throughout the United States and also in foreign countries. We are the last inland agency to be terminated. After 43 years of continuous service starting with Grace Line in 1932 and then Prudential in 1970, we naturally regret losing this long-time association. V. A. Lamark noted that undoubtedly this will have considerable effect on our business as Prudential Lines was our number one account in 1974, having generated about 27 1/2% or our income. He further noted that every effort must be made to secure new accounts to offset this loss which will not be easy. Overtures have already been made to several lines but nothing tangible has developed. Meanwhile, every possible move must be made to economize on expenses. The reduction of personnel will have to be considered; however, it was pointed out that due to 462 the problem of obtaining good personnel this should only be considered as a least resort. A. A. Lamark noted that we cannot stimulate more business for the remaining three lines we represent as the economy is in a downward trend and indications are that this will continue throughout the current year, and we can expect the income from these lines to decline starting the first quarter of 1975 into 1976. V. A. Lamark stated that while 1974 was a banner year for our company, we are now faced with a gloomy picture which has been compounded by the loss of Prudential Lines. From 1967 through 1976 the Prudential-Grace Line generated the following commissions for petitioner: Taxable Year EndedCommissionsPercentage of GrossSeptember 30ReceivedAnnual Revenues (Rounded)1967$ 113,209.9659%1968102,841.2058 1969105,860.3652 197094,352.9241 197173,092.4032 197251,403.0423 197358,134.0222 197455,255.1113 1975186,140.7029 The large increase in commission income during fiscal year 1975 was attributable primarily to the payment by the Prudential-Grace line of accrued but unpaid commissions earned during the 1974 fiscal year, which amounts were paid shortly after the date of contract cancellation. 463 2Petitioner made attempts to secure a replacement line to offset the loss of revenue caused by the termination of the Prudential-Grace contract but was unsuccessful. These efforts, as well as the financial impact of the lost commissions, were discussed at two special meetings of the board of directors on May 1, 1975 and September 2, 1975. The minutes of those meetings are as follows: LAMARK SHIPPING AGENCY, INC. Special Meeting of the Board of Directors May 1, 1975 4:30 P.M. The Meeting was called to order by the Chairman, V. A. Lamark. All Directors were present. The chairman stated that the meeting was held to review the present status and future potentials of our business. The loss of Prudential Lines on April 1, 1975, has created a serious problem and it is definite that we cannot maintain our present organization unless we secure some replacements for Prudential. 464 The chairman stated that very little if any reduction in operating costs can be made which might offset some of the large loss in revenues. Our business is developed through the contacts of our outside salesmen and any cutback in these activities would jeopardize our remaining four accounts. Negotiations which we had with the Spanish Line have broken off. They offered us a very limited agency arrangement but the small earnings were not worth while. We approached the Italian Lines and Finnlines and some interest in our organization was expressed. Neither one looks to be promising at this stage. Prudential Lines six months back log of commissions due us will help to carry us for a while. In view of this we agreed that it will be necessary to preserve our cash balance for the survival of the company. Our situation will need close attention and it was decided to hold a special meeting, if necessary, to determine which direction we will take. It was also discussed that there will be no salary increases at this time. LAMARK SHIPPING AGENCY, INC. Special Directors Meeting September 2, 1975 4:00 P.M. V. A. Lamark called the meeting to order and stated that the reason for the meeting 465 was to discuss the fact that since the last directors meeting May 1, 1975, we have made a number of contacts with steamship lines in New York and New Orleans to secure one or two replacements for Prudential Lines which terminated our agency agreement on March 31, 1975. Italian Lines who we had hopes of securing decided to appoint Seatrain Lines as their agent. The decision was based on Seatrains nation wide offices, which we could not match with our single office in Pittsburgh. At present there is no other line with whom we have pending negotiations so our situation is very precarious and will require some drastic action. V. A. Lamark pointed out that we are now operating at a loss and our cash reserve is gradually eroding. With no immediate prospect of obtaining new accounts and in order to keep our business solvent he suggested that the two senior officers step aside. No plan for phasing out was submitted but a thorough study will be made to work out the best method to terminate the senior officers by sometime in January, 1976. V. A. Lamark stated that he prefers that no publicity be given to this contemplated move since it could have a discouraging effect on the other members 466 of our organization. Sometime in the fall of 1975, approximately five or six months after the loss of the Prudential-Grace line, petitioner heard rumors to the effect that another major account, the Moller line, was about to open its own sales office in Pittsburgh and cancel its agency contract. Victor attempted to dissuade the Moller officials from doing so. Yet, despite his efforts, the Corporation received word on March 23, 1976, that the Moller Line was cancelling its agency contract effective September 1, 1976. From 1967 through 1976 the Moller Line generated the following commissions for petitioner: Taxable Year EndedCommissionsPercentage of GrossSeptember 30ReceivedAnnual Revenues (Rounded)1967$ 25,060.9213%196829,151.2816 196933,505.4716 197039,377.1917 197145,751.0220 197254,743.0025 197370,701.7226 1974126,203.3531 1975160,827.8425 1976212,608.7443 The Corporation's income, expenses, and statement of financial position for the taxable years ended September 30, 1974 through 1976 are as follows: 3467 IncomeFor Taxable Year Ended Commissions (ByShipping Line)9/30/749/30/759/30/76Moram$ 10,000.00Nawal Atlantic$ 16,498.86$ 17,599.8122,075.54Moller126,203.35160,827.84212,608.74Norwegian Carribean67,497.05101,730.7997,437.45Columbus117,370.99149,543.63138,763.83Prudential-Grace55,255.11186,140.70Meyer3,771.89Group5,540.93Johnson ScanStar6,094.27Coles1,700.91Total Commissions398,232.45617,543.68480,885.56Other Income5,275.4618,023.8911,817.58Total Income$ 403,507.91$ 635,567.57$ 492,703.14ExpensesFor Taxable Year Ended 468 9/30/749/30/759/30/76Officers Salaries$ 126,300.00$ 159,800.00$ 56,500.00Other Salaries69,125.0086,527.0084,455.00Solicitation and Travel34,526.1440,662.9044,116.24Telephone22,573.9219,732.0218,230.06Rent16,756.4616,854.8121,677.72Profit Sharing PlanContributions25,000.0052,734.8511,000.00Federal and State IncomeTaxes23,170.2698,350.0883,155.86Depreciation andAmortization3,043.506,164.555,226.64Other Expenses45,478.1848,631.3257,143.95Total Expenses$ 365,973.46$ 529,457.53$ 381,505.47Financial PositionFor Taxable Year EndedAssets9/30/749/30/759/30/76Cash$ 67,920.16 $ 85,673.45 $ 19,529.76 U.S. Treasury Bills71,057.80 167,662.40 MiscellaneousReceivables75.61 304.36 262.94 Prepaid Rent534.00 534.00 Loan Receivable-JayLamark469 56,500.00 Cash SurrenderValue-LifeInsurance7,026.10 7,026.10 Equipment, Furniture,andLeasehold Improvements24,535.25 34,400.29 31,945.55 AccumulatedDepreciation(18,843.25)(17,207.80)(18,893.89)Total Assets$ 152,305.67 $ 278,392.80 $ 89,344.36 LiabilitiesTaxes Payable$ 19,053.27 $ 44,694.25 $ 972.94 NotePayable-PittsburghNational Bank47,088.35 19,053.27 44,694.25 48,061.29 Stockholder's EquityCommon Stock20,000.00 20,000.00 1,010.00 Treasury Stock(5,663.55)(293,292.95)Retained Earnings113,252.40 219,362.10 333,566.02 Total Liabilities andStockholder's Equity$ 152,305.67 $ 278,392.80 $ 89,344.36 During fiscal year 1975 the officers of the Corporation were paid the following compensation: Total CompensationYear-endOfficer(Including Year-end Bonus)BonusVictor Lamark$ 75,000$ 36,000Albert Lamark48,90031,000Jay Lamark35,9008,000Total$ 159,800$ 75,000Despite the loss of the Prudential-Grace and Moller lines, the Corporation's commission income remained fairly stable during the 1976 fiscal year and surpassed the amounts received in fiscal 1974, a year which the corporate minutes had characterized as a "banner year" for the Corporation. This was attributable to several factors, including increased commission rates negotiated by petitioner with some of the lines, the expansion of export services by some of the lines, and a general boom in the export and passenger shipping business. For the taxable year ending September 30, 1977, petitioner reported gross income of $ 503,396.25 and taxable income of $ 74,303.98 on its Federal corporate income tax return. In that year Jay received $ 100,100 in officer's compensation. For the taxable year ending September 30, 1978, petitioner reported gross income of $ 344,017.87 and taxable 470 income of $ 8,900.61, and Jay was paid only $ 55,750 in officer's compensation. In the course of attempting to secure new lines to offset the loss of the Moller and Prudential-Grace lines, a conflict developed between Victor and Jay over whether to take on a Russian line which had recently commenced service between the United States and the Far East. The individual who headed the Russian line's operations in the United States was an American who at one time had been president of the Grace Line, and who was acquainted with the owners of the Lamark Shipping Agency. On several occasions he approached them about the possibility of representing the Russian line. Alarmed about the loss of two of the Corporation's biggest lines, Jay was in favor of taking on the Russian representation. Victor, on the other, was staunchly opposed to such action because the line was a nonconference line and used what he felt were unfair trade practices to snatch business from competing conference lines. In addition, he felt that representation of the line would irritate the other conference lines represented by the Corporation, and would also damage its relationships with the various exporters and shippers 471 from whom it solicited business. After Victor's retirement in 1976 the Corporation became the agent for the Russian line. Although he was 72 when he divested his stock ownership in the Corporation, Victor was in good health and would have preferred to continue working with the company. However, he felt that this was not feasible for two reasons. First, he and Jay were at loggerheads over the Russian line issue and also had other disagreements concerning plans for the longrange future of the Corporation. These disagreements were serious enough that at one point Jay had considered leaving the company. Second, Victor became convinced, following the loss of two of its biggest accounts, that the Corporation would soon to under, and in any event could not continue to pay the large salaries which the officers had been receiving. He felt it was too risky, from a personal investment standpoint, to retire and remain a passive stockholder. Therefore, he decided to get out of the business altogether. He considered and rejected the alternative of liquidating the Corporation, partly because of his reluctance to terminate a 50-year old family business, and partly out of a sense of loyalty 472 to the company's employees, some of whom had been with the company for many years. Eventually he settled on a plan where all but one share of his stock would be redeemed by the Corporation, with the remaining share to be purchased individually by Jay. It was further decided that the stock of Albert and Rose Kozak would also be redeemed, thereby vesting complete ownership of the Corporation in Jay. The stock ownership of the Corporation prior to the implementation of this plan was as follows: Number ofPercent of TotalShares OwnedShares OutstandingVictor Lamark1,77092.43%Albert Lamark251.31 Jay Lamark1005.22 Rose Kozak201.04 Total1,915100.00%On May 25, 1976, Albert was paid $ 5,000 in the complete redemption of his 25 shares of stock of the Corporation. On June 1, 1976, Rose Kozak was paid $ 4,000 in the complete redemption of the 20 shares owned by her. To redeem 1,769 of the 1,770 shares owned by Victor, the Corporation paid him $ 283,271.91 in cash on July 16, 1976, and also transferred to him an automobile with an adjusted basis to the Corporation of $ 5,313.64 and a life insurnce policy on his life with a cash surrender value of $ 9,032.85. The redemption proceeds were reported 473 by Victor on his 1976 Federal income tax return as a distribution qualifying for long-term capital gain treatment. The income tax savings to Victor as a consequence of reporting the $ 283,271.91 cash payment alone as a capital gain distribution versus an ordinary income dividend amounted to $ 63,059.18. The remaining share of stock owned by him was sold to Jay for $ 60,000 pursuant to an agreement executed on February 28, 1976 contemporaneously with the stock redemption agreement between Victor and the Corporation. The purpose of this arrangement was to require Jay to pay a premium out of his personal assets for the transfer of control of the business brought about by the redemption of Victor's stock. The gain on this sale was reported on his 1976 Federal income tax return as long-term capital gain. The agreement between Jay and Victor provided that Victor would be liable for a pro rata share of any additional Federal income taxes resulting from an Internal Revenue Service audit for the taxable year ending September 30, 1976, with the amount of the liability to be based on that portion of the year during which he was a shareholder of the Corporation. The agreement further provided 474 that Victor would continue to remain available for advisory and consulting services during 1977 and 1978 and that office space would be furnished him by the Corporation for a perod of one year. In February 1976 the petitioner borrowed $ 80,000 from the Pittsburgh National Bank and Jay personally guaranteed the loan. Petitioner loaned $ 60,000 of the proceeds to Jay to enable him to finance the purchase of the single share of stock from Victor. Since the redemptions had exhausted nearly all of the Corporation's working capital, it was necessary to retain $ 20,000 of the loan proceeds in the business to meet operating expenses. By September 30, 1976, petitioner had made principal payments totaling $ 30,000 on the $ 80,000 loan. 4 Certain internal memoranda prepared by officials of the Pittsburgh National Bank in the course of making the loan to petitioner indicate that the bank considered the Corporation to be a sound credit 475 risk. A memorandum dated January 14, 1976 provided, in part, as follows: Lamark Shipping has been a customer of Pittsburgh National for over forty years, and all principals are well known to the Oliver office. The company has very little in fixed assets; their main strength is their solid ties with the ocean carriers and shippers in a five state area. Even though net worth of the company will be approximately $ 45,000 after retirement of the stock, the ability to generate gross revenue of $ 264,191 in 1973; $ 403,507 in 1974; $ 635,567 in 1975 shows the viability of the company. Much of the latter growth is due to Jay's efforts. Net income is misleading as the elder Lamarks have enjoyed substantial salaries and generous expense allowances. Net income in 1975 was $ 106,109 after salary expense of $ 246,327, travel of $ 40,000 plus club dues and public relations of $ 12,000+. The elder Lamarks will not draw any of these expenses after the sale. A subsequent memorandum dated February 19, 1976, also discussed the prospects of the Corporation and provided in relevant part: Long term outlook based on increasing international trade from within their trading area is excellent. They 476 also show good growth and excellent potential in selling passenger space. Petitioner paid only one dividend from the date of incorporation through September 30, 1977. That dividend totaled $ 8,000 and was paid during the taxable year ended September 30, 1974. On April 6, 1979, respondent informed petitioner of a proposed statutory notice of deficiency for accumulated earnings taxes under section 531 for the taxable years ended September 30, 1975 and 1976. On May 14, 1979, petitioner submitted to respondent a statement pursuant to section 534(c) which alleged that the earnings in question were accumulated "to protect the corporation from the drastic financial consequences attendant upon the loss of major accounts, not to redeem stock". In the alternative, the statement alleged that "even if the surplus had been accumulated to redeem V. A. Lamark's stock, this would have been an accumulation to meet reasonable needs under the applicable cases." On May 24, 1979, respondent mailed a statutory notice of deficiency to petitioner wherein respondent determined that petitioner was liable for accumulated earnings taxes for the taxable year ended September 30, 1976 in the amount of $ 31,811. 477 5 On September 4, 1980, this Court ordered the burden of proof shifted to respondent with regard to the grounds alleged in the section 534(c) statement. OPINION The accumulated earnings tax is designed to foster the payment of dividends to the shareholders of a corporation by imposing a penalty tax on accumulated earnings and profits in excess of the reasonable needs of the business. Because the tax is in the nature of a penalty it must be narrowly construed. Ivan Allen Co. v. United States, 422 U.S. 617">422 U.S. 617, 626 (1975). The tax is imposed by section 531 and applis to any corporation "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders * * by permitting earnings and profits to accumulate instead of being divided or distributed." Section 478 532(a). In United States v. Donruss Co., 393 U.S. 297">393 U.S. 297 (1969), the Supreme Court held that tax avoidance need only be one of the purposes which contributed to the decision to accumulate, rather than the dominant or controlling purpose. Section 533(a) provides that the accumulation of earnings beyond the reasonable needs of the business is determinative of the existence of a tax avoidance purpose unless the corporation proves otherwise by a preponderance of the evidence. The concept of "reasonable needs of the business" is also important in the computation of the tax, since section 535(c)(1) allows a credit against the accumulated taxable income subject to the tax for the amount of any current earnings and profits which are retained by the corporation for its reasonable business needs. Thus, even if tax avoidance is found to have played a role in the decision to accumulate, the taxpayer can still escape the tax to the extent that it can prove its accumulation of current earnigns was necessary to meet reasonable business needs, thereby reducing or eliminating its accumulated taxable income by way of the accumulated earnings credit. 6 See, e.g., Magic Mart, Inc. v. Commissioner, 51 T.C. 775">51 T.C. 775, 799 (1969); 479 Faber Cement Block Co., Inc. v. Commissioner, 50 T.C. 317">50 T.C. 317, 336 (1968); John P. Scripps Newspapers v. Commissioner, 44 T.C. 453">44 T.C. 453, 474 (1965). The determination of the reasonable needs of the business is strictly a factual question, Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282 (1938); Doug-Long, Inc. v. Commissioner, 72 T.C. 158">72 T.C. 158, 170 (1979), supplemental opinion 73 T.C. 71">73 T.C. 71 (1979), on appeal (2d Cir., Jan. 11, 1980); and in this respect we are to give due deference to the business judgment of corporate management. Atlantic Properties, Inc. v. Commissioner, 62 T.C. 644">62 T.C. 644, 656 (1974), affd. 519 F.2d 1233">519 F.2d 1233 (1st Cir. 1975); Magic Mart, Inc. v. Commissioner, supra at 795; Faber Cement Block Co., Inc. v. Commissioner, supra at 329. According to section 537(a)(1), the phrase "reasonable needs of the business" includes "reasonably anticipated needs of the business." In this regard, section 1.537-1(b)(1), Income Tax Regs., 480 provides as follows: In order for a corporation to justify an accumulation of earnings and profits for reasonably anticipated future needs, there must be an indication that the future needs of the business require such accumulation, and the corporation must have specific, definite, and feasible plans for the use of such accumulation. Such an accumulation need not be used immediately, nor must the plans for its use be consummated within a short period after the close of the taxable year, provided that such accumulation will be used within a reasonable time depending upon all the facts and circumstances relating to the future needs of the business. Where the future needs of the business are uncertain or vague, where the plans for the future use of an accumulation are not specific, definite, and feasible, or where the execution of such a plan is postponed indefinitely, an accumulation cannot be justified on the grounds of reasonably anticipated needs of the business. Although the regulation refers to "specific, definite and feasible plans" for the accumulation, in a closely held corporation this plan need not be inscribed in formal minutes. Doug-Long, Inc. v. Commissioner, supra at 171; 481 John P. Scripps Newspapers v. Commissioner, supra at 469. At a minimum, however, the stated intentions of the taxpayer regarding the use of the accumulated earnings must be evidenced by some contemporaneous course of conduct consistent with the projected use; in other words, conduct which would indicate that the plans were not merely formulated as an afterthought in response to a challenge from the Commissioner. Motor Fuel Carriers, Inc. v. Commissioner, 559 F.2d 1348">559 F.2d 1348, 1352-1353 (5th Cir. 1977); Bahan Textile Machinery Co. v. United States, 453 F.2d 1100">453 F.2d 1100, 1102 (4th Cir. 1972); Smoot Sand & Gravel Corp. v. Commissioner, 274 F.2d 495">274 F.2d 495, 499 (4th Cir. 1960), cert. denied 362 U.S. 976">362 U.S. 976 (1960). The determination of whether the immediate or projected needs of the business reasonably required the accumulation is based on the facts as they exist at the close of the taxable year in question, although subsequent events may be considered in determining whether the taxpayer actually intended to consummate the plans it alleges for the accumulation. Dixie, Inc. v. Commissioner, 31 T.C. 415">31 T.C. 415, 430 (1958), affd. 277 F.2d 526">277 F.2d 526 (2d Cir. 1960), cert. denied 364 U.S. 827">364 U.S. 827 (1960); Faber Cement Block Co., Inc. v. Commissioner, supra at 333; 482 section 1.537-1(b)(2), Income Tax Rags.Once the reasonable needs of the corporation have been ascertained, the next step is to determine whether its earnings and profits were permitted to accumulate beyond those needs. Normally this requires more than a simple comparison of the corporation's total accumulated earnings and profits with its business needs. Because some of these earnings may be held in the form of illiquid assets such as land, plant and equipment, and thus may not be available for current distribution to shareholders, the focus generally is on the net liquid assets of the business and whether they exceed the immediate or reasonably anticipated needs of the business. See Ivan Allen Co. v. United States, 422 U.S. 617">422 U.S. 617, 628 (1975) ("The question, therefore, is not how much capital of all sorts, but how much in the way of quick or liquid assets, it is reasonable to keep on hand for the business."); Smoot Sand & Gravel Corp. v. Commissioner, supra at 501; Montgomery Co. v. Commissioner, 54 T.C. 986">54 T.C. 986, 1008 (1970); Faber Cement Block Co., Inc. v. Commissioner, supra at 328; section 1.537-2(b), Income Tax Regs. It should be emphasized that the accumulated earnings tax applies 483 only to current year's accumulated taxable income as that term is defined in section 535; previously accumulated earnings are not subject to the penalty. However, prior year's accumulations are relevant in the computation to the extent they are available in the form of liquid assets to meet the taxpayer's current needs and render the accumulation of current earnings unnecessary. 7Bahan Textile Machinery Co. v. United States, supra at 1102; Smoot Sand & Gravel Corp. v. Commissioner, supra at 500-501; JJJ Corp. v. United States, 217 Ct. Cl. 132">217 Ct. Cl. 132, 576 F.2d 327">576 F.2d 327, 342 (1978); section 1.535-3(b)(1)(ii), Income Tax Regs.Petitioner timely submitted a statement pursuant to section 534(c) 8485 in which it alleged that the earnings and profits for the taxable year ended September 30, 1976, were accumulated in order to protect the corporation against the loss of major accounts, and not for the purpose of funding the stock redemptions which took place during that year. The statement further alleged that, should this Court determine that current earnings were actually accumulated for the latter purpose, the redemption of Victor Lamark's stock nevertheless served a reasonable 484 business need for purposes of the accumulated earnings tax. No other grounds for the accumulation were contained in the statement. At a pre-trial hearing this Court ruled that the section 534(c) statement was sufficient to shift the burden of proof to respondent with respect to the grounds stated therein in accordance with section 534(a)(2). We note, however, that the burden of proof with respect to any additional grounds alleged by petitioner, as well as the ultimate question of whether the Corporation was availed of for the prohibited purpose, remains with petitioner. Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153">28 T.C. 153, 183-184 (1957), affd. 251 F.2d 278">251 F.2d 278 (7th Cir. 1958), cert. denied 356 U.S. 958">356 U.S. 958 (1958); Wellman Operating Corp. v. Commissioner, 33 T.C. 162">33 T.C. 162, 182 (1959). The parties in this case have confined their arguments to the familiar issues of whether 486 the accumulation of earnings during the year was for the reasonable needs of the business and not for the purpose of avoiding income taxes. Nevertheless, the facts fairly present another, more fundamental legal issue which neither party has addressed: whether the distribution of all of petitioner's current earnings and profits in the redemption of its stock during the year bars the imposition of the penalty on the ground that no earnings were actually permitted to accumulate within the corporation. The facts herein indicate that the portion of the redemption distributions allocable to earnings and profits greatly exceeded petitioner's earnings and profits for its fiscal year ended September 30, 1976. The amounts distributed in the redemptions were as follows: Victor Lamark (1,769 shares)Cash$ 283,271.91Cash surrender value-lifeinsurance policy9,032.85Automobile (adjusted basis)5,313.64$ 297,618.40Albert Lamark (25 shares)Cash5,000.00Rose Kozak (20 shares)Cash4,000.00Total$ 306,618.40Section 312(a) 9488 provides that amounts paid in connection with a redemption of stock are treated as distributions of earnings and profits to the extent they are not properly chargeable to the capital 487 account under section 312(e). 10 Further, section 316(a) 11489 provides that such distributions are to be charged first against the most recently accumulated earnings and profits. The facts indicate that each share of stock had a par value of $ 10. 12 Consequently, of the total amount distributed in the redemptions, $ 18,140 ($ 10 per share X 1,814 shares redeemed) is properly chargeable to the capital account under section 312(e). 13 The balance of the distribution, or $ 288,478.40, is treated as a distribution out of current earnings and profits to the extent thereof under the provisions of section 312(a) and 316(a). Thus, since petitioner's earnings and profits for its fiscal year ended September 30, 1976, amounted to only $ 111,197.17, 14 it can be argued that petitioner did not actually accumulate any earnings during the year and that the imposition of the accumulated earnings tax under such circumstances is inappropriate. In GPD, Inc. v. Commissioner, 60 T.C. 480">60 T.C. 480 (1973) (Court-reviewed), 490 revd. and remanded 508 F.2d 1076">508 F.2d 1076 (6th Cir. 1974), this Court decided this issue in favor of the taxpayer on similar facts and was reversed on appeal by the Sixth Circuit. Inasmuch as this case is appealable to the Third Circuit, we are not constrained to follow the Sixth Circuit's reversal under the rule of Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1971) therefore the matter is open for our reconsideration. However, because neither party has raised or briefed the merits of what has proved to be a fairly nettlesome legal issue, we think it inappropriate to undertake a reassessment of our position in GPD at this time. 15491 492 493 Accordingly, we will decide this case solely on the basis of the arguments raised at trial and briefed by the parties. We are confronted, then, with the question of whether the hypothetical accumulation of current earnings (resulting from a failure to distribute such amounts in the form of taxable dividends) exceeded petitioner's reasonable business needs during the year in issue. Normally this determination requires a comparison of the corporation's net liquid assets at year-end (generally current assets minus current liabilities) to its aggregate business needs. If net liquid assets are found to exceed business needs, a presumption is created that current earnings were accumulated with a tax avoidance motive. Section 533. Assuming the taxpayer is unable to rebut this presumption, the only 494 issue left to be decided is the amount of the accumulated earnings credit. In the present case, however, a substantial portion of petitioner's current and accumulated earnings and profits were distributed during the year, nearly all of it in the form of cash, in order to redeem the stock of several of its shareholders. Because the use of funds to redeem stock does not necessarily qualify as a reasonable business need, particularly where the facts suggest that the redemption is primarily a device to bail out earnings and profits at capital gain rates, the Corporation's net liquid assets at year-end ($ 28,231.41) 16496 497 paint a completely misleading picture of its ability to pay dividends during the taxable year.By contrast, had the Corporation elected to invest its idle cash in the acquisition of additional plant and equipment during the year, the year-end net liquid assets figure would be an appropriate measure of its dividend-paying capacity because the use to which the excess funds were directed would unquestionably constitute a reasonable business need. Thus, it becomes necessary to examine the circumstances surrounding the redemptions to determine whether they served a reasonable 495 business purpose. If this question is answered in the negative, the assets distributed must be considered in the same light as unrelated business investments or shareholder loans; i.e., the amounts must be added back to the corporation's net liquid assets and deemed available for the payment of dividends. 17 See and compare Faber Cement Block Co, Inc. v. Commissioner, supra at 328-330 (unrelated business loans included in liquid assets); Nemours Corp. v. Commissioner, 38 T.C. 585">38 T.C. 585, 602-604 (1962), affd. per curiam 325 F.2d 559">325 F.2d 559 (3rd Cir. 1963) (loans to shareholders included); Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566">44 T.C. 566, 587 (1965) (investment in stock of another company to insure an adequate supply of material used in business not included); John P. Scripps Newspapers v. Commissioner, supra at 472 (investment in preferred stock not a liquid asset where income therefrom used to fund company profit sharing plan). On brief respondent contends that the shift in burden of proof ordered by this Court after consideration of petitioner's section 534(c) statement is ineffective with regard to the redemption issue, since 498 the statement specifically denied that earnings were accumulated for the purpose of redeeming stock. We note, however, that petitioner has not denied the fact of the redemptions; rather, petitioner contends that it did not form an intention to redeem its stock until just before the distributions took place. Until that time, it alleges, it sole purpose in accumulating earnings was to protect against the loss of accounts. Thus, petitioner insists that at no time did it actually accumulate earnings, on a day-to-day basis, with the purpose of avoiding income taxes by distributing earnings in a stock redemption. Petitioner's argument ignores the fact that all the events of the taxable year are relevant in determining whether earnings were accumulated with the proscribed purpose. See JJJ Corp. v. United States, 217 Ct. Cl. 132">217 Ct. Cl. 132, 576 F.2d 327">576 F.2d 327, 344 (1978). Still, petitioner was careful to argue (and at some length) in its 534(c) statement that, assuming this Court found the redemption of Victor Lamark's stock to be relevant in determining the existence of the forbidden purpose, the redemption nevertheless served a reasonable business need of the Corporation. We see no reason to disregard 499 this portion of petitioner's statement merely because it couched the redemption as an alternative, rather than a conjunctive, ground for the accumulation of corporate earnings. We hold, therefore, that respondent bears the burden of proof on the question of whether the redemption satisfied a reasonable business need. Before addressing the arguments of the parties on this issue it is helpful first to restate the changes in stock ownership which took place during the year in issue. At the beginning of the year petitioner's stock was held as follows: Number ofPercent of TotalShares OwnedShares OutstandingVictor Lamark1,77092.43%Albert Lamark251.31 Jay Lamark1005.22 Rose Kozak201.04 Total1,915100.00%The shares owned by Albert Lamark and Rose Kozak were redeemed on May 25, 1976 and June 1, 1976, respectively. On July 16, 1976, 1,769 shares of Victor Lamark's shares were redeemed, representing 94.6 percent of the 1,870 shares then outstanding. Victor sold his remaining share of stock to Jay Lamark for $ 60,000, thereby giving Jay sole ownership and control of the Corporation. In substance the redemption provided a vehicle through which the Corporation's retained earnings could be used 500 to bootstrap the acquisition of the company by Jay, who apparently lacked sufficient personal assets to purchase all of Victor's stock directly. Because the assets distributed to Albert and Rose were insubstantial ($ 9,000) relative to the total distributed to Victor ($ 297,618.40), the remainder of our discussion will focus solely on the redemption of Victor's stock. 18Petitioner maintains that this redemption and the transfer in ownership which accompanied it was essential if the business was to continue to operate as a going concern. In support thereof petitioner contends the following: (1) Victor and Jay anticipated serious financial difficulty in the face of the loss or impending loss of two of its major accounts, the Prudential-Grace and Moller lines, and thus they felt the Corporation could not afford to continue to pay the large salaries which the officers had been receiving. (2) Dissension had arisen between Jay and Victor over whether to take on representation of a nonconference Russian line. The two also had disagreements over other 501 policy matters, and at one point Jay gave serious consideration to leaving the Corporation. (3) Because of his problems with Jay and his belief that the business was headed downhill, Victor decided it was time to cash in his investment, even though he was in good health and would have preferred to continue working with the company. (4) Rather than liquidate the 50-year old family business and dismiss loyal employees, Victor chose to transfer control of the Corporation to Jay by selling one share of stock to him directly and causing the Corporation to redeem the remainder. In short, petitioner argues that, because of the business reversals and the disagreements with Jay, Victor decided it was necessary to leave the company and allow Jay the opportunity to make a fresh start unencumbered by the burdensome salaries which Victor and Albert had been drawing. Since the only other alternative was liquidation, or so petitioner contends, the redemption necessarily satisfied a reasonable business purpose. Respondent insists that the redemption was nothing more than a device employed by a majority stockholder to bail out current earnings and profits at capital gains rates, and therefore 502 the purpose of the redemption was inherently personal. Further, respondent argues that current earnings could have been distributed in the form of dividends without necessarily making it impossible for the planned redemption to occur. Finally, respondent argues that the alleged business purpose for the redemption, which depleted almost all of petitioner's accumulated cash reserves, is belied by petitioner's repeated averments of a desperate need to conserve working capital during the year in issue. Thus, respondent maintains this redemption cannot pass muster as a reasonable business need for purposes of the accumulated earnings tax. The cases dealing with the reasonable needs issue in a redemption context are difficult to reconcile and can hardly be said to constitute a uniform body of law on the subject. No doubt this is due in large measure to the difficulties inherent in attempting to distinguish between corporate and shareholder purposes in a closely held corporate setting. In most cases the presence of a shareholder benefit is readily discernible because the redemption proceeds are invariably taxed to the departing shareholders at favorable capital gain rates. Since capital 503 gain distributions are not the kind of distributions which the accumulated earnings tax was designed to promote, 19 the courts have been understandably reluctant to accord "reasonable need" characterization to earnings accumulated for the purpose of a redemption. Nevertheless, the redemption of a dissenting minority or 50 percent shareholder has been found to serve a reasonable business purpose where the action appeared necessary to promote the harmonious transaction of corporate business or to prevent the sale 504 of the minority stock to a hostile outsider.The case frequently cited for this proposition is Mountain State Steel Foundries, Inc. v. Commissioner, 284 F.2d 737">284 F.2d 737 (4th Cir. 1960), revg. T.C. Memo. 1959-59. In that case the stock of Mountain State Steel was owned equally by two families. The Stratton family was aggressive and wanted to plough corporate profits back into the business in order to expand and modernize. The Miller family, consisting of the widow and daughters of one of the original founders of the business, was more conservative and preferred greater financial security than the uncertain flow of dividends from the corporation would provide. Eventually the widow demanded that the business be sold, but no purchasers were found who were willing to pay the desired price. An agreement was finally reached whereby the corporation agreed to redeem the Miller stock for $ 450,000, payable $ 50,000 in cash with the balance to be paid in installments over a period of years. The Commissioner asserted an accumulated earnings tax deficiency in the year of redemption and the three subsequent years. The Fourth Circuit disagreed, concluding that on the facts presented the accumulations 505 in the year of redemption and in later years to discharge the resulting indebtedness served a legitimate corporate purpose, as follows (284 F.2d at 745): When the stockholders have such conflicting interests, the corporation and its future are necessarily affected. When the situation results in demands that the business be sold or liquidated, as it did here, the impact of the conflict upon the corporation is direct and immediate. * * * The resolution of such a conflict, so that the need of the corporation may govern managerial decision, is plainly a corporate purpose. Other cases embracing the notion that the redemption of a non-controlling interest may serve a reasonable business need where a corporate purpose is evident are Dill Manufacturing Co. v. Commissioner, 39 B.T.A. 1023">39 B.T.A. 1023 (1939); Gazette Publishing Co. v. Self, 103 F. Supp. 779 (E.D. Ark. 1952); Wilcox Manufacturing Co., Inc. v. Commissioner, T.C. Memo. 1979-92; Farmers and Merchants Investment Co. v. Commissioner, T.C. Memo 1970-161">T.C. Memo. 1970-161. Compare John B. Lambert & Assocs. v. United States, 212 Ct. Cl. 71 (1976), (38 AFTR 2d 76-6207, 76-2 USTC par. 9776); Cadillac Textiles, Inc. v. Commissioner, T.C. Memo. 1975-46. The leading 506 case concerning the redemption of a majority stock interest is Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153">28 T.C. 153 (1957), affd. 251 F.2d 278">251 F.2d 278 (7th Cir. 1958), cert. denied 356 U.S. 958">356 U.S. 958 (1958). There two shareholders, one owning 60 percent of the corporation and the other owning 20 percent, decided to sell their stock but were unable to find a purchaser who could meet their price. A third shareholder, who owned the remaining 20 percent of the stock, had devoted most of his life to the business and was concerned that a sale of the majority interest to another corporation would interfere with his management of the business and possibly cause the loss of some key employees. Accordingly, he devised a plan whereby the corporation would redeem the shares for approximately $ 800,000, with $ 300,000 payable out of the corporation's liquid assets and the balance to be paid from the proceeds of a $ 500,000 loan. To insure the availability of the necessary cash the corporation declared no dividends for 1946.The redemption took place the following year. Subsequently the Commissioner determined an accumulated earnings tax deficiency for 1946 on the ground that the accumulation for the proposed 507 redemption did not serve a reasonable business need, but instead indicated a purpose to avoid income taxes. This Court sustained the Commissioner's determination and cited several factors as the basis for its decision. First, we observed that a dividend distribution would not necessarily have made it impossible for the proposed redemption to occur, since the distribution presumably would have resulted in a corresponding reduction in the redemption price to be paid by the corporation. Second, we were unable to identify any reasonable corporate purpose served by the redemption. There was no evidence that the company was threatened with a sale of stock to an undesirable outsider. In fact, from a corporate standpoint the redemption may well have been counter-productive, since it caused a significant drain on the taxpayer's financial resources at a time when the taxpayer was alleging a need to accumulate earnings for additional working capital and plant improvements. Finally, in our view the fact that a majority stock interest was redeemed made it unlikely that the redemptions were motivated by anything other than a desire on the part of the redeeming shareholders to liquidate their 508 interest at capital gain rates. Thus, we concluded that the redemption served no reasonable business purpose, but instead provided proof of the existence of the proscribed purpose. We think the rationale of Pelton Steel applies with even greater force in the present case. Here nearly 95 percent of the outstanding stock of the Corporation, all of it belonging to a single shareholder, was redeemed in a transaction which consumed most of the Corporation's current and accumulated earnings and profits. The redemption proceeds were reported by Victor as long-term capital gain on his 1976 Federal income tax return. This personal tax benefit, coupled with Victor's undisputed control over corporate affairs before the redemption, raises, at the very least, a presumption that his personal objectives outweighed any alleged corporate purpose for the redemption. The circumstances under which the redemption plan was conceived also suggest that personal considerations predominated in Victor's decision to leave the company. Victor was clearly worried about the future of the company in light of the loss of two major accounts, which collectively had accounted for 44 percent of the Corporation's gross 509 revenues for the taxable year ended September 30, 1974. When asked at trial whether he considered simply retiring and assuming the role of a passive stockholder, he stated that it would have been unwise "to retain stock in a company if you know that their business is slipping." Petitioner's reply brief also states that "[Victor] had no confidence that the company would have had the continuing capacity to pay the dividends to give him a modicum of retirement security." Although we accept Victor's testimony that he left the business with great reluctance and would have preferred to continue on as an owner-employee, even though he was 72 years old, we nevertheless think his departure was spurred principally by a belief that the redemption and sale to Jay was the best financial avenue open to him.Considering that the company was, in Victor's words, "going down the drain," the deal with Jay presented a lucrative opportunity: in exchange for his stock Victor received from the Corporation cash and other assets worth $ 297,618.40, only $ 17,690 of which represented a return of capital ($ 10 par X 1,769 shares), and from Jay he received a $ 60,000 premium for the sale of his remaining share 510 of stock. More importantly, all of the consideration he received was taxable as long-term capital gain. The income tax savings to Victor as a consequence of reporting the $ 283,271.91 cash payment from the Corporation alone as a capital gain distribution versus an ordinary income dividend amounted to $ 63,059.18. 20 Thus, it appears to us that Victor, being aware of the Corporation's cash-rich position and believing that the economic tide had turned against the company, simply decided that the time was ripe to divest his ownership interest. Petitioner concedes that, to a certain extent, Victor's decision to leave the company was in fact motivated by personal considerations. But at the same time petitioner contends that the redemption served a vital corporate purpose because the only other alternative was liquidation. Granted, it is entirely possible that this was the only other option Victor was willing to consider under the circumstances, and, 511 indeed, we have found as a fact that at one point he considered and rejected this alternative. Nevertheless, this does not necessarily call for the conclusion that the distribution in redemption was essential from the standpoint of the Corporation. We note that petitioner has offered no rebuttal to respondent's contention that a dividend could have been declared during the year without frustrating the planned redemption. We found this to be a telling argument in Pelton Steel, and it is even more persuasive on these facts. Since Victor owned nearly 95 percent of the outstanding stock of the Corporation immediately preceding the redemption, the benefit of any dividend distribution declared on the common shares would have inured almost entirely to him, with the holdover shareholder (Jay) deriving only a minor benefit. Likewise, the additional cash drain on the Corporation (relative to that caused by the redemption) would have been negligible. Furthermore, the distribution of earnings via a dividend would have reduced the book value of the Corporation and facilitated the forthcoming transfer of ownership to Jay in much the same manner as did the redemption. Thus, we are not convinced 512 that the wholesale bail-out of earnings and profits which accompanied the redemption was an unavoidable result of the desired shift in ownership. Moreover, our doubts as to the validity of the alleged corporate purpose are compounded by the seemingly inconsistent positions which petitioner has taken during this litigation. The bulk of petitioner's argument on brief was aimed at establishing that the Corporation was near the brink of economic collapse during the taxable year in issue. Victor himself testified at trial that he thought the business was "going down the drain". The minutes of the board of directors' special meeting held on May 1, 1975 state that the loss of the Prudential-Grace line made it "necessary to preserve [the] cash balance for the survival of the company". Accordingly, petitioner has contended throughout these proceedings that its sole purpose in accumulating earnings prior to the redemption was to cushion the company against the shock of business reversals. Yet, despite the grim financial outlook portrayed by petitioner, the Corporation ultimately distributed virtually all of its liquid assets during the taxable year in the redemption of Victor Lamark's stock. 513 As a result, the company found itself bereft of working capital and was forced to borrow $ 20,000 from the Pittsburgh National Bank to meet operating expenses immediately following the distribution. On brief petitioner conceded the effect of the redemption on its financial position, stating that "assuredly, it left the company staggering". Under these circumstances we find it paradoxical, to say the least, that on the one hand petitioner alleges a dire need to conserve working capital, while on the other hand contends that a redemption which stripped the company of its entire cash reserve somehow satisfied a reasonable business purpose. Cf. Pelton Steel Casting Co. v. Commissioner, 28 T.C. at 175. It is not our intention to suggest that the redemption of the stock of a majority shareholder can never be beneficial to a corporation. With regard to the present case, we are not prepared to say that the shift in ownership and control to Jay could not, in the long run, have a positive impact on the Corporation. By relieving the company of the salaries which Victor and Albert had been drawing, and by allowing Jay to exercise his unfettered judgment in the management of corporate affairs, 514 the shift in ownership could conceivably have lifted the Corporation out of its alleged financial difficulties. The fact remains, however, that where a majority interest is redeemed in a capital gain distribution the personal shareholder benefit inevitably permeates the entire transaction, and absent evidence of a bona fide and predominant corporate purpose, the distribution cannot qualify as a business need for purposes of the accumulated earnings tax. 21 In this case petitioner has failed to rebut the unfavorable inferences which may be drawn from the evidence before us.Accordingly, we find that respondent has met his burden of proof on this issue and hold that the redemption of Victor Lamark's stock did not serve a reasonable business need. Because the assets distributed in that redemption exceeded the Corporation's current earnings and profits, we conclude that all of the latter were accumulated beyond the reasonable needs of the business, thereby creating a presumption of a tax avoidance motive under section 533(a).That presumption stands unless 515 petitioner proves otherwise by a preponderance of the evidence. On this ultimate issue we find petitioner has failed to meet its burden of proof. Although throughout these proceedings Victor and Jay have vehemently denied that the Corporation ever accumulated earnings with the proscribed purpose, their testimony is unpersuasive. We reiterate the Supreme Court's view in United States v. Donruss Co., 393 U.S. 297">393 U.S. 297 (1969), that tax avoidance considerations need only contribute to the decision to accumulate to justify imposition of the tax. We refuse to believe that the redemption of Victor's stock was made in blissful ignorance of the favorable tax consequences which ensued. We also note that under the redemption agreement Victor would appear to be liable for at least a portion of any accumulated earnings taxes assessed for the taxable year in issue, and therefore he can hardly be called a disinterested party in this affair. Moreover, we note that from the date of its incorporation in 1966 until the end of the taxable year in issue the Corporation has paid only one dividend. That dividend totaled $ 8,000 and was paid during the taxable year ended September 30, 1974. A poor dividend 516 history is a key factor to consider in evaluating a corporation's motives during a particular taxable year. Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566">44 T.C. 566, 588 (1965); section 1.533-1(a)(2)(iii), Income Tax Regs. The failure to pay dividends in this case allowed Victor and the other redeeming shareholders to drain the Corporation of $ 288,478.40 in retained earnings, reducing its once-substantial cash hoard to almost nothing, while suffering only a capital gains tax in the process. Under these circumstances we find that the testimony elicited at trial is insufficient to overcome the presumption of tax avoidance created by section 533(a). Accordingly, we hold that petitioner was availed of during the taxable year for the purpose of avoiding income taxes with respect to its shareholders by permitting earnings to accumulate instead of distributing them in the form of taxable dividends.Since petitioner has failed to prove that it was necessary to accumulate current year's earnings to meet its reasonable business needs, no accumulated earnings credit will be allowed to offset its accumulated taxable income. To reflect the foregoing, Decision will be entered for the respondent. 517 Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise indicated.↩2. Petitioner's credit lag between billings and collections of commissions often ran as much as two or three months, depending on the particular shipping line involved. In the case of the Prudential-Grace line the credit lag was much longer, with collections running behind billings anywhere from six to nine months.↩3. These schedules have been condensed from more detailed schedules prepared by respondent based on his examination of petitioner's books and records. Since petitioner has not objected to any of respondent's figures we have accepted them as true and accurate representations of petitioner's financial activity for the years presented.. Schedule reflects cash-basis income and does not include earned commissions not yet received as of year-end.↩. Schedule reflects cash-basis expenses with the exception of Federal and state income and payroll taxes, which are accrued.. The balance sheet information respondent introduced at trial actually showed a $ 60,000 loan receivable from Jay Lamark. Against this we have offset a $ 3,500 loan payable to Jay Lamark which was included in petitioner's liabilities. Thus, the net amount owed by Jay to the Corporation was $ 56,500.4. The amount of these payments was stipulated to by the parties. However, the balance sheet information submitted by respondent indicates that the principal payments were actually $ 32,911.65 as of year-end. There is no explanation in the record for the variance.↩5. The accumulated taxable income on which this tax was determined was calculated as follows: 1976 taxable income$ 187,279.35 Less: 1976 Federalincome taxes(76,082.18)Accumulated taxable income$ 111,197.17 Petitioner was not entitled to any portion of the minimum accumulated earnings credit under section 535(c)(2) since its accumulated earnings and profits at the close of the prior year exceeded $ 150,000.↩6. The taxpayer is also entitled to a minimum $ 150,000 credit against accumulated taxable income under section 535(c)(2) regardless of its business needs. This amount, however, is subject to reduction by the amount of any accumulated earnings and profits on hand at the beginning of the taxable year.↩7. See also note 6, supra↩.8. Section 534 provides, in part, as follows: (a) General Rule.--In any proceeding before the Tax Court involving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof with respect to such allegation shall-- (1) if notification has not been sent in accordance with subsection (b), be on the Secretary or his delegate, or (2) if the taxpayer has submitted the statement described in subsection (c), be on the Secretary or his delegate with respect to the grounds set forth in such statement in accordance with the provisions of such subsection. (b) Notification by Secretary.--Before mailing the notice of deficiency referred to in subsection (a), the Secretary or his delegate may send by certified mail or registered mail a notification informing the taxpayer that the proposed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by section 531. (c) Statement by Taxpayer↩.--Within such time (but not less than 30 days) after the mailing of the notification described in subsection (b) as the Secretary or his delegate may prescribe by regulations, the taxpayer may submit a statement of the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business.9. Sec. 312. EFFECT ON EARNINGS AND PROFITS. (a) General Rule.--Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of-- (1) the amount of money, (2) the principal amount of the obligations of such corporation, and (3) the adjusted basis of the other property, so distributed. ↩10. Sec. 312. EFFECT ON EARNINGS AND PROFITS. (e) Special Rule for Partial Liquidations and Certain Redemptions↩.--In the case of amounts distributed in partial liquidation (whether before, on, or after June 22, 1954) or in a redemption to which section 302(a) or 303 applies, the part of such distribution which is properly chargeable to capital account shall not be treated as a distribution of earnings and profits. 11. Sec. 316. DIVIDEND DEFINED. (a) General Rule.--For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders-- (1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. * * 12. This figure was arrived at by dividing the total contributed capital prior to the 1975 and 1976 redemptions ($ 20,000) by the total shares outstanding (2,000). ↩13. The proper charge to the capital account is generally held to be the pro rata portion of the contributed capital which is allocable to the redeemed shares, and this holds true even if the amount distributed in the redemption exceeds the book value of the shares because of unrealized appreciation in assets or goodwill which may be reflected in the redemption price. Anderson v. Commissioner, 67 T.C. 522 (1976), affd. per curiam 583 F.2d 953">583 F.2d 953 (7th Cir. 1978); Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781 (1972); Helvering v. Jarvis, 123 F.2d 742">123 F.2d 742 (4th Cir. 1941); see also Rev. Rul. 79-376, 2 C.B. 133">1979-2 C.B. 133↩. 14. We assume, since the parties have produced no evidence to the contrary, that petitioner's current earnings and profits for the year in issue were equal to its accumulated taxable income as computed in respondent's notice of deficiency. See note 5, supra↩.15. The resolution of this issue depends on how one interprets the relationship between several different Code provisions. Section 532(a) provides that the accumulated earnings tax applies to any corporation formed or availed of for the purpose of avoiding income taxes with respect to its shareholders "by permitting earnings and profits to accumulate instead of being divided or distributed." (Emphasis added). Once this statutory requirement is satisfied, section 531 imposes the penalty on the corporation's accumulated taxable income as computed under section 535. Accumulated taxable income is essentially a measure of the corporation's current earnings and profits and is generally equal to taxable income after certain adjustments, less the dividends paid deduction and the accumulated earnings credit. The dividends paid deduction is defined in sections 561 through 565. The key provision insofar as the present issue is concerned is section 562(c), which provides that no distribution shall be eligible for the dividends paid deduction unless the distribution is pro rata. Under this rule a non-pro rata stock redemption does not qualify for the dividends paid deduction, and consequently does not reduce accumulated taxable income (assuming, of course, that the redemption does not otherwise qualify as a reasonable business need eligible for the accumulated earnings credit provided under section 535(c)). However, sections 312(a) and 316(a) provide that amounts paid in connection with a redemption of stock are treated as distributions out of current earnings and profits to the extent they are not properly chargeable to the capital account under section 312(e). Thus, under the statutory framework it is possible to have a stock redemption which consumes all of the current year's earnings and profits without effecting a corresponding reduction in the corporation's accumulated taxable income. Since section 532(a) arguably requires an accumulation of earnings and profits during the taxable year, the imposition of the accumulated earnings tax under these circumstances is subject to serious question. In GPD, Inc. v. Commissioner, 60 T.C. 480">60 T.C. 480 (1973), we relied on several of our prior decisions and held that the accumulated earnings tax could not be applied in a year in which, because of stock redemptions, no current earnings and profits were retained by the corporation. The Sixth Circuit, 508 F.2d 1076">508 F.2d 1076 (1974), relying in part on the opinion of the District Court in Ostendorf-Morris Co. v. United States, an unreported case ( N.D. Ohio 1968, 26 AFTR 2d 70-5369, 70-2 USTC par. 9550), as well as on a lengthy analysis of the legislative history of the accumulated earnings tax provisions, concluded that the accumulated earnings tax could still be imposed under these circumstances if the requisite tax avoidance motive were found to be present. Somewhat surprisingly, there have been no other reported cases dealing with this issue since the Sixth Circuit handed down its reversal in GPD. For an analysis of the GPD cases see Rudolph, "Stock Redemptions and the Accumulated Earnings Tax-An Update," 4 J. Corp. Tax. 101 (1977); Comment, "GPD, Inc. v. Commissioner: Closing a Loophole in the Accumulated Earnings Tax," 70 Nw.U.L. Rev. 651↩ (1975).16. Neither party has requested findings of fact concerning petitioner's net liquid assets at the end of the year in issue. Because of the holding we reach in this case it is technically unnecessary for us to make a specific finding on this matter. For the sake of completeness, however, we have computed petitioner's net liquid assets as follows: Liquid assets as ofSeptember 30, 1976Cash$ 19,529.76 Miscellaneous receivables262.94 Loan receivable-Jay Lamark9,411.65 Taxes payable(972.94)$ 28,231.41 Loans to shareholders are generally included in liquid assets on the ground that a contrary rule would permit a corporation with excessive accumulations to lessen its exposure to the penalty by temporarily diverting liquid assets to its shareholders. See Faber Cement Block Co. v. Commissioner, 50 T.C. 317">50 T.C. 317, 328-330 (1968); Nemours Corp. v. Commissioner, 38 T.C. 585">38 T.C. 585, 602-604 (1962), affd. per curiam 325 F.2d 559">325 F.2d 559 (3rd Cir. 1963); Whitney Chain & Manufacturing Co. v. Commissioner, 3 T.C. 1109">3 T.C. 1109 (1944), affd. per curiam 149 F.2d 936">149 F.2d 936 (2d Cir. 1945). In the instant case, however, most of the funds loaned to Jay Lamark were borrowed by the Corporation from the Pittsburgh National Bank; in other words, the Corporation acted merely as a conduit in arranging a personal bank loan for Jay Lamark to finance his purchase of Victor Lamark's remaining share of stock.Thus, we think the loan receivable from Jay Lamark ($ 56,500) should be included in liquid assets only to the extent it exceeds the balance owed on the Pittsburgh National note ($ 47,088.35). One other point deserves mention. Petitioner is a cash method taxpayer and therefore the financial schedules do not disclose any unbooked accounts receivable or accounts payable at year-end. Arguably these amounts (net of estimated income taxes) should be included in the computation of net liquid assets in order to arrive at a true measure of petitioner's liquidity, even though such amounts are not reflected in the Corporation's accumulated taxable income. We will not address this issue because there is insufficient evidence in the record to allow a determination of petitioner's accrual-based liquid position at year-end. ↩17. While we think this treatment is proper in the year in which the redemption takes place, it is doubtful that the assets distributed should affect the computation of net liquid assets in subsequent years, since the funds distributed are irretrievably lost to the Corporation.↩18. We note that petitioner has made no argument that the redemption of the minority stock interests satisfied a reasonable business purpose.↩19. See Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153">28 T.C. 153, 174 (1957), affd. 251 F.2d 278">251 F.2d 278 (7th Cir. 1958), cert. denied 356 U.S. 958">356 U.S. 958↩ (1958); see also Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.07, p. 8-29 (4th ed.). We note, however, that Congress has seen fit to provide an exception for redemptions of stock which qualify under section 303. Section 537(a)(2) provides that earnings necessary to fund such redemptions will be deemed to have been accumulated for reasonable business needs, but only for the taxable year of the corporation in which the shareholder died or for any taxable year thereafter. See section 537(b)(1) and (4).20. Respondent calculated this figure based on the information contained in Victor's 1976 Federal income tax return, and petitioner has made no objection concerning its accuracy. Therefore, we have included it as a finding of fact herein.↩21. For a good discussion of these issues see Herwitz, "Stock Redemptions and the Accumulated Earnings Tax," 74 Harv. L. Rev. 866">74 Harv. L. Rev. 866↩ (1961).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619268/	Paul Gordon Whitmore and Mary Clarissa Whitmore, Petitioners, v. Commissioner of Internal Revenue, Respondent. Paul Gordon Whitmore, Petitioner, v. Commissioner of Internal Revenue, RespondentWhitmore v. CommissionerDocket Nos. 50358, 50359United States Tax Court25 T.C. 293; 1955 U.S. Tax Ct. LEXIS 44; November 25, 1955, Filed 1955 U.S. Tax Ct. LEXIS 44">44 Decisions will be entered for the petitioners. Petitioner held, on the facts, to have been domiciled in Arizona during all the years in controversy; held, further, returns for certain years are to be treated as separate returns of the income of petitioner and his wife, they being clearly intended as such, notwithstanding they were combined on a single return form. Nicholas Callan, Esq., for the petitioners.James F. Hoge, Jr., Esq., for the respondent. Opper, Judge. OPPER25 T.C. 293">293 In these consolidated proceedings respondent has determined deficiencies, as follows:PetitionersYearTaxDeficiencyPaul Gordon and Mary Clarissa Whitmore1943Income and Victory$ 379.41Paul Gordon and Mary Clarissa Whitmore1944Income385.57Paul Gordon and Mary Clarissa Whitmore1945Income307.85Paul Gordon Whitmore1946Income534.71Paul Gordon Whitmore1947Income536.951955 U.S. Tax Ct. LEXIS 44">45 The issues are whether Paul Gordon Whitmore was domiciled during the years in question in Arizona, a community property State, and even so, whether for certain years, by reason of the form of the returns, he is entitled to report his income on a community property basis.25 T.C. 293">294 FINDINGS OF FACT.Paul Gordon Whitmore, hereafter referred to as petitioner, and Mary Clarissa Whitmore filed their individual returns on a single form for each year from 1943 through 1945 with the collector of internal revenue for the second district of New York. Petitioner filed individual returns with that collector for 1946 and 1947. All these returns were computed on the community property basis. He filed individual returns in Arizona for 1939 and 1940, and individual returns for 1941 and 1942 in New York.Petitioner was born in Arizona in 1904. His parents resided in Tucson, Arizona, from then until their deaths in 1940.In 1923, petitioner graduated, at the age of 19, from the University of Arizona, and he then obtained employment with Westinghouse Electric and Manufacturing Company at East Pittsburgh, Pennsylvania. From this position he hoped to gain experience in the engineering profession. 1955 U.S. Tax Ct. LEXIS 44">46 In March 1924, he changed his employment to the distribution engineering department of West Penn Power Company, at Pittsburgh. He remained with that employer until 1929, working at various tasks.While employed in the Pittsburgh area, petitioner sought other employment, both local and in other localities, including Detroit, New York, and San Juan, Puerto Rico. He referred to classified advertising and to an employment agency.Prior to his marriage in West Virginia in 1925, petitioner resided in Y. M. C. A.'s. Thereafter, he and his wife resided in rented apartments in East Liberty, Wilkinsburg, and Carrick, Pennsylvania, and a rented house in Carrick. He had an account with a Pittsburgh bank from 1924 until 1929. During the years he resided in Pennsylvania, he never returned to Arizona because he felt he could not afford to. He affiliated with no clubs or churches in Pennsylvania, nor did he vote or participate in any political activity. He owned no property there.Petitioner answered a blind advertisement in 1929, and as a result he secured employment with Electric Bond and Share Company. After 2 weeks at its New York headquarters his new employer assigned him to Mexico, 1955 U.S. Tax Ct. LEXIS 44">47 where he remained on assignments for 9 years, until 1938. His wife and two sons lived with him until 1936, when they returned to the United States for educational reasons. They returned to Tucson where they lived with petitioner's parents and in rented houses. Petitioner visited his family during his 2-week vacation, the only time available to him for that purpose.Petitioner left Mexico because he thought he could improve his position. Petitioner returned to New York where he stayed in a hotel for 3 or 4 months, until about February 1939. Beginning at this time he 25 T.C. 293">295 was employed by Ebasco Services, Inc., a service subsidiary of Electric Bond and Share Company, also with headquarters in New York City.In 1939, petitioner worked 4 to 6 months in Mississippi, where he had been assigned by Ebasco to a job with Mississippi Power and Light Company. He was assigned for the remainder of 1939 and the early part of 1940 to the Louisiana Power and Light Company in New Orleans, Louisiana. From there he proceeded to similar work in Arkansas with the Arkansas Power and Light Company, another assignment by Ebasco. During 1940 and 1941, he was occupied with jobs in these three States, 1955 U.S. Tax Ct. LEXIS 44">48 the length of each stay dependent on the specific work assigned. When a job was completed he would notify Ebasco, which would find another task for him. Throughout these years, his wife and children lived in Tucson, except for summer vacations spent with him.In 1941 and years following, petitioner's children attended Castle Heights Military Academy in Lebanon, Tennessee. The children left Tucson after petitioner's parents died and they were placed in this school because its proximity to petitioner's work allowed more frequent visits.From 1942 through 1947, petitioner traveled through the same three States performing various jobs for Ebasco clients, in a manner similar to that of the preceding years. The only exceptions were two assignments in 1945, each of several weeks' duration, in Arizona with power companies. He did not visit Arizona on any other occasion. His wife did not then reside in Arizona.Petitioner lived in hotels while in Arkansas, Louisiana, and Mississippi and never voted, owned property, nor participated in civic life in any of those States. He was required to and did register for the draft in Little Rock, Arkansas.During part of 1943 and 1944, petitioner's1955 U.S. Tax Ct. LEXIS 44">49 wife lived in a rented house and a rooming house in Lebanon, Tennessee. She visited her parents in Florida for a short time. For most of 1945 the family lived in New Orleans, but later moved to Jackson, Mississippi, where they lived until at least 1951.During the years in question, petitioner had no banking connections in Arizona, although a Tucson bank had a trust account for his sons. He owned no real property except his parents' home which was inherited in 1940 and disposed of in 1941. He owned some furnishings from that home which were stored in Tucson. From his departure in 1923 through 1949, he had never voted or participated in any political activity in Arizona, or filed any Arizona State income tax returns, or belonged to any clubs there.Petitioner has resided in New York City at least since 1952. He went there in 1950 in connection with a 2-year undertaking in Greece. In 1952, he was again assigned to work in Arkansas, Louisiana, and 25 T.C. 293">296 Mississippi. He divorced his wife in 1952 and remarried. He has revealed no plans to resign his job or to change his life's work. He was a nonresident member of the Downtown Athletic Club of New York City from 1946 or 19471955 U.S. Tax Ct. LEXIS 44">50 until 1951, when he became a resident member. He became a member of the American Institute of Electric Engineers and of its New York section in 1940, but he never attended a meeting of the local chapter to which members are assigned automatically. He voted in New York in the 1952 and 1954 elections. He filed New York State income tax returns for years beginning with 1952. He has considered himself a resident of New York since 1952.Most of the income reported on the returns in question came from Ebasco Services, Inc., and was earned by petitioner. In the 1943 return, "On Community Prop. State Basis" was written on line 9 of the Computation of Income and Victory Tax following the printed words "Surtax on amount in line 4." The 1944 return had "JOINT RETURN -- COMMUNITY PROPERTY STATE" typed at the top of the front page over the names of petitioner and his wife. An attached schedule referred to the propriety of a deduction when reporting on the community property basis. Half of the total income reported in item 5 on the front page of the 1945 return was allocated to each spouse under the written caption "community property."Respondent determined that petitioner was not domiciled1955 U.S. Tax Ct. LEXIS 44">51 in Arizona during any of these years, and that all income is taxable only to petitioner.Petitioner and his wife were domiciled in Arizona from 1943 through 1947.In their returns for 1943 through 1945, petitioners intended to report their income on the community property basis.OPINION.I.The parties are in virtual agreement as to the legal principles to be applied. They differ, of course, as to the factual conclusion. Respondent contends that petitioner was domiciled either in Pennsylvania or in New York during the years in issue and that consequently he may not avail himself of the community property provisions of the law of Arizona, which he claims as his domicile.There seems to us little doubt that petitioner never acquired a New York domicile until after the period with which we are concerned. He visited New York first for a 2-week period during which he was being interviewed for new employment, and stayed at a hotel. His periods of physical presence in New York thereafter were sparse and short; 25 T.C. 293">297 he became a "nonresident" member of a New York club; and we find nothing to indicate even residence, much less domicile in that State.With respect to Pennsylvania, 1955 U.S. Tax Ct. LEXIS 44">52 the evidence is much less conclusive. It may be that prior to 1929 petitioner might have been considered to have been domiciled in that State. But we find it unnecessary to decide that question. On the evidence petitioner seems to us to have reacquired a domicile in Arizona in any event.where there is any doubt on a domicile, the domicile of origin always reverts. * * * 1In re Norton, Surrogate's Court, New York County, 96 Misc. 152">96 Misc. 152, 159 N.Y.S. 619, 622, affd. 162 N.Y.S. 1133. See also Johnson v. Harvey, 261 Ky. 522">261 Ky. 522, 88 S.W.2d 42; Petition of Oganesoff, (S. D., Cal.) 20 F.2d 978; 28 C. J. S. 33.1955 U.S. Tax Ct. LEXIS 44">53 Petitioner's wife and children returned to Arizona in 1936 and remained there until 1940. Petitioner's business required traveling from place to place, and the only periods in which he was free to choose his place of sojourn were for his vacations. These he spent with his family in Arizona. While statements as to domicilary intention tend to be self-serving and may not always be conclusive, see Texas v. Florida, 306 U.S. 398">306 U.S. 398, in this case petitioner's income tax return for 1940, several years prior to the period in dispute, although giving his business address as New York City, lists under name and address: "Tucson, Pima, Arizona." The stamp on the return indicates that it was filed with the collector for Arizona. The form also declares that the return for the prior year was filed with the collector at Tucson, Arizona. Whether or not he was entitled to it under the law, petitioner claimed no community property benefits in that return -- an indication that the statement was not made with an eye to its tax consequences. On the entire record we think the conclusion warranted that at least after 1936 petitioner was domiciled in Arizona. Nor do1955 U.S. Tax Ct. LEXIS 44">54 we find evidence that any other domicile was acquired thereafter and prior to 1950.A domicile once acquired is presumed to continue until it is shown to have been changed. Where a change of domicile is alleged the burden of proving it rests upon the person making the allegation. To constitute the new domicile two things are indispensable: First, residence in the new locality; and, second, the intention to remain there. The change cannot be made except facto et animo. Both are alike necessary. * * * [Mitchell v. United States, 88 U.S. 350">88 U.S. 350, 21 Wall. 350.]The fact that in 1941 and subsequent years petitioner filed his income tax returns with the collector at New York does not seem to us, without more, to indicate any change in domicile. In fact, in 1942 and each year thereafter, although the return was filed in New York, petitioner 25 T.C. 293">298 again gave Arizona as his address and New York only as his place of business. It seems to be conceded that New York was the home office of his employer during all these years. The question is not, as respondent seems to suggest, whether petitioner intended to1955 U.S. Tax Ct. LEXIS 44">55 comply with section 53 (b) (1), Internal Revenue Code of 1939, but whether he intended to be domiciled in New York. That section, 2 referring as it does to "legal residence or principal place of business," seems to us in the light of the facts to be wholly irrelevant. Cf. Pietro Crespi, 44 B. T. A. 670, 674. We have accordingly made the dispositive finding that petitioner, during the years involved, was a resident of Arizona.II.Respondent further insists that even though petitioner might have been entitled to claim the benefits of community property reporting, he has not fulfilled1955 U.S. Tax Ct. LEXIS 44">56 the necessary prerequisites for the years 1943 through 1945; this is because for each of those years petitioner and his then wife filed a single return. Respondent's own rulings, however, set forth what we regard as the correct principle in such situations. Whether or not a return, even though combined in form in a single document, is intended to be joint or separate is a matter of the intention of the taxpayers adequately manifested on the return. Zabelle Emerzian, 20 T.C. 825. The principle is stated in O. D. 960, 4 C. B. 255:Where husband and wife clearly indicate on a single return form the net income of each, such a return does not necessarily constitute a joint return. It is a matter of intent. * As to a marital community --In determining whether the return should be treated as separate returns on one form or as a joint return, the real intent of the taxpayers should govern. Such intent may be disclosed by the return or by an affidavit subsequently filed clearly showing that the taxpayers intended to file on a community property basis. * * Where the incomes are separated or can be clearly identified and1955 U.S. Tax Ct. LEXIS 44">57 the tax has been computed on the separate net incomes, the return should be treated as separate returns on one form. * * [I. T. 1530, I-2 C. B. 174.]In 1943, in his computation of the tax, petitioner stated that the surtax was "On Community Prop. State Basis." In 1944, he stated on the face of the return, "JOINT RETURN -- COMMUNITY PROPERTY STATE," and, in a schedule annexed, asserted:The 3%, not to exceed $ 15.00, deduction allowed for joint returns is not claimed, nor deducted, as it is understood that such deduction was not intended to apply to Community Property returns.25 T.C. 293">299 And in 1945, on the line beginning --If item 5 includes incomes of both husband and wife * the statement is "Community property" with a figure for husband's and wife's income of one-half each of the total income shown.On these facts it seems to us shown by the face of the returns that the requirements of respondent's rulings were complied with, and we have found as a fact that for all 3 years it was petitioner's intention to file in the form of a separate community property return.Decisions will be entered for the petitioners. Footnotes1. "a. I somewhat fear that these decisions are going to defeat the state from the collection of much well-earned revenue, for while a man may have many 'residences' he can have only one domicile. So where there is any doubt on a domicile, the domicile of origin always reverts. * *"↩2. SEC. 53. TIME AND PLACE FOR FILING RETURNS.(b) To Whom Returns Made. -- (1) Individuals. -- Returns (other than corporation returns) shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or, if he has no legal residence or principal place of business in the United States, then to the collector at Baltimore, Maryland.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619269/	PAUL B. HUNT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. GEORGE C. SHEPARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hunt v. CommissionerDocket Nos. 49508, 49509.United States Board of Tax Appeals36 B.T.A. 268; 1937 BTA LEXIS 746; June 30, 1937, Promulagated 1937 BTA LEXIS 746">746 After negotiations for the acquisition of the stock or assets of A company, an ice company, petitioners caused B company to be organized to carry on the same business. They entered into an agreement with a bank as escrow agent under which stock of A company was to be deposited, they to have the exclusive right to purchase it for a stipulated amount to be paid in cash and preferred stock of B company. Experiencing some difficulty in raising the requisite cash, petitioners subsequently entered into an agreement with A company in which they agreed to pay it cash and preferred stock of B company in exchange for its assets. A portion of the assets was conveyed to B company, B company pledged them as security for a bond issue and secured $337,838.54. This sum, together with the cash which A company had on hand amounting to $109,303.06, was turned over to the escrow agent. The remaining assets of A company were turned over to petitioners. The escrow agent paid the cash to the stockholders of A company and the president of B company delivered to them the preferred stock specified in the escrow agreement. One of petitioners then signed a receipt for the stock. A company was left without1937 BTA LEXIS 746">747 assets or property with which to pay the tax on the profit resulting from the sale or disposition of its assets. Held:(1) Former decision by this Board that stockholders of A company were not liable as transferees is not res judicata of the issue in these proceedings. (2) The assumption of existing liabilities of A company by petitioners and their nominee, B company, did not include the tax liability here in dispute as it is based upon the profit realized upon the sale of A company's assets, and did not materialize until after the sale of the assets was completed. (3) The taxable fund was the purchase price which petitioners promised to pay to A company, and it rightfully belonged to that company. Its diversion and appropriation by petitioners to their private use, since it left A company without funds to pay the tax on the profit resulting from the sale of its assets, made the petitioners liable for the deficiencies asserted against them as transferees. H. A. Mihills, C.P.A., for the petitioners. J. R. Johnston, Esq., for the respondent. MELLOTT36 B.T.A. 268">269 The respondent determined a deficiency in the amount of $37,766.04, in the1937 BTA LEXIS 746">748 income tax of the City Ice & Supply Co., an Illinois corporation, for the calendar year 1926. The corporation having no assets with which to pay the tax, he now seeks to collect it from petitioners, as transferees, under the provisions of section 280 of the Revenue Act of 1926. The proceedings were duly consolidated for hearing, and the same issue is involved in each. FINDINGS OF FACT. The petitioners are residents of the State of Ohio. In the fall of 1925 or early in 1926 they began negotiations for the acquisition of the stock or assets of the City Ice & Supply Co., an Illinois corporation, and for the formination of a new company to carry on substantially the same business. The capital stock of the City Ice & Supply Co. (hereinafter called the old company) consisted of 3,325 shares of common stock and 1,000 shares of preferred stock, each of the par value of $100 per share. On February 8, 1926, M. L. Tewes and Lewis S. Roth, who were stockholders and officers of the old company, gave petitioners a 30-day option to purchase the common capital stock of that company at $200 per share, specifically agreeing that there would be ready for purchase by the petitioners, if and1937 BTA LEXIS 746">749 when the option were exercised, a majority of the stock of the said company. This option was never exercised by petitioners. On March 10, 1926, petitioners entered into an agreement with the Stony Island State Savings Bank (hereinafter referred to as escrow agent). The escrow agent agreed to accept and hold in escrow all certificates representing shares of the capital stock of the old company when and if offered for deposit, provided all such certificates were endorsed in blank by the owners thereof, and were accompanied 36 B.T.A. 268">270 by an escrow and option agreement signed by each owner defining the donditions under which the deposit was made. The escrow agent was to receive for its services 10 cents per share for each share of stock deposited, and petitioners paid it $250 on the date the agreement was executed. The agreement also provided that the escrow agent's responsibility to the depositors of the stock and to the petitioners was limited to that imposed by the terms of the escrow and option agreement. The escrow and option agreement provided, among other things, that the stockholders would vote the stock or execute the proxy to vote it as requested by petitioners so1937 BTA LEXIS 746">750 as to bring about the reorganization of the old company or sale of its assets; that petitioners should have the exclusive option to purchase the stock deposited with the escrow agent and that the latter would deliver it to them, or on their order, upon the delivery by them of payment to the escrow agent for the account of the stockholders of $200 per share for common stock (two-thirds in cash and one-third in 7 percent cumulative preferred stock of the Illinois corporation taking over the assets of the old cpmpany); that the preferred stock of the old company deposited with the escrow agent would be redeemed at $105 per share and accrued dividends from December 31, 1925; that the stock deposited would not be withdrawn and the option and agreement would be effective until April 10, 1926; that the time might be extended by the escrow agent for 30 days additional if in the opinion of the investment brokers, Schultz Brothers & Co. of Cleveland, Ohio, the transaction was in the process of closing and was likely to be closed within 30 days; and that petitioners should use their best efforts to organize and finance a new corporation. On April 30, 1926, a special meeting of the board of1937 BTA LEXIS 746">751 directors of the old company was held, the minutes of that meeting, in so far as they are here pertinent, being as follows: The president called the meeting to order and stated that the occasion for this meeting was to consider details recommended by counsel for George C. Shepard and Paul Hunt in furtherance of their proposal heretofore made for the reorganization of this Company. It was stated that the plan contemplated the formation of a new Illinois corporation with the same name as the present company which should succeed to the physical assets, securities and inventories of this corporation, and in return therefor carry out the provisions and conditions stated in the various escrow memoranda on file with the Stony Island State Savings Bank in commection with the deposit of most of the stock of this corporation. On May 6, 1926, petitioners caused the City Ice & Coal Co. (hereinafter referred to as the new company) to be organized as a corporation under the laws of the State of Illinois, and on the same 36 B.T.A. 268">271 date they submitted an offer to the old company which, omitting caption, salutation and signatures, is as follows: The undersigned propose, in consideration1937 BTA LEXIS 746">752 of your causing to be conveyed to us or our nominees all of the physical assets, bills receivable, accounts receivable, securities and inventories of your company, that we shall cause to be paid, delivered and surrendered to your corporation: (a) A sum of money which, added to the cash held by the Company will be equal to 105% of the par value of the 1000 shares of the preferred stock of your company and accrued dividends thereon to May 10, 1926, plus 133 1/3 percent of the par value of the 3325 shares of the common stock of the Company. (b) 2216 2/3 shares of the 7% Cumulative Preferred Stock of City Ice & Coal Company, an Illinois Corporation, which company shall acquire from us and be vested with the principal portion of your property, upon which this proposition is based. This offer is made with the understanding that the same shall be acted upon by the Board of Directors of your company at a meeting to be held May 7, 1926, and at a meeting of stockholders of your Company to be held on notice heretofore issued, May 10, 1926; and if accepted the transactions herein proposed shall be fully and effectively consummated not later than noon of the 10th day of May, 1926, it being1937 BTA LEXIS 746">753 further understood that the sum of money to be paid by us pursuant to paragraph (a) above shall be computed on the showings of the Company's books as of the close of business on May 8, 1926, as the same may appear May 9, 1926. All existing liabilities of City Ice and Supply Company to be assumed and paid by the parties making this proposition and payment thereof guaranteed by the corporation to whom will be made the conveyance herein contemplated. This offer was duly accepted by the old company's directors on May 7, 1926. On May 6, 1926, petitioners signed a letter, directed and delivered to the new company, reading as follows: Steps have been taken by the undersigned to acquire the physical properties and certain other assets of the City Ice & Supply Co., an Illinois corporation, chiefly engaged in the manufacture and sale of ice in the City of Chicago. Such acquisition being on the basis of assumption and payment by us of all liabilities and obligations of said City Ice and Supply Company. We propose to cause to be conveyed to you certain of such assets as set forth in the statement hereto attached marked "Schedule A", in consideration of the payment and delivery to1937 BTA LEXIS 746">754 us or our nominees of (a) The sum of $337,500 in cash (less the amount necessary to retire the existing bonded indebtedness of said City Ice and Supply Company. (b) 2500 shares of the 7% Cumulative Preferred Stock of your corporation. (c) 19,800 shares of the Common Capital Stock of your corporation. (d) Your guaranty of the payment in due course of all the existing liabilities of said City Ice and Supply Company. This offer is made with the understanding it will be considered and finally acted upon at meetings of your Board of Directors and Stockholders held May 7, 1926. 36 B.T.A. 268">272 On the same day, May 6, 1926, the directors of the new company accepted the offer contained in the above letter, the stockholders later ratifying their action. The resolution of acceptance contained this provision: (d) and further as a part of the consideration for the property so to be acquired by this corporation that this company shall guarantee to said Hunt and Shepard and to City Ice and Supply Co. all the liabilities and obligations of said City Ice & Supply Co. as they exist at the close of business on May 7, 1926; the officers are hereby empowered and directed to execute and1937 BTA LEXIS 746">755 deliver to said Hunt and Shepard and to City Ice & Supply Co. all instruments and writings convenient or appropriate evidencing such guaranty. The old company closed its books as of May 8, 1926, and the new company took over its business on the same date. On May 10, 1926, petitioners signed and delivered to the old company the following letter addressed to it: Referring to the purchase by the undersigned of the real estate, improvements, machinery, equipment, fixtures, investments, bills receivable and accounts receivable, of your company, pursuant to our written proposition to you, dated May 6, 1926, and submitted to your Board of Directors at a meeting thereof held May 7, 1926, we hereby direct that you execute, acknowledge and deliver the necessary instruments of conveyance for the transfer, assignment and conveyance of all of said property so purchased by us to City Ice and Coal Company, an Illinois corporation, having its principal office and place of business in the City of Chicago, County of Cook and State of Illinois, with the exception of the items referred to in the balance sheet of your company prepared by Ernst and Ernst, as of date March 31, 1926, under the headings1937 BTA LEXIS 746">756 "Marketable Securities" and "First Mortgage Notes Receivable", which items shall be assigned and delivered by you to us. It is the object of this memorandum effectively to designate and constitute said City Ice and Coal Company and ourselves, respectively, as our nominees to whom shall be conveyed, assigned and delivered the property purchased by us in pursuance to our written offer above mentioned. Dated Chicago, Illinois, May 10, 1926. The original plan was that petitioners should raise sufficient cash to acquire the common and preferred stock of the old company by the payment of $200 per share for the common and $105 per share, plus accrued dividends, for the preferred. Petitioners experienced difficulty in raising the large amount of cash necessary to carry out this plan, so another plan was evolved and carried out whereby the cash which the old company had on hand, together with the proceeds from the sale of bonds of the new company, was used to make the necessary payment. The substituted or modified plan was carried out as follows: The Guardian Trust Co., which had been designated as trustee under a first mortgage bond issue of the new company, had on hand $337,838.54, 1937 BTA LEXIS 746">757 derived through the sale of an issue of $375,000 of bonds of the new company at $90. Inasmuch as the property which the new company expected to receive from the old company was the 36 B.T.A. 268">273 major portion of, if not all, the assets pledged as security for said bonds, the Guardian Trust Co. refused to pay over to the new company or to its stockholders the amount in its hands as trustee until a deed, conveying the real estate of the old company to the new company, had been placed on record. Such deed was executed by the old company to the new company and placed on record in the office of the recorder of deeds at 3:50 p.m. on May 10, 1926, whereupon the Guardian Trust Co., at the request of petitioners, made out and delivered to the escrow agent, on May 10, 1926, a check payable to it in the amount of $337,838.54. Also on May 10, 1926, but the evidence does not disclose whether it was prior to, contemporaneously with, or subsequent to the transaction set out in the preceding paragraph, the old company issued and delivered to the escrow agent a check for $109,303.06, representing all of the cash which the old company had on hand on that date. On the same date the remaining assets1937 BTA LEXIS 746">758 of the old company, with the exception of "Marketable Securities" and "First Mortgage Notes Receivable", were transferred to the new company, as the nominee of petitioners, the "Marketable Securities" and "First Mortgage Notes Receivable" being transferred directly to petitioners on the same date. The stockholders of the old company, on or prior to May 10, 1926, had endorsed in blank and deposited with the escrow agent all of the common and preferred stock of that company and had signed the escrow and option agreement hereinabove referred to. After the escrow agent received the above checks, aggregating $447,141.60, it paid said amount to the stockholders of the old company. At the same time the president of the new company delivered to the stockholders of the old company 2,254 1/2 shares of the preferred stock of the new company. With two exceptions, each stockholder received the amount of cash and preferred stock specified in the escrow and option agreement. Mrs. Martha L. Tewes, who owned 1,256 shares of common and 75 shares of preferred stock in the old company, accepted a note for $100,000 signed by petitioners in lieu of a portion of the cash to which she was entitled. 1937 BTA LEXIS 746">759 Lewis S. Roth, who owned 40 shares of common and 36 shares of preferred in the old company, accepted 37 additional shares of preferred stock in the new company in lieu of $3,700 in cash to which he was entitled. These two exceptions were due to the fact that petitioners had planned to borrow $200,000 from the Stony Island State Savings Bank, but at the last moment were unable to consummate the loan. The escrow agent made the distributions above set forth pursuant to and in accordance with the terms of the escrow agreement. 36 B.T.A. 268">274 Each stockholder, upon receiving the cash and preferred stock to which he was entitled, signed a receipt reading as follows: CHICAGOMay 1926RECEIVED OF STONY ISLAND STATE SAVINGS BANK Dollars in cash and shares Preferred Stock of City Ice & Coal Company in full settlement of all claims and demands whatsoever under or arising out of stock of City Ice & Supply Company deposited in Escrow under agreement with Paul B. Hunt and George C. Shepard. After the stockholders had been paid for their stock as above set forth, petitioner George C. Shepard signed the following receipt, the last sentence being, presumably, in his handwriting: 1937 BTA LEXIS 746">760 May 11, 1926. RECEIVED OF Stony Island State Savings Bank forty (40) options and Forty-three Hundred and Sixty-five (4365) shares of Capital Stock representing all of the common and Preferred Stock of City Ice & Supply Company which delivery constitutes completed performance by Stony Island State Savings Bank of Escrow Agreement dated March 10, A.D. 1926. After cancellation these certificates can be returned to Lewis Roth to complete records of City Ice & Supply Co. George C. Shepard. May 12, 1926. (The total number of shares of the capital stock of the old company was 4,325 and the figure used in the above receipt, 4,365, is obviously in error.) Shepard did not take physical possession of the stock for which he receipted. The stock was offered to him, but his attorney, one Ogden, said: "We don't want it; it is not ours." The stock was left with the escrow agent, and someone from the office of the old company called for it. The old company never actually received the cash and preferred stock which petitioners in their offer of May 6, 1926, promised would "be paid, delivered and surrendered" to it in consideration for the conveyance of its assets. After May 10, 1926, the1937 BTA LEXIS 746">761 old company had no assets and did not engage in business. The new company thereafter carried on substantially the same kind of business as that formerly engaged in by the old company and at the same place of business. The new company, on incorporation, issued 200 shares of common stock of which Hunt owned 96 and Shepard 96, the remaining 8 being scattered. Additional shares of common stock of the new company were subsequently issued to petitioners in accordance with the offer which they submitted to the new company on May 6, 1926. Petitioners were, at all times material herein, officers and directors of the new company. 36 B.T.A. 268">275 The old company kept its books and filed its income tax return for the year 1926 on the accrual basis. It did not report as income in that year any profit from the sale of its assets. The respondent determined that the old company's basis for gain or loss on the assets sold was $281,756.79; that the amount realized was $559,505.21 ($337,838.54 in cash plus $221,666.67 value of preferred stock of new company) and that the sale resulted in a net profit of $277,748.42, which should have been reported in its income for 1926. Respondent added this1937 BTA LEXIS 746">762 profit to the income reported by the old company in that year and determined a deficiency in tax of $37,766.04. The old company having no assets, deficiencies were determined against the petitioners, under the provisions of section 280 of the Revenue Act of 1926, as transferees of the property of the old company. OPINION. MELLOTT: Many of the facts set out in the above findings were considered by this Board in proceedings brought by 16 stockholders of the City Ice & Supply Co. (the old company) to set aside deficiencies determined against them as transferees of such company. The proceedings were consolidated for hearing, an unpublished memorandum opinion of the Board was filed, and on October 4, 1933, decision was duly entered that petitioners were not liable as transferees. (See Fred Messerschmidt et al., Docket No. 47848.) The record in that hearing is not in evidence in the instant proceedings, though the same documents that were offered and received as exhibits therein, in addition to others, are again in evidence before us. Petitioners contend that the decision of the Board in the Messerschmidt case, supra, is res judicata of the present controversy; 1937 BTA LEXIS 746">763 but not so. The question determined therein was whether the stockholders of the old company - not these petitioners - were liable as transferees. These petitioners were neither parties to that proceeding nor in privity with the parties therein. Hence the doctrine relied upon is inapplicable. ; ; . Nor is it material that the Commissioner has abandoned the theory relied upon in the Messerschmidt case, and now seeks to hold these petitioners as transferees. There is nothing in the law which would preclude him from determining a deficiency against one group of taxpayers on one theory and against another group on an entirely different theory. Of course, he can not recover the same tax twice; but he is not attempting to do so. 36 B.T.A. 268">276 The fact that some of the findings herein are at variance with those made in the Messerschmidt case is not being overlooked. Thus it was there held, under the evidence then before the Board, that the outstanding1937 BTA LEXIS 746">764 preferred stock of the old company was redeemed by it out of its own assets, after which the stockholders of the old company sold their common stock to Hunt and Shepard. But evidence in addition to that which was before the Board when such finding was made has now been adduced, which convinces us that the transfer of the assets of the old company to Hunt and Shepard, and to their nominee, the new company, occurred prior to the sale of the stock under the escrow agreement. Moreover, both parties tacitly admit that the assets were transferred prior to the sale of the stock. It is also apparently admitted by both parties that the basis for determining the gain or loss from the sale or other disposition of the property of the old company was $281,756.79. If the assets were disposed of in a transaction in which gain or loss under the statute was to be recognized, then it must be held that the old company - it keeping its books on the accrual basis - should have accrued upon its books the sum of money plus the fair market value of the property which it was entitled to receive. (Sec. 202(c), Revenue Act of 1926.) Its gain, therefore, which should have been accrued upon its books is, 1937 BTA LEXIS 746">765 as computed by the respondent, the excess of the amount realized - $337,838.54 cash, plus $221,666.67, value of the preferred stock of the new company - over the basis of $281,756.79, or $277,748.42. But, say petitioners in their pleadings: (a) The assets were acquired by them from the old company as purchasers for value, an adequate consideration being paid therefor; (b) they were not at any time owners of the capital stock of the old company; and (c) the proposal for the purchase of the assets of the old company by them, and under which such purchase was made, while it contained an agreement that they, as purchasers, were to assume all existing liabilities of the old company, did not contemplate that any liabilities other than those appearing upon the books of the company as of the close of business on May 8, 1926, should be assumed or paid by them. The respondent contends that petitioners, through their agents and attorneys, having suggested a plan thereafter carried out, by which they were to purchase all of the assets and continue the going business of the old company, for a consideration of cash and stock, which cash and stock were to be distributed and were distributed1937 BTA LEXIS 746">766 to the stockholders of the vendor corporation, as part of the general plan, have thus made themselves liable, under the trust fund doctrine, for the income taxes of the vendor, it being thus deprived of any means of making payment of such taxes. 36 B.T.A. 268">277 In support of this contention respondent relies upon the well settled principle of law that where assets of a corporation are sold for an equivalent consideration, which under an agreement is paid to the stockholders, leaving the corporation without assets to satisfy its creditors, the purchasing corporation is liable to creditors of the selling corporation to the extent of the value of the property received, the sale being in fraud of creditors and the purchaser being a party to such fraud through his knowledge that the result of the transaction must necessarily leave such creditors with no assets from which to satisfy their claims. ; ; ; 1937 BTA LEXIS 746">767 ; ; and ; and . Upon brief petitioners argue, first, that the tax liability here under consideration not only was not known at the time of the conveyance of the assets, but also could not have materialized until after the assets were sold, and hence no liability existed which could have been, or was, assumed by them as purchasers. We agree. The liability for the tax did not arise until the assets were transferred. The assumption by the petitioners of the existing liabilities of the old company did not include the tax here in dispute. Nor did the transfer of the assets ipso facto constitute a fraud upon the United States as a creditor; for it was not a creditor of the old company prior to, or at the time, the assets were transferred. We also agree with petitioners' contention that the principle of law and the cases relied upon by the respondent relating to tax liabilities imposed as a result of the operations1937 BTA LEXIS 746">768 of a business and to liabilities which accrued and existed prior to the date of the conveyance of the assets are not determinative of the issue before us. The case at bar, as pointed out by petitioners, is somewhat analogous to . In that case the corporation purchased assets of another corporation for $337,500 and assumed the selling companies' liabilities as of a specified date, together with subsequent liabilities incurred in ordinary routine business. The purchaser paid the seller the purchase price of $337,500 and the latter distributed it to its stockholders. Neither the purchaser nor its stockholders participated in the profits of the sale. The tax return of the seller showed a tax liability resulting from the profits of the sale, which the respondent proposed to assess and collect from the purchaser under section 280 of the Revenue Act of 1926. The Circuit Court of Appeals for the Second Circuit decided that the purchasing corporation did not 36 B.T.A. 268">278 assume the liability for the tax imposed on the profit; this liability did not arise until the sale was completed and was not therefore an1937 BTA LEXIS 746">769 existing liability. The court said: A tax on the profits of a sale such as is involved here is one of extraordinary liability, and, unless assumed in plain terms, ought not to be imposed upon the transferee of the property. Where the parties spoke they referred to the liabilities incident to the business. An income tax on the seller's profits is not a liability of the business; it is a liability which follows the sale, and the business changes hands before the tax liability arises. * * * A purchaser of property for value has, in his position as a transferee, no liability to pay his vendor's tax; if he incurs such, he does so by a promise ex contractu. His liability is not the liability of the transferee but the liability of a promisor. The act deals with the peculiar liability of the transferee. Here there was no taxable fund until after the sale, and the petitioner never partook of a taxable fund because no tax liability arose except upon receipt by the seller of the purchase price. That, and not the assets sold, constitutes the taxable fund. There could not be any claim against the transferred assets. Therefore section 280 creates no liability; it is remedial and1937 BTA LEXIS 746">770 presupposes a liability for the enforcement of which it is designed to furnish a remedy. But there are a number of important differences between the facts in the instant proceedings and those in In the Reid case the purchaser paid the seller the purchase price. In the instant proceedings, although petitioners promised that they would cause the purchase price to be paid, delivered, and surrendered to the old company, they did not do so. In the Reid case the findings show that the purchaser did not participate in the profits of the sale. In the instant proceedings petitioners appropriated to their private use the entire proceeds of the sale. They used these proceeds to purchase the stock of the old company under the terms of the escrow and option agreements. When they did this, they were not acting as the agents of that company. They, and not the old company, were parties to the agreement whereby the escrow agent was to purchase the stock with funds they were to furnish. That they exercised the exclusive option given them is apparent from the receipts given by the stockholders and the receipt which Shepard executed1937 BTA LEXIS 746">771 for the stock. The remaining contentions of the petitioners may be considered together. True it is that if petitioners had purchased the assets of the old corporation for an adequate consideration, which had been paid to it, they would not be liable for the vendor's tax upon such transaction, in the absence of an express agreement to pay it. ( ) But they did not pay the consideration for the assets of the old company to it. Instead of doing so they appropriated the funds and property, which under their contract they promised would be delivered to it - cash 36 B.T.A. 268">279 in the amount of $337,838.54 and preferred stock of the new company of the value of $221,666.67 - and used it to purchase the stock of the old company from its stockholders in accordance with the terms of the escrow and option agreements. As pointed out, supra, the old company kept its books and filed its income tax returns on the accrual basis. When it transferred its assets to petitioners and their nominee, it was required to accrue upon its books the consideration which was to be paid (1937 BTA LEXIS 746">772 ) and its liability for the tax upon the profit immediately came into being and likewise should have been accrued. The Government had a perfect right to look to the proceeds of the sale for the payment of the tax. Such proceeds constituted the taxable fund to which the tax attached. ( ) In equity, if not in law - and we need not decide which - such fund should have been used for the payment of the tax. The diversion and appropriation of this fund by these petitioners, leaving the old company without funds to pay the tax upon the profit derived from the disposition of its assets (cf. ; ), made them liable for the payment of the tax. We hold that the respondent did not err in determining that the petitioners are liable under the provision of section 280 of the Revenue Act of 1926, as transferees of the property of the City Ice & Supply Co., in respect of the income tax imposed upon said company for the year 1926. 1937 BTA LEXIS 746">*773 Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619271/	Andrew Jackson Sailer and Esther Cherry Sailer v. Commissioner.Sailer v. CommissionerDocket No. 13487.United States Tax Court1948 Tax Ct. Memo LEXIS 185; 7 T.C.M. 300; T.C.M. (RIA) 48085; May 20, 19481948 Tax Ct. Memo LEXIS 185">185 Bad debts: Worthless notes. - Collateral Serial 6% coupon notes of the Level Club, Inc., became worthless prior to the year 1942 where the organization was adjudicated a bankrupt in 1930, although the New York Court of Appeals did not deny leave to appeal from an adverse judgment until 1942. Palmer Watson, Esq., 1010 Real Estate Trust Bldg., Philadelphia, Pa., for the petitioners. Karl W. Windhorst, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: This proceeding involves a deficiency in income tax for the year 1943 in the amount of $230.76. The sole issue is whether certain coupon notes became worthless in the taxable year 1942. Findings of Fact The case was submitted upon a stipulation of facts, oral testimony and exhibits. The stipulation of facts, 1948 Tax Ct. Memo LEXIS 185">186 so far as pertinent, follows: 1. In the year 1928, Level Club, Inc., a non-profit association incorporated under the Membership Laws of the State of New York in January, 1920, issued $750,000.00 Collateral Serial 6% Coupon Notes, secured by a second mortgage upon its club house located at 253-267 West Seventy-third Street, New York City and by an assignment of existing subscriptions of members to debenture bonds as well as subscriptions to be thereafter received. The issue of notes was sold outright, by Level Club, Inc. to Sawyer Brothers, Inc. at 88% of their face value under a written contract of sale dated January 31, 1928. Sawyer Brothers, Inc. sold one-half of the notes to Cullen & Drew on March 14, 1928. Both of said firms were investment brokers and the respective allotments of notes thus purchased by them were resold for their own account and profit to individuals and institutions, either for investment purposes or for future resale. 2. That on April 6, 1928, Sawyer Brothers, Inc. sold to Andrew Jackson Sailer, trading as A. J. Sailer & Company, $10,000 par value Level Club, Inc. Collateral Serial 6% coupon notes for which he paid $9,994.10. 3. On December 15, 1928, Level1948 Tax Ct. Memo LEXIS 185">187 Club, Inc. defaulted in the payment of interest on said notes, referred to in paragraphs 1 and 2 hereinabove. Thereafter on November 5, 1930, Level Club, Inc. was adjudicated a bankrupt. The premises of Level Club, Inc. at 253-267 West Seventy-third Street, New York City, were sold on May 18, 1931 to the First Mortgage Bondholders Committee upon foreclosure of the first mortgage. Subsequent thereto, Level Club, Inc. had no assets and was unable to meet any part of its obligation represented by the Collateral Serial 6% Coupon Notes referred to in paragraphs 1 and 2 hereinabove. 4. A Second Mortgage Noteholders Protective Committee of Level Club, Inc. was formed in 1929 and Andrew Jackson Sailer deposited said notes referred to in paragraph 2 hereinabove at the Liberty National Bank and Trust Company in New York on August 2, 1929. 5. On August 2, 1929, a certificate of deposit relating to the notes referred to in paragraph 2 hereinabove was issued to Andrew Jackson Sailer by the Liberty National Bank and Trust Company in New York as a depository under an agreement dated May 22, 1929 by William F. Fowler, Chairman; John G. Clute, Richard S. Cullen, Stanley C. Eaton and Natianiel F. 1948 Tax Ct. Memo LEXIS 185">188 Glidden, as a committee, and certain holders of the Collateral Serial 6% Coupon Notes of Level Club, Inc. 6. On October 16, 1930, a suit in equity was brought by certain holders of the notes referred to in paragraph 1 hereinabove in the Supreme Court of New York County, New York, against Level Club, Inc., its officers and directors and the Irving Trust Company, individually and as trustee with respect to the second mortgage referred to in paragraph 1 hereinabove. The plaintiffs, repesenting the holders of notes aggregating $650,000.00, demanded in said suit, as against the Level Club, Inc., a rescission of the transactions whereby they became purchasers of the notes and a recovery of the amounts paid by them. As against the individual defendants the action was one in fraud and money damages were sought as against such defendants upon the theory that plaintiffs were induced to purchase the notes by false statements emanating from the directors and set forth in a letter issued by Level Club, Inc., over the signature of its president and that the individual defendants, the officers and directors of the Level Club, Inc., were responsible for its publication by the security brokers who1948 Tax Ct. Memo LEXIS 185">189 sold the issue to the public. The liability of the Irving Trust Company, as trustee under the mortgage securing the notes, was predicated upon the claim that it had knowledge of the fact that certain of the statements made in the letter forming part of the prospectus issued by the brokers were false, and continued to act as trustee and aided in carrying out the fraud, notwithstanding such knowledge to the damage of the plaintiffs who thereafter purchased notes. 7. On June 9, 1932, Andrew Jackson Sailer was joined as a plaintiff in the suit in equity referred to in paragraph 6 hereinabove. On said date and at all times thereafter, any money judgment against Level Club, Inc., if obtained by the plaintiffs in said suit, was uncollectible. He agreed to become a party to said suit on the condition that he would not be liable for any expense connected therewith, unless there were a recovery in money, in which event he was to pay one-fourth of his share of the recovered amount. The plaintiffs, other than Andrew Jackson Sailer, in contemplation of instituting the suit referred to in paragraph 6 hereinabove had entered into an agreement dated May 14, 1930 with Messrs. Satterlee and Canfield, 1948 Tax Ct. Memo LEXIS 185">190 New York City, counsel to the Second Mortgage Noteholders Protective Committee, under the terms of which their monetary liability was limited to 5% of the face amount of the notes they deposited with the Committee. 8. The suit referred to in paragraph 6 hereinabove was dismissed by the New York Supreme Court. An appeal from the decision dismissing said suit was taken by Andrew Jackson Sailer, inter alios, to the New York Supreme Court, Appellate Division, the decision of the New York Supreme Court was reversed and a new trial ordered pursuant to the opinion filed on June 8, 1934 in the case of First National Bank of Hempstead, N. Y. et al. v. Level Club, Inc. et al., the same being reported in 241 App. Div., N. Y. 433. The said case was retried in the New York Supreme Court and was again dismissed. An appeal from the decision dismissing the suit was taken by Andrew Jackson Sailer, inter alios, to the said Supreme Court, Appellate Division, and, in an opinion filed by said Court on May 27, 1938, the same being reported in the case of First National Bank of Hempstead et al. v. Level Club, Inc. et al., 254 App. Div., N. Y. 255, the decision of the lower court was upheld. An appeal from1948 Tax Ct. Memo LEXIS 185">191 this decision was taken by Andrew Jackson Sailer, inter alios, to the New York Court of Appeals and on December 29, 1939 judgment was affirmed, as reported in First National Bank of Hempstead, et al. v. Level Club, Inc. et al., 282 N.Y. 577. On May 20, 1940, a motion was filed in the said Court of Appeals on behalf of Andrew Jackson Sailer, inter alios, to amend the remittitur, which motion was denied on May 28, 1940, as reported in First National Bank of Hempstead, N. Y. et al. v. Level Club, Inc. et al., 283 N.Y. 641. 9. On October 18, 1940, following the determination of the suit referred to in paragraphs 6 and 8 hereinabove, an action for an accounting was instituted by the trustees of the Second Mortgage Noteholders Protective Committee, representing holders of notes aggregating $650,000.00, against the Irving Trust Company as trustees under the mortgage securing the notes referred to in paragraph 1 hereinabove. The said Irving Trust Company as trustee under the January, 1941 and annexed thereto an account showing total receipts of $180,269.06 and disbursements of $180,352.25. 10. Andrew Jackson Sailer in connecnection with said suit referred to1948 Tax Ct. Memo LEXIS 185">192 in paragraph 9 hereinabove was not liable for any expense, unless there were a recovery in money in which event he was to pay one-fourth of his share of the recovered amount. The liability of the noteholders other than Andrew Jackson Sailer was governed by the terms of the agreement dated May 14, 1930, referred to in paragraph 7 hereinabove. 11. The trustees contended in the suit, referred to in paragraph 9 hereinabove, that certain disbursements had been improperly made and that the noteholders were entitled to $46,774.17 with interest thereon from December 15, 1931. 12. The suit referred to in paragraph 9 hereinabove was tried on May 20, 1941 and resulted in a judgment by the New York Supreme Court in favor of the plaintiffs with a direction that an account be rendered and the matter was referred to a referee. On September 29, 1941, the referee rendered a report in favor of the defendant holding that said disbursements were properly charged to the funds in its hands, which report was approved by the New York Supreme Court. The trustees appealed to the New York Supreme Court, Appellate Division, which court affirmed the judgment of the trial court by an order dated June 12, 1942 and1948 Tax Ct. Memo LEXIS 185">193 judgment of the affirmation was entered on such order on June 17, 1942. A motion for leave to appeal to the New York Court of Appeals was denied by said Supreme Court, Appellate Division, by an order dated July 3, 1942. A similar motion was made to the said Court of Appeals on October 15, 1942 which denied the leave to appeal. The following additional facts are found from the evidence: The Irving Trust Company, as trustee, at the end of the year 1936 had a net credit balance in the amount of $7,826.40; and at the end of July 1940, a debit balance in the amount of $83.19. Under date of May 14, 1932, the Secretary of the Second Mortgage Noteholders Protective Committee wrote petitioner a letter which contained the following paragraph: "In November 1930, the Level Club was adjudicated a bankrupt and counsel for the Committee has recently examined the receiver in bankruptcy of the Club and has learned that there are, as a practical matter, no assets of the Club existing. Indeed the first mortgage securing an issue of securities prior to these notes was a year or so ago foreclosed, at which time the Club property was sold to the first mortgagees. The result is that so far as the1948 Tax Ct. Memo LEXIS 185">194 Committee can see your ten notes, as obligations of the Level Club, are utterly and hopefully [sic] worthless." In a letter dated November 12, 1941, which was received by Palmer Watson, Esq., on behalf of the petitioner Andrew Jackson Sailer (hereinafter referred to as "petitioner") from the Second Mortgage Noteholders Protective Committee, it was stated with respect to the accounting suit as follows: "Our Counsel have advised us that an appeal should be taken to the Appellate Division and that the same has been duly noted. Indeed, the taking of this appeal appears to be the only course open to us. Judgments for costs already outstanding ($564.16 in the fraud action and $1,057.82 in the accounting action) total $1,603.98, for which the Noteholders are liable. The maximum amount which will be risked in prosecuting the appeal will not, it is estimated, exceed $500, and the Chairman of your Committee has personally volunteered to advance up to that sum to meet the expenses of the appeal. If we are successful on the appeal, a substantial sum will be recovered. "Furthermore, when the fraud action was instituted in 1930, the following agreement was made with Counsel in respect to1948 Tax Ct. Memo LEXIS 185">195 their compensation: "'The monetary liability of the noteholders shall be limited to 5% of the face amount of the notes deposited, or approximately $26,000, of which $23,000 shall be the fee of Counsel, to be paid regardless of the outcome of the suit, and approximately $3,000 shall be reserved as a sum to cover payment of costs and disbursements.' "In fact, however, the depositing Noteholders have paid in a total of only $24,190. Expenses to date have aggregated more than $20,100, and Counsel have received about $4,000 for their twelve years of labor. "Counsel have generously agreed to make no additional charge for their work in the accounting action, including the pending appeal therein. "Consequently, in the event that our appeal is upheld, a fund will be available to pay the outstanding judgments for costs and all other expenses of litigations, and, possibly, to make a cash distribution to the Noteholders." The petitioner at no time incurred any expense in connection with either the suit for rescission and damages instituted in 1930 or the accounting suit instituted in 1940. Opinion The sole question presented is whether collateral serial 6% coupon notes issued by1948 Tax Ct. Memo LEXIS 185">196 the Level Club, Inc., purchased by the petitioner in 1928 for the sum of $9,994.10, became worthless in the year 1942. There is no dispute that petitioner sustained a loss of $9,994.10, nor as to the manner in which the loss was claimed, i.e., a $1,000 capital loss in 1942 and a $1,000 carry-over to 1943, if, in fact, the loss was sustained in 1942. The pertinent statute is section 23 (k) (2) and (3) of the Internal Revenue Code. 11948 Tax Ct. Memo LEXIS 185">197 The year in which bonds become worthless presents a question of fact. Petitioner has the burden of proof. To entitle petitioner to a deduction on account of the worthlessness of securities as defined in code section 23 (k) (3), the record must show that the bonds became worthless in the taxable year the deduction is claimed. San Joaquin Brick Co. v. Commissioner, 130 Fed. (2d) 220; Bartlett v. Commissioner, 114 Fed. (2d) 634. And to do that, it is imperative that the evidence show that the bonds had some value at the beginning of the taxable year. We think the evidence fails to establish this necessary premise. As we view the record the notes in question had no potential or intrinsic value long prior to the year 1942. The notes were secured by a second mortgage on the property of the Level Club, and by certain subscription agreements. On May 18, 1931, the building was sold to the first mortgagees upon foreclosure of the first mortgage. On November 5, 1930, the Level Club was adjudicated a bankrupt. On January 5, 1932, the Court of Appeals of New York, in the case of Eaton v. Reich, 258 N.Y. 202, 179 N.E. 385">179 N.E. 385, held that the subscription agreements1948 Tax Ct. Memo LEXIS 185">198 securing the notes were unenforceable unless special damages could be shown. It does not appear that any attempt was made to make out a case of special damages. In July 1940, the account of the trustee shows a debit balance in its favor. As early as May 14, 1932, the Second Mortgage Noteholders Protective Committee expressed the view that the "notes, as obligations of the Level Club, are utterly and hopefully [sic] worthless". Petitioner apparently relies upon the fact that the accounting suit to surcharge the trustee was not finally concluded until October 15, 1942, when the New York Court of Appeals denied leave to appeal from an adverse judgment, furnishes the identifiable event fixing the time the loss was sustained. This position is untenable. Where the surrounding circumstances indicate a loss has been sustained, the existence of a collateral suit against third parties is too contingent and remote to warrant the postponement of the taking of the loss. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287; E. R. Hawke, 35 B.T.A. 784">35 B.T.A. 784; cf. Charles A. Dana, 6 T.C. 177">6 T.C. 177. Petitioner has failed to establish that the collateral notes in question became worthless1948 Tax Ct. Memo LEXIS 185">199 in the year 1942. The respondent is sustained. Decision will be entered for the respondent. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * (k) Bad Debts. - * *(2) Securities Becoming Worthless - If any securities (as defined in paragraph (3) of this subsection) become worthless within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank, as defined in section 104, for the purposes of this chapter, be considered as a loss from the sale or exchange on the last day of such taxable year, of capital assets. (3) Definition of Securities. - As used in paragraphs (1), (2), and (4) of this subsection the term "securities" means bonds, debentures, notes, or certificates, or other evidences of indebtedness, issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619272/	MICHAEL R. MCBRIDE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMcBride v. CommissionerDocket No. 11726-91United States Tax CourtT.C. Memo 1992-44; 1992 Tax Ct. Memo LEXIS 43; 63 T.C.M. 1898; T.C.M. (RIA) 92044; January 23, 1992, Filed 1992 Tax Ct. Memo LEXIS 43">43 Julie M.T. Foster, for respondent. WELLS, Judge. WELLSMEMORANDUM OPINION This matter is before the Court on respondent's motion to dismiss for lack of jurisdiction. Respondent seeks a dismissal on the ground that the petition was not filed within the time prescribed by sections 6213(a) and 7502. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. By Order of the Court petitioner was directed to file his objection, if any, to the instant motion, but no objection was filed by petitioner. The instant case is set for trial at the April 27, 1992, Atlanta, Georgia, Trial Session. According to the petitioner in the instant case, petitioner resided in Atlanta, Georgia, when the petition was filed. Respondent contends that his motion should be granted because the petition was filed more than 90 days after the notice of deficiency was mailed. Respondent asserts that on March 5, 1991, he issued a notice of deficiency to petitioner for the taxable year in issue. Attached to respondent's motion was a copy of a completed certified mail list, indicating that the notice of deficiency was sent by certified mail to 1992 Tax Ct. Memo LEXIS 43">44 petitioner on such date. Essential to the right to maintain an action in this Court is a timely filed petition. ; . Generally, section 6213(a) limits the time for filing a petition in this Court to 90 days from the date such notice is mailed. The petition in the instant case was filed on June 10, 1991, (97 days after the mailing of the notice of deficiency) in an envelope bearing a U.S. Postmark date of June 8, 1991 (95 days after the mailing of the notice of deficiency). The 90 day period for filing a timely petition expired on June 3, 1991, which was not a legal holiday in the District of Columbia. Based on the foregoing, we hold that the petition was not timely filed. Accordingly, we have no jurisdiction in the instant case and will therefore grant respondent's motion. To reflect the foregoing, An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619273/	Estate of Helen Dow Peck, Deceased, Joseph H. Donnelly, Administrator, Petitioner, v. Commissioner of Internal Revenue, RespondentEstate of Peck v. CommissionerDocket No. 92912United States Tax Court40 T.C. 238; 1963 U.S. Tax Ct. LEXIS 132; May 7, 1963, Filed 1963 U.S. Tax Ct. LEXIS 132">132 Decision will be entered under Rule 50. Held, that the amount which the administrator of a Connecticut estate allowed and paid to the named executor of a purported will which was denied admission to probate -- representing attorneys' fees and expenses incurred by said named executor in litigation respecting the decedent's testamentary capacity to make such purported will -- is deductible by the estate as an administration expense for Federal estate tax purposes. John E. Dowling, for the petitioner.Lawrence A. Wright, for the respondent. Pierce, Judge. PIERCE 40 T.C. 238">238 Respondent determined a deficiency in estate tax with respect to the above-named estate, in the amount of $ 2,901.93. The estate not only challenges said deficiency, but also makes claim to additional deductions not claimed in the estate tax return, which if allowed may result in an overpayment of the tax.The sole issue to be decided is whether the amount of $ 11,950.77 which was allowed and paid by the administrator to the named executor of a purported will which was denied admission to probate -- representing attorneys' fees and expenses incurred by said named executor in litigation respecting the decedent's testamentary capacity to make such purported will -- is deductible by the estate as an administration expense for Federal estate tax purposes.The only other issue raised by the petition, which pertained to the deductibility of claimed additional administration expenses of $ 1,540, has been conceded by respondent on brief.FINDINGS OF FACTThe evidentiary facts are not in controversy.The petitioner1963 U.S. Tax Ct. LEXIS 132">134 is the duly appointed and acting administrator of the estate of Helen Dow Peck, deceased, who died on September 7, 1955, a resident of the town of Bethel, Conn. The Federal estate tax return for the estate was filed with the district director of internal revenue at Hartford, Conn.The decedent, at the time of her death, was a widow of the age of 85 years. The amount of her gross estate was about $ 158,000.In 1941, the decedent executed an instrument which she therein declared to be her Last Will and Testament. This instrument appeared on its face to have been prepared, executed, and attested in conformity with the legal requirements for a valid will; and it was never revoked or canceled by the decedent. The instrument provided first, for payment of all just debts and funeral expenses of the decedent; secondly, 40 T.C. 238">239 for two cash bequests of $ 1,000 each to individuals who were apparently servants of the decedent; and then further provided, so far as here material, as follows:Third: I give, devise and bequeath to John Gale Forbes all the rest, residue and remainder of my estate, real, personal and mixed of whatsoever name and nature and wheresoever situated.Fourth: If the1963 U.S. Tax Ct. LEXIS 132">135 said John Gale Forbes be deceased, I direct that my estate be liquidated in part or whole as my executors may determine and the sum be reinvested and the income applied toward the investigation of telepathy among the insane for their understanding and cure. This sum is to be known as The John Gale Forbes Memorial Fund.Fifth: I direct my executors to be the City National Bank & Trust Company of Danbury, Connecticut and I authorize them to consult with the Rockefeller Foundation toward the appointment of a suitable institution or individual not connected with the Duke University who would be sympathetic in the carrying out of this investigation.After the decedent's death, the City National Bank & Trust Company of Danbury, which as above shown was designated in said purported will to be the corporate executor thereof, offered the same for probate in the Probate Court for the District of Bethel. The decedent's heirs-at-law opposed admission of the same. The Probate Court thereupon appointed a temporary administrator for the estate; caused an investigation respecting the instrument and the decedent's testamentary capacity to be made by an independent investigator; and then, after 1963 U.S. Tax Ct. LEXIS 132">136 a hearing, denied admission to probate of the entire instrument on the grounds that the purported residuary legatee named therein, John Gale Forbes, was a fictitious and nonexisting person; and that the decedent, at the time of executing said instrument, lacked testamentary capacity to make a valid will. Thereupon, said Probate Court appointed the present petitioner, Joseph H. Donnelly, to be the administrator of the decedent's estate; and he has at all times since acted in such capacity.Said named corporate executor filed an appeal from the order of the Probate Court to the Superior Court of Fairfield County, Connecticut; and there, after a trial de novo in accordance with the law of Connecticut, that court entered a judgment dismissing the appeal. The named corporate executor then filed a further appeal to the Supreme Court of Errors, being the highest court of the State of Connecticut; but this court, after a hearing, affirmed the judgment below.Following the conclusion of this litigation, the named corporate executor requested reimbursement from the administrator of the estate, of amounts which it had incurred for legal fees and expenses in connection with said litigation. 1963 U.S. Tax Ct. LEXIS 132">137 The administrator, after consideration, fixed and approved as being just and reasonable, and then allowed and paid to the attorneys of the named executor, part of the amount so claimed -- which reduced amount was $ 11,950.77.40 T.C. 238">240 The administrator filed with the tax commissioner of Connecticut, a succession tax return (such succession tax being similar to an inheritance tax); and he therein claimed as one of the deductible administration expenses of the estate, the following:Paid to Driscoll & Lane, Attys.: Fee and disbursements as fixed by the Probate Court in the matter of the Appeal from Probate of the order of the Probate Court denying to Probate an instrument purporting to have been the Last Will and Testament of the deceased -- $ 11,950.77.The tax commissioner, upon his examination of said return, approved and allowed all of the deductions claimed as administration expenses, including the above-quoted item; and he then computed the amount of the succession tax liability to be $ 4,196.73, plus interest thereon of $ 229.76, being a total of $ 4,426.46. The Probate Court thereupon approved such actions of the tax commissioner, and certified the latter's computation 1963 U.S. Tax Ct. LEXIS 132">138 of the tax to be correct. The estate then paid such amount of $ 4,426.46 for succession tax, plus interest, which had been so determined and approved.In the Federal estate tax return for the decedent's estate, the above-mentioned litigation expenses were deducted by the administrator as administration expenses of the estate, in the then estimated amount of $ 7,500. The respondent, in his notice of deficiency, did not allow this claimed deduction.The final accounting of the administrator and the closing of the estate have been postponed pending the outcome of the present case.OPINIONIt is our opinion that the Commissioner erred in failing to allow to the estate, as one of its deductions for administration expenses, the item of $ 11,950.77, which is here involved.Section 2053(a) of the 1954 Code provides as follows:SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES.(a) General Rule. -- For purposes of the tax imposed by section 2001 [Federal estate tax] the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts -- (1) for funeral expenses,(2) for administration expenses,(3) for claims against the estate, and(4) 1963 U.S. Tax Ct. LEXIS 132">139 for unpaid mortgages on, or any indebtedness in respect of, * * * [certain property],as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered. [Emphasis supplied.]The General Statutes of Connecticut provide, so far as here material, as follows:40 T.C. 238">241 Sec. 45-163. Executor to exhibit will for probate. Every executor having knowledge of his appointment shall, within thirty days next after the death of the testator, exhibit the will for probate to the court of probate of the district where the testator last dwelt; and every executor neglecting to do so shall be fined not more than one hundred dollars or imprisoned not more than thirty days or both. * * Sec. 45-167. Hearing required before proving or rejecting a will. Notice. Any court of probate shall, before proving or disapproving any last will and testament, or codicil thereto, hold a hearing thereon, of which notice, either public or personal or both, as the court may deem best, has been given to all parties known to be interested in the estate, unless all parties so interested sign and file in court a written waiver of such notice, 1963 U.S. Tax Ct. LEXIS 132">140 or unless the court, for cause shown, dispenses with such notice; * * . * * Sec. 45-185. Expenses of executor or administrator in will contest. The court of probate having jurisdiction of the testate estate of any person shall allow to the executor his just and reasonable expenses in defending the will of such person in the probate court, whether or not the will is admitted to probate: and, if there is an appeal from the order or decree of such court, admitting or refusing to admit to probate the will of such person, shall allow to the executor or administrator his just and reasonable expenses in supporting and maintaining or defending against such will, on such appeal, and such expenses shall be charged by such court pro rata against the respective rights or shares of the devisees and legatees under such will and the distributees of such estate. * * Sec. 45-273. Distribution of intestate estates. -- Intestate estates, after deducting expenses and charges, shall be distributed by the administrator or other fiduciary charged with the administration of the estate; * * [Emphasis supplied.]The above-quoted Connecticut statutes clearly show: 1963 U.S. Tax Ct. LEXIS 132">141 (1) That it was the duty and obligation of the named executor of the decedent's purported will to submit that instrument for probate; (2) that under section 45-185, it was the duty of the Probate Court having jurisdiction of the estate, to allow to said named executor its just and reasonable expenses in defending the purported will in the Probate Court and also on appeal, "whether or not the will is admitted to probate"; and (3) that thereafter such expenses are chargeable pro rata against the shares of all distributees of the estate (rather than against merely the shares of the particular distributees who had objected to the admission of the purported will to probate) -- in the same manner that all other allowable expenses and charges of the estate are deductible under section 45-273, before the shares of the intestate estate become distributable.In the instant case, the duly appointed administrator fixed the just and reasonable amount of the litigation expenses to be allowed to the named executor; and he then actually paid the same. Also the State tax commissioner allowed the amount of these litigation expenses as a deductible administration expense, in computing the State1963 U.S. Tax Ct. LEXIS 132">142 40 T.C. 238">242 succession tax; and the Probate Court then approved such allowance. In the absence of any evidence to the contrary, it is to be presumed that all these officials acted in accordance with the State law.Moreover, it is our opinion that the litigation expenses so allowed and paid, were essential to the proper settlement of decedent's estate. For until it had been finally adjudicated that the decedent lacked testamentary capacity to make the purported will, it could not be determined with certainty whether she had died testate or intestate; or whether the estate should be administered by the named executor, or by an appointed administrator; or what persons were entitled to have the beneficial interests in said estate. The Connecticut courts have recognized that an executor of a purported will has the duty to present the same to probate and endeavor to procure its admission, and this includes a right of appeal from a decision of the court of probate refusing to admit it. . To the same effect see .1963 U.S. Tax Ct. LEXIS 132">143 In the instant case, where the amount of the decedent's gross estate was approximately $ 158,000, it would appear that the above principle is particularly applicable.We decide the issue in favor of the petitioner.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619274/	Pope & Talbot, Inc., & Subsidiaries, Petitioner v. Commissioner of Internal Revenue, RespondentPope & Talbot, Inc. v. CommissionerDocket No. 530-93United States Tax Court104 T.C. 574; 1995 U.S. Tax Ct. LEXIS 29; 104 T.C. No. 29; May 8, 1995, Filed An appropriate order will be issued granting respondent's motion for partial summary judgment and denying petitioner's motion for partial summary judgment. P, a publicly held corporation, owned business properties in the State of Washington. Pursuant to a "Plan of Distribution", P transferred its Washington properties to a newly formed limited partnership. Upon the transfer of the Washington properties, P's shareholders received a pro rata distribution of partnership units. P determined its gain from the distribution of the Washington properties under sec. 311(d)(1), I.R.C., by reference to the value of the partnership units received by its shareholders. R determined P's gain as if P had sold its entire interest in the Washington properties for fair market value on the date of distribution. Held, under sec. 311(d)(1), I.R.C., P's gain is determined as if P had sold its entire interest in the Washington properties for fair market value on the date of distribution. Grady M. Bolding, James E. Burns, Jr., Russell D. Uzes, and Kevin P. Muck, for petitioner.Milton J. Carter, Jr., Christopher D. Hatfield, and William McCarthy, for respondent. RuweRUWE104 T.C. 574">575 1995 U.S. Tax Ct. LEXIS 29">30 OPINIONRUWE, Judge: Respondent determined deficiencies in petitioner's 1985 and 1986 Federal income taxes in the amounts of $ 17,693,960 and $ 954,678, respectively. Petitioner has filed a motion for partial summary judgment, and respondent has filed a cross-motion for partial summary judgment. The sole issue presented by these motions is whether gain from the distribution of appreciated property under section 311(d)1 is determined as if petitioner had sold the property in its entirety for its fair market value, as respondent contends, or by reference to the value of the property interest received by each shareholder, as petitioner contends.Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Northern Ind. Pub. Serv. Co. v. Commissioner, 101 T.C. 294">101 T.C. 294, 101 T.C. 294">295 (1993);1995 U.S. Tax Ct. LEXIS 29">31 Shiosaki v. Commissioner, 61 T.C. 861">61 T.C. 861, 61 T.C. 861">862 (1974). Rule 121(a) provides that either party may move for summary judgment upon all or any part of the legal issues in controversy. Rule 121(b) provides that a "decision shall thereafter be rendered if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." For purposes of the motions before us, the following facts are undisputed.Petitioner is a publicly held Delaware corporation with its principal place of business in Portland, Oregon. Petitioner's shares are traded on the New York Stock Exchange. During 1985, petitioner's operations included timber, land development, and resort businesses in the State of Washington.In October 1985, petitioner's board of directors adopted a "Plan of Distribution". In furtherance of this plan, petitioner's chairman and chief executive officer notified the shareholders 104 T.C. 574">576 of a special meeting to be held on December 4, 1985, stating:The purpose of the Special Meeting1995 U.S. Tax Ct. LEXIS 29">32 is to enable the stockholders to vote on a proposed plan to distribute Pope & Talbot's timber and land development properties in the State of Washington to a newly-formed limited partnership which will be owned by the stockholders of Pope & Talbot. The proposed plan, which is described in detail in the enclosed Proxy Statement, has been carefully considered and unanimously approved by the Board of Directors as being in the best interests of the stockholders. The Board of Directors urges your approval of the plan.On December 4, 1985, petitioner's shareholders approved the plan to transfer the assets from the Washington businesses (the Washington properties) to Pope Resources, a newly formed Delaware limited partnership (the partnership). The partnership was formed with Pope MGP, Inc., and Pope EGP, Inc., newly formed Delaware corporations, as partners. Pope MGP, Inc., was the managing general partner, and Pope EGP, Inc., was a standby general partner. The two corporate partners initially were owned equally by two of petitioner's principal shareholders. Under the plan, Pope MGP, Inc., was to receive partnership units when petitioner transferred the Washington properties to the partnership. 1995 U.S. Tax Ct. LEXIS 29">33 Pope MGP, Inc., was then to make a pro rata distribution of the partnership units to petitioner's shareholders.On December 20, 1985, pursuant to its "Plan of Distribution", petitioner (1) borrowed approximately $ 22.5 million from Travelers Insurance Co., secured by 71,363 acres of its timberlands located in the State of Washington; (2) transferred all its approximately 78,000 acres of Washington timberlands to the partnership, subject to the Travelers' loan; (3) transferred all its Washington land development and resort business to the partnership; (4) transferred $ 1.5 million in cash for working capital to the partnership; and (5) sold certain installment note receivables to the partnership for approximately $ 5 million in cash.Also on December 20, 1985, Pope MGP, Inc., issued partnership units to each holder of record of petitioner's common stock. At this time, petitioner had approximately 6,000 shareholders. Each shareholder received one partnership unit for every 5 shares of petitioner's common stock. Petitioner was not a partner in Pope Resources and received no partnership units. On December 6, 1985, prior to the effective 104 T.C. 574">577 date of the "Plan of Distribution", the1995 U.S. Tax Ct. LEXIS 29">34 partnership units began trading on a "when issued basis" on the Pacific Stock Exchange.Section 311(d)(1) provides:SEC. 311(d). DISTRIBUTIONS OF APPRECIATED PROPERTY. --(1) IN GENERAL. --If--(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),then a gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. * * Respondent contends that under section 311(d), the fair market value of the property distributed is determined as if it had been sold in its entirety. Petitioner argues that the fair market value of the property distributed should be determined by reference to the value of the partnership unite received by each shareholder.This is an issue of first impression. It requires us to deter mine what "property" interest is to be valued for purposes o section 311(d). Is it the entire property interest which is being taken out of corporate solution, 1995 U.S. Tax Ct. LEXIS 29">35 or is it the fractiona interests received by the shareholders? Each party believes that the statutory language is clear, although they arrive at different results. We, on the other hand, have not been able to achieve such certainty based on the language of the statute. We will therefore resort to the legislative history in order to assist us in interpreting the statutory language.Subsection (d) was first added to section 311 by the Tax Reform Act of 1969, Pub. L. 91-172, sec. 905(a), 83 Stat. 713. With respect to this amendment, the legislative history provides the following:Recently, large corporations have redeemed very substantial amounts of their own stock with appreciated property and in this manner have disposed of appreciated property for a corporate purpose to much the same effect as if the property had been sold and the stock had been redeemed with the proceeds of the sale. * * ** * * 104 T.C. 574">578 The committee does not believe that a corporation should be permitted to avoid tax on any appreciated property (investments, inventory, or business property) by disposing of the property in this manner.* * * The committee amendments provide that if a corporation distributes1995 U.S. Tax Ct. LEXIS 29">36 property to a shareholder in redemption of part or all of his stock and the property has appreciated in value in the hands of the distributing corporation (i.e. the fair market value of the property exceeds its adjusted basis), then gain is to be recognized to the distributing corporation to the extent of the appreciation. * [S. Rept. 91-552, at 279 (1969), 1969-3 C.B. 423, 600; emphasis added.]See also H. Conf. Rept. 91-782, at 333 (1969), 1969-3 C.B. 644, 677; Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1969, at 238 (J. Comm. Print 1970).As initially enacted by the Tax Reform Act of 1969, a corporation recognized gain under section 311(d) only if it distributed appreciated property in a redemption transaction. This was changed in the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 54, 98 Stat. 568, which amended section 311(d)(1) by providing that gain shall be recognized if a corporation distributes property to a shareholder in a "distribution to which subpart A applies". 2 Thus, recognition of gain by a corporation was no longer limited to redemption transactions. The reasons1995 U.S. Tax Ct. LEXIS 29">37 for this change were explained in the legislative history as follows:In many situations, present law permits a corporation to distribute appreciated property to its shareholders without recognizing the gain. In such a case, if the distributee is an individual, the basis of the property will be stepped up without any corporate-level tax having been paid (although the individual shareholder will often have dividend income in an amount equal to the fair market value of the property). The committee believes that under a double-tax system, the distributing corporation generally should be taxed on any appreciation in value of any property distributed in a non-liquidating distribution. For example, had the corporation sold the property and distributed the proceeds, it would have been taxed. The result should not be different if the corporation distributes the property to its shareholders and the shareholders then sell it. * * ** * * Under the bill, gain (but not loss) is generally recognized to the distributing corporation on any ordinary, non-liquidating distribution, whether or not it qualifies as a dividend, of property to which subpart A (secs. 301 through 307) applies as if1995 U.S. Tax Ct. LEXIS 29">38 such property had been sold by the distributing corporation for its fair market value rather than distributed. The general 104 T.C. 574">579 rule applies whether or not there is a redemption of stock. [S. Prt. 98-169 (Vol. 1), at 176-177 (1984) (emphasis added).]See also H. Rept. 98-432 (Part 2), at 1189-1190 (1984); Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 149-150 (J. Comm. Print 1985).It is apparent that the purpose underlying section 311(d) was to tax the appreciation in value that had occurred while the distributing corporation held the property and to prevent a corporation from avoiding tax on the inherent gain by distributing such property to its shareholders. To achieve this result, section 311(d)(1) requires the distributing corporation to recognize the difference between the property's adjusted basis and its fair market value "as if the property distributed had been sold at the time1995 U.S. Tax Ct. LEXIS 29">39 of the distribution." The focus of section 311(d)(1) is on the fair market value of property that had appreciated in value. It follows that we must focus on the value of the Washington properties as owned by petitioner and value them as if petitioner had sold them at fair market value at the time of the distribution.The quantity and quality of property distributed by a corporation on behalf of its shareholders are essential factors to be considered when making a fair market value determination. The property distributed by petitioner was its entire interest in the Washington properties. In a declaration submitted in support of petitioner's motion for partial summary judgment, Donald R. Berry, petitioner's "vice president/tax management", stated:[Petitioner] * * * did not distribute undivided interests in the Timber Properties and Development Properties to its shareholders, and as a practical matter could not have done so. If any of the shareholders had decided not to contributed [sic] their interests to the Partnership, then the Partnership would have been a co-tenant of the Timber Properties and Development Properties, without full control and power of disposition over those businesses.1995 U.S. Tax Ct. LEXIS 29">40 By structuring the transaction so that the property was transferred in its entirety to the partnership, the property remained intact and, theoretically, the partnership could sell the property at fair market value and distribute the proceeds 104 T.C. 574">580 to its partners (petitioner's shareholders). 31995 U.S. Tax Ct. LEXIS 29">41 Had this happened, each of the shareholders would have been able to realize a proportionate share of the full fair market value of the property distributed. 4 Petitioner, nevertheless, argues that its gain should be determined by reference to the value of the individual partnership units received by each shareholder. In computing its gain under section 311(d)(1), petitioner determined that the fair market value of the property distributed was $ 40,325,775. Respondent, on the other hand, determined that the fair market value of the property was $ 115,610,385. Petitioner determined fair market value by reference to the partnership units received by petitioner's shareholders, whereas respondent determined the 1995 U.S. Tax Ct. LEXIS 29">42 fair market value as if petitioner had sold its entire interest in the Washington properties. We have made no judgment with respect to the accuracy of these valuations. However, for purposes of the motions before us, if we assume that $ 40,325,775 is an accurate valuation under petitioner's rationale, and that $ 115,610,385 is an accurate valuation under respondent's rationale, then $ 75,284,610 of inherent gain in appreciated property will escape the corporate-level tax. This would undermine the purpose of section 311(d).Petitioner contends that for purposes of symmetry between sections 301, 302, and 311(d), the "fair market value" of the property distributed by a corporation must be the same as the "fair market value" of the property received by its shareholders. Section 301 provides that the amount of a distribution of property by a corporation with respect to its stock to a noncorporate distributee is the amount of money received, plus the "fair market value" of the other property received. 104 T.C. 574">581 Sec. 301(b)(1)(A). Under section 302, a redemption transaction is either treated as an exchange whereby section 1001 applies, or as a distribution of property whereby section 301, 1995 U.S. Tax Ct. LEXIS 29">43 outlined above, applies. If the redemption transaction is treated as an exchange, the amount realized is the sum of any money received plus the "fair market value" of the property received. Sec. 1001(b). Respondent does not dispute the theoretical possibility that the value of the property distributed within the meaning of section 311(d) might be greater than the value of the property received by shareholders under sections 301 and 302.The value of what the shareholders received is not before us, and we express no view on that question. However, we do not view the potential lack of initial symmetry as sufficient reason to abandon our interpretation of section 311(d)(1). In fact, petitioner's position might also result in a lack of symmetry. For example, if petitioner were permitted to determine its gain under section 311(d)(1), based on the lower value of partnership units, and the partnership were to sell the property distributed at full fair market value, the shareholders would recognize the full fair market value of the property as income; i.e., the value of the partnership units plus their portion of partnership gain attributable to the appreciation that occurred while the1995 U.S. Tax Ct. LEXIS 29">44 property was in corporate solution. However, in this scenario, petitioner would escape recognition of gain inherent in the Washington properties prior to the distribution. This is what section 311(d)(1) was designed to prevent.Petitioner contends that the plain meaning of section 311(d)(1) requires that distributions of property be valued by reference to the property received by each shareholder. In support of this contention, petitioner points to the fact that section 311(d)(1)(A) refers to distributions of property made "to a shareholder". 5 We are not convinced that the use of shareholder in the singular supports petitioner's rationale.Words in a statute used in the singular may apply to the plural as well:In determining the meaning of any1995 U.S. Tax Ct. LEXIS 29">45 Act of Congress, * * 104 T.C. 574">582 words importing the singular include and apply to several persons, parties, or things;words importing the plural include the singular;[1 U.S.C. sec. 1 (1988); see sec. 7701(h)(1)(1) and (2) (cross-referencing 1 U.S.C. sec. 1).]In First Natl. Bank v. Missouri, 263 U.S. 640">263 U.S. 640, 263 U.S. 640">657 (1924), the Supreme Court stated: "this rule is not one to be applied except where it is necessary to carry out the evident intent of the statute". See also Metallics Recycling Co. v. Commissioner, 79 T.C. 730">79 T.C. 730, 79 T.C. 730">738 (1982) ("Thus, whether the rule of 1 U.S.C. sec. 1 is to be applied to section 52(c) depends upon congressional intent in enacting the new jobs credit generally, and section 52(c) particularly."), affd. 732 F.2d 523">732 F.2d 523 (6th Cir. 1984). We have previously concluded that the purpose for enacting section 311(d)(1) was to prevent corporations from avoiding tax on the gain inherent in property distributed to shareholders, and that this purpose could be frustrated if we were to accept1995 U.S. Tax Ct. LEXIS 29">46 petitioner's rationale. Accordingly, we find that the term "shareholder" as used in the singular in section 311(d) may, where appropriate, be used in the plural as well.Petitioner contends that it is significant that the Tax Reform Act of 1986, Pub. L. 99-514, sec. 631(c), 100 Stat. 2272, changed the phrase "as if the property distributed had been sold at the time of the distribution" to "as if such property were sold to the distributee at its fair market value." 61995 U.S. Tax Ct. LEXIS 29">47 The only apparent reason for the 1986 change to section 311 was to conform its language with that of section 336(a), as amended by section 631(a) of the Tax Reform Act of 1986. 7 H. Conf. Rept. 99-841, at II-198 (1986), 1986-3 C.B. (Vol. 4) 104 T.C. 574">583 1, 198; see Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 337 (J. Comm. Print 1987) ("the Act generally conforms the treatment of nonliquidating distributions with liquidating distributions").One of the objectives of the Tax Reform Act of 1986 was to expand the repeal of the doctrine of General Utilities & Operating Co. v. Helvering, 296 U.S. 200">296 U.S. 200 (1935), by requiring a corporation making a liquidating distribution of assets to recognize gain. H. Conf. Rept. 99-841, supra at II-198, 1986-3 C.B. (Vol. 4) at 198.The General Utilities rule permitted nonrecognition of gain by corporations on certain distributions of appreciated property to their shareholders and on certain liquidating sales of property. Thus, its effect was to allow appreciation in property accruing during the period it was1995 U.S. Tax Ct. LEXIS 29">48 held by a corporation to escape tax at the corporate level. * * * [Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, 101 T.C. 294">supra at 328; fn. ref. omitted.]Given the purpose of the Tax Reform Act of 1986, we are not persuaded that the term "distributee" should be read only in the singular, and we believe the rule of 1 U.S.C. sec. 1 (1988) would apply to the term "distributee". We note, however, that section 311, as amended by the Tax Reform Act of 1986, is not before us.Petitioner argues that the change to section 311 by the Tax Reform Act of 1986 is consistent with an example in the General Explanation of the Deficit Reduction Act of 1984 by the Staff of the Joint Committee on Taxation, evidencing congressional intent that gain on the distributions of property under section 311(d) be determined "as if the distributing corporation had sold the property distributed to the recipient shareholder". 81995 U.S. Tax Ct. LEXIS 29">49 104 T.C. 574">584 The example given by the Joint Committee staff involved the distribution by a corporation of an entire interest in property to a single shareholder. Such a simplistic example does not support petitioner's rationale; i.e., that the value of property transferred in its entirety by a corporation to a partnership on behalf of its shareholders should be determined by the value of partnership interests received by each shareholder. Moreover, the fair market value of the property is given as a fact in the example. See Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 328-329 (J. Comm. Print 1987).We hold that, under section 311(d)(1), petitioner's gain on the distribution of the Washington properties is to be determined as if petitioner had sold its interest in Washington properties at fair market value on the date of distribution.An appropriate order will be issued granting respondent's motion for partial summary judgment and denying petitioner's motion for partial summary judgment. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Subpt. A is composed of secs. 301 through 307.↩3. Some of the properties were to be sold in the ordinary course of the partnership's operations. According to the limited partnership agreement:The Partnership will engage generally in any and all phases of the businesses of conducting traditional forestry operations and selling timber or logs under cutting contracts or other arrangements, selling undeveloped acreage, developing acreage for sale as improved property, selling developed and undeveloped lots * * . * * and maintaining and operating reforestation and transplant nurseries, and in any other business with the exception of the business of granting policies of insurance, or assuming insurance risks or banking * * .↩4. We would not expect a corporation to knowingly distribute property to its shareholders in a manner that would permanently diminish its value in the hands of its shareholders. The board of directors that recommended the plan owed a fiduciary duty to act in the best interests of the shareholders. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173">506 A.2d 173, 506 A.2d 173">179↩ (Del. 1986). Indeed, petitioner's distribution plan was unanimously approved by its board of directors as being in the best interests of the stockholders.5. No argument was made that sec. 311(d)(1) should not apply, because the Washington properties were not conveyed directly "to a shareholder", and it is clear that a conveyance of property to a partnership on behalf of a shareholder falls within the ambit of sec. 311(d)(1)↩.6. The Tax Reform Act of 1986, Pub. L. 99-514, sec. 631(c), 100 Stat. 2272, redesignated and amended sec. 311(d)(1) as follows:SEC. 311(b). DISTRIBUTIONS OF APPRECIATED PROPERTY. --(1) IN GENERAL. --If--(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.↩7. After the amendments to sec. 336 by the Tax Reform Act of 1986, sec. 336(a), which applies to distributions of property in complete liquidation, provides:SEC. 336(a). GENERAL RULE. --Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value.↩8. The portion of the example quoted by petitioner in its motion is as follows:Assume that: (1) X, a corporation, has one class of stock outstanding; (2) Y, an individual, owns, and has owned for over 5 years, 85 percent of the outstanding stock of X; (3) X, under subpart A, distributes to Y real property of a character subject to the allowance for depreciation under section 167; (4) at the time of the distribution the fair market value of the property was $ 2,000 and its basis to the distributing corporation was $ 1,000; (5) there was no recapture income to X under section 1245 or section 1250 on the distribution of the property; and (6) prior to the distribution the property was used by X in a trade or business acquired within 5 years of the distribution in a taxable transaction. In such a case, X would be treated as if it sold the property to Y. Gain would be recognized on the deemed sale under section 311↩. * * [Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 151 (J. Comm. Print 1985).]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619278/	SIDNEY BLUMENTHAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Blumenthal v. CommissionerDocket No. 34092.United States Board of Tax Appeals15 B.T.A. 1394; 1929 BTA LEXIS 2667; April 12, 1929, Promulgated 1929 BTA LEXIS 2667">2667 An antenuptial agreement, entered into in Alsace-Lorraine in 1903 between the petitioner and his wife, that property acquired (including earnings of either) should be conclusively considered as jointly held, does not entitle each of them after becoming residents of New York to return one-half of the salary earned by the husband. Walter H. Liebman, Esq., for the petitioner. Brice Toole, Esq., for the respondent. LITTLETON15 B.T.A. 1394">1394 The Commissioner determined a deficiency in income tax of $6,387.96 for 1925. The error assigned is that the Commissioner erroneously included in petitioner's income $36,500, being one-half of his salary for 1925, petitioner claiming that one-half of his salary was income and taxable to his wife under an antenuptial agreement made in 1903 under the community property laws of Alsace-Lorraine. FINDINGS OF FACT. The petitioner is a resident of New York City. He married his wife, Lucy A. Blumenthal, in March, 1903, in the province of Alsace-Lorraine, 15 B.T.A. 1394">1395 then part of the Empire of Germany. Immediately prior to marriage, petitioner and the said Lucy A. Blumenthal entered into an antenuptial agreement, the1929 BTA LEXIS 2667">2668 portion of which that is pertinent and material to the issue now before the Board is as follows: Property acquired during the period of the marriage shall be conclusively considered as jointly held. There remains therefore to each spouse as his or her respective contributed fortune, whatever belonged to such party at the time of the marriage, and further whatever such party may after the marriage contract acquire through inheritance, legacy, gift or otherwise, based upon individual title, including also any future legacy. The community property of the parties to the marriage is only what the contracting parties to this marriage may acquire in any way during the period of their married life, whether as earnings or through good fortune, including also any income from their community property or from the contributed fortune. Any debts that have been brought in remain the obligation of that one of the contracting parties from whom they originated. At the time of the making of the antenuptial agreement, a community property system between husband and wife prevailed as the law of Alsace-Lorraine. OPINION. LITTLETON: The antenuptial agreement made in Alsace-Lorraine, as between1929 BTA LEXIS 2667">2669 petitioner and his wife, remained in force during 1925, the taxable year in question, but it did not have the effect of changing the law of New York, in which State the community property system does not prevail, nor did the agreement operate to relieve the petitioner from taxation under the Federal statute upon his entire earnings. Notwithstanding the rights and privileges of petitioner and his wife as they existed under the antenuptial agreement and community property law of Alsace-Lorraine, neither was effective to make an exception in their favor in New York in the matter of reporting their taxable income arising from the salary of the husband, first earned and received by him in New York from two corporations. The income in question, one-half of the salary of petitioner for 1925, was not in existence until more than twenty years after the agreement was made. Under the laws of New York and section 213 of the Revenue Act of 1924, the salary of petitioner was taxable income to him before any rights of his wife could vest by virtue of the antenuptial agreement. Neither the Federal statute nor the law of New York was affected or changed by the community system of property1929 BTA LEXIS 2667">2670 prevailing in Alsace-Lorraine, where the antenuptial contract was made. As the community system of property does not exist in New York, the wife of petitioner could acquire no vested interest in his 1925 salary by virtue of the law of Alsace-Lorraine, or by reason of the 15 B.T.A. 1394">1396 antenuptial contract, in such way as to prevent the entire salary being taxable to the petitioner. In , the court said: An assignment of something which has no present, actual or even potential existence when the assignment is made does not operate to transfer the legal title to that thing when it does come into existence. * * Such an instrument, if made in good faith for a valuable consideration and not void as against public policy, operates as an executory contract to transfer such after acquired property, and creates an equitable lien thereon. * * * But the legal title remains in the assignor. * * * And at law that title is not transferred until either the equitable lien is enforced by judicial decree or some new act intervenes by which the assignor puts the assignee in possession thereof. 1929 BTA LEXIS 2667">2671 In , the court states: To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt. In , this Board said: * * No one is permitted to make his own tax law and if it were permitted to modify the express provisions of a taxing statute by agreement any taxpayer could say what should or should not be income. To merely state the proposition is to expose its fallacy, and it is of no importance that the taxpayer, as stated in his brief, believes in the community property theory in effect in some of the States. The answer to such a contention is that even if it would effect the result desired it is not in force in New York State and that a community created by positive law1929 BTA LEXIS 2667">2672 has attributes which cannot be given effect in a community created by agreement. * * We think the Commissioner properly held petitioner liable for tax upon his entire salary for the taxable year. Cf. . Reviewed by the Board. Judgment will be entered for the respondent.LOVE LOVE, dissenting: Regardless of the fact that I dislike to write an opinion dissenting from a decision of the Board, I feel impelled to write this one because I believe and feel that the prevailing opinion and decision are fundamentally wrong. As I view the situation, the decision seriously curtails the inviolable right of contract, a right held sacred in our jurisprudence, both Federal and State. Community property laws are not here involved. However, by reason of the fact that the parties to the contract in question, were, 15 B.T.A. 1394">1397 when the contract was entered into, resident citizens of a country where community property laws prevail, and especially because the parties to the contract make use of the term "community property" in that contract, we may look to those laws if need be in construing the terms of that contract1929 BTA LEXIS 2667">2673 and determining just what the parties meant by the wording therein employed. There are no controverted facts in issue. The questions to be answered are: 1. What is the legal status of the antenuptial contract entered into by and between the petitioner and his wife while citizens and residents of Alsace-Lorraine? Will the courts of New York uphold and enforce the terms of that contract since the parties to it have immigrated into and become residents of that State? 2. What are the terms and conditions of that contract? 3. A third question has been injected into the controversy by reason of a contention made that regardless of how the two first questions be answered, the Federal income-tax laws require that a married man's salary be deemed, for tax purposes, to be wholly his own as of the date received by him. I desire to consider the questions suggested in the order presented. What is the legal status of the contract in question? There is no question raised in regard to the validity of the contract as a contract between two persons competent to enter into a contract. There is no question raised as to the legal right of the parties to bind themselves to perform1929 BTA LEXIS 2667">2674 the terms and conditions of that contract. None of its terms or conditions are immoral, against a sound public policy, or antagonistic to any law in the country where executed, or in the after-acquired domicile. The contract being an antenuptial contract, based on the consideration of marriage, is a binding, legal contract between them, and is irrevocable by either of them so long as the marriage relation exists. See . Briefly, the facts in the DeCouche case, supra, are that DeCouche and his wife were resident citizens of France and married in Paris. Prior to their marriage they entered into a contract which provided that there should be a community of property between them, and that in case of the death of either without lawful issue, all the interest in the property held by the one so dying should go to the survivor. The husband after marriage abandoned his wife, came to New York and amassed a large estate of personal property, and died in New York without lawful issue. It was held that the estate went to the wife, under the contract, to the exclusion of the husband's relatives. France is a community1929 BTA LEXIS 2667">2675 property country, and New York is a common law State and has no semblance of community property laws in 15 B.T.A. 1394">1398 her jurisprudence. Yet the courts of that State recognized the validity of that contract, which provided for the community property holding of assets of that conjugal couple, and enforced its terms and conditions even to the extent of decreeing the whole estate to the wife, the husband dying without lawful issue. The case of ; ; is one where a man and woman who were resident citizens of Georgia, which is a common law State and has no community property laws, entered into an antenuptial contract which provided for a community holding of property which should be acquired during coverture, as well as other conditions relative to property rights, none of which conditions were according to Georgia's laws of descent and distribution. The husband died first, and several years after his death the wife died. A contest then arose between the heirs of the husband and the heirs of the wife, and while the validity of the contract was not directly brought in issue, all parties, including the court, assumed1929 BTA LEXIS 2667">2676 its validity, the validity of the contract being necessarily involved in the case. Nearly every State in the Union has had occasion to consider the validity of antenuptial contracts modifying the laws of the domicile of the contracting parties, or providing conditions not in accord with the laws of the State to which the parties subsequently moved. So far as I have been able to ascertain, the courts of every State that have considered that question sustained the contract. An interesting case arose in England, De Nichols v. Curlier, 1 A.C. (1900) 21. (See discussion of case in McCay on Community Property, p. 110, sec. 142.) DeNichols and wife were resident citizens of France, and married in Paris. After marriage they went to England to reside, and he became a naturalized British citizen. After amassing a considerable fortune, he died testate, and in his will he attempted to dispose of all the property acquired by him in England. The will being contested, it was held by the House of Lords that by the laws of France, where he was married, only one-half of his accumulations was his, and evidently engrafted upon the marriage relation an implied antenuptial contract, 1929 BTA LEXIS 2667">2677 which embodied the laws of his domicile at the time of marriage, and held that he was authorized to dispose of only one-half of the estate. England is a common law country, in fact, the mother of the common law, and her courts enforced the community property laws of France, notwithstanding the fact that no express contract existed between the parties. Our courts would probably not go to the extent of engrafting an implied contract upon the marriage relation. However, the New Jersey court, in , by coupling residence 15 B.T.A. 1394">1399 in France, during coverture, with the marital laws of France, when such marriage was of man and woman residents of that country, applied and enforced such laws of France to the exclusion of beneficiaries of a will executed prior to marriage and involving property located in America. In this case there was no antenuptial contract. Moreover, our courts do favor marital contracts () and invariably enforce their terms and conditions when they embody no conditions repugnant to morals, sound public policy, or statutory laws of the loci fori.1929 BTA LEXIS 2667">2678 An illuminating discussion of the subjects here involved, with copious citations of authorities, may be found in Ruling Case Law, vol. 13, p. 1011, et seq.The next question to consider is: What is the legal meaning or import of the contract in question? Is it an executed, or an executory contract. Does it establish a status of the parties that, ipso facto, fixes the property rights of the parties, or does it only promise that certain things shall be done in the future. To be explicit, does it provide that income, as it is earned during coverture, as salary paid to either husband or wife, shall belong wholly to the one so receiving it, and by such one thereafter divided, and one-half assigned to the other; or does it mean that as and when such salary is paid, one-half of it, ab initio, belongs to the wife and one-half to the husband? It seems to me that the clear import of the phraseology used in the contract precludes a construction otherwise than the latter of the two above suggested. A partnership agreement between two men is not different in substance and no more specific. I do not believe it would be seriously contended that in the case of law partners, 1929 BTA LEXIS 2667">2679 A and B, that a fee earned by A, working alone on a given case, is wholly his own when received, and that he is only obligated by the contract of partnership, to assign one-half of it to B. If any doubt remain as to the import of the contract here in question, as to what the parties to that contract meant by the phraseology therein employed, we may look to the principles underlying the community property laws. Blumenthal and wife, at the time the contract was entered into, lived in a country where community property laws prevail. That they were familiar with those laws is evidenced by their reference in the contract to those laws, and it is further evidenced in that contract that they meant to embody the spirit and principles of those laws in that contract. They made the contract in 1903, long prior to the enactment of income-tax laws in this country. The bona fides of such contract can not be questioned. The spirit and principles of community property laws are founded on the hypothesis or idea that when a man and woman marry, they embark on life's voyage 15 B.T.A. 1394">1400 with a common purpose or goal in view. That the function and duty of the wife are to remain at home, 1929 BTA LEXIS 2667">2680 make a home for the family, bear and rear the children that come to them, and make, as she only can make, a happy home. The function and duty of the husband are to get out and into the business world and make the income that comes to them. That in such endeavor each contributes services to the common purpose of equal value, and that each, of right, is entitled to one-half of all that comes to them. Such is the purport of the contract here involved. Such are the self-imposed obligations of the parties to that contract. To render a decree that tends to impair those obligations, repudiates the obligations of a contract solemnly entered into in writing under seal. I can never agree to such a decree. But, thirdly, it is argued that the Supreme Court has said in the Robbins case, that regardless of the legal ownership of the income to husband and wife, because the statutes of California give to the husband the management and control of that income, the husband is the target the Government must shoot at, and that he is liable for the tax. In the instant case we have no such statutory provision. We have, here, a contract, and that contract has no stipulation for the management1929 BTA LEXIS 2667">2681 and control of the income. Certainly, the presumption is that each manages and controls his or her own property. It is further argued that, in , the court held that, regardless of the character of an organization as per the laws of its domicile, the Federal Government had the constitutional right to prescribe that an organization with certain characteristics shall be classed for income-tax purposes differently from the classification given it by state laws. That question is not here involved. The income-tax statutes have provided for separate return, by a wife, of her income. Joint return for husband and wife is a privilege granted at the option of the parties. If they elect to make separate return it is their legal right so to do. The petitioner here is not seeking to evade his taxes. He and his wife, each, claimed one-half of their joint income, and claimed the right to make separate return, each, of one-half of that income. The Commissioner determined that the whole income belonged to the husband, and demanded that he include the whole in his return. From that determination he appealed to this Board. 1929 BTA LEXIS 2667">2682 I believe judgment should be for the petitioner. GREEN and SIEFKIN concur in this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619279/	GORDON CAN COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gordon Can Co. v. CommissionerDocket No. 51845.United States Board of Tax Appeals29 B.T.A. 272; 1933 BTA LEXIS 980; October 31, 1933, Promulgated 1933 BTA LEXIS 980">980 Edgar M. Morsman, Jr., Esq., for the petitioner. P. M. Clark, Esq., for the respondent. MATTHEWS 29 B.T.A. 272">272 OPINION. MATTHEWS: This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the sum of $4,458.75. It is alleged by the petitioner that the respondent erroneously added to the petitioner's reported income for the taxable year the sum of $37,367.98, representing commissions paid to the Wallace Realty Co. by C. S. Davis & Co. uvder the circumstances which will be hereinafter set out. Petitioner is a corporation, organized under the laws of the State of Nebraska, with its principal place of business in Omaha, Nebraska. It is engaged in the business of manufacturing and selling tin cans. During the taxable year the entire common stock of the petitioner corporation was owned by its president, A. W. Gordon, and his wife, Almyra B. Gordon, in the respective amounts of 790 and 200 shares. There were outstanding 667 shares of preferred stock, all of which were owned by Mrs. Gordon with the exception of 12 shares; this preferred stock was being retired and 100 shares belonging to Mrs. Gorden were retired during1933 BTA LEXIS 980">981 the taxable year. Petitioner's business was extremely profitable. A. W. Gordon, as president of the corporation, handled the large contracts and had exclusive control of the buying of the tin plate used in the manufacture of the cans. His nephew, S. R. Gordon, as secretary-treasurer, attended to the manufacturing end and the routine work. A. W. Gordon was a close personal friend of C. S. Davis of the firm of C. S. Davis & Co., which will be hereinafter referred to as the Davis Co., from whom the petitioner purchased tin plate. Because of this friendship A. W. Gordon received concessions which would not have 29 B.T.A. 272">273 been otherwise obtainable. He was always given first-hand information as to purchases by large consumers who had tin plate made to order by exact measurement and was given the opportunity to procure at very advantageous prices the surpluses or "spots" left on hand with the Davis Co. after filling these orders. By purchasing these spots from the Davis Co. at a price considerably below the prevailing market price for tin plate, petitioner was enabled to make large profits. The Revenue Act of 1924 contained a provision making income tax returns open to the public. 1933 BTA LEXIS 980">982 Petitioner had three large customers, located in Omaha, and it was believed that if they knew the amount of the petitioner's profits they would insist upon a reduction of the prices paid by them for the tin cans manufactured by the petitioner. Accordingly, after the enactment of the Revenue Act of 1924, the Wallace Realty Co. was organized by A. W. Gordon and his associates, with A. W. Gordon as president, for the purpose of holding a certain building which was owned by the petitioner and to receive the profits attributable to the advantageous position occupied by A. W. Gordon on account of his friendship with C. S. Davis, which profits had previously been received and reported as income by the petitioner. These profits were termed commissions upon purchases of tin plate made for the petitioner and were received by the Wallace Realty Co. from the Davis Co. Payment for its tin plate was made by the petitioner to the Davis Co. and the latter company then rebated to the Wallace Realty Co. the difference between the price at which the tin plate was billed to the petitioner, which was approximately the market price, and the lower price at which the Davis Co. was willing to furnish the1933 BTA LEXIS 980">983 tin plate to the petitioner. The Davis Co. consented to this arrangement and made these rebates to the Wallace Realty Co. at the direction of the petitioner corporation. Prior to the organization of the Wallace Realty Co. petitioner had purchased its tin plate direct from the Davis Co. at the lower price without the payment of any commission or rebate by the Davis Co. All purchases of tin plate were made or authorized by A. W. Gordon personally, by mail or over the telephone. A. W. Gordon drew no salary from the Wallace Realty Co.; he received an annual salary of $36,000 as president of the petitioner corporation. During the taxable year 5 shares of stock of the Wallace Realty Co. stood in the name of A. W. Gordon and the balance of 95 shares of stock stood in the name of his wife. At intervals between 1924 and the taxable year, in accordance with its instructions, petitioner's purchases of tin plate were handled direct from the Davis Co. without being billed through the Wallace Realty Co. Under date of February 27, 1926, which was the day 29 B.T.A. 272">274 following the date of enactment of the Revenue Act of 1926, which act repealed certain provisions of the Revenue Act of 1924, 1933 BTA LEXIS 980">984 including the provision with respect to making income tax returns open to the public, the petitioner corporation addressed the Davis Co. as follows: We wish to advise you that from now on we will appreciate very much if you will bill tinplate to the Gordon Can Company in the regular way as you used to do. We appreciate the trouble that you were put to in order to figure our commissions but the emergency which caused us to do this has now been repealed, so from now on you may bill the tinplate to us the regular way. we want you to know that we appreciated your cooperation with us. These instructions were countermanded under date of November 15, 1926, when the Davis Co. was advised by the petitioner to bill the cars of tin plate "on the same basis that you billed them a year ago, sending the commission check to the Wallace Realty Company." The commissions or rebates paid to the Wallace Realty Co. by the Davis Co. amounted to $37,367.98 for the taxable year 1928. The Wallace Realty Co. included this amount in its income tax return for 1928. In determining the deficiency herein complained of the respondent included in the petitioner's income these commissions in the sum of1933 BTA LEXIS 980">985 $37,367.98 and explained this adjustment as follows: Tin plate purchased from C. S. Davis and Company was billed to your corporation at a price in excess of actual prices and the difference between the billed price and actual price was refunded to the Wallace Realty Company in the guise of commissions. It is therefore held that this is merely a diversion of profits and is restored to income by reducing purchases to actual cost through elimination of excess cost transferred to the Wallace Realty Company. It is not disputed that payment of commissions to the Wallace Realty Co. was made by the Davis Co. in accordance with instructions from the petitioner and that the Wallace Realty Co. furnished no goods and performed no services for the Davis Co. The petitioner is contending that the tin plate used by it was purchased from the Davis Co. by A. W. Gordon as president of the Wallace Realty Co. and urges that Gordon had the right to take the commissions personally or to give them to the Wallace Realty Co. or to give them to the petitioner corporation. As stated in the brief filed by counsel for the petitioner, "A. W. Gordon decided that this personal drag of his with Davis & Company1933 BTA LEXIS 980">986 should inure to the benefit of the Wallace Realty Company and not to the benefit of the Gordon Can Company," and for this reason petitioner insists that it is not taxable upon the amount of the commissions. The petitioner's contention cannot be sustained. The record clearly shows that the commissions in question were paid to the Wallace Realty Co. not because they were earned in any way by that corporation but because the petitioner was desirous of preventing its customers 29 B.T.A. 272">275 from knowing how much profit it was making on the manufacture of tin cans, and this method of billing petitioner's purchases of tin plate would result in a reduction of the profits which it would have to report. A. W. Gordon and his wife owned all of the common stock of both the petitioner and the Wallace Realty Co. It was through Gordon's personal efforts and on account of his friendship with C. S. Davis that the tin plate used in the manufacture of its tin cans was obtained by the petitioner at such a low figure. As president of the petitioner corporation Gordon would be expected to so manage its affairs that its best interests would be protected. Certainly he would not undertake to benefit1933 BTA LEXIS 980">987 personally by receiving from the Davis Co. commissions on orders placed by him for the petitioner corporation. Had there been other stockholders in the petitioner corporation who did not own stock in the Wallace Realty Co. they undoubtedly would have objected to the latter corporation's receiving such commissions. In effect the commissions were paid by the petitioner to the Wallace Realty Co. for no other purpose than to reduce petitioner's profits. The fact that the Wallace Realty Co. reported these sums as income does not change the liability of the petitioner. While respondent does not base his action upon the provisions of section 45 of the Revenue Act of 1928, it may be assumed that the adjustment was made in order that the real income of the petitioner might be clearly reflected. This section reads as follows: SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS. In any case of two or more trades or business (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions1933 BTA LEXIS 980">*988 between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such trades or businesses. We hold that under the circumstances outlined above the respondent did not err in adding to the petitioner's income for 1928 the sum of $37,367.98. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619282/	THOMAS F. BAYARD, TRUSTEE OF THE EASTERN UTILITIES INVESTING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bayard v. CommissionerDocket No. 59550.United States Board of Tax Appeals38 B.T.A. 778; 1938 BTA LEXIS 828; October 7, 1938, Promulgated 1938 BTA LEXIS 828">828 During the period August 1, 1927, to December 31, 1928, petitioner had outstanding 100,000 shares of class B voting common stock, which was unlimited and nonpreferred as to dividends. During the same period it also had outstanding 100,000 shares of class A common stock, more than 95 percent of which was owned by the Associated Gas & Electric Co. or one of its affiliates. On July 25, 1927, the latter company entered into a written agreement with a Massachusetts trust, with which it was not affiliated, wherein it was agreed that the trust would be permitted to subscribe for and purchase petitioner's class B stock at $1 per share, and that the Associated Gas & Electric Co. "shall have the option, at any time after the expiration of five years and prior to the expiration of ten years from the date of issuance" to the trust of petitioner's class B stock, to repurchase such stock at $1 per share, plus interest at 6 percent on the price paid by the trust, less cash dividends, if any. As security that the option agreement would be carried out, the trust agreed to deposit in escrow the class B shares and any distributions other than current net profits. It was further agreed that the option1938 BTA LEXIS 828">829 would not be exercised under certain conditions, and that, "Until and unless said option shall be exercised" the trust "shall be and continue to remain the absolute owner of said shares of class B stock * * ." The agreement was substantially carried out. Held, during the period August 1, 1927, to December 31, 1928, petitioner's class B shares were owned by the trust and that, therefore, petitioner and the Associated Gas & Electric Co. were not affliated during that period under section 240(d), Revenue Act of 1926, and section 142(c), Revenue Act of 1928. Charles M. Trammell, Esq., Bradford S. Magill, Esq., Dean P. Kimball, Esq., and Francis J. Sweeney, Esq., for the petitioner. Chester A. Gwinn, Esq., for the respondent. BLACK 38 B.T.A. 778">778 This proceeding was brought by the Eastern Utilities Investing Corporation to redetermine its income tax liability for the years 1927 and 1928, for which years the respondent determined deficiencies in 38 B.T.A. 778">779 the amounts of $54,141.64 and $53,251.36, respectively. Thereafter, the Eastern Utilities Investing Corporation, as debtor, filed a petition for reorganization under section 77 B of the Bankruptcy1938 BTA LEXIS 828">830 Act, as amended, in the United States District Court for the District of Delaware, and Thomas F. Bayard was appointed trustee. Upon motion duly made before this Board it was ordered that the instant proceeding "shall proceed henceforth under the title of Thomas F. Bayard, Trustee of the Eastern Utilities Investing Corporation, v. Commissioner of Internal Revenue." The deficiencies previously mentioned were assessed during December 1936. On December 15, 1937, the respondent duly filed a claim for an increased deficiency for the year 1928 in the amount of $23,092.86, making the total income tax liability claimed by the respondent against petitioner for the year 1928, $76,344.22. If we sustain his contention as to affiliation, the Commissioner concedes that there is an overassessment for the year 1927 of $20,711.95 in income tax and $2,707.08 in penalty. The parties have agreed upon all the errors assigned in the petition except the one alleging that the respondent erred in refusing to determine under section 240(d), Revenue Act of 1926, and section 142(c), Revenue Act of 1928, that the Eastern Utilities Investing Corporation (hereinafter referred to as petitioner) was affiliated1938 BTA LEXIS 828">831 with the Associated Gas & Electric Co. and its affiliated corporations (hereinafter sometimes collectively referred to as group II but generally as the Associated Co.) for the period August 1, 1927, to December 31, 1928. The parties have also agreed that, if it be held that petitioner is not so affiliated, its tax liabilities for the years in question are as set forth in exhibit A of the "Statement as to Facts" filed at the hearing on December 13, 1937; and that, if it be held that petitioner is so affiliated, then its income tax liabilities should be determined upon a consolidated basis with group II, the proceedings of which are now pending before this Board in Docket No. 59572, with the Associated Co. as the petitioner therein. At the hearing the parties introduced an agreed statement of facts, together with exhibits attached thereto. Also several witnesses testified orally and certain documentary evidence was received, from all of which we make the following findings of fact. FINDINGS OF FACT. During the taxable years 1927 and 1928 petitioner was a corporation, duly organized and existing under the laws of the State of Delaware, and was engaged in the business of holding1938 BTA LEXIS 828">832 securities for investment and as a corporate convenience. It was formerly known as the Pennsylvania Electric Corporation, then as the Eastern Utility Preferred Holding Corporation, and finally on and after July 26, 1927, as the Eastern Utilities Investing Corporation. 38 B.T.A. 778">780 During September 1925 at least 95 percent of petitioner's common stock was acquired by the Associated Co., which on December 31, 1926, sold it to a nonaffiliated company. On or about August 1, 1927, at least 95 percent of this common stock was reacquired by a group II company. During the period August 1, 1927, to December 31, 1928, petitioner had outstanding several classes of preferred stock, the classification of which was changed from time to time, but all of which were nonvoting stocks and limited and preferred as to dividends within the meaning of section 240(d) of the Revenue Act of 1926 and section 142(c) of the Revenue Act of 1928. In addition thereto, it had outstanding during all of this period 100,000 shares each of class A common stock and class B common stock. The class B common stock was voting stock and was unlimited and nonpreferred as to dividends. During this period more than 951938 BTA LEXIS 828">833 percent of the 100,000 shares of class A common stock was owned by the Associated Co. or one of its wholly owned subsidiaries. Petitioner was a holding company which controlled public utility and other companies operating in western Pennsylvania and Maryland. It desired to purchase a large number of securities of public utility companies in the Commonwealth of Massachusetts. The bankers, Harris-Forbes & Co., representing the Associated Co., had been advised that under the laws of Massachusetts, particularly chapter 181, section 10, General Laws of Massachusetts (1921), it would be advisable to have the record ownership of petitioner's class B voting common stock in a Massachusetts trust rather than in a corporation foreign to Massachusetts. The Associated Co. was incorporated under the laws of the State of New York. On July 14, 1927, Harding U. Greene, S. H. Cheney, and P. M. Hopson (a sister of H. C. Hopson, who at that time was financial vice president, treasurer, and director of the Associated Co. and was also an officer of petitioner and one of the trustees of the Associated Gas & Electric Properties, hereinafter mentioned), as original trustees, made at Boston a declaration1938 BTA LEXIS 828">834 of trust 37 pages in length. The name of this trust was Eastern Utilities Investing Trust (hereinafter generally referred to as the trust). It was a Massachusetts form of common law trust. Among other things, the declaration of trust provided that the trust property was to be held for the benefit of the shareholders (sec. 3); that the trustees were to have full power and discretion to purchase, hold, and sell stocks and other securities of any firm, association, trust, joint stock company, or corporation of any state, territory, or country, to conduct and manage plants, to borrow and lend money, to exercise any and all powers and rights belonging to the holder of any stocks, securities, etc., to invest and reinvest the 38 B.T.A. 778">781 capital or other funds of the trust, to declare dividends out of the net earnings of the trust property, to use a common seal, and generally in all matters to deal with the trust property and to manage and conduct the business of the trust as fully as if the trustees were the absolute owners of the trust property (sec. 5); that the original trustees thereunder were to be the three persons executing the declaration of trust (sec. 6); that the trustees might1938 BTA LEXIS 828">835 from time to time appoint depositaries (sec. 14); that until appointment was terminated, the State Street Trust Co. of Boston was to be the principal depositary (sec. 14); that the beneficial interest of the trust was to be and during the continuance of the trust was to remain in the owners of transferable shares of beneficial interest consisting of 1,000 shares of no par value common stock (sec. 21); that the shares were to be personal property entitling the holders only to the rights and interest in the trust property (sec. 29); that, unless sooner terminated as provided in section 38, the trust was to continue until the expiration of 75 years from the date thereof or the expiration of 20 years from the death of the last survivor of the persons signing the declaration and 18 other named persons, whichever of such periods shall first expire (sec. 36); that the trustees could terminate the trust at any time upon authorization of a majority of the outstanding shares thereof (sec. 38); and that upon termination of the trust the trustees were to make proper distribution of the trust property to the shareholders (sec. 39). On July 14, 1927, the trustees of the trust adopted certain1938 BTA LEXIS 828">836 "Votes of Trustees" two of which concern the trust's 1,000 shares of no par value common stock and two of which concern the 100,000 shares of petitioner's class B voting common stock. The first two votes are as follows: VOTED that this Trust issue 1,000 of its shares for the consideration of $100 per share and that said shares, when issued for such consideration, shall be fully paid and nonassesable. VOTED that the officers of this Trust be, and they hereby are, authorized to prepare suitable certificates for the shares of this Trust and to issue and deliver the same upon receipt of the consideration therefor. Journal entry No. 1 of the trust, made on or about August 1, 1927, was as follows: DebitCreditACCOUNTS RECEIVABLE$100,000.00COMMON STOCK (1,000 shares)$100,000.00To record the sale of the latter stock to Associated Gas and Electric Properties for $100,000 cash.On August 1, 1927, the books of the Associated Gas & Electric Properties recorded the purchase of the 1,000 shares of no par value common stock of the trust on open account for a consideration 38 B.T.A. 778">782 of $100,000. It carried the said 1,000 shares of stock in its1938 BTA LEXIS 828">837 investment account until after December 31, 1928. The Associated Gas & Electric Properties was also a Massachusetts trust. It had outstanding two beneficial certificates, one of which was owned by J. I. Mange and the other by H. C. Hopson. The Associated Gas & Electric Properties and its affiliates are sometimes referred to as group I. For the purposes of this proceeding the parties agree that group I was not affiliated with group II. One of the wholly owned subsidiaries of the Associated Gas & Electric Properties was the Associated Securities Corporation. It owned all the class B voting stock of the Associated Co. The latter company also had outstanding some preferred stock, debentures and class A stock, the ownership of which is not shown by the record except for 242,700 shares of $7 dividend series preferred stock, the rights to which were acquired by petitioner during July 1926. The 1,000 shares of no par value common stock of the trust were actually issued July 14, 1927, to Daly & Co. as nominees of an undisclosed principal. On January 28, 1932, they were transferred to Day & Co. as nominees of an undisclosed principal. The certificate itself was deposited from1938 BTA LEXIS 828">838 August 10 to December 31, 1928, in vault No. 434 of the Columbia Safe Deposit Co. (now known as the Irving Safe Deposit Co.), which vault was leased to the Associated Co. from December 18, 1925, to December 17, 1929. Daly & Co. was a nominee partnership or street name, which was used to record stocks and securities for any company in the Associated Gas & Electric System, but principally for the Associated Co. and its subsidiaries. The term "Associated Gas & Electric System" was understood to include all organizations under the management of J. I. Mange and H. C. Hopson and their associates. Daly was an associate vice president with H. C. Hopson. Daly later became ill, and the system selected one Day to take his place. One of the wholly owned subsidiaries of the Associated Co. was the Associated Gas & Electric Securities Co. On or about July 31, 1927, it purchased from petitioner the 100,000 shares of petitioner's class A common stock and the 100,000 shares of petitioner's class B voting common stock for a total consideration of $100,000 for the 200,000 shares. The acquisition by the Associated Gas & Electric Securities Co. of the 100,000 shares of petitioner's class B voting1938 BTA LEXIS 828">839 common stock was a part of the plan then being worked out by the representatives of the Associated Co. and the representatives of the Associated Gas & Electric Properties of placing the record ownership of such 100,000 shares of petitioner's class B voting common stock in a Massachusetts trust. H. C. Hopson was the principal representative of both the Associated Co. and the Associated Gas & Electric Properties. Although the record ownership of petitioner's 38 B.T.A. 778">783 100,000 shares of class B voting common stock was to be in a Massachusetts trust, it was also a part of the plan, as more fully described below, that the Associated Co. was to have an option whereby it could, under certain circumstances and after the lapse of a certain number of years, reacquire the record ownership of these shares and thereby assure for itself all the benefits of ownership therein. The second two "votes of Trustees" of the trust referred to above which were adopted on July 14, 1927, are as follows: VOTED that this Trust subscribe for, purchase or acquire at the price of One Dollar ($1.00) per share 100,000 shares of the proposed Class B stock of Eastern Utility Preferred Holding Corporation (whose1938 BTA LEXIS 828">840 name is about to be changed to "Eastern Utilities Investing Corporation"), a corporation of the State of Delaware. VOTED that the President or any Vice-President and the Secretary or any Assistant Secretary of this Trust be, and they hereby are, authorized to execute and deliver on behalf of this Trust an option or contract for the sale of said 100,000 shares of the proposed Class B stock of Eastern Utilities Investing Corporation, upon such terms and for such period as shall be approved by the officers executing the same. On July 25, 1927, a written agreement was entered into between the trust as first party and the Associated Co. as second party. In this agreement the trust is called the "Association"; the Associated Co. is called the "Company"; and petitioner is called the "Investing Company." The material provisions thereof are as follows: WHEREAS the Investing Company proposes to enlarge the scope of its business and, in order to permit the Investing Company the fullest opportunity for the investment of its funds, it is deemed inadvisable that the Company or any of its subsidiary corporations at the present time acquire the Class B Stock of the Investing Company, and1938 BTA LEXIS 828">841 the Association is willing and desires to acquire the same upon the terms hereinafter mentioned; Now, THEREFORE, * * the parties hereto do hereby agree as follows: 1. The Company agrees that, upon the amendment of the certificate of incorporation of the Investing Company so as to effect said reclassification of existing classes of stock and authorization of new classes of stock, the Association or its nominee will be permitted to subscribe for and purchase said 100,000 shares of Class B Stock of the Investing Company at the price of One Dollar per share. 2. The Association agrees that the Company, its successors and assigns, shall have the option, at any time after the expiration of five years and prior to the expiration of ten years from the date of issuance to the Association or its nominee of said shares of Class B Stock of the Investing Company, to purchase said 100,000 shares of Class B Stock of the Investing Company, upon and subject to the following terms and conditions: (a) The purchase price shall be One Dollar per share plus an amount equal to interest thereon at the rate of six per cent. (6%) per annum from the date of payment of the subscription of the Association1938 BTA LEXIS 828">842 therefor, less the amount of cash dividends, if any, paid by the Investing Company on said shares of its Class B Stock from the date of issue thereof to the date of the exercise of said option and not deposited in escrow as hereinafter provided. (b) As security for the delivery of said shares of Class B Stock of the Investing Company if and when such option shall be exercised, the Association will, upon the issue thereof, deposit in escrow the certificates therefor, duly endorsed 38 B.T.A. 778">784 in blank or accompanied by proper instruments of assignment duly exercised in blank, with a depositary satisfactory to the Company, with instructions to deliver the same upon the exercise, within the period hereby permitted, of said option and upon receipt for account of the Association of the purchase price specified in subdivision (a) hereof in accordance with the provisions of this agreement. (c) The Association agrees that if, pending the exercise or expiration of said option, the Investing Company shall pay any dividend on said shares of its Class B Stock in stock, securities or property, other than cash, or shall pay any dividends upon, or make any distribution of assets to the holders1938 BTA LEXIS 828">843 of, said shares of its Class B Stock except out of current net profits accruing after the date of issue thereof, exclusive of profits derived from the sale of assets or resulting from a reappraisal or revaluation of assets, the stock, securities, property or funds paid upon such dividend or so distributed will likewise be deposited in escrow, with all necessary instruments of transfer, with a depositary satisfactory to the Company, with instructions to deliver the same upon the exercise, within the period hereby permitted, of said option, and upon receipt for account of the Association of the purchase price specified in subdivision (a) hereof in accordance with the provisions of this agreement. (d) Said option shall not be exercised by the Company or by any corporate successor or assignee of the Company if at the time of the acquisition of said shares of Class B Stock of the Investing Company, such acquisition, or the issuance of securities of the purchaser thereafter, shall be contrary to the provisions of any statute or shall subject the Investing Company, or any corporation or association whose stock is directly or indirectly held by the Investing Company or from which any part1938 BTA LEXIS 828">844 of the income upon any shares or securities held by the Investing Company is directly or indirectly derived, to any penalty, fine, forfeiture, dissolution or other action prejudicial to any such corporation or association. 3. Until and unless said option shall be exercised, the Association shall be and continue to remain the absolute owner of said shares of Class B Stock of the Investing Company and of all dividends declared and paid thereon and of all voting rights appertaining thereto, and in voting said shares of stock the Association shall be under no obligation or duty whatsoever to consult or advise with the Company, its successors or assigns, respecting the same. Journal voucher No. 232 of the Associated Gas & Electric Securities Co., under date of "Month of August, 1927", debits accounts receivable with $100,000 and credits investments with $99,999 and capital surplus with $1, "To record sale as at July 31, 1927, of 100,000 shares Eastern Utilities Investing Corp. Class 'B' Stock." Journal entries Nos. 2 and 3 of the trust, made on or about August 1, 1927, were as follows (see also Journal entry No. 1, supra ): -2-INVESTMENTS (100,000 shares Class "B" stock of E.U.I. Corp.)$100,000.00ACCOUNTS PAYABLE$100,000.00To record the purchase of the former securities for $100,000 cash.Note: The accounts receivable and accounts payable above were liquidated by checks passed on August 9th.-3-ACCOUNTS PAYABLE$100,000.00ACCOUNTS RECEIVABLE$100,000.00For liquidation of accounts payable and accounts receivable by checks passed on August 9th.1938 BTA LEXIS 828">845 38 B.T.A. 778">785 Although the books of the trust show that its account receivable due from the Associated Gas & Electric Properties and its account payable due to either the petitioner or the Associated Gas & Electric Securities Co. were offset against each other by checks passed on August 9, the check offsetting and liquidating these two accounts, through an oversight of the accountant for the Associated Gas & Electric System, was not actually issued until April 5, 1928, on which date the Associated Securities Corporation drew a check on the First National Bank of New York City for $100,000 payable to the order of its sole stockholder, the Associated Gas & Electric Properties. This was regarded solely as a loan to the latter by its wholly owned subsidiary. The Associated Gas & Electric Properties endorsed the check, payable to the order of petitioner. This direct endorsement to petitioner was done with the intention of liquidating the $100,000 which the Associated Gas & Electric Properties owed the trust on open account for the 1,000 shares of no par value common stock of the trust purchased by the Associated Gas & Electric Properties on or about August 1, 1927, and with the intention1938 BTA LEXIS 828">846 of also liquidating the $100,000 which the trust owed either the petitioner or Associated Gas & Electric Securities Co. on open account for the 100,000 shares of class B voting common stock of petitioner purchased by the trust on or about August 1, 1927. Petitioner endorsed the check, payable to the order of the Associated Gas & Electric Securities Co., which in turn deposited it in the Chase National Bank of New York City. The latter received payment through the New York Clearing House on April 10, 1928. The certificate representing the 100,000 shares of class B voting common stock of petitioner was, during the period involved in this proceeding, in the name of Daly & Co., as nominees of an undisclosed principal, deposited in vault No. 434 of the Columbia Safe Deposit Co. No dividends were declared or paid upon the class B stock of the petitioner during the years 1927 and 1928. On November 19, 1928, the trust extended the option contained in the July 25, 1927, contract, referred to above, to cover any additional shares of the class B stock of the petitioner which the trust might purchase at $5 per share. This extension was approved by votes of the trustees of the trust adopted1938 BTA LEXIS 828">847 on November 20, 1928. No shares of class B stock of petitioner, in addition to the 100,000 shares hereinbefore referred to, were issued until after December 31, 1928. 38 B.T.A. 778">786 The Associated Utilities Investing Corporation, the name of which was changed some time between March 1929 and March 1932, to Associated Gas & Electric Corporation, was a Delaware corporation and, except for some debentures owned by the public, was a wholly owned subsidiary of the Associated Co.During March 1929 the books of the trust record a purchase from petitioner on open account of 400,000 additional shares of class B voting common stock at $5 per share. As a result of this purchase the trust's investment account was debited with the 400,000 shares at $2,000,000, and petitioner was given a credit of a like amount. At or about the same time the Associated Co., for the account of the trust, made payment to petitioner through open account for the 400,000 shares purchased by the trust from petitioner at $5 per share. As a result of this payment the trust on its books charged or debited petitioner's account with $2,000,000 and credited the Associated Co. with a like amount. During June 1929 this1938 BTA LEXIS 828">848 credit of $2,000,000 on the books of the trust to the Associated Co. was transferred to the Associated Utilities Investing Corporation, the name of which, as above stated, was later changed to Associated Gas & Electric Corporation. In March 1932 the following journal entry was made on the books of the trust: DebitCreditASSOCIATED GAS AND ELECTRIC CORP. DEL. INVESTMENTS$2,100,000.00X Eastern Utilities Investing Corp. Common Class "B" (500,000 Shares)$2,100,000.00To charge Associated Gas and Electric Corp.Del. for the above securities transferred to them as of March 31, 1932.X Ctfs. #1/2As per resolution adopted at a meeting of the Trustees held on May 3, 1932.The resolution referred to in the above entry, which was adopted at a meeting of a majority of the trustees of the trust held on May 3, 1932, is as follows: VOTED that the acition of the officers in arranging for the sale as of March 31, 1932 to Associated Gas and Electric Corporation of 500,000 shares of Class B Common Stock of Eastern Utilities Investing Corporation for the consideration of $2,100,000.00, be and the same is hereby ratified, approved and confirmed. As1938 BTA LEXIS 828">849 a result of the above sale the Associated Gas & Electric Corporation owed the trust $100,000 instead of the trust owing the Associated Gas & Electric Corporation $2,000,000. On June 13, 1932, the Associated Gas & Electric Corporation drew a cashier's draft for $100,000 on the Guaranty Trust Co. of New 38 B.T.A. 778">787 York in favor of the trust. On the same day the $100,000 in cash was received by the trust, and was distributed by the trust in liquidation to its sole stockholder, the Associated Gas & Electric Properties, which in turn transferred the $100,000 in cash to its wholly owned subsidiary, the Associated Securities Corporation, in liquidation of the advance of $100,000 made by that subsidiary to it on April 5, 1928. On May 18, 1932, Day & Co. delivered to the trustees of the trust an instrument reading as follows: The undersigned, holder of all the outstanding shares of Eastern Utilities Investing Trust, constituted under Declaration of Trust, dated July 14, 1927, hereby consents to the termination of said Eastern Utilities Investing Trust and for that purpose delivers herewith for cancellation certificate No. C2 for 1,000 common shares, being all the outstanding shares1938 BTA LEXIS 828">850 of said Eastern Utilities Investing Trust, registered in the name of and bearing the endorsement of the undersigned. On May 19, 1932, the three trustees, Greene, cheney, and Hopson, terminated the trust by means of a signed instrument reading as follows: The undersigned, Trustees of Eastern Utilities Investing Trust, constituted under a Declaration of Trust dated July 14, 1927, having received the consent of the holders of all of the outstanding shares of said Eastern Utilities Investing Trust as required under section 38 of said Declaration of Trust and having received for cancellation the certificate representing all of said issued and outstanding shares, hereby terminate said Trust this 19th day of May, 1932. The proceedings for reorganization of petitioner under section 77 B of the Bankruptcy Act, as amended, referred to in our preliminary statement, are still pending. On January 10, 1938, the United States Attorney for the District of Delaware filed as a part of such proceedings for reorganization a "Petition for examination of designated persons under Section 21(a) of the Bankruptcy Act." In this petition for examination of designated persons, which was sworn to before1938 BTA LEXIS 828">851 a notary public, the United States Attorney alleged on information and belief in part as follows: 6. That under an Indenture dated March 15, 1929, the Debtor (Eastern UtilitiesInvestigating Corporation) issued $35,000,000.00 5% debentures due in 1954 * * ; that the prospectus upon which the debentures were advertised and sold contained statements * . 7. That said prospectus, although indicating wide diversification of investments, failed to state that * ; That said prospectus further failed to state that the Debtor's substantial investment in the Class A common stock of its parent company, Associated Gas and Electric Company, represented stock * . [Italics supplied.] During the period August 1, 1927, to December 31, 1928, the 100,000 shares of petitioner's class B voting common stock were owned by a separate and distinct legal entity, the Eastern Utilities Investing 38 B.T.A. 778">788 Trust. During the same period the 1,000 shares of no par value common stock of the trust were owned by the Associated Gas & Electric Properties. During the years 1927 and 1928, petitioner was included as an affiliate of the Associated Gas & Electric Properties in a consolidated1938 BTA LEXIS 828">852 corporation income tax return filed by the Associated Gas & Electric Properties, as parent, which return also included group II companies as affiliates. The respondent determined that petitioner was neither affiliated with group I nor group II. OPINION. BLACK: The sole issue in this proceeding is whether petitioner was affiliated with the Associated Gas & Electric Co. (generally referred to in this report as the Associated Co.) for the period August 1, 1927, to December 31, 1928. The applicable statutes are section 240(d) of the Revenue Act of 1926 and section 142(c) of the Revenue Act of 1928. The pertinent provisions of these sections are substantially identical. Those of the 1928 Act provide: (c) Definition of affiliation. - For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subsection the term "stock" does not include nonvoting stock which is limited and preferred as to dividends. 1938 BTA LEXIS 828">853 The ownership referred to in the applicable statutes pertaining to affiliation means beneficial ownership. Handy & Harman v. Burnet,284 U.S. 136">284 U.S. 136. The parties are in agreement that the question of affiliation in this proceeding is narrowed to a determination of the beneficial ownership of the 100,000 shares of petitioner's class B voting common stock during the period August 1, 1927, to December 31, 1928. If this beneficial ownership was in the Associated Co. or its wholly owned subsidiary, the Associated Gas & Electric Securities Co., respondent concedes our decision must be for the petitioner; otherwise, petitioner concedes it must be for the respondent. Petitioner, in support of its contention that its class B stock was during the period in question beneficially owned by the Associated Co. or one of its affiliates, relies upon six points, namely, (1) that the issue before us has in effect been admitted by the respondent by reason of the fact that in the proceedings for reorganization of petitioner under section 77 B of the Bankruptcy Act, now pending in the United States District Court for the District of Delaware, the United States Attorney in a petition1938 BTA LEXIS 828">854 for examination of designated persons, referred to the Associated Co. as petitioner's "parent company" 38 B.T.A. 778">789 during the year 1929; (2) that during the period involved the Associated Co. or one of its determined affiliates had legal title to petitioner's class B stock; (3) that if the trust had any title to petitioner's class B stock, it held such title only as an agent or nominee of the Associated Co.; (4) that, by virtue of the option contract of July 25, 1927, as construed by the contracting parties, the record transfer to the trust of petitioner's class B stock was not a sale, but at most a transfer in trust; (5) that by virtue of oral agreements and understandings between the parties involved, the Associated Co. was the beneficial owner of petitioner's class B stock; and (6) that the purpose of the revenue acts, and particularly the provisions thereof relating to consolidated returns, can be carried out only by permitting the consolidation of petitioner with the Associated Co. We shall consider these points in their regular order. Point (1). - Petitioner contends that the sworn statement made by the United States Attorney for the District of Delaware in the petition1938 BTA LEXIS 828">855 for examination of designated persons filed in the proceedings for reorganization of petitioner, pursuant to section 77 B of the Bankruptcy Act, as amended, now pending in the United States District Court for the District of Delaware, that a certain prospectus issued by petitioner in 1929 failed to state that petitioner's substantial investment in the "stock of its parent company, Associated Gas and Electric Company * " has the effect of an admission on the part of the respondent in the instant proceeding that petitioner was affiliated with the Associated Co. as the term "affiliated" is used in the applicable statutes, sections 240(d) and 142(c), supra. The basis of this contention is that, where corporations are deemed affiliated within the applicable revenue statute, it is customary to refer to the corporation which owns the required percentage of the stock of another or others as the parent corporation. In fact, Congress, in providing for consolidated returns for 1929 and subsequent years, in section 141(d) of the Revenue Act of 1928, used the term "a common parent corporation * ." Petitioner argues therefore that, when the United States Attorney for the District of Delaware1938 BTA LEXIS 828">856 referred to the Associated Co. as petitioner's "parent company", such allegation under oath had the same effect as if counsel for the respondent in the instant proceeding had admitted that the two corporations were affiliated, since, as contended by petitioner, the United States Attorney and counsel for respondent are both in effect representatives of the United States of America. Assuming without deciding that the United States Attorney for the District of Delaware could, in another different proceeding and in the manner alleged by petitioner, bind the United States on some issue involved in an entirely separate proceeding such as we now have before us, we do not think he did so in the present instance. 38 B.T.A. 778">790 Without discussing all the arguments made pro and con by the parties on this point, we deem it sufficient to say that the term "parent company" is by no means synonymous with the term "affiliated" as used in the applicable statutes. Frequently in cases involving the question of affiliation one of two corporations will for convenience be referred to as the "parent company" and yet the two corporations will be held not affiliated. In 1938 BTA LEXIS 828">857 Commissioner v. Terre Haute Electric Co., 57 Fed.(2d) 697; certiorari denied, 292 U.S. 624">292 U.S. 624, the Circuit Court's opinion opened with the question: "Were the taxpayer, the Terre Haute Electric Company, and its parent company, the Terre Haute, Indianapolis and Eastern Traction Company, Affiliated within in the meaning of that word as used in the Revenue Act?" [Italics supplied.] The two companies in that case were held not affiliated, although the one company was the parent company of the other. Crowell's Dictionary of Business and Finance (Rev. Ed.), defines "parent company" as follows: Parent Company. One of which other companies derive authority. A company owning a patent may grant to other companies the right to use the patent. The parent company generally owns a controlling interest in a company which operates under authority from it, but this is not necessarily the case. This term is sometimes used for Holding Company or Controlling Company. * * * In the large field of corporation law the term "parent company" is often used in referring to a corporation owning a bare majority of the stock of another or others. See Fletcher1938 BTA LEXIS 828">858 Cyclopedia Corporations (Permanent Ed.), vol. 6, secs. 2821 to 2844. But a bare majority is not sufficient to permit affiliation under the revenue acts. The term "parent company" is not defined in the applicable statutes now under consideration. As previously shown, it is a rather loose term, lacking in any precise definition. During the period in question petitioner had outstanding several classes of preferred stock, substantially all of which was owned by the Associated Co. We think this preferred stock could also be considered in determining whether in a broad sense the Associated Co. was petitioner's parent company. Since the Associated Co. or one of its wholly owned subsidiaries owned 100 perecent of petitioner's class A common stock and substantially all of its preferred stock, it is apparent that it owned more than a majority of all the outstanding stock. But without the ownership of the required amount of the class B stock the two corporations would not be affiliated, although one might be referred to as the parent of the other. Therefore, it is our opinion that the allegation made by the United States Attorney that the Associated Co. was petitioner's parent company1938 BTA LEXIS 828">859 does not in any way prove that petitioner was affiliated with the Associated Co. during the period in controversy. The petitioner's contention on this point is denied. 38 B.T.A. 778">791 Point (2). - Petitioner's second point is that, since it was stipulated that the certificate representing the 100,000 shares of its class B stock was during the period involved in the name of Daly & Co., as nominees of an undisclosed principal, deposited in a vault leased by the Associated Co., and also in view of Hopson's testimony that the undisclosed principal of Daly & Co. was the Associated Co., the legal title to the shares was never transferred to the trust, but remained in the Associated Gas & Electric Securities Co., a wholly owned subsidiary of the Associated Co. Petitioner cites Fletcher Cyclopedia Corporations (Permanent Ed.), vol. 12, sec. 5484; Bank of Atchison County v. Durfee,118 Mo. 431">118 Mo. 431; 24 S.W. 133">24 S.W. 133, and Re Broomhall, Killough & Co., 47 Fed.(2d) 948, in support of the general rule that, in the absence of an express agreement to the contrary, there must be a delivery of some document representing shares of stock in order to constitute1938 BTA LEXIS 828">860 a valid transfer. This is undoubtedly the general rule, but section 5484, supra, also states: There may be a constructive delivery and acceptance, unaccompanied by a manual delivery or actual change of custody resulting from acts and conduct from dealing with stock, when there has been a change in the relation of the parties to it. In De Nunzio v. De Nunzio,90 Conn. 342">90 Conn. 342; 97 A. 323, it was stated that "Both acceptance and receipt and therefore delivery may be inferred from the attendant circumstances." The attendant circumstances in the instant proceedings are set forth at length in our findings. We think they were of such a nature as to show a very decided intention on the part of the contracting parties to dispense with the manual delivery or actual change of custody of the certificate in question. The certificate during the entire period was in the "street" name of Daly & Co., a circumstance which was not at all uncommon in view of the option to repurchase contained in the contract of July 25, 1927, between the trust and the Associated Co. See Fletcher Cyclopedia Corporations (Permanent Ed.), vol. 19, sec. 8981, on stock in "street" 1938 BTA LEXIS 828">861 names. Daly & Co. was the street name, or nominee partnership, for all the companies in the Associated Gas & Electric System, which included the trust and the Associated Co. and its wholly owned subsidiaries. Therefore, Daly & Co. was the trust's agent as well as the agent for the Associated Co., and, in view of the July 25, 1927, contract above referred to and the contemporaneous records made by the trust and the Associated Gas & Electric Securities Co., the conclusion, in our opinion, is inescapable that Daly & Co. held the certificate for the 100,000 shares of petitioner's class B voting common stock during the period August 1, 1927, to December 31, 1928, for the trust rather than the Associated Co. or its subsidiary, the Associated Gas & Electric Securities Co., as testified to by Hopson. 38 B.T.A. 778">792 Petitioner also cites Stiver v. Commissioner, 90 Fed.(2d) 505, as being a case in which an alleged similar agreement was held to be an option rather than a sale. We do not, however, regard this case as being in point, as its facts are quite different from those here involved. Points (3), (4), (5). - Under these points petitioner argues that if the1938 BTA LEXIS 828">862 trust held any title to petitioner's class B stock, it held such title as an agent, nominee or trustee for the Associated Co., and that therefore the latter company was the beneficial owner of petitioner's class B stock. Petitioner cites eight court and Board decisions and also a Bureau ruling, to wit, G. C. M. 8982, C.B. X-1, p. 250, in support of the proposition that a corporation, as well as an individual, may hold technical title to property as a mere nominee, agent, or trustee. We do not question the soundness of such a view, but we fail to see wherein it is of any help to petitioner in the instant case. An examination of the 37-page declaration of trust shows that the trust was organized and had authority to engage in an unusually wide and diversified field of business activities. It issued to a party unaffiliated with the Associated Co. all of its stock for $100,000 in cash. It then entered into a written contract with the Associated Co. in which it agreed to purchase petitioner's 100,000 shares of class B voting common stock for a consideration of $100,000, and further agreed that the Associated Co. "shall have the option, at any time after the expiration1938 BTA LEXIS 828">863 of five years and prior to the expiration of ten years" from the date of issuance to the trust "or its nominee" of petitioner's class B stock, to purchase such stock upon the terms set out in our findings. The Associated Gas & Electric Securities Co. then purchased from petitioner all of its class A and class B common stock for $100,000. The stock was issued in the name of Daly & Co. and placed in a vault leased by the Associated Co. On the books of Associated Gas & Electric Securities Co. the trust was charged with $100,000 "To record sale as at July 31, 1927, of 100,000 shares Eastern Utilities Investing Corp. Class 'B' Stock." On the books of the trust the investment account was charged with 100,000 shares of class B stock of the Eastern Utilities Investing Corporation, "To record the purchase of the former securities for $100,000 cash." The trust later used the $100,000 which it received for the issuance of its own stock to pay for the 100,000 shares of petitioner's class B stock, which $100,000 was received by the Associated Gas & Electric Securities Co. on or about April 10, 1928. Notwithstanding all of the above recorded corporate and trust evidence of what the transactions1938 BTA LEXIS 828">864 were, petitioner now offers the testimony of Hopson, who was the financial vice president of the Associated Co., an officer of petitioner, and one of the trustees of the Associated Gas & Electric Properties, to prove that the transactions 38 B.T.A. 778">793 were something different from that which they purported to be. But we are not convinced by this testimony. The trust was more than a mere agency or conduit or nominee of the Associated Co. Its business transactions were real and not mere bookkeeping entries and must be given their usual legal effect. Cf. Consumers Construction Co. (Del.),35 B.T.A. 966">35 B.T.A. 966. In the latter case pretty much the same sort of a contention was made as is made in the instant case, but we denied it. The main difference in that case from the instant case is that in the Consumers Construction Co. case the issue was as to income, whereas here the issue is as to affiliation, but we do not think this difference serves to distinguish the two cases, as petitioner argues in its brief. Our decision was affirmed by the Second Circuit in 1938 BTA LEXIS 828">865 Consumers Construction Co. v. Commissioner, 94 Fed.(2d) 731. Income taxes are levied with respect to annual periods, and each annual period must necessarily stand by itself. Burnet v. Sanford & Brooks Co.,282 U.S. 359">282 U.S. 359; Burnet v. Thompson Oil & Gas Co.,283 U.S. 301">283 U.S. 301; Woolford Realty Co. v. Rose,286 U.S. 319">286 U.S. 319; Helvering v. Morgan's Inc.,293 U.S. 121">293 U.S. 121; MacMillan Co.,4 B.T.A. 251">4 B.T.A. 251. We are concerned here with the situation as it existed during the taxable years 1927 and 1928 and not as it existed in 1932. During the period from August 1, 1927, to December 31, 1928, it is our opinion, and we have so found as a fact, that the beneficial ownership of petitioner's 100,000 shares of class B voting common stock was in the trust and not in the Associated Co. or any of its subsidiaries. To otherwise hold would be to completely disregard corporate and trust records which were made contemporaneous with the transactions involved and to rely upon oral testimony which is not convincing. It follows therefore that the trust beneficially owned the title to the stock for itself1938 BTA LEXIS 828">866 and not as nominee, agent or trustee for the Associated Co. or any of its subsidiaries. The cases of Dome Co.,26 B.T.A. 967">26 B.T.A. 967, and Mark A. Mayer,36 B.T.A. 117">36 B.T.A. 117, specifically relied upon by petitioner, are distinguishable upon their facts. As we said in Savoy Oil Co.,1 B.T.A. 230">1 B.T.A. 230: The taxpayer can not convert a sale into a conditional sale, a trust, a joint adventure, or an advance merely by its board of directors deciding that they did not consider it a sale. The taxpayer did not produce the minutes of any meeting of its stockholders of directors as evidence of its contentions, it did not produce any evidence of a collateral agreement between it and the Burke-Hoffield Oil Co., showing that the sale evidenced by the agreement of May 1, 1917, was not a sale but was something else; instead, it chose to rely on parol evidence of conclusions drawn, after the lapse of seven years, by officers of the corporation. In the absence of convincing evidence that the transaction evidenced by the agreement of May 1, 1917, was not what it purports to be, viz., a sale, this 38 B.T.A. 778">794 Board can not accept any of the contentions advanced by1938 BTA LEXIS 828">867 the taxpayer purporting to show error on the part of the Commissioner in determining the tax. Before passing these points we shall refer briefly to Lavenstein Corporation v. Commissioner, 25 Fed.(2d) 375, cited by petitioner as having a controlling effect on the instant proceeding. That case involved the question whether the petitioner there was affiliated with the Lavenstein Brothers Co. under section 240(b) of the Revenue Act of 1918, and the question turned on whether the three Lavenstein brothers, who owned all the stock of the petitioner in that case, also owned substantially all the stock of the other corporation. The facts showed that the brothers had transferred all the stock, except two shares, of the Lavenstein Brothers Co. to a creditors' committee "as security for the claims of creditors * * ." The Fourth Circuit, in allowing affiliation, held that the brothers, however, remained the owners of the stock so transferred because "the Lavensteins could have had the stock transferred to them at any time, by merely paying the claims of creditors * ." In the instant proceeding the Associated Co. did not have the right to reacquire petitioner's class1938 BTA LEXIS 828">868 B stock during the taxable years in question and not until after the expiration of five years from the date of issuance to the trust, nor was the class B stock up as security to secure the payment of any loan. Therefore the Lavenstein case, in our opinion, does not control the question here involved. Point (6). - Under this point petitioner's main propositions are that facts rather than bookkeeping entries control; and that our decision in United National Corporation,33 B.T.A. 790">33 B.T.A. 790, is practically on all fours with petitioner's contentions in the instant proceeding and that therefore the Board should reach the same conclusion here as it did there. "Bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability." Helvering v. Midland Mutual Life Insurance Co.,300 U.S. 216">300 U.S. 216. But when the bookkeeping entries actually record the true facts, the rule thus emphasized by petitioner is not applicable. We think this is the situation in the instant proceeding. We have carefully considered all the evidence in the case and are unable to find that the intention of the parties interested in petitioner's1938 BTA LEXIS 828">869 class B stock was other than that which was so clearly expressed in the written agreement between the Associated Co. and the trust on July 25, 1927. This agreement provided, among other things (see paragraph 3 of the agreement set out in our findings), that "until and unless said option shall be exercised," the trust "shall be and continue to remain the absolute owner" of the shares in question. There were urgent business reasons why this should be so. 38 B.T.A. 778">795 Fred S. Burroughs testified as a witness for petitioner. He was a member of the board of directors of the Associated Co. and was the representative on the board of Harris, Forbes & Co., bankers for the Associated Co. He testified that in 1927, when Harris, Forbes & Co. agreed to float $35,000,000 debentures for petitioner, the bankers did not want the control of petitioner to appear in the Associated Co. This testimony and other testimony in the record shows to our satisfaction that it was the purpose of all the parties to the transaction to have the trust acquire actual ownership of petitioner's class B stock, with the option that the Associated Co. or one of its subsidiaries could, after five years, reacquire the1938 BTA LEXIS 828">870 stock, and that what was done was to accomplish that purpose. Now, after the lapse of several years, petitioner asks us to find that what was done, as shown by the corporate and trust records, was a sham and subterfuge and that from the beginning it was the intention that the beneficial ownership of petitioner's class B stock should not be in the trust, but should be in the Associated Co. or one of its subsidiaries. We are asked to do this largely on the strength of the testimony of the witnesses Hopson and Burroughs. We think we may not treat trust and corporate records so lightly, especially when there is ample evidence in the record to corroborate the fact that these records were meant to record the transactions as they really were. The United National Corporation case is easily distinguishable from the instant proceeding. There the alleged sale was made to a subsidiary of the alleged seller. Here the trust was not a subsidiary of the Associated Co. But of much more importance is the distinguishable fact that in the United National Corporation case the alleged seller had an option to repurchase at any time, whereas in the instant proceeding the Associated Co. had1938 BTA LEXIS 828">871 no option to repurchase whatever during the taxable years in question. Furthermore, the evidence in the United National Corporation case was clear and convincing that the whole transaction was intended as a loan, with the stock merely being transferred as collateral security therefor. Here the convincing evidence is that of an outright sale to the trust of 100,000 shares class B stock of petitioner, with an option to repurchase after a period of five years. It is our conclusion, and we have so found as a fact, that during the period August 1, 1927, to December 31, 1928, petitioner's 100,000 shares of class B voting common stock were owned by the Eastern Utilities Investing Trust. It follows, therefore, that during the taxable years 1927 and 1928, petitioner was not affiliated with the Associated Gas & Electric Co. and its affiliated corporations and associations. Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619284/	RICHARD E. AND MARY ANN HURST, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHurst v. Comm'rNo. 15792-02 United States Tax Court124 T.C. 16; 2005 U.S. Tax Ct. LEXIS 2; 124 T.C. No. 2; February 3, 2005, Filed Court did not rule against petitioners on section 304 question. Cost of petitioner's medical insurance were taxable to her, subject to deduction for percentage of health insurance premiums that Hurst Mechanical, Inc. paid on her behalf. Penalty against petitioners was not sustained. 2005 U.S. Tax Ct. LEXIS 2">2 In 1997, as part of their retirement planning, Ps sold their stock in R Corp. to H Corp. H Corp. redeemed 90 percent of P- husband's stock in H Corp., and P-husband sold the remainder to his son and two third parties. Both the redemption and stock sales provided for payment over 15 years and were secured by the shares of stock being redeemed or sold. Ps continued to own H Corp.'s headquarters building, which they leased back to H Corp. P-wife continued to be an employee of H Corp. after the redemption, and she and her husband continued to receive medical insurance through her employment. All the agreements -- stock purchase and redemption, lease, and employment contract -- were cross-collateralized by P-husband's H Corp. stock and contained cross-default provisions. Held: 1. The sale and redemption of the H Corp. stock qualifies as a termination redemption under sec. 302(b)(3), I.R.C. None of the cross-default and cross-collateralization provisions made P- husband's post-transaction interest one "other than an interest2005 U.S. Tax Ct. LEXIS 2">3 as a creditor." 2. R's contention that Ps' sale of their R Corp. stock should be analyzed under sec. 304's rules governing sales of stock between corporations under common control must be rejected for lack of evidence because it was raised only in posttrial briefing and is a "new matter" rather than a "new argument." 3. P-wife is a "2-percent shareholder" under section 1372, I.R.C., because the rules of section 318, I.R.C., attribute to her the ownership of the H Corp. stock of both her husband and son during 1997; accordingly, the H Corp. health insurance premiums are includible in her income, subject to a deduction of a percentage of their amount under section 162(l)(1)(B), I.R.C. Terry L. Zabel, for petitioners.Bryan E. Sladek, for respondent. Holmes, Mark V.HOLMES124 T.C. 16">17 HOLMES, Judge: Richard Hurst founded and owned Hurst Mechanical, Inc. (HMI), a thriving small business in Michigan that repairs and maintains heating, ventilating, and air conditioning (HVAC) systems. He bought, with his wife Mary Ann, a much smaller HVAC company called2005 U.S. Tax Ct. LEXIS 2">4 RHI; and together they also own the building where HMI has its headquarters.When the Hursts decided to retire in 1997, they sold RHI to HMI, sold HMI to a trio of new owners who included their son, and remained HMI's landlord. Mary Ann Hurst stayed on as an HMI employee at a modest salary and with such fringe benefits as health insurance and a company car.The Hursts believe that they arranged these transactions to enable them to pay tax on their profit from the sale of HMI and RHI at capital gains rates over a period of fifteen years. The Commissioner disagrees.FINDINGS OF FACTThe Hursts were married in 1965, and have two children. Mr. Hurst got his first job in the HVAC industry during high school, working as an apprentice in Dearborn. He later earned an associate's degree in the field from Ferris State College. After serving in the military, he moved back to Detroit, and eventually gained his journeyman's card from a local union. In 1969, he and his wife made the difficult decision to move their family away from Detroit after the unrest of the previous two years, and they settled in Grand Rapids where he started anew as an employee of a large mechanical contractor.In April2005 U.S. Tax Ct. LEXIS 2">5 1979, the Hursts opened their own HVAC business, working out of their basement and garage. Mr. Hurst handled the technical and sales operations while Mrs. Hurst did the bookkeeping and accounting. The business began as a proprietorship, but in November of that year they incorporated it under Michigan law, with Mr. Hurst as sole shareholder of the new corporation, named Hurst Mechanical, Inc. (HMI). In 1989, HMI elected to be taxed under subchapter S124 T.C. 16">18 of the Code, and that election has never changed. 1 The firm grew quickly, and after five years it had about 15 employees; by 1997, it had 45 employees and over $ 4 million in annual revenue.After leaving the Hursts' home, HMI moved to a converted gas station, and then to a building in Comstock Park, Michigan. When the State of Michigan bought the Comstock Park building in the mid-1990s, the company moved again to Belmont, Michigan, in a building2005 U.S. Tax Ct. LEXIS 2">6 on Safety Drive. The Hursts bought this building in their own names and leased it to HMI. In early 1994, the Hursts bought another HVAC business, Refrigerator Man, Inc., which they renamed R.H., Inc. (RHI). Each of the Hursts owned half of RHI's stock.In 1996, with HMI doing well and settled into a stable location, the Hursts began thinking about retirement. Three employees had become central to the business and were to become important to their retirement plans. One was Todd Hurst, who had grown up learning the HVAC trade from his parents. The second was Thomas Tuori. Tuori was hired in the mid-1980s to help Mary Ann Hurst manage HMI's accounting, and by 1997 he was the chief financial officer of the corporation. The last of the three was Scott Dixon, brought on in 1996, after Richard Hurst came to believe that HMI was big enough to need a sales manager. Dixon anticipated the potential problems posed by the Hursts' eventual retirement so, before joining the firm, he negotiated an employment contract that included a stock option. His attorney also negotiated stock option agreements for Tuori and Todd Hurst at about the same time. These options aimed to protect Dixon and the others2005 U.S. Tax Ct. LEXIS 2">7 if HMI were sold.In late 1996, Richard Hurst was contacted by Group Maintenance American Corporation (GMAC). GMAC was an HVAC consolidator -- a company whose business plan was to buy small HVAC businesses and try to achieve economies of scale -- and it offered to buy HMI for $ 2.5 million. Mr. Hurst told Tuori, Dixon, and Todd about GMAC's offer, and they themselves confirmed it -- only to learn that GMAC had no interest in keeping them on after a takeover. Convinced they were ready to run the business, they approached Mr. Hurst in124 T.C. 16">19 May 1997 with their own bid to buy his HMI stock, matching the $ 2.5 million offered by GMAC. Mr. Hurst accepted the offer, confident that the young management team he had put together would provide a secure future for the corporation he had built up over nearly twenty years.Everyone involved sought professional advice from lawyers and accountants who held themselves out as having expertise in the purchase and sale of family businesses. The general outline of the deal was soon clear to all. The Hursts would relinquish control of HMI and RHI to Tuori, Dixon, and Todd Hurst, and receive $ 2.5 million payable over fifteen years. HMI, Inc. would continue2005 U.S. Tax Ct. LEXIS 2">8 to lease the Safety Drive property from the Hursts. The proceeds from the sale of the corporations and the rent from the lease would support the Hursts during their retirement. Mrs. Hurst would continue to work at HMI as an employee, joining the firm's health plan to get coverage for herself and her husband. Tuori, Dixon, and Todd Hurst would own the company, getting the job security they would have lacked had HMI been sold.Everything came together on July 1, 1997: HMI bought 90 percent of its 1000 outstanding shares from Mr. Hurst for a $ 2 million note. Richard Hurst sold the remaining 100 shares in HMI to Todd Hurst (51 shares), Dixon (35 shares), and Tuori (14 shares). The new owners each paid $ 2500 a share, also secured by promissory notes. HMI bought RHI from the Hursts for a $ 250,000 note. 2 (All these notes, from both HMI and the new owner, had an interest rate of eight percent and were payable in 60 quarterly installments.) HMI also signed a new 15-year lease for the Safety Drive property, with a rent of $ 8,500 a month, adjusted for inflation. The lease gave HMI an option to buy the building from the Hursts, and this became a point of some contention -- described below2005 U.S. Tax Ct. LEXIS 2">9 -- after the sale. And, finally, HMI also signed a ten-year employment contract with Mrs. Hurst, giving her a small salary and fringe benefits that included employee health insurance.If done right, the deal would have beneficial tax and nontax effects for the Hursts. From a tax perspective, a stock sale would give rise to long-term capital gain, taxed at lower124 T.C. 16">20 rates than dividends. 3 And by taking a 15-year note, rather than a lump sum, they could qualify for installment treatment under section 453, probably letting them enjoy a lower effective tax rate.2005 U.S. Tax Ct. LEXIS 2">10 There were also nontax reasons for structuring the deal this way. HMI's regular bank had no interest in financing the deal, and the parties thought that a commercial lender would have wanted a security interest in the corporations' assets. By taking a security interest only in the stock, the Hursts were allowing the buyers more flexibility should they need to encumber corporate assets to finance the business.But this meant that they themselves were financing the sale. And spreading the payments over time meant that they were faced with a lack of diversification in their assets and a larger risk of default. To reduce these risks, the parties agreed to a complicated series of cross-default and cross-collateralization provisions, the net result of which was that a default on any one of the promissory notes or the Safety Drive lease or Mrs. Hurst's employment contract would constitute a default on them all. Since the promissory notes were secured by the HMI and RHI stock which the Hursts had sold, a default on any of the obligations would have allowed Mr. Hurst to step in and seize the HMI stock to satisfy any unpaid debt.As it turned out, these protective measures were never used, 2005 U.S. Tax Ct. LEXIS 2">11 and the prospect of their use seemed increasingly remote. Under the management of Todd Hurst, Dixon, and Tuori, HMI boomed. The company's revenue increased from approximately $ 4 million annually at the time of the sale to over $ 12 million by 2003. Not once after the sale did any of the new owners miss a payment on their notes or the lease.The Hursts reported the dispositions of both the HMI and RHI stock on their 1997 tax return as installment sales of long-term capital assets. The Commissioner disagreed, and recharacterized these dispositions as producing over $ 400,000 in dividends and over $ 1.8 million in immediately recognized capital gains. In the resulting notice of deficiency for the124 T.C. 16">21 Hursts' 1997 tax year, he determined that this (and a few much smaller adjustments) led to a total deficiency of $ 538,114, and imposed an accuracy-related penalty under section 6662 of $ 107,622.80. The Hursts were Michigan residents when they filed their petition, and trial was held in Detroit.OPINIONFiguring out whether the Hursts or the Commissioner is right requires some background vocabulary. In tax law, a corporation's purchase of its own stock is called a "redemption." Sec. 317(b). 2005 U.S. Tax Ct. LEXIS 2">12 The Code treats some redemptions as sales under section 302, but others as a payment of dividends to the extent the corporation has retained earnings and profits, with any excess as a return of the shareholder's basis, and any excess over basis as a capital gain. Distributions characterized as dividends, return of basis, or capital gains are commonly called "section 301 distributions," after the Code section that sets the general rules in this area.The rules for redemptions and distributions from S corporations, which are found in section 1368 and its regulations, add a layer of complexity, especially when the corporation has accumulated earnings and profits (as both HMI and RHI did). These rules require computation of an "accumulated adjustments account," an account which tracks the accumulation of previously taxed, but undistributed, earnings of an S corporation. Distributions up to the amount of the accumulated adjustments account are generally tax free to the extent they do not exceed a shareholder's basis in his stock. (Some of the Hursts' proceeds from their sales of their stock benefited from these rules, but that was not a point of contention in the case.)For much of the2005 U.S. Tax Ct. LEXIS 2">13 Code's history (including 1997), noncorporate sellers usually preferred a redemption to be treated as a sale because that offered the advantage of taxation at capital gains rates and the possible recognition of that gain over many years under section 453's provisions for installment sales. This preference led to increasingly elaborate rules for determining which redemptions qualify as sales and which are treated as dividends or other section 301 distributions. The Code has three safe harbors: Redemptions that are124 T.C. 16">22 substantially disproportionate with respect to the shareholder, sec. 302(b)(2); redemptions that terminate a shareholder's interest, sec. 302(b)(3); and redemptions of a noncorporate shareholder's stock in a corporation that is partially liquidating, sec. 302(b)(4). Each of these safe harbors comes with its own regulations and case law.The Code also allows redemption treatment if a taxpayer can meet the vaguer standard of proving that a particular redemption is "not essentially equivalent to a dividend." Sec. 302(b)(1). The relevant regulation notes that success under this standard turns "upon the facts and circumstances of each case." Sec. 1.302-2(b), Income Tax Regs.2005 U.S. Tax Ct. LEXIS 2">14 Given the stakes involved, the Hursts and their advisers tried to steer this deal toward the comparatively well-lit safe harbor of section 302(b)(3) -- the "termination redemption." Reaching their destination depended on redeeming the HMI stock in a way that met the rules defining complete termination of ownership. And one might think that a termination redemption would be easy to spot, because whether a taxpayer did or didn't sell all his stock looks like a simple question to answer. Congress, however, was concerned that taxpayers would manipulate the rules to get the tax benefits of a sale without actually cutting their connection to the management of the redeeming corporation. The problem seemed especially acute in the case of family-owned businesses, because such businesses often don't have strict lines between the roles of owner, employee, consultant, and director.The Code addresses this problem by incorporating rules attributing stock ownership of one person to another (set out in section 318) in the analysis of transactions governed by section 302. Section 318(a)(1)(A)(ii), which treats stock owned by a child as owned by his parents, became a particular obstacle to the Hursts' 2005 U.S. Tax Ct. LEXIS 2">15 navigation of these rules because their son Todd was to be one of HMI's new owners. This meant that the note that Mr. Hurst received from HMI in exchange for 90 percent of his HMI stock might be treated as a section 301 distribution, because he would be treated as if he still owned Todd's HMI stock -- making his "termination redemption" less than "complete".But this would be too harsh a result when there really is a complete termination both of ownership and control. Thus, 124 T.C. 16">23 Congress provided that if the selling family member elects to keep no interest in the corporation other than as a creditor for at least ten years, the Commissioner will ignore the section 318 attribution rules. Sec. 302(c)(2); sec. 1.302-4, Income Tax Regs. 42005 U.S. Tax Ct. LEXIS 2">16 By far the greatest part of the tax at issue in this case turns on whether Richard Hurst proved that the sale of his HMI stock was a termination redemption, specifically whether he kept an interest "other than an interest as a creditor" in HMI. There are also two lesser questions -- whether the Hursts can treat the sale of their stock in RHI, the smaller HVAC company, as a sale or must treat it as a section 301 distribution; and whether the Hursts owe tax on the health insurance premiums that HMI paid for Mrs. Hurst.We examine each in turn.A. Complete Termination of Interest in HMIThe Hursts' argument is simple -- they say that Richard (who had owned all the HMI stock) walked completely away from the company, and has no interest in it other than making sure that the new owners keep current on their notes and rent. The Commissioner's argument is more complicated. While acknowledging that each relationship between the Hursts and their old company -- creditor under the notes, landlord under the lease, employment of a non-owning family member -- passes muster, he argues that the total number of related obligations resulting from the transaction gave the Hursts a prohibited interest2005 U.S. Tax Ct. LEXIS 2">17 in the corporation by giving Richard Hurst a financial stake in the company's continued success.In analyzing whether this holistic view is to prevail, we look at the different types of ongoing economic benefits that the Hursts were to receive from HMI: (a) The debt obligations in the form of promissory notes issued to the Hursts by HMI and the new owners, (b) their lease of the Safety Drive building to HMI; and (c) the employment contract between HMI and Mrs. Hurst.124 T.C. 16">39 1. Promissory NotesThere were several notes trading hands at the deal's closing. One was the $ 250,000 note issued by HMI to the Hursts for their RHI stock. The second was the $ 2 million, 15-year note, payable in quarterly installments, issued to Mr. Hurst by HMI in redemption of 90 percent (900 of 1000) of his HMI shares. Mr. Hurst also received three 15-year notes payable in quarterly installments for the remaining 100 HMI shares that he sold to Todd Hurst, Dixon, and Tuori. All these notes called for periodic payments of principal and interest on a fixed schedule. Neither the amount nor the timing of payments was tied to the financial performance of HMI. Although the notes were subordinate to HMI's obligation to2005 U.S. Tax Ct. LEXIS 2">18 its bank, they were not subordinate to general creditors, nor was the amount or certainty of the payments under them dependent on HMI's earnings. See Dunn v. Commissioner, 615 F.2d 578">615 F.2d 578, 615 F.2d 578">582-583 (2d Cir. 1980), affg. 70 T.C. 715">70 T.C. 715, 70 T.C. 715">726-727 (1978); Estate of Lennard v. Commissioner, 61 T.C. 554">61 T.C. 554, 61 T.C. 554">563 & n.7 (1974). All of these contractual arrangements had cross-default clauses and were secured by the buyers' stock. This meant that should any of the notes go into default, Mr. Hurst would have the right to seize the stock and sell it. The parties agree that the probable outcome of such a sale would be that Mr. Hurst would once again be in control of HMI.Respondent questions the cross-default clauses of the various contractual obligations, and interprets them as an effective retention of control by Mr. Hurst. But in Lynch v. Commissioner, 83 T.C. 597">83 T.C. 597 (1984), revd. on other grounds 801 F.2d 1176">801 F.2d 1176 (9th Cir. 1986), we held that a security interest in redeemed stock does not constitute a prohibited interest under section 302. We noted that "The holding of such a security interest is common in sales agreements, and * * not inconsistent2005 U.S. Tax Ct. LEXIS 2">19 with the interest of a creditor." 83 T.C. 597">Id. at 610; see also Hoffman v. Commissioner, 47 T.C. 218">47 T.C. 218, 47 T.C. 218">232 (1966), affd. 391 F.2d 930">391 F.2d 930 (5th Cir. 1968). Furthermore, at trial, the Hursts offered credible evidence from their professional advisers that these transactions, including the grant of a security interest to Mr. Hurst, were consistent with common practice for seller-financed deals.124 T.C. 16">25 2. The LeaseHMI also leased its headquarters on Safety Drive from the Hursts. As with the notes, the lease called for a fixed rent in no way conditioned upon the financial performance of HMI. Attorney Ron David, who was intimately familiar with the transaction, testified convincingly that there was no relationship between the obligations of the parties and the financial performance of HMI. The transactional documents admitted into evidence do not indicate otherwise. There is simply no evidence that the payment terms in the lease between the Hursts and HMI vary from those that would be reasonable if negotiated between unrelated parties. And the Hursts point out that the IRS itself has ruled that an arm's-length lease allowing a redeeming corporation to use property owned by a former2005 U.S. Tax Ct. LEXIS 2">20 owner does not preclude characterization as a redemption. Rev Rul 77-467, 1977-2 C.B. 92, 1977 IRB LEXIS 147.The Commissioner nevertheless points to the lease to bolster his claim that Mr. Hurst kept too much control, noting that in 2003 he was able to persuade the buyers to surrender HMI's option to buy the property. Exercising this option would have let HMI end its rent expense at a time of low mortgage interest rates, perhaps improving its cashflow -- and so might well have been in the new owners' interest. But the Hursts paid a price when the new owners gave it up. Not only did the deal cancel the option, but it also cut the interest rate on the various promissory notes owed to the Hursts from eight to six percent. So we think the Commissioner is wrong in implicitly asserting that the buyers should have engaged in every behavior possible that would be adverse to the elder Hursts' interest, and focus on whether the elder Hursts kept "a financial stake in the corporation or continued to control the corporation and benefit by its operations." Lynch, 83 T.C. 597">83 T.C. 604. Ample and entirely credible testimony showed that the discussions about HMI's potential purchase of the Safety2005 U.S. Tax Ct. LEXIS 2">21 Drive location were adversarial: The Hursts as landlords wanted to keep the rent flowing, and the new owners wanted to reduce HMI's cash outlays. Though the Hursts kept their rents, the new owners did not give up the option gratuitously -- making this a negotiation rather than a collusion.124 T.C. 16">26 3. Employment of Mrs. HurstAt the same time that HMI redeemed Mr. Hurst's stock and signed the lease, it also agreed to a ten-year employment contract with Mrs. Hurst. Under its terms, she was to receive a salary that rapidly declined to $ 1000/month and some fringe benefits -- including health insurance, use of an HMI-owned pickup truck, and free tax preparation.In deciding whether this was a prohibited interest, the first thing to note is that Mrs. Hurst did not own any HMI stock. Thus, she is not a "distributee" unable to have an "interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor." Sec. 302(c)(2)(A)(i). The Commissioner is thus forced to argue that her employment was a "prohibited interest" for Mr. Hurst. And he does, contending that through her employment Mr. Hurst kept an ongoing influence in HMI's corporate affairs. 2005 U.S. Tax Ct. LEXIS 2">22 He also argues that an employee unrelated to the former owner of the business would not continue to be paid were she to work Mrs. Hurst's admittedly minimal schedule. And he asserts that her employment was a mere ruse to provide Mr. Hurst with his company car and health benefits, bolstering this argument with proof that the truck used by Mrs. Hurst was the same one that her husband had been using when he ran HMI.None of this, though, changes the fact that her compensation and fringe benefits were fixed, and again -- like the notes and lease -- not subordinated to HMI's general creditors, and not subject to any fluctuation related to HMI's financial performance. Her duties, moreover, were various administrative and clerical tasks -- some of the same chores she had been doing at HMI on a regular basis for many years. And there was no evidence whatsoever that Mr. Hurst used his wife in any way as a surrogate for continuing to manage (or even advise) HMI's new owners. Cf. Lynch, 801 F.2d 1176">801 F.2d at 1179 (former shareholder himself providing post-redemption services).It is, however, undisputed that her employment contract had much the same cross-default provisions that were part2005 U.S. Tax Ct. LEXIS 2">23 of the lease and stock transfer agreements. The Commissioner questions whether, in the ordinary course of business, there was reason to intertwine substantial corporate obligations124 T.C. 16">27 with the employment contract of only one of 45 employees. He points to this special provision as proof that the parties to this redemption contemplated a continuing involvement greater than that of a mere creditor.In relying so heavily on the cross-default provisions of the Hursts' various agreements, though, the Commissioner ignores the proof at trial that there was a legitimate creditor's interest in the Hursts' demanding them. They were, after all, parting with a substantial asset (the corporations), in return for what was in essence an IOU from some business associates. Their ability to enjoy retirement in financial security was fully contingent upon their receiving payment on the notes, lease, and employment contract. As William Gedris, one of the Hursts' advisers, credibly testified, it would not have been logical for Mr. Hurst to relinquish shares in a corporation while receiving neither payment nor security.The value of that security, however, depended upon the financial health of the company. 2005 U.S. Tax Ct. LEXIS 2">24 Repossessing worthless shares as security on defaulted notes would have done little to ensure the Hursts' retirement. The cross-default provisions were their canary in the coal mine. If at any point the company failed to meet any financial obligation to the Hursts, Mr. Hurst would have the option to retrieve his shares immediately, thus protecting the value of his security interest instead of worrying about whether this was the beginning of a downward spiral. This is perfectly consistent with a creditor's interest, and there was credible trial testimony that multiple default triggers are common in commercial lending.We find that the cross-default provisions protected the Hursts' financial interest as creditors of HMI, for a debt on which they had received practically no downpayment, and the collection of which (though not "dependent upon the earnings of the corporation" as that phrase is used in section 1.302-4(d), Income Tax Regs.) was realistically contingent upon HMI's continued financial health. The buyers likewise had a motivation to structure the transaction as they did -- their inability to obtain traditional financing without unduly burdening HMI's potential for normal business2005 U.S. Tax Ct. LEXIS 2">25 operations. Even one of the IRS witnesses showed this understanding of Mr. Hurst's relationship to the new owners after the redemption -- the revenue agent who conducted the audit accurately124 T.C. 16">28 testified that Mr. Hurst was "going to be the banker and wanted his interests protected."The number of legal connections between Mr. Hurst and the buyers that continued after the deal was signed did not change their character as permissible security interests. Even looked at all together, they were in no way contingent upon the financial performance of the company except in the obvious sense that all creditors have in their debtors' solvency.Moreover, despite the Commissioner's qualms, we find as a matter of fact that Mr. Hurst has not participated in any manner in any corporate activity since the redemptions occurred -- not even a Christmas party or summer picnic. His only dealing with HMI after the sale was when, as noted above, he dickered with the buyers over their purchase option on the Safety Drive property. These facts do not show a continuing proprietary stake or control of corporate management.B. Treatment of the RHI SaleAnalyzing the Hursts' disposition of their interest in the2005 U.S. Tax Ct. LEXIS 2">26 smaller HVAC company, RHI, turns out to be more complicated than analyzing the redemption of their HMI stock. The notice of deficiency was clear in stating that the Commissioner was disallowing the Hursts' treatment of the HMI redemption as a sale because that sale was to a "related party." And both the Hursts and the Commissioner understood this to mean that the disposition of Mr. Hurst's HMI stock implicated section 302(b)(3). That's the way both parties approached trial preparation and then tried the case. But the notice of deficiency cited no authority in disallowing capital gains treatment for the Hursts' sale of their RHI stock, simply including it as a disallowed subitem within the overall disallowance of Mr. Hurst's treatment of his HMI stock sale. The Commissioner's answer did assert that "both petitioners retained prohibited interests, within the meaning of I.R.C. section 302(c)(2)(A), in the corporation referred to by petitioners as 'RH, Inc.'" And though the answer makes no more specific allegation about Mr. Hurst's alleged "prohibited interest" in RHI, it does specifically allege that Mrs. Hurst had "an 124 T.C. 16">29 employment contract with that corporation, which2005 U.S. Tax Ct. LEXIS 2">27 is a prohibited interest."The issue did not get much attention at trial, because the stipulated evidence showed that the answer simply got it wrong -- Mrs. Hurst's employment contract was with HMI, not RHI. And neither side showed that either of the elder Hursts had any continuing involvement in whatever business RHI had left. (Indeed, the trial left unclear what, if anything, was left of RHI by the time HMI bought it.)Relying on section 302 alone to upset the Hursts' characterization of their RHI stock sale under these circumstances seemed mistaken for another reason: That section governs stock redemptions, and the RHI stock was sold to HMI, not redeemed by RHI. As already noted, the trial focused almost entirely on HMI, and the Hursts' continuing connection to it. Both parties seemed to assume that if the Hursts won the battle for treating the redemption of their HMI stock as a sale, they would win as well on RHI.Now the Commissioner urges us to rely on a different section of the Code -- section 304 -- to support his position on RHI. This section is a more promising ground for him, because it allows him to treat some stock sales to related corporations as redemptions under2005 U.S. Tax Ct. LEXIS 2">28 section 302. The problem, however, is that he raised section 304 for the first time only in his answering brief. The Hursts object to the introduction of an issue so late in the proceedings, invoking Aero Rental v. Commissioner, 64 T.C. 331">64 T.C. 331 (1975), and Theatre Concessions v. Commissioner, 29 T.C. 754">29 T.C. 754 (1958). Aero Rental and Theatre Concessions are part of a line of cases beginning at least with Nash v. Commissioner, 31 T.C. 569">31 T.C. 569 (1958), in which we have refused to allow a party to raise an issue for the first time in posttrial briefing.52005 U.S. Tax Ct. LEXIS 2">29 To decide whether the Commissioner can do this so late in the game, we first outline our Rules on putting issues in 124 T.C. 16">30 play. We then analyze section 304 as it might apply here to decide whether the Commissioner can rely on it.1. Raising Arguments and Issues After TrialWe begin by noting that we share the Hursts' dim view of raising an issue for the first time in a posttrial answering brief. Numerous procedural safeguards built into the Code and our own rules are designed to prevent such late-in-the-day maneuvering. Section 7522(a) requires the Commissioner to "describe the basis for" any increase in tax due in the notice of deficiency. After a case in this Court has begun, Rule 142(a) places the burden of proof on the Commissioner "in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer."The difficulty for the Hursts is that we do distinguish between new matters and new theories -- "we have held that for respondent to change the section of the Code on which he relies does not cause the assertion of the new theory to be new matter if the section relied on is consistent with the determination made in the deficiency notice relying on2005 U.S. Tax Ct. LEXIS 2">30 another section of the Code." Barton v. Commissioner, T.C. Memo. 1992-118 (citing Estate of Emerson v. Commissioner, 67 T.C. 612">67 T.C. 612, 67 T.C. 612">620 (1977)), affd. 993 F.2d 233">993 F.2d 233 (11th Cir. 1993). In short, a "new matter" is one that reasonably would alter the evidence presented. A "new theory" is just a new argument about the existing evidence and is thus allowed.We therefore describe how section 304 works, how it might apply to the Hursts' sale of RHI, and most importantly whether it would alter the evidence the Hursts might reasonably have wanted and been able to introduce.2. Section 304 and the Sale of the RHI StockAs noted above, the best individual taxpayers can hope for when disposing of their stock is for it to be treated as a sale of a capital asset. But this might create an opportunity for a creative taxpayer in command of two companies to sell his stock in one to the other, gaining the benefit of sale treatment, avoiding any tax on receiving a dividend, all without relinquishing effective ownership. Congress squelches this opportunity with section 304. It addresses both parent/child situations -- the acquisition by a subsidiary of stock in the2005 U.S. Tax Ct. LEXIS 2">31 124 T.C. 16">31 parent corporation that owns it, sec. 304(a)(2); and brother/sister situations -- the acquisition of one corporation's stock by another when both are under common control, sec. 304(a)(1). The Commissioner contends that the RHI sale to HMI is one of the latter.What makes this contention look more like a new theory, and less like a new matter, is the truth that sections 302 and 304 are linked if section 304 applies to a stock sale, the consequence is that it is treated as a redemption under section 302 and its regulations. And so we begin with the text of section 304(a)(1):SEC. 304(a). Treatment of Certain Stock Purchases. -- (1) Acquisition by Related Corporation (Other Than Subsidiary). -- For purposes of sections 302 and 303, if -- (A) one or more persons are in control of each of two corporations, and (B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) in control, then * * * such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such2005 U.S. Tax Ct. LEXIS 2">32 stock. 6 * Section 304(b) then helpfully sets out six paragraphs, ten subparagraphs, and dozens of clauses and subclauses to explain section 304(a). If these weren't clear enough, there are also seven columns of single-spaced regulations. Secs. 1.304-1 through 1.304-5, Income Tax Regs. The result is a rococo fugue of tax law. 72005 U.S. Tax Ct. LEXIS 2">33 To begin decomposing this fugue, we note that section 304(c) and section 1.304-5(b), Income Tax Regs., define "control," a term of critical importance in this case. The regulation tells us that in deciding whether section 304(a)(1) applies, we look to see if the taxpayers involved (1) control 124 T.C. 16">32 both the issuing and acquiring corporation, (2) transfer stock in the issuing corporation to the acquiring corporation for property, and then (3) still control the acquiring corporation thereafter. We also listen to section 304(c)(3) and section 1.304-5(a), Income Tax Regs., which tell us to look at section 318's attribution rules to determine who controls what under section 304. See Gunther v. Commissioner, 92 T.C. 39">92 T.C. 39, 92 T.C. 39">49 n. 12 (1989), affd. 909 F.2d 291">909 F.2d 291 (7th Cir. 1990).In this case, RHI was the "issuing corporation" and HMI was the "acquiring corporation." Before the sale, RHI was owned entirely by Richard and Mary Ann Hurst. Under section 318(a)(1)(A)(i), a taxpayer is considered to own shares of stock held by his spouse. Thus, we treat HMI and RHI as being under common control, in that HMI was actually owned by Mr. Hurst and RHI was constructively owned by Mr. 2005 U.S. Tax Ct. LEXIS 2">34 Hurst (since he actually owned 50 percent and the 50 percent his wife owned is constructively owned by him as well). Moreover, Mrs. Hurst also constructively controlled both corporations, in that her husband's 50-percent interest in RHI was attributed to her (thus putting her at 100-percent ownership) as was his 100-percent interest in HMI. Section 304(a)(1)(A) is met.HMI also acquired the RHI stock in exchange for property, as the Code makes painfully clear by defining "property" to include "money". Sec. 317(a). The accompanying regulation helpfully clarifies that definition by including as "property" a promise to pay money in the future. Sec. 1.317-1, Income Tax Regs. Thus, section 304(a)(1)(B) is met.The next issue is whether the Hursts were in "control" of HMI (the "acquiring corporation") for section 304 purposes after the transaction as they were before. Under section 318(a)(1)(A)(ii), a taxpayer constructively owns any stock owned by his children. Thus, the Hursts are considered to own Todd's 51- percent interest in HMI. As all three elements of section 1.304-5(b) are met, section 304(a) applies.Because section 304(a) applies, determinations as to whether2005 U.S. Tax Ct. LEXIS 2">35 the acquisition is, by reason of section 302(b), to be treated as a distribution in part or full payment in exchange for the stock shall be made by reference to the stock of the issuing corporation. * Sec. 304(b)(1).124 T.C. 16">33 The consequence of applying section 304 is thus to send us back to section 302, treating the Hursts' sale of their RHI stock to HMI as if it were a redemption by RHI. For the Commissioner, this deemed redemption analysis under section 302(b) turns on the uncontested fact that Mrs. Hurst remained an employee of HMI after the sale. He argues that HMI's purchase of RHI made RHI into an HMI subsidiary. Section 1.302-4(c), Income Tax Regs., would then govern: "If stock of a subsidiary corporation is redeemed, section 302(c)(2)(A) shall be applied with reference to an interest both in such subsidiary corporation and its parent." Thus, despite section 304(b) 's command to treat the RHI sale as a redemption by RHI, the Commissioner contends that post-sale em-ployment by either RHI or HMI is a prohibited interest.So far, so good, for the Commissioner. This analysis looks as if it is purely legal, and so only a new "theory". 2005 U.S. Tax Ct. LEXIS 2">36 In analyzing the RHI sale under section 304, it seems, there is no different evidence that the Hursts could have introduced that would change the analysis.But this is where the Commissioner's failure to raise the deemed redemption analysis before filing his answering brief begins to look less like a tardy-though-forgivable new theory, and more like an unforgivable-if-unaccompanied-by-evidence introduction of a new matter. The Commissioner may well be right that the Hursts' sale of their RHI stock couldn't steer into the safe harbor of section 302(b)(3). However, there are several other paragraphs of section 302(b), and if the Commissioner had raised his section 304 argument earlier, it seems likely that the Hursts would have counterpunched by exploring whether one of those other paragraphs would have helped their cause.Consider, for example, section 302(b)(1), which allows for exchange treatment of a redemption not essentially equivalent to a dividend. In order to qualify for exchange treatment under this provision, a transaction needs to satisfy the "meaningful reduction * * [in] proportionate interest" test set out in United States v. Davis, 397 U.S. 301">397 U.S. 301, 397 U.S. 301">313, 25 L. Ed. 2d 323">25 L. Ed. 2d 323, 90 S. Ct. 1041">90 S. Ct. 1041 (1970).2005 U.S. Tax Ct. LEXIS 2">37 In this case, Mrs. Hurst did in fact experience a reduction in her constructive RHI interest, even after applying section 318's attribution rules, because her interest was reduced from 100 percent (her 50-percent interest plus Mr. Hurst's 124 T.C. 16">34 50-percent interest) to 51 percent (her son's interest in RHI after the deal was done. 8To find that the 49-percent reduction in ownership was meaningful, we would then have "to examine all the facts and circumstances to see if the reduction was meaningful for the purposes of section 302." Metzger Trust v. Commissioner, 76 T.C. 42">76 T.C. 42, 76 T.C. 42">61 (1981), affd. 693 F.2d 459">693 F.2d 459 (5th Cir. 1982). This would have allowed the trial to focus upon the practical2005 U.S. Tax Ct. LEXIS 2">38 differences, if any, which exist between a 51-percent interest and a 100-percent interest in RHI after the sale.It is true that redemptions in which the 50-percent threshold is not passed will generally be considered essentially equivalent to a dividend. Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 9.05[3][d] at 9-41 (7th ed. 2002). Yet an exception exists when a threshold has been passed which alters the practical control of the taxpayer under State corporate law. Id.; see also Wright v. United States, 482 F.2d 600">482 F.2d 600, 482 F.2d 600">608-609 (8th Cir. 1973); Patterson Trust v. United States, 729 F.2d 1089">729 F.2d 1089, 729 F.2d 1089">1095 (6th Cir. 1984).Due to the Commissioner's tardiness in raising the section 304 issue, the parties offered no evidence as to whether the passage from 100 percent to 51 percent passes any thresholds in Michigan corporate law that might affect RHI. The record is similarly bereft of indicators about the rights over RHI held by Todd Hurst, Tuori, and Dixon. At trial, Tuori and others did testify that corporate decisions at HMI were made by a majority vote of himself, Todd Hurst, and Dixon, and that 2-to-1 votes were regular occurrences. 2005 U.S. Tax Ct. LEXIS 2">39 This issue was not fleshed out in the manner we assume counsel for each party would have, had they focused upon clarifying the section 304 issue, and we are thus at a loss to analyze how it would affect a proper section 302(b)(1) analysis.At the end of this long digression through sections 304 and parts of section 302 not raised before or during trial, we need not reach any firm conclusion on the issue. It is enough to observe that raising section 304 in an answering brief is in124 T.C. 16">35 this case not just making a new argument, but raising a new matter.The Hursts' case thus ends up looking like Shea v. Commissioner, 112 T.C. 183">112 T.C. 183 (1999). Here, as in Shea, there is an obviously applicable law newly relied upon by the Commissioner to support a portion of the original deficiency. 112 T.C. 183">Id. at 197. Here, as there, "Respondent failed to offer any evidence that indicated that respondent considered the application of * * [that law] in making his determination." 112 T.C. 183">Id. at 192. We thus view the lack of evidence on the section 304 question as the Commissioner's failure to meet his burden, and we do not rule against the Hursts on this issue. 92005 U.S. Tax Ct. LEXIS 2">40 C. The Taxability of Mrs. Hurst's Medical BenefitsThe final issue is the Commissioner's assertion that the cost of Mrs. Hurst's medical insurance paid by HMI is taxable to her. On this issue, the Commissioner is right. Under section 1372(a), an S corporation (and, remember, HMI elected to be an S corporation) is treated as a partnership, and any employee who is a "2-percent shareholder" is treated as a partner when it comes to deciding whether an employee fringe benefit (like an employer's share of health insurance premiums) is includible in his gross income. Amounts paid by a partnership to (or for the benefit of) one of its partners are called "guaranteed payments" under section 707(c) of the Code, if they are made without regard to the partnership's income. Like a partner, a 2-percent shareholder is required by section 61(a) to include the value of such guaranteed payments in his gross income and is not entitled to exclude them under the Code sections that otherwise allow the exclusion of employee fringe benefits. See Rev. Rul. 91-26, 1991-1 C.B. 184.The only question left, then, is whether Mrs. Hurst is a "2- percent shareholder." Section 1372(b) defines the term: 2005 U.S. Tax Ct. LEXIS 2">41 SEC. 1372(b). 2-Percent Shareholder Defined. -- For purposes of this section, the term "2-percent shareholder" means any person who owns (or is considered as owning within the meaning of section 318) on any day124 T.C. 16">36 during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation * .And Mrs. Hurst fits within the definition because through her husband she was a 100-percent shareholder of HMI for part of the year; through her son, she was a 51-percent shareholder for the remainder. Owning, even by attribution, two percent "on any day during the taxable year of the S corporation" would have sufficed. Thus, the employer's cost of her health insurance is clearly includible in her gross income.The Hursts are correct, however, that section 1372 gives Mrs. Hurst a deduction for a percentage of the health insurance premiums that HMI paid on her behalf. And in 1997, section 162(l)(1)(B) set that percentage at 40. 102005 U.S. Tax Ct. LEXIS 2">42 To reflect the foregoing and incorporate other stipulated issues,Decision will be entered under Rule 155. Footnotes1. All references to sections and the Code are to the Internal Revenue Code in effect for 1997, unless otherwise noted.↩2. Trial testimony amply demonstrated that an extra $ 25,000 loan repayment was mistakenly included in the sale price of RHI, and the Commissioner now agrees that RHI's price was $ 250,000.↩3. This was an important consideration to the Hursts -- although HMI was an S corporation at the time of these transactions, and thus subject only to a single tier of tax, secs. 1363, 1366, it had been a C corporation until 1989 and still had $ 383,000 in accumulated earnings from those years that had not been distributed to Mr. Hurst. Without careful planning, these earnings might end up taxed as dividends under section 1368(c)↩.4. There are other requirements for a termination redemption to be effective, notably that a taxpayer has to file a timely election. Sec. 1.302-4↩, Income Tax Regs. Mr. Hurst filed such an election for his HMI stock, having received permission from the District Director to file it late.5. The Commissioner does argue that the Hursts must have known that section 304 applied because they both filed waivers of family attribution for their sale of RHI stock. A close look at the waiver request shows, however, that it is based on the clearly faulty representation that RHI itself issued the $ 250,000 note in redemption of the RHI stock. This appears, then, to be just a markup of the waiver request filed at the same time by Mr. Hurst for the actual redemption of his HMI stock. Whether it was filed out of an abundance of caution by the Hursts' former adviser or out of a misunderstanding of the deal, it nowhere mentions the fact that RHI and HMI might be affected by section 304↩. And, of course, the failure of the Commissioner even to raise this point at trial means that the Hursts didn't provide any explanation of their own.6. The Hursts argue that one reason the Commissioner's argument should fail is that section 304 was amended effective June 8, 1997 and had a transition provision that exempted binding deals already reduced to writing even if not yet closed. However, the amending language that the Hursts cite did not affect the first sentence of section 304 quoted above, which has been in the Code and unchanged for a half century at least. See Internal Revenue Code of 1954, ch. 736, sec. 304, 68AStat 89↩. It is this sentence that might affect the tax treatment of the RHI stock sale.7. There is a custom of referring to the interplay of section 302 and section 318's family attribution rules as a "baroque fugue," traceable to 1 Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 9.04[3] at 9- 35 (7th ed. 2002) (so many points and counterpoints as to be a "baroque fugue"). See also W. Rands, "Corporate Tax: The Agony and the Ecstasy," 83 Neb. L. Rev. 39">83 Neb. L. Rev. 39, 83 Neb. L. Rev. 39">69 (2004) (" This provides some relief in class. We take a five minute break from our work to discuss whatever a 'fugue' is. Usually, most of us do not know, but occasionally a classical music enthusiast tries to enlighten us."). Adding section 304↩ makes the fugue rococo.8. Under section 318(a)(2)(C), Todd Hurst's 51-percent ownership of HMI stock after the sale also makes him constructive owner of 51 percent of RHI. Section 318(a)(1)(A)(ii) then makes the elder Hursts constructive owners of 51 percent of RHI even after they actually sold all of it to HMI. See sec. 318(a)(5)(A)↩.9. The Commissioner also contends that the Hursts should have understood that section 304 was at issue, because "[t] he only legal theory upon which the respondent could have relied to disallow the installment sale or exchange treatment for the redemption of the RHI stock is I.R.C. section 304↩." Respondent's Response to Petitioner's Motion to Strike A Portion of Respondent's Brief par. 2. Our rules do not force taxpayers into such guesswork.10. The Commissioner also contends that the Hursts are liable for a penalty under section 6662 -- either for negligence under sections 6662(b)(1) and (c) or for substantial understatement under sections 6662(b)(2) and (d). Because we find almost entirely in the Hursts' favor, there is no substantial understatement. The Hursts' partial victory on the minor issue of calculating the taxable portion of Mrs. Hurst's medical insurance premiums showed no failure in reasonably complying with the Code on that score, either. The penalty is not sustained. See sec. 6664(c); sec. 1.6664-4(b)(1)↩, Income Tax Regs.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619287/	CHARLES L. AND MARILYN L. WRIGHT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWright v. CommissionerDocket No. 14482-89.United States Tax CourtT.C. Memo 1990-630; 1990 Tax Ct. Memo LEXIS 700; 60 T.C.M. 1427; T.C.M. (RIA) 90630; December 13, 1990, Filed 1990 Tax Ct. Memo LEXIS 700">700 Decision will be entered under Rule 155. Charles L. and Marilyn L. Wright, pro se. David H. Peck, for the respondent. COUVILLION, Special Trial Judge. COUVILLION1990 Tax Ct. Memo LEXIS 700">702 2057 MEMORANDUM FINDINGS OF FACT AND OPINION This case was assigned pursuant to section 7443A(b) 1 and Rule 180 et seq. Respondent determined deficiencies in petitioners' Federal income taxes of $ 492, $ 4,104, $ 6,073, and $ 2,247, respectively, for tax years 1982, 1984, 1985, and 1986. As a result of concessions by the parties, there are no issues with respect to the 1986 tax year. The sole issue for 1982 is petitioners' entitlement to the carryback of an investment credit from the year 1985, the merits of which will be resolved by the issue involving the years 1984 and 1985. The sole issue for 1984 and 1985 is whether petitioners' farming activities constituted activities not engaged in for profit under section 183. In the event these activities are found to have been engaged in for profit, respondent1990 Tax Ct. Memo LEXIS 700">703 alternatively contends that (1) some of the expenses claimed were not ordinary and necessary under section 162(a); (2) certain expenses were not substantiated; (3) depreciation claimed on certain assets exceeded the adjusted basis of the assets; (4) depreciation was erroneously claimed on personal-use assets; and (5) the allocation of basis between certain depreciable and nondepreciable assets was improper. FINDINGS OF FACT The parties stipulated to some of the facts which are incorporated herein by reference. Petitioners, husband and wife, resided at Bay City, Texas, at the time their petition was filed. Charles L. Wright (petitioner) was an electrician who was employed full time in this capacity before, during, and after the years in question. He also worked as an electrical consultant during this period. The nature of his work was that he worked temporarily on jobs at various places in the United States. On their 1984 income tax return, petitioner reported wages and salary income of $ 38,083. In 1985, he reported wages and salary income of $ 41,250, and $ 5,093 as an electrical consultant. For 1986, he reported salary and wages of $ 70,046. In 1981, while petitioner1990 Tax Ct. Memo LEXIS 700">704 was employed and living in Arizona, petitioners purchased 2-1/2 acres of land in the Harquahala Valley region of Arizona. This property was in a development which was promoted for the growth of plum trees as well as for residential use. Owners in the development were afforded the opportunity to have their plum trees, or any other fruit trees an owner might elect to grow, and the produce to be managed and marketed by a cooperative organized and operated by the promoter of the development. The 2-1/2 acres petitioners purchased consisted of a house and some 190 peach trees. Petitioners were not interested in plum trees nor did they avail themselves of the services available from the cooperative for the management and marketing of their peaches. In 1984, petitioners purchased an additional acre adjacent to the 2-1/2 acres. This additional acre had no trees or other improvements. At the time petitioners purchased the 2-1/2 acres in 1981, they were living some 63 miles away but drove to the property two to three times a week to tend to the peach trees. In 1982, they moved on the property after making considerable improvements to the house, constructing other buildings on the property, 1990 Tax Ct. Memo LEXIS 700">705 and purchasing a tractor and related implements. In addition to the peaches, petitioners also raised cattle, ducks, geese, and chickens on the property. Although petitioners expected to plant peach trees on the additional acre purchased in 1984, they never did. Petitioners, however, installed an irrigation system on this portion of the property. In September 1984, petitioner left Arizona to assume a position as a consultant in the construction of a nuclear power plant at St. Francisville, Louisiana. In February 1985, presumably while still employed at this power plant, he moved to Liberty, Mississippi. At this time, Mrs. Wright, who had remained in Arizona, also moved to Liberty. Shortly thereafter, petitioners purchased and moved to a 20.237-acre hay farm at Liberty, retaining their Arizona property. Their purpose in buying the 20.237 acres was to produce Bahia hay, which petitioner felt he could transport to Arizona and sell at $ 9 per bale. The hay operation never materialized. In September 1985, petitioners moved to Georgia, where petitioner took on another consultation 2058 job. They left the Mississippi property to a caretaker in consideration for which the1990 Tax Ct. Memo LEXIS 700">706 caretaker was given all the hay produced by the farm. In 1986, petitioners sold the property for the amount of the mortgage because they could no longer afford the payments. Petitioners held on to their Arizona property; however, at trial, they testified they were in default on their mortgage, and the creditor holding the mortgage was making every effort to sell the property. The peach trees on the property died in 1985, when the caretaker neglected to irrigate the trees. The record is silent as to what became of the cattle, ducks, geese, and chickens on the Arizona property. For income tax purposes, petitioners did not report their Arizona peach activity until the 1984 tax year. On their 1984 Federal income tax return, they reported no income from the sale of peaches, $ 600 from the sale of cattle having an adjusted basis of $ 674, and $ 15 from the sale of eggs. They reported expenses of $ 17,869 and claimed a net loss of $ 17,810, all reflected on Schedule F of their return. The peach activity was not reported on their 1985 return nor has it since been reported on petitioners' returns. As to the 20.237-acre Mississippi hay farm, petitioners reported this activity on their1990 Tax Ct. Memo LEXIS 700">707 1985 return. On Schedule F of their return, they reported no income from the farm and claimed expenses of $ 24,884 and a net loss for this amount. In addition, petitioners claimed an investment credit of $ 744 relating to the farm, $ 492 of which was carried back to 1982. Respondent disallowed the $ 17,810 net loss claimed on petitioners' 1984 return for the Arizona peach activity and the 1985 loss of $ 24,884 from the Mississippi hay activity as well as the $ 744 investment credit on the ground that the activities were not engaged in for profit under section 183 and for the other reasons recited earlier in this opinion. OPINION Section 183(a) provides generally that, if an activity is not engaged in for profit, no deduction attributable to such activity shall be allowed. Section 183(c) defines an activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." The standard for determining whether the expenses of an activity are deductible under either section 162 or section 212(1) or (2) is whether the taxpayer engaged in the activity with1990 Tax Ct. Memo LEXIS 700">708 the "actual and honest objective of making a profit." Ronnen v. Commissioner, 90 T.C. 74">90 T.C. 74, 90 T.C. 74">91 (1988); Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 78 T.C. 642">645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). While a reasonable expectation of profit is not required, the taxpayer's profit objective must be bona fide. Hulter v. Commissioner, 91 T.C. 371">91 T.C. 371, 91 T.C. 371">393 (1988); Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 72 T.C. 28">33 (1979). Whether a taxpayer had an actual and honest profit objective is a question of fact to be resolved from all relevant facts and circumstances. 91 T.C. 371">Hulter v. Commissioner, supra at 393; Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 72 T.C. 411">426 (1979), affd. in an unpublished opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). The burden of proving such objective is on petitioner. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). In resolving this factual question, greater weight is given to objective facts than to the taxpayer's after-the-fact statements of intent. Section 1.183-(2)(a), Income Tax Regs.; Thomas v. Commissioner, 84 T.C. 1244">84 T.C. 1244, 84 T.C. 1244">1269 (1985),1990 Tax Ct. Memo LEXIS 700">709 affd. 792 F.2d 1256">792 F.2d 1256 (4th Cir. 1986); Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 78 T.C. 659">699 (1982). Section 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of nine objective factors relevant to the determination of whether an activity is engaged in for profit. These factors are (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the 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 earned, if any; (8) the financial status of the taxpayer; and (9) the elements of personal pleasure or recreation involved in the activity. These factors are not merely a counting device where the number of factors for or against the taxpayer is determinative, but rather all facts and circumstances must be taken into account, and more weight may be given to some factors than to others. 1990 Tax Ct. Memo LEXIS 700">710 Cf. Dunn v. Commissioner, 70 T.C. 715">70 T.C. 715, 70 T.C. 715">720 (1978), affd. without published opinion 615 F.2d 578">615 F.2d 578 (2d Cir. 1980). Not all factors are applicable in every case, and no one factor is controlling. Section 1.183-2(b), Income Tax Regs.; Abramson v. Commissioner, 86 T.C. 360">86 T.C. 360, 86 T.C. 360">371 (1986); 72 T.C. 28">Allen v. Commissioner, supra at 34. In considering the various applicable factors in this case, the Court finds that petitioners did not engage in their peach and hay farming activities during 1984 and 1985 with an actual and honest objective of making a profit. The hay farm in Mississippi never attained a status as to which the Court might conclude that there was ever a trade or business. Petitioners purchased the farm in 1985, moved away from the farm the same year, produced no hay, left the farm with a caretaker, realized absolutely no revenue 2059 from the property, then sold it in 1986 for the balance due on the mortgage. The Mississippi hay farm, therefore, in 1985, was clearly not an activity engaged in for profit. Although petitioners were more directly involved with their peach activity1990 Tax Ct. Memo LEXIS 700">711 in Arizona, the record does not support a finding that petitioners had a profit objective with respect to that activity. To begin with, the nature of petitioner's full-time calling was that he worked temporarily at certain locations, then moved to new employment, usually distant from the previous location. There is no showing that any serious effort was made by petitioners to analyze the economic viability of a peach operation in Arizona on the scale of petitioners' operation. Respondent's witness at trial testified that, although peach trees could be grown successfully on a commercial basis in Arizona, the witness knew of no successful commercial operations in the area of petitioners' property. One of the problems at petitioners' location was the necessity of irrigation, and the costs related thereto. Other risks in that part of the country are that the "dormant" period in the winter and early spring frosts can adversely affect production. In fact, petitioners sold no peaches in 1984 because of unfavorable weather. Petitioner acknowledged that, without his full-time employment and consultation income, he could not have financed the two activities in question. Indeed, even1990 Tax Ct. Memo LEXIS 700">712 with his continued outside employment, petitioner was unable to retain the Mississippi property and later defaulted on the Arizona property. At trial, petitioners presented numerous receipts to substantiate the expenses they incurred with their farm; however, when questioned about several of these expenses, petitioners admitted that some were personal expenses and some related to the house in which they lived. There were other receipts in which petitioners could not identify whether the item was personal or related to the farm. Section 1.183-2(b)(9), Income Tax Regs., provides that "The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved." Petitioners also argued that, because their Arizona property had appreciated in value, this satisfied section 1.183-2(b)(4), Income Tax Regs. However, petitioner admitted that the property's appreciation in value was attributable to the improvements made to the property rather than the property's potential as a profitable peach farm. This Court has held1990 Tax Ct. Memo LEXIS 700">713 that, when the property's appreciation in value is independent of the claimed business activity, the gain from sale of the property is not taken into account in evaluating the profits and losses of the activity in question. See Ruben v. Commissioner, T.C. Memo. 1986-260. The Arizona peach activity, therefore, was not engaged in for profit under section 183. Having found that section 183 applies to petitioners' farming activities for 1984 and 1985, the Court finds it unnecessary to pass upon respondent's alternative positions regarding these activities. On their 1984 and 1985 returns, petitioners claimed $ 658 and $ 875, respectively, as interest expenses on their Arizona and Mississippi properties. In the notice of deficiency, respondent allowed $ 43 in interest expense for 1984 as a Schedule A itemized deduction, under section 163(a). No deduction was allowed for 1985. In the stipulation of facts presented at trial, the parties agreed that the amounts claimed as interest by petitioners had in fact been paid. Section 183(b)(1) provides that deductions which are allowable without regard to whether the activity is engaged in for profit shall be allowed. Because1990 Tax Ct. Memo LEXIS 700">*714 interest is an expense which is deductible in any event, the Court finds that petitioners are entitled to interest deductions of $ 658 and $ 875, respectively, for 1984 and 1985 in lieu of the $ 43 allowed in the notice of deficiency for 1984. In all other respects, the adjustments for 1982, 1984, and 1985 are sustained. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619288/	PHILLIP R. CLARK and FRANCES B. CLARK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentClark v. CommissionerDocket No. 5455-79.United States Tax CourtT.C. Memo 1982-401; 1982 Tax Ct. Memo LEXIS 344; 44 T.C.M. 492; T.C.M. (RIA) 82401; July 19, 1982. William V. Lewis, for the petitioners. F. Michael Kovach, Jr., for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in the Federal income tax of Phillip R. and Frances B. 1982 Tax Ct. Memo LEXIS 344">345 Clark for the taxable year 1971 in the amount of $13,889.18. Some of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for decision whether the sum of $16,779.16 received by Phillip R. Clark during the taxable year 1971 from a partnership was a guaranteed payment under section 707(c)1 and taxable as ordinary income. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Phillip R. Clark (petitioner) and Frances B. Clark, who were husband and wife during the taxable year 1971, filed a joint Federal income tax return for the calendar year 1971 with the Internal Revenue Center in Holtsville, New York. At the time of the filing of the petition in this case, Mr. Clark resided in Bloomfield Hills, Michigan, and Mrs. Clark resided in Norfolk, Virginia. Petitioner was a stockbroker and investment advisor. He had been an employee of, and later a special limited partner in, Frances I. duPont & Co. and its predecessor firm since July 1958. After successfully1982 Tax Ct. Memo LEXIS 344">346 managing several of the firm's branch offices, petitioner became a general partner on January 1, 1970, of the firm which, in July 1970, became F.I. duPont, Glore Forgan & Co. Petitioner remained a general partner through April 30, 1971. F.I. duPont, Glore Forgan & Co. was a member firm of the New York Stock Exchange and other securities exchanges and was organized as a New York limited partnership pursuant to the terms of Articles of Limited Partnership dated July 2, 1970. It was petitioner's belief that even though the name of the firm was changed, the partnership agreement dated July 2, 1970, contained the same provisions as the agreement prior to the change of name. Upon becoming a general partner in the partnership in January 1970, petitioner made a capital contribution of $54,000 consisting of $25,000 in cash transferred to his general partnership account from his special limited partnership account and $29,000 in promissory notes dated June 1, 1970. Petitioner paid $11,000 on these notes to the partnership on October 1, 1970. In return for this capital contribution, petitioner's interest in the profits and losses of the partnership was.4885993 percent (or 45 divided by1982 Tax Ct. Memo LEXIS 344">347 9,210). At the time of his admission into the partnership as a general partner, his compensation was not discussed. He understood, however, that his compensation was to come solely from the profits of the partnership. He did not receive at any time a separately specified salary from the partnership apart from the amounts here in issue. The partnership agreement provided as follows with respect to the right of a general partner to make withdrawals: FOURTH: (a) Each of the general partners may, with the consent of the Finance Committee, contribute additional general capital to the partnership (such contribution being herein called his "additional general capital"). (b) Subject to the approval of the Finance Committee, a general partner shall have the right to withdraw all or any portion of his additional general capital by giving notice in writing to the Finance Committee specifying the amount of such withdrawal. Such amount shall be paid to him six months after the last day of the calendar month in which such notice is given. The partnership may, at any time, return to a general partner, or to his legal representatives after his death, all or any portion of his additional1982 Tax Ct. Memo LEXIS 344">348 general capital. Article 10(b) provided that "Net profits may not be withdrawn by the general partners during the year in which they are earned by the partnership except with the consent of the Finance Committee." Article 8 of the partnership agreement provided that the partnership "shall pay the following items" in the stated order of priority. The items which were to be paid to the general partners were as follows: (b) To each general partner an amount computed at such rate or rates as the Finance Committee shall fix from time to time on (i) the amount of cash, and (ii) the capital requirements value (revalued on the last day of each month) of all property other than cash, constituting his additional general capital held in his additional general capital account, other than Secured Capital Notes. (d) To each general partner an amount computed at the rate of Fifty Dollars per annum per Unit held by such partner. (e) Such salaries to the general partners (payable at least monthly) as shall be determined from time to time by a majority in interest of the general partners. Article 14 of the partnership agreement provided that upon the death, adjudication of incompetency1982 Tax Ct. Memo LEXIS 344">349 or retirement of a partner, the value of that partner's interest was to be determined and paid to that partner or his representatives within six months after the date of such computation. However, if this computation "shows a net balance due the partnership, such balance shall be payable fifteen days after the date as of which such value was computed or at such later date as may be agreed upon by the Finance Committee." Article 26 of the partnership agreement provided that upon termination of the partnership, a full accounting of the partnership's assets and liabilities was to be made. If it was determined that a partner owed any amounts to the partnership, the agreement provided as follows: Any partner who is indebted to the partnership in liquidation shall promptly pay the amount of such indebtedness and no payment shall be made to him under this Article until such indebtedness shall have been paid in full by him to the partnership. In order to meet his monthly fixed living expenses, petitioner received monthly payments from the partnership. It was petitioner's understanding that each partner could take money out of the partnership in the amounts he felt he needed to live on1982 Tax Ct. Memo LEXIS 344">350 and then this amount would be deducted from his share of the partnership income which he would receive at the end of the year. He believed these amounts would be charged to his capital account and then he would get a check from the partnership at yearend to the extent that his share of the partnership profits exceeded the total amount of these payments. For nine months in 1970, petitioner received payments of $2,916.66 each month. For the months of July, August, and September, petitioner received payments of $2,666.66 per month. These payments continued in 1971 and, for the first four months of that year, petitioner received payments of $16,666.66 in the form of these monthly withdrawals and a separate payment of $112.50. In his personal capital account maintained by the partnership, the credit side of the statement showed that the $112.50 was characterized as "Int on Genl Cash Cap--Dec" and the other payments were characterized as "Salary." However, on the "debit" side of petitioner's personal capital account statement, his capital account was reduced by the total amount of these payments. The partnership's records entitled "Partners' Shares of Income and Credits, Year Ended1982 Tax Ct. Memo LEXIS 344">351 December 31, 1970," indicate that the so-called "Salary" payments, denominated "Drawing Account" payments, varied in amount amount the various partners and did not relate in any way to their capital interest in the partnership. These payments also did not necessarily reflect the amount or type of work performed by the individual partner for the partnership. In fact, one partner with a 7 or 8 percent capital interest only received payments of $2,666.67 in 1970. The so-called "Interest" payment of $112.50 in 1971 was listed under the heading "Interest on Capital." These payments to the partners were not a uniform percentage of their capital contributions. Beginning in 1970, the partnership sustained heavy losses which continued in 1971. Sometime in 1970, petitioner's capital account became a negative amount due to the amounts he had withdrawn and the fact that the partnership had large losses. Petitioner claimed on his return and was allowed by respondent the amount of $65,517 as his share of the partnership's distributable loss for 1970. In lieu of a Schedule K-1, the partnership submitted to petitioner a typed page indicating the amounts and appropriate lines on the Form 10401982 Tax Ct. Memo LEXIS 344">352 upon which these items were to be listed. The schedule stated under the heading of "Details which will not appear on individual Federal Income Tax Returns" that petitioner's total distributive share of the partnership losses for 1971 was $69,292.97. This loss was reduced by the amount of $16,666.66, which was listed as the total of his drawing account for the year 1971, and $112.50 listed as "Interest," leaving as his distributive share of the partnership losses the amount of $52,513.83. This amount represented the balance to be charged against petitioner's capital account. Petitioner did not claim this amount as a deduction on his 1971 income tax return. The partnership terminated on April 30, 1971. Pursuant to an agreement dated March 17, 1971, a corporation purchased the assets of the partnership and petitioner then worked for the corporation for the following two years. For the remaining seven months of 1971, petitioner was paid a salary of $25,416.69. The corporation did not assume all of the liabilities of the partnership and an administrator was set up to arrange for the payment of the partnership's debts. As a general partner, petitioner agreed to pay a percentage1982 Tax Ct. Memo LEXIS 344">353 of his income from all sources for five years to the administrator. These payments were not paid specifically to discharge his obligation based on his negative capital account but, rather, were paid to satisfy the general debts of the partnership. His Federal tax refunds for the three years prior to 1970 were also required to be turned over to the administrator and petitioner was required to retain a national accounting firm to audit his returns and provide the administrator with a copy throughout the five-year period. In satisfaction of the general partnership obligations, petitioner paid in excess of $15,000, including the amounts from his tax refunds. A lawsuit was filed against the partnership and petitioner ultimately paid in 1980 more than $20,000 in cash in settlement of this lawsuit against the partnership. Petitioner did not include any of the total amount of $16,779.16 he received from the partnership in 1971 in the income reported on his Federal income tax return for that year. In his deficiency notice, respondent determined that the amount of $16,779.16 constituted guaranteed payments under section 707(c) and thus was taxable to petitioner as ordinary income. OPINION1982 Tax Ct. Memo LEXIS 344">354 The only issue presented is whether the payments received by petitioner from his partnership in 1971 in the amounts of $16,666.66 and $112.50 were guaranteed payments.Section 707(c)2 provides that payments made to a partner which are determined without regard to the income of the partnership with be includable in the partner's gross income under section 61(a) and deductible by the partnership under section 162(a). See section 1.707-1(c), Income Tax Regs. In determining whether the payments herein meet the requirements of this section, we must look to the substance of the transaction rather than its form. Falconer v. Commissioner,40 T.C. 1011">40 T.C. 1011, 40 T.C. 1011">1015 (1963). 1982 Tax Ct. Memo LEXIS 344">355 The payments received by petitioner in the amount of $16,666.66 were all described on the partnership's books and records as "Salary." Petitioner, however, contends that these payments were made to him as a member of the partnership out of his own capital account and therefore were not guaranteed payments under section 707(c). Although the payments to petitioner were labeled as "Salary" on the books and records of the partnership, they were entered on petitioner's capital account first as a credit at the beginning of the month and then as a debit when a check was issued to petitioner. Under this method of entry, the payments actually "washed out" in the capital account, neither increasing nor decreasing the negative balance therein. In a typed page prepared by the partnership and given to petitioner in lieu of a Schedule K-1, the payments to him in 1971 of $16,666.66 were described as payments from his "Drawing account." However, the amount was subtracted from his distributive share of the partnership's loss for the year on the schedule, thereby reducing petitioner's distributive share of the 1971 partnership loss of $69,292.97 to a negative balance of $52,513.83 (after a reduction1982 Tax Ct. Memo LEXIS 344">356 of $112.50 for interest) which was to be charged to petitioner's capital account. Petitioner was unable to explain why this reduction was made in his distributive share of the loss. 3Respondent's principal argument is that, while debit entries to petitioner's capital account constitute withdrawals of capital, the credit entries of "Salary" at the first of each month to this same account are in fact salary payments against which petitioner was entitled1982 Tax Ct. Memo LEXIS 344">357 to draw for his living expenses. Petitioner argues that respondent puts too much weight on the credit entries to his capital account. He contends that the fact that these payments were registered as adjustments to petitioner's capital account is inconsistent with respondent's position that these payments were guaranteed payments under section 707(c). There is no showing in the record of the account initially charged on the partnership books when the credit entry was made to petitioner's capital account. The record does indicate that on its Form 1065 the partnership did not initially deduct these "credits" but upon audit of its returns a deduction was allowed for these amounts. The burden of proof in this case is on petitioner. Based on the record before us, we conclude that petitioner has failed to show that the $16,666.66 credited to his capital account as "Salary" which he withdrew in 1971 was not a guaranteed payment. Insofar as this record shows, this amount was paid to petitioner without regard to the partnership income and was payable in all events. For this reason petitioner has1982 Tax Ct. Memo LEXIS 344">358 failed to show error in respondent's determination that the $16,666.66 were guaranteed payments includable in his income. There is no evidence in the record as to the proper characterization of the $112.50 received by petitioner in 1971 which was described as interest on general cash capital. This amount was also used to reduce petitioner's distributive share of the partnership loss on the statement given to petitioner. Based on this record, we conclude that petitioner has failed to show that the $112.50 amount was not a guaranteed payment made to him without regard to the partnership income. We therefore sustain respondent with respect to the inclusion of this $112.50 in petitioner's 1971 income. Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩2. Sec. 707(c) provides as follows: (c) Guaranteed Payments.--To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and section 162(a)↩ (relating to trade or business expenses).3. See sec. 1.707-1(c), Example (2), Income Tax Reg., which states: Example (2).↩ Partner C in the CD partnership is to receive 30 percent of partnership income as determined before taking into account any guaranteed payments, but not less than $10,000. The income of the partnership is $60,000, and C is entitled to $18,000 (30 percent of $60,000) as his distributive share. No part of this amount is a guaranteed payment. However, if the partnership had income of $20,000 instead of $60,000, $6,000 (30 percent of $20,000) would be partner C's distributive share, and the remaining $4,000 payable to C would be a guaranteed payment.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619290/	APPEAL OF REUBEN SADOWSKY.Sadowsky v. CommissionerDocket No. 2965.United States Board of Tax Appeals2 B.T.A. 281; 1925 BTA LEXIS 2468; July 10, 1925, Decided Submitted June 5, 1925. 1925 BTA LEXIS 2468">2468 An individual who incorporated his business prior to July 1, 1919, and elected under section 330 of the Revenue Act of 1918 to have the tax on the income from the business from January 1, 1919, to date of incorporation (June 26, 1919), computed at corporation rates, is not entitled, in arriving at the net income which shall afford the basis for computing the 15 per cent limitation upon charitable contributions contained in section 214(a)(11), to include the net income from the business from January 1, 1919, to date of incorporation. Louis Salant, Esq., for the taxpayer. Lee I. Park, Esq., for the Commissioner. LITTLETON2 B.T.A. 281">281 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This is an appeal from a determination by the Commissioner of a deficiency in individual income tax for the calendar year 1919 in the amount of $8,479.06. The taxpayer elected under section 330 of the Revenue Act of 1918 to have the tax upon the income from his business from January 1, 1919, to June 26, 1919, the date on which the business was incorporated, computed at the rates applicable to corporations, the tax so computed amounting to $115,413.60. This tax is not in1925 BTA LEXIS 2468">2469 controversy. In computing the tax of $8,479.06 upon the net income of taxpayer, amounting to $65,874.81, from sources other than his business, at rates applicable to individuals, the Commissioner, in determining the amount of charitable contributions which the taxpayer might deduct for the calendar year 1919, excluded from the taxpayer's net income taxable at the rates imposed upon the net income of individuals, the net income from the business of $347,981.44. FINDINGS OF FACT. For a number of years prior to 1919 taxpayer was engaged in the manufacture of ladies' cloaks and suits, a business in which capital was a material income-producing factor. On June 26, 1919, the business was incorporated under the name of R. Sadowsky, Inc. In computing 2 B.T.A. 281">282 his tax he elected to exercise the option granted him by the second paragraph of section 330 of the Revenue Act of 1918 to have the tax upon the net income from the business computed at the rates applicable to corporations. The net income from the cloak and suit manufacturing business for the period January 1 to June 26, 1919, was $347,981.44, upon which a tax of $115,413.60 was computed at corporation rates. This tax is1925 BTA LEXIS 2468">2470 not in controversy. The income of the taxpayer for the calendar year 1919 from sources other than the manufacturing business, and taxable at the rates imposed upon individuals, was $65,874.81. During the calendar year 1919 taxpayer made contributions, amounting to $29,950, to corporations organized and operated exclusively for religious, charitable, scientific, and educational purposes or for the prevention of cruelty to children and animals, no part of the net earnings of which inured to the benefit of any private stockholder or individual. In computing taxpayer's individual income taxes for the calendar year 1919 the Commissioner limited the allowable deduction for charitable contributions to 15 per cent of $65,874.81, the taxpayer's net income derived from sources other than the business, allowing thereby a deduction for charitable contributions of only $9,922.55. DECISION. The determination of the Commissioner is approved. OPINION. LITTLETON: The issue presented by this appeal concerns the question of whether an individual carrying on a manufacturing business and an individual, incorporating the business on June 26, 1919, and electing to be taxed as a corporation1925 BTA LEXIS 2468">2471 in respect of profits from the business from January 1, 1919, to the date of incorporation (June 26, 1919), is entitled to include the profits of the business for such period in computing the net income of the individual for the calendar year 1919 which shall afford the basis for computing the 15 per cent limitation on charitable contributions provided by section 214(a)(11) of the Revenue Act of 1918. The facts are admitted. The taxpayer was a manufacturer of ladies' cloaks and suits and conducted his business as an individual from January 1, 1919, to the date of incorporation (June 26, 1919). The net income of the business for such period was $347,981.44. The net income of the taxpayer for the year 1919, exclusive of any part of the $347,981.44 profits of the business and exclusive of charitable contributions, was $65,874.81. During the year 1919 the taxpayer made charitable contributions amounting to $29,950 and has claimed 2 B.T.A. 281">283 the deduction of such amount from the gross income shown on his individual return. The Commissioner has held, however, that the taxpayer is entitled to a deduction for charitable contributions not to exceed 15 per cent of the net income shown1925 BTA LEXIS 2468">2472 by the return without the deduction of the charitable contributions, namely, $65,874.81. In support of his contention taxpayer claims that there is nothing in section 330 which expressly modifies or limits sections 212(a), 213, and 214(a)(11), but that the specific provision of section 330 that the taxpayer should pay the capital stock tax as a condition to availing himself of the option contained in that section, and the further specific provision that any amounts distributed to the individual on or after January 1, 1918, from the earnings of the business should be taxed to the individual as dividends, were intended by necessary implication to mean that the individual should not be subjected to any other burden, or to the forfeiture of any other right, such as the right to avail himself in full of section 214(a)(11); and that the net income from the business should be included, and not excluded, in computing his net income for the calendar year upon which the 15 per cent deduction should be figured under section 214(a)(11) - expressio unius est exclusio alterius.The Commissioner, however, contends that, when the taxpayer elected to have the tax upon the net income from the1925 BTA LEXIS 2468">2473 business computed at the rates applicable to corporations, the law did not permit the inclusion of that income in the income of the taxpayer from other sources for the purpose of determining the amount allowable as a deduction for charitable contributions. Section 212(a) of the Revenue Act of 1918 provides: That in the case of an individual the term "net income" means the gross income as defined in section 213, less the deductions allowed by section 214. Section 213 of the Act defines what shall be included in gross income and section 214 provides the deductions that may be made from the gross income in computing the net income. Paragraph (11) of the latter section provides for the deduction of certain charitable and other contributions "to an amount not in excess of 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph." Section 330 provides, in part: * * In the case of the organization as a corporation before July 1, 1919, of any trade or business in which capital is a material income-producing factor and which was previously owned by a partnership or individual, the net income of such trade or business from January 1, 1918, to1925 BTA LEXIS 2468">2474 the date of such reorganization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1918, and the 2 B.T.A. 281">284 undistributed profits or earnings of such trade or business shall not be subject to the surtax imposed in section 211, but amounts distributed on or after January 1, 1918, from the earnings of such trade or business shall be taxed to the recipients as dividends, and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business: Provided, That this paragraph shall not apply to any trade or business the net income of which for the taxable year 1918 was less than 20 per centum of its invested capital for such year: Provided further, That any taxapyer who takes advantage of this paragraph shall pay the tax imposed by section 1000 of this Act and by the first subdivision of section 407 of the Revenue Act of 1916, as if such taxpayer had been a corporation on and after January 1, 1918, with1925 BTA LEXIS 2468">2475 a capital stock having no par value. * * If the taxpayer had not incorporated his business on June 26, 1919, there is no question but that he would have been required to account in his individual return for the profits from his business. In such event he would have paid the normal income and surtaxes imposed upon individuals in respect of his entire net income computed in the manner outlined by sections 212, 213, and 214 of the Act. Section 330 of the Act gives him the privilege, however, of being taxed as a corporation in respect of the net income of his business. The net income of that business is determined in the manner outlined in sections 232, 233, and 234 of the taxing act. The deductions from gross income to which he became entitled when he elected to be taxed as a corporation in respect of the net income from his business are different in several respects from the deductions allowed individuals in respect of the net income from a business. Section 330 provides that "all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business." In the instant case the taxpayer was not taxed as an individual in respect1925 BTA LEXIS 2468">*2476 of the profits from his business for the period January 1, 1919, to June 25, 1919, inclusive. The profits of the business were not included in the gross income upon which the taxpayer paid a normal income and surtax. They were not included as a part of the gross income of the individual under section 213 of the Act. Under the provisions of the taxing act, the taxpayer had an option to elect whether he would be taxed as an individual in respect of the profits from his business for the period January 1 to June 25, 1919, inclusive, or as a corporation. He exercised the option given him by section 330 and elected to be taxed as a corporation in respect of the profits. Those profits do not constitute a part of his individual net income for the year 1919. We think that the Commissioner was correct in limiting the amount of charitable contributions deductible from the taxpayer's gross income for the year 1919 by limiting that amount to 15 per cent of the net income shown by his individual return before the deduction of the charitable contributions in question.	01-04-2023	11-21-2020

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