Split (1)

train · 657k rows

url stringlengths 56 59	text stringlengths 3 913k	downloaded_timestamp stringclasses 1 value	created_timestamp stringlengths 10 10
https://www.courtlistener.com/api/rest/v3/opinions/204868/	FILED NOT FOR PUBLICATION FEB 15 2011 MOLLY C. DWYER, CLERK UNITED STATES COURT OF APPEALS U .S. C O U R T OF APPE ALS FOR THE NINTH CIRCUIT KELOMAR, INC., a California No. 09-56929 corporation, D.C. No. 3:09-cv-00353-BTM- Plaintiff - Appellant, PCL v. MEMORANDUM * DARRELL KULOW, Defendant - Appellee. Appeal from the United States District Court for the Southern District of California Barry T. Moskowitz, District Judge, Presiding Submitted February 11, 2011 ** Pasadena, California Before: PREGERSON, WARDLAW, and BEA, Circuit Judges. Kelomar, Inc. (“Kelomar”) appeals from the district court’s grant of Darrell Kulow’s (“Kulow”) motion for judgment on the pleadings. We affirm. * This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3. ** The panel unanimously concludes this case is suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2). Kelomar contends that Kulow owed a personal duty to ensure that Kelomar’s melons were properly labeled. The law imposes no general duty to label melons correctly independent of a contract. See Stop Loss Ins. Brokers, Inc. v. Brown & Toland Med. Group, 49 Cal. Rptr. 3d 609, 612 (Ct. App. 2006) (stating that the duty to “promptly process another’s data” arises from a contract, and is not comparable to a general duty to avoid injuring others). Thus, if Kulow had such a duty, it could only arise from Hebberd-Kulow Enterprise’s (“HKE”) contract with Kelomar. But even assuming HKE’s contract with Kelomar imposed a duty on Kulow, Kelomar could not recover in tort for the breach of that contractual duty. See Aas v. Superior Court, 101 Cal. Rptr. 2d 718, 729 (2000) (“A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations.”). As the district court stated, Kelomar should seek its remedy in a breach-of-contract suit against HKE. Kelomar argues that the deterioration of the melons resulted in property damage as opposed to purely economic injury, thus elevating the breach-of- contract claim to a tort claim. Assuming without deciding that the existence of property damage may convert a breach of contract into a tort, we nonetheless disagree that the defective labels damaged the melons. The defective labels 2 arguably precluded sale of the melons temporarily until the error was corrected. The labels did not “directly cause[] physical injury.” Erlich v. Menezes, 87 Cal. Rptr. 2d 886, 891 (1999). Any damage to the melons resulted from natural deterioration, not from any defect in the labels. Kelomar does not dispute that the loss of profits from a decline in value of non-perishable goods is adequately addressed by remedies in contract. See S.M. Wilson & Co. v. Smith Intern., Inc., 587 F.2d 1363, 1376 (9th Cir. 1978) (“Where the suit is between a non-performing seller and an aggrieved buyer and the injury consists of . . . a loss of profits that the deal had been expected to yield to the buyer, it would be sensible to limit the buyer's rights to those provided by the Uniform Commercial Code.”). We see no reason to create a special rule for perishable goods, nor does Kelomar cite to any case suggesting we should. Kelomar objects that if it can recover only for breach of contract, then Kelomar has no remedy against Kulow, who is not a party to the contract. But this is the nature of limited liability, and this case presents no reason to question a fundamental concept of the law of corporations. See United States Liab. Ins. Co. v. Haidinger-Hayes, Inc., 83 Cal. Rptr. 418, 423 (1970) (“Directors and officers are not personally liable on contracts signed by them for and on behalf of the corporation unless they purport to bind themselves individually.”). 3 AFFIRMED. 4	01-04-2023	02-16-2011
https://www.courtlistener.com/api/rest/v3/opinions/4619589/	Estate of Abraham Koshland, Deceased, Jesse Koshland, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentKoshland v. CommissionerDocket No. 13780United States Tax Court11 T.C. 904; 1948 U.S. Tax Ct. LEXIS 22; November 30, 1948, Promulgated 22 Decision will be entered under Rule 50. Decedent in 1922 created a trust which he later amended in 1923. The unrestricted power was retained in the decedent, as settlor, in conjunction with his wife, the life beneficiary, to alter and amend the trust. Held:(1) The value of the remainder interests transferred is includible in decedent's gross estate under section 811 (d) (2) of the code, decedent's wife having no substantial adverse interest in remainders.(2) The application of section 811 (d) (2) in the present proceeding does not violate the due process clause of the Fifth Amendment of the Constitution.(3) In computation of the value of the includible remainder interests, (a) petitioner has not shown error in respondent's use of the Actuaries or Combined Experience Table included in his Regulations, and (b) no error has been shown in respondent's use of the factor set forth in the regulations applicable to quarterly payments. Samuel Taylor, Esq., Edgar Sinton, Esq., and Bernard Shapiro, Esq., for the petitioner.A. J. Hurley, Esq., for the respondent. Kern, Judge. KERN 904 Respondent determined a deficiency in the estate tax of petitioner in the sum of $ 49,062.25. Practically all of this deficiency results from the inclusion by respondent in the decedent's gross estate of the value, as determined by him, of the remainder in a trust created by decedent in 1922. The reasons given by respondent for such inclusion are that the decedent reserved the power to alter, amend, or revoke as to the remainder interests in the trust, and that the transfer to the trust24 was intended to take effect at or after decedent's death. Petitioner alleges that respondent erred in including such interests in decedent's gross estate, and, in the alternative, that the respondent's valuation of such interests was too high. Petitioner also alleges that respondent erred in not allowing full credit for state inheritance taxes paid or payable, and in not allowing petitioner a deduction for legal fees as a result of this proceeding. As to the last two issues, 905 the first is covered by the stipulation of the parties hereinafter referred to, and the second was not made the subject of any testimony.At the hearing herein a stipulation of facts was filed by the parties. In addition oral and documentary evidence was introduced.FINDINGS OF FACT.We find the facts to be as stipulated by the parties, and set out herein a resume of those facts stipulated, together with our findings based upon the evidence adduced at the hearing.The decedent died on April 15, 1944, and his estate is in the process of administration in California. The estate tax return of the petitioner estate was filed with the collector of internal revenue for the first district of California. 25 At the time of his death decedent was 75 years old, and his wife, Estelle W. Koshland, who was still living at the time this case was tried, was 66 years old. She had been his wife for many years prior to 1922. They had two sons, both of whom are living. One, Stephen A. Koshland, was born in 1902, and the other, William A. Koshland, was born in 1906. The older son married in 1938. He and his wife have two children, one born in 1940 and the other in 1943.Decedent also had a brother, Jesse Koshland, with whom he had very close personal and business contacts until decedent's death.On December 26, 1922, the decedent created a trust by transferring certain securities, which had a cost to him of $ 290,596, to Jesse Koshland and Stanley H. Sinton (a nephew), who declared themselves trustees of this property in a declaration of trust, the pertinent provisions of which read as follows:Second: For and during the lifetime of Estelle W. Koshland of said Boston the income of this trust less proper charges and deductions including the payment of such taxes, municipal, state or Federal as may be levied thereon, shall be paid over unto her semi-annually, quarterly or oftener for and during26 her lifetime and upon her death then said income shall be paid over unto Abraham Koshland of said Boston, semi-annually, quarterly or oftener for and during his lifetime, and upon the death of the survivor of the said Estelle W. Koshland, and the said Abraham Koshland, said fund shall be divided into two equal parts, and one of said parts shall be held for the use and benefit of each of Stephen A. Koshland and William A. Koshland, sons of the said Estelle W. Koshland and the said Abraham Koshland, upon the following terms and conditions, to wit: the income to be paid to the guardian of a son during his minority and upon such son attaining the age of twenty-one (21) to pay the said income to him for and during his lifetime. At any time after a son shall have attained the age of twenty-one (21) to pay over to such son from time to time such proportion of the principal of such trust fund as the Trustees may deem best, but not more than one-third (1/3) of such principal shall be advanced to him before he reaches the age of thirty (30) years, the balance of the principal may be paid over to him after he attains the age of thirty (30).906 Upon the death of a son, to pay over the27 principal of his share of this fund to the lawful issue of such son in such proportion and such manner and upon such terms as he may by any last will or testamentary instrument direct, and in default of such direction, then to and amongst his issue, or if he leave no issue, then to and amongst such other persons as he shall by any last will or other testamentary instrument direct, and in default of such direction, then to and amongst his heirs-at-law.Third: Neither said Stephen A. Koshland nor said William A. Koshland shall have any right to anticipate payments of income, nor shall the said Stephen A. Koshland or the said William A. Koshland have any right to assign or transfer any part of the fund or income therefrom to which he may be entitled hereunder, and if any such assignment shall be made, whether voluntary or involuntary, then in the discretion of the Trustees all right of such assignor may be determined and the share of such beneficiary disposed of in the same manner as if the beneficiary had died at the date of such assignment.The Trustees shall exercise uncontrolled discretion if in their judgment at any time it is deemed undesirable to pay over the income to any one28 of the sons of said Estelle W. Koshland and Abraham Koshland to withhold the same and in that event they are authorized under the terms herein to expend the same or any part thereof for the benefit of the sons so entitled to such income, or they may allow such income or any unexpended part thereof to accumulate and add the same to the principal of said fund held for the benefit of such son.Fourth: At any time or during any period when no income is received, or where the income received is less than Fifteen Thousand (15,000) Dollars in any year, the Trustees may, upon the application of any beneficiary, apply and expend such part of the principal of the fund as may be necessary:(a) To provide either the said Estelle W. Koshland or the said Abraham Koshland with an income of Fifteen Thousand (15,000) Dollars for such year;(b) To provide any one of the children of said Estelle W. Koshland and Abraham Koshland with an income of Five Thousand (5,000) Dollars for such year.Fifth: Upon the death or resignation or inability of the said Jesse Koshland and the said Stanley H. Sinton to act as Trustees for a period of six (6) months, certified to by the beneficiaries, a new Trustee may be29 appointed upon the nomination of the said Abraham Koshland for and during his lifetime, and after his death then by the nomination of the said Estelle W. Koshland for and during her lifetime and after the death of the said Estelle W. Koshland and the said Abraham Koshland, then upon the nomination of the two beneficiaries. A written nomination or appointment of such new trustee shall be filed with this Agreement and Declaration of Trust and the new appointee shall in writing accept and upon such written acceptance of his appointment, and the filing thereof with the nomination, shall thereupon, without any further act or conveyance, be vested with all the rights and powers of a Trustee, and subject to all the obligations and duties herein imposed.Sixth: The Trustees shall keep proper books of account, showing their receipts and disbursements which shall at all reasonable times be open to the inspection of the beneficiaries.Seventh: Power is hereby reserved during the lifetime of the said Abraham Koshland and given to the said Abraham Koshland, with the approval of the Trustees hereof, at any time in his uncontrolled discretion to amend this Declaration of Trust in any manner whatever, 30 and expressly including the right to limit or change the beneficiaries herein or the share or proportion of any beneficiary.907 Eighth: Power is hereby reserved, during the lifetime of said Abraham Koshland, and given to the said Abraham Koshland at any time in his uncontrolled discretion to terminate this trust and upon such termination, the principal and undistributed income then in the hands of the Trustees shall be distributed to and amongst such person or persons as he shall direct by a written instrument addressed to the Trustees and authority is expressly reserved to the said Abraham Koshland to direct and designate himself as the person entitled to such distribution either in part or in whole of said fund.Ninth: Each and every one of the powers, purposes and provisions hereof, except as otherwise provided, shall be regarded as separate and distinct from every other power, purpose and provision so that no one shall be limited by reference to or inference from any other, and the enumeration of specific purposes and powers shall not be construed to limit or restrain in any manner the meaning of general terms. If a court of last resort shall decree that any of the powers, 31 purposes, or provisions hereof are invalid, this shall not in any wise limit any other power, purpose or provision hereinbefore granted, but only such power, purpose or provision so decreed to be invalid shall be limited, and all other powers, purposes and provisions herein granted, shall be unmodified thereby.On December 26, 1923, decedent, for the first and only time, amended this trust. The amendment canceled articles 7 and 8 of the original declaration of trust and substituted therefor the following:7. Power is hereby reserved during the lifetime of the said Abraham Koshland and given to the said Abraham Koshland and Estelle W. Koshland with the approval of the Trustees hereof at any time in the uncontrolled discretion of the said Abraham Koshland and Estelle W. Koshland to amend this declaration of Trust, and if during the lifetime of the said Abraham Koshland the said Estelle W. Koshland shall not be living, then any one of the sons of the said Abraham Koshland and the said Estelle W. Koshland, who is a beneficiary under the said Declaration of Trust, may exercise in conjunction with the said Abraham Koshland the power of amendment in place of, and in substitution for, said32 Estelle W. Koshland, with the same force and effect as if the son so joining in such amendment had been originally and specifically named in the place and stead of said Estelle W. Koshland.8. This trust shall be irrevocable.Since the creation of the trust, two individuals closely related to decedent have served as trustees. Since September 28, 1945, the two trustees have been decedent's sons.All of the income of this trust has been paid year by year to Estelle W. Koshland. Prior to 1931 this income was in excess of $ 15,000 annually. Since then, it has fluctuated between $ 10,000 and $ 14,000. Although she has not made any application to the trustees for the payment from trust principal of any amount necessary to bring her income to the sum of $ 15,000, it was the intent of the decedent and the understanding of the trustees that she have this right; and it is conceded by respondent on brief that she is and was entitled to an annual income from the trust in the amount of $ 15,000.At the time of decedent's death, as well as at the time of the hearing in this proceeding (March 23, 1948) decedent's wife was in good 908 health, and her personal physician expected her to live33 out her normal life expectancy.Decedent's power of amendment of the trust was unrestricted and was exercisable by him with a person not having a substantial adverse interest in the remainder.The fair market value of the trust estate, as of the date of decedent's death, was $ 231,524.64.In determining the value of the remainder interest, which respondent contends is includible in decedent's gross estate, he substracted from the value of the trust estate the value of decedent's wife's life estate, calculating this value in conformity with Table A appearing in Regulations 105, section 81.10 (i). This table is based upon The Actuaries' or Combined Experience Table of Mortality.This table is the result of experience of seventeen British life insurance companies covering a period from 1762 until 1837; it makes no distinction between the length of male lives and the length of female lives.Many other tables of mortality have been in widespread use. The Actuaries' or Combined Experience Table of Mortality is not now used by insurance companies in computing annuities. Insurance companies do not use annuity mortality tables in determining life insurance premiums or in calculating life34 insurance reserves. Annuity mortality tables reflect only the experience of insurance companies with annuitants as a class. They do not purport to reflect the general mortality experience. Annuitants, as a rule, are a self-selected group and tend to outlive the average. For the purpose of computing life insurance premiums, insurance companies use their own mortality tables based upon their individual experience.Modern experience has demonstrated that females live longer than males, and some annuity tables now take this factor into account.The 1937 Standard Annuity Table has been used by insurance companies and by actuaries as a basis for determining annuities and life estates since 1937. The table is used for both male and female lives, except that the age of the female is taken at an age five years younger than the male life. It is one of the most current tables in use for the evaluation of annuities.The table currently used by insurance companies for purposes of reserves and the like and considered as reflecting general mortality experience is the Insurance Commissioners' 1941 Standard Ordinary Table of Mortality. This table is based upon experience in the years 1934 to35 1936, with adjustment for possible epidemics and other catastrophes.Decedent's wife's expectation of life under various mortality tables is as follows: 909 Mortality TableAge 66Combined Experience or Actuaries' Table10.46American Experience10.54Insurance Commissioners' 1941 Table11.01American Annuitants'11.95Combined Annuity:Male12.17Female14.521937 Standard Annuity:Male13.81Female16.90The proper factor for quarterly payments is 1.01488, to be multiplied by the annuity value of the annual payments to the estate of Koshland under the trust.The value of the trust remainder, includible in decedent's gross estate, is $ 116,973.71.OPINION.The principal issue in this proceeding is whether the value of the remainder interest in the trust created and amended prior to 1924 is includible in decedent's gross estate. One of the grounds urged by respondent for inclusion is that the transfer was one in which the decedent reserved the power to alter and amend the trust within the meaning of section 811 (d) of the Internal Revenue Code137 and the applicable regulations. 2 Petitioner seeks to meet this argument by a three-fold36 attack. First, it is urged that after the 1923 amendments to the trust the right to amend further encompassed 910 only slight and trivial matters; second, that the right to amend was in conjunction with decedent's wife, who had a substantial adverse interest in the remainder of the trust; and, third, that the law and regulations may not be constitutionally applied to pre-1924 transfers.Petitioner's first point is without merit. The trust instrument, as amended, contains a broad sweep of power. It was provided: 38 7. Power is hereby reserved during the lifetime of the said Abraham Koshland and given to the said Abraham Koshland and Estelle W. Koshland with the approval of the Trustees hereof at any time in the uncontrolled discretion of the said Abraham Koshland and Estelle W. Koshland to amend this declaration of Trust. * Petitioner would have us construe this language narrowly, since certain provisos appearing in the paragraph prior to amendment were deleted. Rather than an aid to petitioner's view, these omissions can be interpreted as clothing decedent with as broad a power as it was possible to accord him. In any event, the mere fact that no limitations appear can not be said to diminish the general power granted.None of the cases cited to us by petitioner, of which Theopold v. United States (CCA-1), 164 Fed. (2d) 404, is an example, are in point, as none contained as general a power of amendment as retained by this decedent. In the Theopold case, the power was limited to amend the trust instrument only "so that it will more clearly express my actual intentions * ." The Circuit Court recognized that the trust instrument was inexpertly 39 drawn and the trustor wished to retain the power to settle meaning. It further observed:* * * Certainly if he had wished to retain broad powers of amendment as to substance he could have said so very simply by merely reserving a general power to alter, amend or revoke. * * Such a general power as referred to by the court was here retained.Petitioner next contends that, irrespective of the scope of the power of amendment, it could not be exercised except in conjunction with a person having a substantial adverse interest. This raises the question of whether the life tenant, decedent's wife, can be said to have a substantial adverse interest in the remainder. 3 We believe that she did not.40 911 Petitioner's argument, with which we can not agree, is that decedent's wife had a substantial adverse interest in the remainder, since she possessed the right during her lifetime to have corpus invaded if it became necessary to assure her the receipt of $ 15,000 annually, and it was to her benefit to retain her sons as remaindermen. This approach loses sight of the meaning and significance of the "substantial adverse interest" concept. See Flood v. United States (CCA-1), 133 Fed. (2d) 173; Union Trust Co. of Pittsburgh v. Driscoll (CCA-3), 138 Fed. (2d) 152; certiorari denied, 321 U.S. 764">321 U.S. 764.Petitioner relies principally upon Commissioner v. Kaplan (CCA-1), 102 Fed. (2d) 329, and seeks to distinguish David J. Lit et al., Executors, 28 B. T. A. 853; affd., 72 Fed. (2d) 551, and Estate of Charles M. Thorp, 7 T.C. 921">7 T. C. 921; affd., 164 Fed. (2d) 966; certiorari denied, 333 U.S. 843">333 U.S. 843. In the Kaplan41 case, decedent created a trust in 1923, of which he was trustee and his wife life beneficiary, with remainders over after his and his wife's deaths to their children. The trust could be amended and revoked "by the Trustees," assented to by the life beneficiary. Under these facts, it was held that decedent's wife had a substantial adverse interest in the remainder, and hence it was not includible in decedent's gross estate. Among the reasons assigned to support this conclusion was the following:In this connection it is to be noted that Mr. Kaplan [decedent] as an individual reserved no right of revocation but rather granted these rights to the trustee then in office. This fact, if not controlling, supports the conclusion that the trust was, when made, a fully completed transfer of all interests in the trust estate. * * The Circuit Court distinguished the Lit case:Lit et al. v. Commissioner of Internal Revenue, 3 Cir., 72 F. 2d 551, relied upon by the petitioner, was a case where the remainder interest was held properly included, the trust instrument reserving in the settlor the right of revocation with the assent of the42 life beneficiary. Apart from the distinguishing fact that the donor expressly reserved the right of revocation, it appears, also, that the trust was created in 1927 and the Revenue Act of 1926, sec. 302 (d), 44 Stat. 71, was applied. * * In the Lit case, the decedent in 1927 created a trust the income of which was to be paid to his wife for life, and after the death of both remainders were given to others. The power of amendment and revocation was retained by decedent in his individual capacity, in which his wife was required to join. It was there held that the value of the life estate vested in the wife should not be included as part of decedent's gross estate, but the remainder interest was includible; the wife was said to have a nonadverse interest in the remainder, and trust was deemed revocable within the meaning of section 302 (d) of the Revenue Act of 1926. It was there said by us: * * All that the settlor had to do in order to exercise this reserved power of revocation as to David Jack Lit was to do it in conjunction with Rosa L. Lit 912 [his wife], who was in no sense an adverse interest as to the remainder interest of the trust estate. * While it 43 is true that in the Porter case the settlor of the trust was left free to exercise the limited power which he reserved, alone and without having to secure the consent of any one, whereas in the instant case the settlor must secure the written consent of his wife, Rosa L. Lit, still, as we have already stated, Rosa L. Lit had no interest in the remainder interest and as to that she was not an adverse interest and we think these facts bring the situation as to the remainder interest within the purview of the language of section 302 (d). * * The Lit case was cited approvingly by us in the Thorp case, and by the Circuit Court in its affirmance. There, decedent created a trust in 1918, reserving the power in himself to terminate the trust, cutting off the remainder interest, upon the request of the life beneficiaries. We held that the value of the transferred remainder interest was includible in decedent's gross estate under section 811 (d) (2) of the Internal Revenue Code. The Circuit Court, in its affirmance, stated: * * On the question whether the interests of the five children were "substantially adverse," the Tax Court said, "Here the persons in whom the right to44 terminate was reserved were obviously not adversely interested in the exercise of that right as to the remainder -- which is the only matter basing the present controversy." Bearing in mind that by exercising their power of termination the children would have received "absolute property" in the corpus, rather than merely the income therefrom, and also the fact that there was a close family relationship, we are not prepared to say that the Tax Court erred in choosing from conflicting inferences the conclusion that their interests were not "substantially adverse." * Taxpayer's further contention that a beneficiary of a trust is "adverse to the grantor * * regardless of whether a change would benefit or injure him" not only rejects the ordinary meaning of the word "adverse," but also meets such insurmountable obstacles as Helvering v. City Bank Co., supra at page 90, and the express language of the Tax Court in Lit v. Commissioner, 28 B. T. A. 853, 860-861 (1933), affirmed by this court in 72 F. 2d 551 [14 AFTR 481] (1934). * * Such cases as Estate of Frederick S. Fish, 45 B. T. A. 120,45 where the life tenant had also a power of appointment over the remainder interest, and Mackay v. Commissioner (CCA-2), 94 Fed. (2d) 558, reversing 33 B. T. A. 765, holding that a remainderman has an adverse interest in the life estates, cited to us by petitioner, are clearly distinguishable and are not in point.Since we hold that decedent reserved to himself the power of amendment with a person whose interest was nonadverse as to that portion of the trust property sought to be included in decedent's gross estate, petitioner's constitutional argument, based upon the application of the law and regulations to pre-1924 transfers, disappears. Estate of Charles M. Thorp, supra. Cf. Commissioner v. Kaplan, supra;Union Trust Co. of Pittsburgh v. Driscoll, supra.In view of our decision that the remainder interest is includible in decedent's gross estate, under section 811 (d), it becomes unnecessary 913 to decide whether it is also includible under 811 (c) of the code. There does remain, however, one further question, i. e., 46 the value of the interest to be included.The parties have stipulated the fair market value of the trust estate as of the date of death. The area of disagreement is as to the value of the life interest which is to be subtracted. Petitioner contends that it is unsound to determine such value in conformity with respondent's regulations, 4 as they are based upon an obsolete mortality table, and, further, that an improper factor for quarterly payments is therein employed. The burden of proving these contentions is upon petitioner. Estate of Charles H. Hart, 1 T. C. 989; Estate of Koert Bartman, 10 T.C. 1073">10 T. C. 1073.The questions petitioner raises are not new. Estelle May Affelder, 7 T. C. 1190; Henry F. du Pont, 2 T. C. 246. We have carefully considered all of the evidence introduced by petitioner. It is of the same purport as that presented by taxpayers in some47 of the earlier cases, and we must conclude that petitioner has not borne the burden of proof on either point.An actuarial expert called by petitioner testified as to the history of various mortality tables, and then expressed the opinion that if he had his choice of the table to be used to value the life estate he would select the 1937 Standard Annuity Table. This table shows a life expectancy for decedent's wife of over six years more than the table embodied in respondent's regulations, and about five years more than the table approved in Anna L. Raymond, 40 B. T. A. 244; affd., 114 Fed. (2d) 140; certiorari denied, 311 U.S. 710">311 U.S. 710, a case upon which petitioner chiefly relies. It should be observed that the latest mortality table presented indicates a life expectancy of 11.01 years for decedent's wife as compared to 10.46 years in the table incorporated in respondent's regulations.The table petitioner urges might be worthy of further consideration if our question were the cost of an annuity from a commercial insurance company. This was the underlying problem posed in the Raymond case, and it48 was there considered proper to utilize a table that such companies were using in their annuity business. We observed in the Bartman case, supra, "that insurance companies take into consideration the element of self-selection in writing annuities; and that they use whatever tables are best suited for their particular needs." There is no showing here that the mortality of inheritors or donees closely resembles that of purchasers of annuity policies. In fact, contrary evidence appears in the record.Whatever may be the shortcomings of the table used by respondent, cf. concurring opinion of Mellott, J., in Henry F. du Pont, supra, 914 petitioner has not convinced us that the 1937 table or any other table, not embodied in respondent's regulations, must be applied in this proceeding, or that respondent's use of the Combined Experience Table in this proceeding is erroneous. Estelle May Affelder and Estate of Koert Bartman, both supra.Even greater weakness pervades petitioner's argument as to the proper factor for quarterly payments. The actuarial expert testified that the factor respondent used was proper if only an annuity49 for a term certain were involved, but was not correct if the annuity were for life. He testified further that the value of a life annuity, payable quarterly, is less than the value of an annuity certain, payable quarterly, for a term equal to the annuitant's life expectancy. Yet the factor petitioner urges and the method of its application lead to a higher value for a life annuity. This discrepancy could not be adequately explained by petitioner, nor was there any significant evidence as to the derivation of the factor it sought to have us apply. Petitioner's view can not be sustained. Estelle May Affelder, supra.Decision will be entered under Rule 50. Footnotes1. SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --* * * (d) Revocable Transfers. -- * ** * * (2) Transfers on or prior to 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, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth * .↩2. Sec. 81.20 [Regulations 105]. Transfers with power to change the enjoyment. * * *(b) Taxability. -- The property or any interest therein transferred as described in subsection (a) shall be included in the gross estate if it comes within any one of the following paragraphs:(1) If the transfer was made prior to the enactment of the Revenue Act of 1924 (4:01 p. m., eastern standard time, June 2, 1924), and the power was reserved at the time of the transfer and was exercisable by the decedent alone or in conjunction with a person or persons having no substantial adverse interest or interests in the transferred property, or if exercisable in conjunction with a person having a substantial adverse interest or with several persons some or all of whom held such an adverse interest, then to the extent of any interest or interests held by a person or persons not required to join in the exercise of the power and to the extent of any adverse interest which was not substantial.↩3. The question of whether the decedent's wife had a substantial adverse interest in this pre-1924 inter vivos transfer becomes important under the established doctrine of Reinecke v. Northern Trust Co., 278 U.S. 339">278 U.S. 339. It was there recognized that a transfer in trust, where the settlor reserved to himself alone or to himself with a person having a nonadverse interest, was not a completed transfer because the property did not pass completely out of his control until his death, and as such was includible in the decedent's gross estate even prior to the enactment of the Revenue Act of 1924. The taxing statute is not unconstitutional as to trusts created prior to its enactment if the transfers thereunder are incomplete. Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327. Section 302 (d) of the Revenue Act of 1924 first introduced the provision that if the settlor in conjunction with any person reserved the right to revoke or otherwise materially change the transferred interests, the conveyance was taxable. As to transfers after that date, the "substantial adverse interest" requirement is immaterial. Helvering v. City Bank Farmers Trust Co., 296 U.S. 85">296 U.S. 85↩.4. Regulations 105, sec. 81.10 (i).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619590/	Walts, Inc., a corporation v. Commissioner.Walts, Inc. v. CommissionerDocket No. 6974.United States Tax Court1947 Tax Ct. Memo LEXIS 335; 6 T.C.M. (CCH) 22; T.C.M. (RIA) 47003; January 17, 1947George H. Zeutzius, Esq., and A.P.G. Steffes, Esq., for the petitioner. W. J. McFarland, Esq., for the respondent. HARLANMemorandum Findings of Fact and Opinion HARLAN, Judge: The respondent determined a deficiency in the declared value excess profits tax of petitioner for the year 1942 in the amount of $1,021.20, and in excess-profits taxes for the same year in the amount of $28,690. The questions involved are: (1) Whether respondent correctly disallowed certain amounts as deductions by petitioner on the ground that they constituted exclusive compensation for services rendered by W. J. Cunningham and E. D. Morse during the year 1942, and (2) Whether the respondent correctly disallowed amounts paid by petitioner to each of its directors during the same year. Findings of Fact Petitioner, Walts, Inc. 336 , known also by the fictitious name of Aero Alleys, has its principal office and place of business in Los Angeles, California. Its books are kept and its returns filed on the accrual and calendar year basis. Its return for 1942 was filed with the collector of internal revenue for the sixth district of California at Los Angeles. Walter J. Cunningham, the president of petitioner, is a veteran of World War I. Prior to entering the service he completed his high school education, had two years in business college, and one year at Williams College. Upon his discharge from the Army he decided to engage in business, and worked for one year as a claims adjuster with the Travelers Insurance Company. His father had a lumber business in Rochester, New York, and he became associated with his father in the wholesale end of this business in 1920 as a salesman. He was secretary and treasurer of the lumber company from 1922 to 1935, and received compensation of from $12,000 to $15,000, one-half of which was salary and the remainder commission and bonus. The lumber company underwent a reorganization under section 77-B of the Bankruptcy law in 1932, and continued in business until 1935 when it was dissolved. 337 Cunningham then went to the West Coast in October 1936 and secured employment as a salesman with a lumber company, doing practically the same type of work he had been doing in Rochester, and received a salary of $270 a month. He did not receive any commission or bonus. During the course of his employment by the West Coast lumber company, Cunningham met Walter E. Withers and J. Robert Muratta. Withers owned some foundry equipment at Culver City. After looking it over, Cunningham suggested moving the equipment to a different location in an industrial section and organizing a corporation to engage in the foundry business. This was done and petitioner was incorporated under the laws of California on April 24, 1940, with an authorized capital stock of $25,000, divided into 2,500 shares of a par value of $10 a share. Petitioner's articles of incorporation were executed April 22, 1940, by Withers, Cunningham and Muratta who were named therein as its directors. At an organization meeting held on April 25, 1940, Withers was elected president, Muratta vice-president, and Cunningham secretary-treasurer. Withers acquired 100 shares of petitioner's stock by paying therefor $500 in cash and338 by transferring to petitioner foundry equipment valued at $600. Katharyn S. Cunningham, wife of Walter J. Cunningham, acquired 50 shares by paying therefor $500 in cash which she borrowed from her father. Walter J. Cunningham did not invest any money in petitioner's business, and was not a stockholder at any time. Under date of February 26, 1941, 2 agreements were entered into between petitioner and the Aluminum Company of America, wherein the latter licensed petitioner to use its patented processes for the thermal treatment of casting of aluminum alloy compositions, in consideration of the payment of a royalty of one-half cent per pound on all articles produced by petitioner with the use of such processes. At a meeting of the Board of Directors of petitioner held on March 31, 1941, Cunningham advised the directors that the licensing agreements of February 26, 1941, had been procured for petitioner through the efforts of Katharyn S. Cunningham and that she incurred obligations and expended the sum of $1,140 in obtaining them. A resolution was adopted directing that she be reimbursed for the moneys expended. The direction also authorized the leasing or construction of an adequate339 plant and the purchase and installation of equipment to maintain said plant for the manufacture of aluminum alloys products. For the purpose of obtaining needed funds, the directors authorized the borrowing of $8,500 from Dorothy M. Morse, the wife of Elmer D. Morse. The authorized loan was made and petitioner gave its note for $8,500 to Dorothy M. Morse. Thereafter a building 40 X 60 feet was leased. At the March 31, 1941, meeting the board also authorized the payment of salaries of $200 per month each to Walter J. Cunningham and Elmer D. Morse for their services. It accepted the resignation of Muratta as a director and vice-president and appointed Morse to succeed him as a director. Withers resigned as a director and president of the corporation, and Walter J. Cunningham was appointed president and Morse secretary and treasurer. At or about the time of the March 1941 meeting Katharyn S. Cunningham became the owner of 75 shares of petitioner's outstanding stock and Elmer D. Morse the owner of the remaining 75 shares, and this ownership of stock prevailed throughout the remainder of the year 1941 and during the year 1942. On January 5, 1942, the stockholders of petitioner had340 a meeting and elected Walter J. Cunningham, Katharyn S. Cunningham, Dorothy M. Morse, and Elmer D. Morse to be directors. At a directors meeting on the same day a resolution was adopted that Walter J. Cunningham and Elmer D. Morse each be paid at the rate of $24,000 per annum for their services effective as of January 1, 1942. Cunningham was elected president, Mrs. Cunningham vice-president, Morse secretary and treasurer, and Mrs. Morse vice-president. At a meeting held April 10, 1942, petitioner's directors authorized the purchase and installation of a new heat treating furnace at the cost of approximately $5,000 and the erection of an addition to petitioner's plant, together with necessary equipment, to cost approximately $3,000. On June 12, 1942, petitioner's directors authorized its president and treasurer to erect an additional building on the north side of petitioner's plant and to purchase necessary equipment at an expenditure of approximately $2,500. At a meeting held August 14, 1942, petitioner's directors adopted a motion "that each director be paid the sum of $25 for attendance at each meeting of the board of directors". On August 28, 1942, the Aluminum Company341 of America wrote petitioner that because of the direct and immediate relationship of the heat treatment of aluminum alloy castings to war time production, the license agreement of February 26, 1941, was to be royalty-free from July 1, 1942, until the cessation of hostilities. At a meeting held August 28, 1942, petitioner's directors adopted resolutions that Walter J. Cunningham and Elmer D. Morse each be paid at the rate of $36,000 per year for their services effective as of September 1, 1942. During the period August 28, 1942, to December 30, 1942, inclusive, ten recorded directors' meetings were held at which all four directors were present. The discussions in the meetings dealt chiefly with reports on the increase of the business, bank loans, the construction of additions to petitioner's plant, the purchase of necessary additional equipment, the authorization thereof, and of other expenditures; also that arrangements had been completed for a line of credit with the Bank of America up to Twenty-five Thousand Dollars. During 1942, petitioner's business consisted entirely of the manufacture and sale of airplane parts as a sub-contractor for airplane parts used by aircraft corporations342 engaged in war work, which said parts were made of aluminum by use of the heating processes covered by the licensing agreements with the Aluminum Company of America. Petitioner's gross sales in 1940 were $1,227.38, and it sustained an operating loss for the year ending December 31, 1940, in the amount of $1,123.58. No salaries were paid by petitioner to any of its officers or directors during 1940. During 1941 petitioner's gross sales amounted to $39,996.19, and respondent determined that petitioner had an adjusted net taxable income of $1,205.92. During 1941 it paid salaries to its officers aggregating $3,300, of which $1,650 was paid to its president, Walter J. Cunningham, and $1,650 to its secretary, E. D. Morse, both of whom devoted their entire time to petitioner's business and operations. During the calendar year 1942 petitioner's gross sales amounted to $434,363.44, and its net profit before payment of salaries to its officers amounted to $85,828.39. During 1942 petitioner paid officers' salaries aggregating $56,000, of which $28,000 was paid to its president, Walter J. Cunningham, and $28,000 to its secretary, E. D. Morse, both of whom devoted their full time to the business343 and operations of petitioner. In addition, each of the four directors was paid $250 during 1942 for attendance and services at directors' meetings, being at the rate of $25 per meeting per director for ten of the directors' meetings held during 1942. No dividends were paid by petitioner at any time during the period April 24, 1941, to December 31, 1942, inclusive. The gross sales per books of petitioner reflect the following monthly cumulative balances for the period August 31, 1941, to December 31, 1943, inclusive: August 31, 1941$ 7,208.87September 30, 194110,357.09November 30, 194126,789.91December 31, 194139,996.19January 31, 194211,982.38February 28, 194225,321.67March 31, 194242,455.69April 30, 194265,515.58May 31, 194291,019.92June 30, 1942126,858.37July 31, 1942170,755.49August 31, 1942215,347.22September 30, 1942263,711.51October 31, 1942311,958.67November 30, 1942369,684.11December 31, 1942434,363.44January 31, 194368,469.17February 28, 1943151,118.93March 31, 1943246,500.53April 30, 1943337,799.36May 30, 1943399,247.60June 30, 1943474,109.72July 31, 1943551,789.76August 31, 1943617,334.03September 30, 1943685,084.75October 30, 1943776,982.08November 30, 1943873,646.35December 31, 1943964,862.25344 In determining the deficiencies, the Commissioner disallowed $36,000 of the total amount of $56,000 paid equally to Cunningham and Morse during 1942 and claimed as a compensation deduction by petitioner for the taxable year 1942. The respondent also disallowed directors' fees totalling $1,000, paid to the four directors for attendance at ten meetings, at the rate of $25 per meeting. During the year 1942, both Cunningham and Morse devoted from twelve to fourteen hours each day to their duties as president and secretary and treasurer. Cunningham performed a variety of duties during that year including those of general and production manager, sales promotion, metallurgist, shipping clerk, and inspector of castings. Morse, who operated several sporting goods stores prior to his association with petitioner, handled the financial end of the business, office detail, and matters pertaining to the scheduling of parts out of the foundry. Morse severed his connections with petitioner in June 1943. The profit and loss account appearing on the books of the petitioner for the years 1941 and 1942 reflects the following: 19411942Sales$39,996.19$434,363.44Cost of goods sold31,261.93329,163.97Gross profit8,734.26105,199.47Compensation of officers3,300.0056,000.00Other expenses3,950.0419,371.08Net profit (before taxes)1,484.2229,828.39345 A reasonable allowance for salary for the services rendered by Walter J. Cunningham and Elmer D. Morse to the petitioner as president and secretary-treasurer, respectively, during the year 1942 was $10,000 per annum for each. A reasonable allowance for directors' fees for services rendered by the four directors of petitioner at ten meetings attended by them during the period August 28, 1942, to December 31, 1942, inclusive, was $25 per meeting, or a total of $1,000. Opinion The first contention of petitioner is that the respondent is without power to partially disallow as excessive previously authorized salaries actually paid by petitioner during the taxable year 1942, for services rendered to it in the carrying out of its business. We are not impressed by this contention. Section 23 (a) (1) (A) provides that in computing net income 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 a reasonable allowance for salaries or other compensation for personal services actually rendered * * ." The petitioner argues that the "including" clause was added by Section346 234 (a) (1) of the Revenue Act of 1918 to make provision for a reasonable allowance as compensation for services rendered, though none was actually paid, in order to rectify the hardship worked upon partnerships, individual proprietorships and closely held corporations by the excess profits provisions of the Act of October 3, 1917, and that the amendment was intended as a liberalization rather than a restriction in its application. Even if it be assumed that petitioner is correct in its argument, respondent's inquiry as to reasonableness could not be logically limited to amounts not actually paid. In Botany Worsted Mills v. United States, 278 U.S. 282">278 U.S. 282, a case which arose under the 1916 Act as amended by the War Revenue Act of 1917, prior to the addition of the so-called "including" clause, the Supreme Court of the United States said: * * * it is clear that extraordinary, unusual and extravagant amounts paid by a corporation to its officers in the guise and form of compensation for their services, but having no substantial relation to the measure of their services and being utterly disproportioned to their value, are not in reality payment for services, and cannot be347 regarded as "ordinary and necessary expenses" within the meaning of the section; and that such amounts do not become part of the "ordinary and necessary expenses" merely because the payments are made in accordance with an agreement between the corporation and its officers. Even if binding upon the parties, such an agreement does not change the character of the purported compensation or constitute it, as against the Government, an ordinary and necessary expense. Compare 20 Treas. Dec., Int. Rev. 330; Jacobs & Davies v. Anderson (C.C.A.) 228 Fed. 505, 506; United States v. Philadelphia Knitting Mills Co., (C.C.A.) 273 Fed. 657, 658; and Becker Bros. v. United States (C.C.A.) 7 Fed. (2d) 3, 6. Subsequent to this decision and the incorporation of the "including" clause in section 23 (a) (1) (A), this and other tribunals, in a long line of decisions, have decided that where issue is joined on the question of reasonableness of salaries paid for services rendered, the Commissioner's determination carries a clear presumption of correctness and places upon the taxpayer the burden of proving that it is entitled to a deduction larger than that determined348 by the Commissioner. The holding of this tribunal in Gustafson Manufacturing Company, (1925), 1 B.T.A. 508">1 B.T.A. 508, involving the application of Section 234 (a) of the Revenue Act of 1918, which brought into the statute the "including" phrascology, that "Under the provision of this section the Commissioner not only has the authority but it is his duty to determine * * * the reasonableness or unreasonableness of deductions by a corporate taxpayer of compensation paid" has been consistently followed. Moreover, the exact wording of what is now section 23 (a) (1) (A), I.R.C. has been incorporated in every revenue act since 1918, and the respondent's regulations have been substantially the same in each reenactment. These regulations have uniformly stated that the test of deductibility of compensation payments is whether they are reasonable and are in fact payment for services. The continued reenactment of the statute must be construed as legislative approval of these regulations. Our conclusion is that the Commissioner has the power under section 23 (a) (1) (A), to disallow as deductions any part of compensation paid which, in his judgment, does not meet the test349 of reasonableness. The second contention of petitioner is that the amounts of $28,000 each paid to Cunningham and Morse during 1942, represent reasonable compensation for services rendered and are allowable deductions for that year. We have found as a fact that $10,000 per annum for each of these officers constituted reasonable compensation. It follows that our conclusion is that the remainder of the compensation paid was excessive. In reaching this conclusion we have carefully considered and weighed the stipulated facts, testimony submitted at the hearing, and the documentary evidence. This reveals to our satisfaction that neither Cunningham nor Morse, at the time each of them became officers of petitioner, were qualified either by training or experience to render unique or specialized services. Cunningham had had a long and varied experience in the lumber business and Morse had operated several sporting goods stores. While it appears that both of them devoted long hours to their respective duties, petitioner's success from August 1941 to and including 1942, was primarily attributable to the acquisition of the license to use the heating processes owned by the Aluminum Company350 of America in producing aluminum parts for aircraft corporations and to the demand for such parts during the war years. The evidence also convinces us that the value of services rendered or to be rendered was not the guiding factor which influenced the directors in authorizing large salaries to be paid to their two officers. On December 31, 1941, the books of petitioner disclosed a surplus of $38.46. Five days later, on January 5, 1942, the directors - Cunningham, Morse and their respective wives - adopted a resolution that the salaries of Cunningham and Morse be increased from $1,650 per annum received by each in 1941, to $24,000 per annum. When Cunningham was asked what yardstick was used to determine the amount of salaries voted at this meeting, he replied "past experience and performances" and stated that what might occur subsequent to January 5, 1942, was not taken into consideration. When his attention was called to the fact that the gross sales of the company for 1941 were only $30,996.19, he stated that perhaps they took into consideration previous work that had been done in forming the corporation and that no compensation was received for this work. Cunningham's wife testified351 that the reason the directors authorized this increase was that her husband had been in the habit of earning that amount of money in the past. On August 28, 1942, the same day the Aluminum Company of America wrote petitioner that it would have the use of the heat treatment of aluminum alloy castings royalty-free from July 1, 1942, until the cessation of hostilities, petitioner's directors voted Cunningham and Morse a further increase in salary at the rate of $36,000 per annum effective September 1, 1942. Petitioner's sales which amounted to $11,982.38 at the end of January 1942 aggregated $170,755.49 as of July 31, 1942. Cunningham testified that this increase in sales possibly had some bearing on the increase in salaries. His wife testified that increased production and increased responsibilities warranted the increase to $36,000 for her husband and Morse. Cunningham on redirect examination testified that on January 5, 1942, the business outlook for petitioner was very promising inasmuch as it had actual orders at that time totalling $35,000 or $40,000, and that on August 28, 1942, it had a backlog of unfilled orders of approximately $500,000. Petitioner paid Cunningham and Morse352 $28,000 each a total of $56,000, during 1942, and at the end of the year its books disclosed an earned surplus of only $9,014.83. Prior to December 31, 1942, it had never distributed any dividends to its stockholders. At all times material herein its stock was owned 50 per cent by Cunningham's wife and 50 per cent by Elmer D. Morse. The salaries paid to Cunningham and Morse were in direct relationship to the stockholdings of the respective families. Although an unimpressive attempt was made to prove that the petitioner would have had to pay more than $28,000 if it had hired others to do the work performed by Cunningham, evidence as to the value of Morse's services is limited to testimony that as secretary-treasurer he worked long hours, handled the office detail, scheduled the parts out of the foundry, and did the financing. The equality of compensation paid to these two officers seems to us to be inconsistent with an intention to compensate them on the basis of the value of the services they rendered and the evidence presented indicates a studied plan to anticipate profits to be earned and distribute them in the guise of compensation rather than as dividends. Petitioner has not proved*353 to our satisfaction that a salary of $10,000 per annum for each of them, which was allowed as a deduction by the respondent, did not constitute reasonable compensation for their services. The remaining issue relates to the fees of $25 per meeting paid to the four directors of petitioner for attendance at ten meetings, or a total of $1,000 which was disallowed by the respondent as a deduction for 1942. The evidence discloses that the meetings were held, that they were attended by all of the directors, and that matters such as business progress, bank loans, construction of additions to plant, purchase of necessary additional equipment and its authorization, and under expenditures, were considered. Our best judgment is the $1,000 paid to the directors in 1942 constituted reasonable compensation and we have made a finding to this effect. Respondent should have allowed this amount as a deduction. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/265110/	334 F.2d 931 Andrew Cleveland ROGERS, III and Andrew Cleveland Rogers, Jr., Plaintiffs-Appellants,v.UNITED STATES of America, Defendant-Appellee. No. 15424. United States Court of Appeals Sixth Circuit. July 24, 1964. Russell H. Volkema, of Volkema, Wolske & Bopeley, Columbus, Ohio, for appellants. Robert Long, Civil Division, Dept. of Justice, Washington, D. C., John W. Douglas, Asst. Atty. Gen., Morton Hollander, Irvin M. Gottlieb and Robert E. Long, Attys., Dept. of Justice, Washington, D. C., and Joseph P. Kinneary, U. S. Atty., Columbus, Ohio, on the brief for appellee. Before PHILLIPS and EDWARDS, Circuit Judges, and McALLISTER, Senior Circuit Judge. McALLISTER, Senior Circuit Judge. 1 Andrew Cleveland Rogers, Jr. and his son, Andrew Cleveland Rogers, III, a minor, aged eleven, acting through his next friend, brought suit against the United States under the Federal Tort Claims Act, 28 U.S.C.A. § 1346(b), claiming damages to the minor, caused by malpractice of government doctors in rendering medical service to the boy, when, at 2 A. M. on December 27, 1958, he was brought to the Lockbourne Air Force Base Hospital at Columbus, Ohio, and underwent a surgical operation and was also rendered post-operative care. The boy's father, Andrew Cleveland Rogers, Jr. was at the time in military service, and he and the members of his family were entitled to medical care at the Lockbourne hospital. The suits were joined for trial and are appealed as one case. Plaintiffs-appellants will hereafter be referred to as "plaintiffs," and defendant-appellee, as "defendant". 2 Prior to the time the boy was admitted to the hospital, he had periodically complained of abdominal pain for approximately four weeks, and, on the day before he was admitted, he had diarrhea, complained of pain in the lower abdomen, became nauseated, and vomited. The boy was examined in the early hours of the morning of December 27, 1958, by the medical officer at the hospital. The examination disclosed that he had tenderness with rebound in the right lower quadrant of his abdomen, an elevated pulse — 128 per minute, an elevated white blood count — 13,650, and a slightly elevated temperature — 99°. At 8 A. M., on December 27, the boy was seen by Dr. Lawrence Strenger, a surgeon, who obtained a history from the boy and reviewed the case with the medical officer who had examined the boy on his admission to the hospital. Dr. Strenger then conducted a complete physical examination, finding location of pain with rebound tenderness in the right lower quadrant, and tenderness in the right rectal vault. The boy's temperature was somewhat lower than the admission reading, but the white blood count was still elevated and not significantly lower than at the time of admission. 3 After talking with the boy's parents with regard to his history, it was Dr. Strenger's decision that the child probably had acute appendicitis, and both parents of the child executed a consent to an appendectomy. There was an abundance of proof by distinguished physicians and surgeons that the signs, symptoms, and history of the child pointed to a diagnosis of appendicitis. Shortly after Dr. Strenger's conclusion that the boy had acute appendicitis, and after the parents had executed a consent to an appendectomy, the operation was performed. 4 The operation disclosed that the boy's appendix was not completely sound, but that he had not been suffering from appendicitis. The boy's post-operative course was not unusual in any respect and gave no cause for alarm until the afternoon of December 30, the third postoperative day. At this time the child developed complications which were a source of concern to the government physicians. Five of them examined the boy and reviewed the medical record. As a result of their consultations, it was their impression that the boy had some bleeding into the peritoneal cavity which was causing paralytic ileus — a failure of the contractibility of the intestines — with a resulting reduction of the ability of the intestines to pass along gas and solid matter, and subsiding gastroenteritis. 5 On January 1, the boy's condition deteriorated, and a civilian pediatric consultant, Dr. Thomas Boles, from the Children's Hospital at Columbus, Ohio, was summoned for consultation. Dr. Boles examined the records and the patient, and agreed that the boy probably had an obstructed bowel. Dr. Boles and Dr. Thomas Talley, a government physician, agreed that the boy's condition warranted their transferring him to the intensive care unit of the Children's Hospital for closer observation. 6 On January 4, Dr. Boles performed an exploratory operation. His pre-operative diagnosis was essentially the same that the government doctors had made on December 30, to the effect that the child was suffering from intraperitoneal hemorrhage with secondary ileus and possible mechanical small bowel obstruction. The operation performed by Dr. Boles on January 4 revealed that the child then had severe generalized peritonitis, which had caused a strangulation, or kink, in the intestine. Ten days after the boy's removal to Children's Hospital, the hospital laboratory expert bacteriologist was able to culture and identify the pathogenic organism-bacteroides — as the principal agent in the child's infection. This organism is generally found in the human intestinal tract and usually, as a result of an appendectomy, invades the peritoneal cavity. This does not, except on very rare occasions, cause trouble, as the body is normally able to handle the organism. Cases of peritonitis and resulting septicemia, wherein bacteroides is the causative agent, are rare in medical literature, and it appears that it was only because of the unusually fine facilities of the laboratory of the Children's Hospital, under the charge of an outstanding authority in this field, Dr. Wheeler, in addition to some good fortune, that the techniques employed resulted in culturing the true culprit — bacteroides, as so well expressed by Judge Bailey Brown in his opinion in the determination of this case. 7 The foregoing does not constitute the entire history of the child's misfortunes. About January 18, he began to pass blood in large quantities from his rectum, and a tube was inserted in his stomach. An X-ray diagnosis was made of ulcers in his intestine just below the stomach. Dr. Clatworthy, in the Children's Hospital, then performed a third operation. This revealed that the diagnosis was incorrect to the extent that the ulcers were actually in the stomach, and these were repaired and a tube passed from the stomach directly out through the abdominal wall. The boy tolerated this operation fairly well, but about the second day thereafter he began to develop neurological difficulties, manifested by convulsions, paralysis over half of his body, and by a coma or semi-coma. Although he improved from this condition, a tube was inserted in his windpipe because of a possible threat to his breathing. The boy continued to bleed into the stomach, and when this grew worse and could not be controlled and transfusions were not sufficient, another operation was performed on his stomach on January 30, and revealed that the stomach was filled with blood and clots. Ulcers were again repaired, and a new tube was placed in another opening in the abdominal wall. At this time, as well as at the time of the first stomach operation, the patient still had a generalized peritonitis. He was in very poor condition during the second month at the Children's Hospital, and his central nervous system continued to create problems. In the third month at the hospital, his improvement was general, but he developed a jaundice which was thought by Dr. Boles to be a serum hepatitis caused by the transfusions. Also, he developed an absence of vision to the right side. In addition to all of his other difficulties, the boy developed abscesses on his extremities, from which staphylococcus was cultured. 8 The result of all of the foregoing is that the child now had a grotesquely scarred body, is retarded to the extent that he cannot attend school, and is in need of permanent medical care and guidance. 9 In their complaint and on the trial, plaintiffs contended that the doctors at the government hospital, to which the boy was first admitted, were guilty of both pre-operative negligence and post-operative negligence, resulting in the boy's present condition. The alleged preoperative negligence was in failing to give antibiotics before the operation; removing the appendix unnecessarily, and in failing to tie off the stub properly, The alleged post-operative negligence was the failure of government doctors to make a diagnosis of peritonitis, and their failure to administer antibiotics at the time they discovered that the boy was not suffering from appendicitis. 10 The case was tried before the District Court without a jury, and the court found that plaintiffs did not sustain the burden of proof as to negligence, and that even if the alleged negligence were established, there was no proof that it was the proximate cause of the injuries and damages for which they sued. 11 As to the District Court's finding that even if the alleged negligence were established there was no proof that it was the proximate cause of the injury suffered by the boy, a further observation should be made. 12 With regard to proximate cause, the District Court evidently had in mind the plaintiffs' claim that the government doctors were negligent in not administering antibiotics to the boy, pre-operatively and post-operatively. As to pre-operative administration of antibiotics in this case, all physicians, other than plaintiffs' witness, Dr. Hardie, testified that antibiotics should not have been administered before the operation; and plaintiffs' witness, Dr. Harmon, agreed with the government physicians on this aspect of the case. As to post-operative administration of antibiotics and the failure of the government physicians to diagnose peritonitis, the testimony adduced on behalf of the Government was to the effect that the boy, while at the government hospital, did not appear to have the signs that "we would expect to go along with peritonitis." Dr. Boles of Children's Hospital, however, testified that he diagnosed peritonitis and prescribed the administration of antibiotics, upon the admission of the boy to Children's Hospital; and the antibiotics, so prescribed, were penicillin, streptomycin, and chloromycetin. These antibiotics were administered during a period of ten days after the admission of the boy to Children's Hospital, until it was found that his condition was due to a rare causative agent, as hereafter appears, for which the above-named antibiotics, which would be administered in the ordinary course of medical skill to combat peritonitis, were wholly ineffective; and, subsequently, another antibiotic, which, in the ordinary exercise of medical skill, would not be used for peritonitis, was administered, resulting in the disappearance of the causative agent of the infection. 13 Since administration of penicillin, streptomycin, and chloromycetin, in the ordinary course of medical skill, to combat peritonitis, would have been completely ineffective, if they had been used by the government physicians during the last three days during which the boy was at the government hospital — the period upon which the claimed negligence is based — and prior to the boy's admission to Children's Hospital; and, since such antibiotics were administered for ten days after his admission to Children's Hospital before they were found ineffective, the wrong diagnosis as to peritonitis, and the failure of the government physicians to administer penicillin, streptomycin, and chloromycetin, while the boy was at the government hospital, could not be considered to be the proximate cause of the child's injury, since these antibiotics, in any event, would have been found wholly ineffective against the causative agent of the peritonitis in this case. 14 On appeal, in their reply brief, plaintiffs concede that they did not prove that the operation by the government doctors was negligently performed. Plaintiffs say they do not concede, however, that there was no negligence in this area, but "only that they were unable to prove it." The plaintiffs also concede that they did not prove post-operative negligence by clear and convincing proof, or by the manifest weight of evidence, from the time of surgery through December 29, 1958. Plaintiffs now rest their claim upon the alleged negligence of the Government "from the morning of December 30 until the child was transferred to Children's Hospital during the late afternoon of January 1, 1959." These concessions on the part of plaintiffs removed from the case much of their argument, even in their reply brief, which is directed to claimed negligence on the part of the government surgeon in performing the operation — in relation to which they now concede that they were not able to prove negligence. 15 Plaintiffs complain that the government doctors were negligent in not administering antibiotics to the child for peritonitis from the morning of December 30, 1958, until the late afternoon of January 1, 1959. However, as the trial court found, the evidence clearly showed that it was impossible to say that anything the government doctors could have done on December 30, 1958, including the administration of broad-spectrum antibiotics, would have altered the child's future medical course, or decreased, or obviated the residual disability attributable to this rare and unusual bacterial infection; and there was substantial evidence to support this finding. The antibiotics administered to the child when he was removed to Children's Hospital were penicillin, streptomycin, and chloromycetin. These are the antibiotics that would be administered in the course of ordinary medical skill and practice to combat peritonitis. But these are of no avail in infection by bacteroides, which can be destroyed only by tetracycline. 16 The court found that there was no negligence on the part of the government doctors in performing the operation, and in their post-operative care of the patient; and that their conduct was in keeping with the exercise of reasonable medical judgment and medical practice, under the circumstances of this unusual case. In all probability, the peritonitis and resulting septicemia, wherein bacteroides was the causative agent — a situation rarely to be found in medical literature — resulted in all of the ills and sufferings to which the child was subjected — the bleeding into the peritoneal cavity, causing paralytic ileus with subsiding gastroenteritis; the passage of blood from the rectum; the ulcers, as well as the clots in the stomach; the convulsions and paralysis; the staphylococcus abscesses; the damage to the central nervous system; and, as a result of the blood transfusions, hepatitis. 17 There were thirty-four witnesses in the case, of whom twenty-two were medical witnesses. As has been said, conflicting medical opinion in medical malpractice cases is the rule rather than the exception; and it is for the trial court to choose from among the competing and conflicting inferences and conclusions that which it deems most reasonable. An examination of the record is convincing that the judgment entered by the District Court in favor of the government was not clearly erroneous. Moreover, it was sustained by the evidence. 18 As to the question of missing records, and the arguments adduced therefrom by counsel for plaintiffs, no presumption can be drawn unless it is clearly shown that the evidence was wilfully withheld; and it appears that, if, in this case, the missing records in question, consisting of X-rays and reports thereon, had been available at the trial, they would have been, in the light of testimony, devoid of probative value on the issue whether there were clear signs of peritonitis present on December 30 and 31, 1958, which was the only pertinent point involved in the controversy about the records. 19 On the question of application of the rule of res ipsa loquitur, there was no error in the holding of the trial court. 20 In accordance with the foregoing, the judgment of the District Court is affirmed upon the opinion of Judge Bailey Brown, which is adopted by this court and which is reported in Rogers v. United States, D.C., 216 F.Supp. 1 (1963).	01-04-2023	08-23-2011
https://www.courtlistener.com/api/rest/v3/opinions/4619591/	John E. and Ellen G. Callahan, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentCallahan v. CommissionerDocket Nos. 48374-86, 1380-87, 1390-87, 1471-87, 1855-87, 1904-87, 1927-87, 4227-87, 4598-87, 4607-87, 4736-87, 5116-87United States Tax Court98 T.C. 276; 1992 U.S. Tax Ct. LEXIS 26; 98 T.C. No. 22; March 18, 1992, Filed 26 An appropriate order denying petitioners' motion for partial summary judgment and granting respondent's motion for partial summary judgment will be issued. Ps are limited partners who were required, if called upon by the general partners, to pay three times the amount of cash contributions. The limited partners had the discretion, by written notice, to elect out of the overcall provision. Ps argue, under Pritchett v. Commissioner,827 F.2d 644">827 F.2d 644 (9th Cir. 1987), revg. and remanding 85 T.C. 580">85 T.C. 580 (1985), that the limited partners are at risk for three times their capital contributions. R argues that the nature of Ps' contractual rights and obligations is distinguishable from that in Pritchett. R contends that Ps' obligation is contingent and illusory. Held, the facts of this case are distinguishable from Pritchett and Ps are not at risk for amounts in excess of their cash contributions. J. David Sanner, for petitioner.James R. McCann, for respondent. Gerber, Judge. GERBER277 OPINIONGerber, Judge:This case is before the Court on the parties' cross-motions for partial summary judgment27 pursuant to Rule 121 2 on the issue of whether petitioners, as limited partners, were at risk within the meaning of section 465 for amounts in excess of their actual cash contributions to the partnership for tax years 1980, 1981, and 1982.Respondent determined deficiencies in income tax against petitioners resulting from respondent's disallowance of reported losses from option straddle transactions. Respondent also determined that petitioners are liable for increased interest under section 6621(c), formerly section 6621(d), relating to substantial underpayments attributable to tax-motivated transactions.The issue for our consideration is whether petitioners, as limited partners, were at risk within the meaning of section 465 for amounts in excess of their actual cash contributions pursuant to an overcall provision of the28 partnership agreement. If petitioners are not at risk for amounts greater than their actual cash contributions, then deductions for their distributive share of partnership losses are limited to the amounts of their actual cash contributions to the partnership.278 Summary judgment under Rule 121 is derived from rule 56 of the Federal Rules of Civil Procedure. It is intended to expedite litigation and avoid unnecessary and expensive trials of phantom factual questions. Cox v. American Fidelity & Casualty Co.,249 F.2d 616">249 F.2d 616, 618 (9th Cir. 1957); Shiosaki v. Commissioner,61 T.C. 861">61 T.C. 861, 862 (1974). Under Rule 121(b), a motion for summary judgment is granted when it is shown "that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Either party may move for summary judgment in its favor on all or part of the issues in controversy. Rule 121(a). The party moving for summary judgment has the burden of showing the absence of a genuine issue of material fact. Jacklin v. Commissioner,79 T.C. 340">79 T.C. 340, 344 (1982); Espinoza v. Commissioner,78 T.C. 412">78 T.C. 412, 416 (1982).29 In considering a motion for summary judgment, we construe the facts in a manner most favorable to the party opposing the motion. Naftel v. Commissioner,85 T.C. 527">85 T.C. 527, 529 (1985).It is respondent's position that even if petitioners as limited partners had sufficient basis to absorb the losses from option straddle transactions, they were not, as a matter of law, at risk for any amount in excess of their capital contributions. Petitioners on the other hand contend that the limited partners were at risk for three times their capital contributions pursuant to the terms of the partnership agreement.BackgroundPetitioners were partners in JEC Options (JEC), a limited partnership organized under the laws of the State of Illinois. JEC was organized by a limited partnership agreement dated September 2, 1980. The agreement (first agreement) and certificate of limited partnership were filed with the Illinois secretary of state on or about December 19, 1980. The first agreement was amended three times, and the amended agreements 3 with accompanying certificates of limited partnership were filed with the Illinois secretary of state. The general partners30 of JEC were petitioners John and Ellen Callahan (the Callahans). JEC was formed for the purpose of 279 engaging in the trading of investment securities, including put and call options and commodity futures contracts (long and short) 4 with partnership funds and funds which might be borrowed. Under the partnership agreements, JEC was prohibited from engaging in any other business.The agreements defined the capital contributions of the original limited partners and the general partners as "original capital contributions" and the capital contributions of the additional limited partners as "additional capital31 contributions". The agreements contained an overcall provision 5 which provided as follows:Each Partner shall be obligated to make capital contributions in excess of his Original Capital Contribution and Additional Capital Contribution upon the request of the General Partner solely for the purpose of paying or satisfying liabilities or expenses of the Partnership, but only to the extent that such liabilities and expenses cannot be paid out of Partnership assets. Such capital contributions shall be hereinafter referred to as "New Capital Contributions". Each such call for New Capital Contributions shall be made by written notice to each of the Partners no less than 30 days prior to the due date for such New Capital Contributions and shall be allocated among the Partners in accordance with their prior capital contributions. Each Partner shall be personally liable for his share of such New Capital Contributions. The maximum amount of a New Capital Contribution for each Partner under this Section 3.5 shall be an amount equal to 300 percent of such Partner's Original Capital Contributions and Additional Capital Contributions. Each Partner hereby agrees that his obligation to32 make any New Capital Contributions pursuant to this Section 3.5 is made for the benefit of and may be enforced by any person entitled to payment or to require satisfaction of the obligations of the Partnership with respect to which such New Capital Contributions may be required under this Section 3.5. If any Partner shall default in the payment of any New Capital Contribution, the General Partners may, at any time not earlier than ten days after giving written notice of such default, take any action that may be necessary to enforce such obligation and the defaulting Partner shall be responsible and shall indemnify and hold harmless the Partnership from and against any and all damages, costs, liabilities and expenses arising out of such default. Subject to the rights of creditors of the Partnership and provided the assets of the Partnership exceed the expenses and liabilities for which a New Capital Contribution may be required, a Partner may, at any 280 time, elect by written notice to reduce the amount by which he is required to make New Capital Contribution. [Emphasis added.]33 The agreements limit further each limited partner's liability as follows:Notwithstanding anything to the contrary herein contained, the liability of any Limited Partner for any losses or obligations of the Partnership shall be limited to the extent of his Original Capital Contribution, Additional Capital Contribution and New Capital Contribution.The general partners never requested new capital contributions from the limited partners in accordance with the overcall provision. No limited partner elected to reduce the amount of his new capital contribution.DiscussionGenerally, a partner may deduct the partner's distributive share of losses of a partnership in which he is a member. Sec. 702(a). However, a partner's distributive share of partnership loss is allowed only to the extent of the partner's adjusted basis in the partnership at the end of the year in which the partnership incurred the loss. Sec. 704(d). A partner's adjusted basis in his partnership interest is the amount of money and the adjusted basis of other property contributed to the partnership, increased or decreased by the partner's distributive share of income, loss, and applicable expenditures. Sec. 705(a)(1), 34 (2). The basis of an interest in a partnership acquired by a contribution of property, including money, is the amount of money and the adjusted basis of the property to the partner at the time of contribution. Sec. 722. Any increase in a partner's share of the liabilities of a partnership, or any increase in a partner's individual liabilities by reason of the partner's assumption of partnership liabilities, is considered a contribution of money by the partner to the partnership. Sec. 752.Section 465 imposes additional limitations on a partner's distributive share of partnership losses. Under section 465, losses relating to activities engaged in by a taxpayer in carrying on a trade or business or for the production of income are allowed as deductions only to the extent that the taxpayer is at risk financially with respect to the activities. Sec. 465(a)(1), 281 (c)(3). 6 Investors generally are considered to be at risk financially to the extent they contribute money to the activities. Sec. 465(b)(1)(A). In addition, investors are considered to be at risk financially with respect to third-party debt obligations relating to the activities to the extent they are personally35 liable for repayment of the debt obligations or to the extent they have pledged property, other than property used in the activities as security for the debt obligations. Sec. 465(b)(1)(B), (b)(2). 7 The determination of whether a taxpayer is to be regarded as at risk on a particular debt obligation is to be made at the end of each taxable year. Sec. 465(a)(1); Levy v. Commissioner,91 T.C. 838">91 T.C. 838, 862 (1988).36 Concerning third-party debt obligations, investors will be regarded as personally liable under section 465(b)(2)(A) in the event funds from the investment activities are not available to repay the obligations, if the investors are ultimately and personally liable to repay the obligations. The critical inquiry involves who is the obligor of last resort, and the scenario that controls is the worst case scenario. The fact that the partnership or other partners remain in the chain of liability should have no effect on the at-risk amount of the parties who do have the ultimate obligation. In determining which investors are ultimately financially responsible for the obligations, the substance of the transaction controls. Pritchett v. Commissioner,827 F.2d 644">827 F.2d 644, 647 (9th Cir. 1987), revg. and remanding 85 T.C. 580">85 T.C. 580 (1985); Thornock v. Commissioner,94 T.C. 439">94 T.C. 439, 448 (1990); Krause v. Commissioner,92 T.C. 1003">92 T.C. 1003 (1989); 282 Melvin v. Commissioner,88 T.C. 63">88 T.C. 63, 75 (1987), affd. per curiam 894 F.2d 1072">894 F.2d 1072 (9th Cir. 1990).37 Petitioners contend that pursuant to the overcall provision the limited partners were at risk for amounts exceeding their initial capital contributions because the limited partners were required, if called upon by the general partners, to make new capital contributions if necessary to pay partnership liabilities and expenses. Respondent contends that the limited partners were not at risk for amounts in excess of their initial cash contributions because the obligation to make additional contributions under the overcall provision was contingent and illusory. We agree with respondent.Both parties have relied upon Pritchett v. Commissioner, supra, in support of their respective positions. In Pritchett, a limited partnership executed a recourse note in connection with a turnkey drilling agreement. Only the general partners were personally liable on the notes. In addition to their initial cash contributions, however, the limited partners agreed that in the event that the notes were not paid in full at maturity they would make additional cash contributions if called upon to do so by the general partners. This Court found that the limited partners were contingently obligated38 to make future contributions only in the event partnership revenues were insufficient to satisfy the note at maturity and the general partners exercised their discretion to make the cash call. In concluding that the limited partners were not at risk because they bore no current personal liability we stated:Our holding comports with the common law contract principle that a contingent debt does not reflect a present liability. A debt is an unconditional promise to pay a sum certain in money or money's worth on demand or on a specific date. As long as it is subject to a contingency, it is not a debt on which present liability has accrued. [Pritchett v. Commissioner,85 T.C. at 588; citation omitted.]The Court of Appeals for the Ninth Circuit reversed, concluding that the limited partners' obligation was unavoidable because the contracts made the cash call mandatory and the "economic reality" insured that the general partners would enforce their rights. We find the nature of the limited partners' contractual rights and obligations in this case is distinguishable 283 from that in Pritchett. 8 The debt here is subject to a contingency. 39 The limited partners' liability is more contingent than the promise to pay in Pritchett. In Pritchett it was the general partners who could unilaterally waive the cash-call requirement. Here, pursuant to section 3.5 of the agreement it was the limited partners who possessed the right and sole discretion to waive the overcall requirement. The general partners could exercise the overcall provision only if the liabilities or expenses of the partnership could not be paid out of partnership assets. Moreover, 30 days' written notice was also required from the general partners prior to an overcall. Accordingly, so long as the partnership was solvent, the limited partners could elect out of the overcall provision. In this manner, a limited partner could successfully elect out of the overcall provision in anticipation of an impending cash call. Unlike the mandatory cash-call provision in Pritchett, the obligation of the limited partners in this case is not unavoidable. Therefore, the limited partners are not at risk within the meaning of section 465.40 In light of the foregoing,An appropriate order denying petitioners' motion for partial summary judgment and granting respondent's motion for partial summary judgment will be issued. Footnotes1. Cases of the following petitioners are consolidated herewith: J. Burke Gelling and Dora L. Gelling, docket No. 1380-87; Scott McKay and Heide McKay, docket No. 1390-87; Joseph Farragher and Margaret M. Farragher, docket No. 1471-87; John T. Kiggins and Patricia A. Kiggins, docket No. 1855-87; William A. Debes and Mary I. Debes, docket No. 1904-87; John L. Flynn and Gene Flynn, docket No. 1927-87; Phillip B. Rooney and Suzanne V. Rooney, docket No. 4227-87; Patrick H. Hughes and M. Brigid Hughes, docket No. 4598-87; Michael J. Corey and Cathleen M. Corey, docket No. 4607-87; Richard L. Halpin, Jr., and Suzanne D. Halpin, docket No. 4736-87; and Donald L. Wheeler and Ottelene C. Wheeler, docket No. 5116-87.↩2. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩3. For convenience we will refer to the first agreement and the three amended agreements collectively as the agreements.↩4. This Court has previously addressed "commodity tax straddles"; for a discussion of the fundamentals of such transactions, see, e.g., Smith v. Commissioner,78 T.C. 350">78 T.C. 350 (1982); Resser v. Commissioner,T.C. Memo. 1991-423↩.5. The overcall provision is provided in section 3.2 of the first agreement and section 3.5 of the amended agreements. The overcall provision of the amended agreements is substantially the same as that of the first agreement.↩6. Sec. 465 was added to the Internal Revenue Code by the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, and applies to tax years beginning after Dec. 31, 1975. Sec. 465(a) makes no reference to partners, partnerships, or joint ventures, but it is clear that sec. 465 was intended to apply to those activities. See Krause v. Commissioner,92 T.C. 1003">92 T.C. 1003, 1017 n.2 (1989); Bennion v. Commissioner,88 T.C. 684">88 T.C. 684, 691 n.6 (1987); Melvin v. Commissioner,88 T.C. 63">88 T.C. 63, 70 (1987), affd. 894 F.2d 1072">894 F.2d 1072↩ (9th Cir. 1990).7. Sec. 465(b)(2) provides as follows:(2) Borrowed amounts. -- For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he --(A) is personally liable for the repayment of such amounts, or(B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property).↩No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1).8. Although this case is distinguishable from Pritchett v. Commissioner,827 F.2d 644">827 F.2d 644 (9th Cir. 1987), revg. and remanding 85 T.C. 580">85 T.C. 580 (1985), we also note that as this case is appealable to the Court of Appeals of the Seventh Circuit we nonetheless would not be bound by the Ninth Circuit's opinion. Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985↩ (10th Cir. 1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619592/	A. W. HURLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hurley v. CommissionerDocket No. 7339.United States Board of Tax Appeals6 B.T.A. 695; 1927 BTA LEXIS 3435; April 2, 1927, Promulgated 3435 1. Amounts paid by a national bank on behalf of its stockholders for taxes assessed against them constitute income to the stockholder, and the amount paid as taxes is deductible from gross income. 2. Allowance for exhaustion, wear and tear of oil well equipment as determined by the respondent approved. Charles H. Garnett, Esq., for the petitioner. Robert A. Littleton, Esq., for the respondent. MARQUETTE 695 This is a proceeding for the redetermination of deficiencies in income taxes for the years 1919 and 1920, in the amounts of $568.96 and $117.68, respectively. 696 FINDINGS OF FACT. The petitioner was, during the years 1919 and 1920, the owner of certain shares of the capital stock of the Citizens National Bank of Pawhuska, Okla. The laws of Oklahoma taxed the shares with regard to ownership, required the bank to retain so much of every dividend belonging to the stockholders necessary to pay the tax, and gave the bank a lien on such shares to reimburse it for any taxes so paid. In those years the said Citizens National Bank paid the state and county taxes assessed on the stock of its stockholders. The amount of these3436 taxes applicable to the shares of stock owned by the petitioner was $617.14 for the year 1919, and $547.18 for the year 1920. During the years 1919 and 1920, the petitioner was a member of the partnership of Vandervoort & Hurley, which owned two oil leases on which were producing wells. The cost of the equipment on these leases in the year 1917 was $31,849.94. No additional equipment was purchased in 1918 or 1919, but additional equipment was purchased in 1920 at a cost of $20,359.56. The net oil reserve on these leases was 69,850 barrels in the year 1917. Due to additional development in 1920, the reserve was increased in that year by 18,000 barrels. The production for the said leases was 2,206 barrels in 1917, 34,328 barrels in 1918, 13,336 barrels in 1919, and 11,094 barrels in 1920. The Commissioner, upon audit of the petitioner's income-tax returns for the years 1919 and 1920, increased the petitioner's income for 1919 by the amount of $617.14 and his income for 1920 by the amount of $547.18, on account of the state and county taxes paid by the Citizens National Bank of Pawhuska on the shares of its capital stock owned by the petitioner, but refused to allow any deduction3437 from gross income on account of the taxes so paid. The Commissioner also allowed the partnership of Vandervoort & Hurley an allowance in each of the years 1919 and 1920 for the exhaustion, wear and tear of its oil well equipment, computed at the rate of 10 per cent, and adjusted the petitioner's income accordingly. OPINION. MARQUETTE: The record herein discloses that the petitioner was owner of shares of capital stock of the Citizens National Bank of Pawhuska, and that state and county taxes were assessed thereon, which were paid by the bank. These taxes constituted an obligation of the petitioner and not of the bank. . 697 The transaction was the same in substance as if the bank had paid the petitioner a dividend in the amount of the taxes and he had then liquidated his obligation. Stating the transaction in another way the bank paid the taxes for the petitioner with the petitioner's money. If the bank had paid the petitioner a dividend in the amount of the taxes and the petitioner had then paid the taxes, it is clear that he would have been required to include in gross income the amount3438 of the dividend, and that he would be entitled to deduct from gross income the amount of the tax. We are of the opinion that the respondent properly included in the petitioner's gross income for 1919 and 1920 the amount of the taxes paid by the bank on his shares of stock, but that the respondent erred in refusing to allow the amount so paid to be deducted in computing the petitioner's net income. With reference to the deductions to which the partnership of Vandervoort & Hurley is entitled as allowances for the exhaustion, wear and tear of its oil well equipment in the years 1919 and 1920, the petitioner and the respondent are in agreement as to the cost of the equipment, the oil reserves on the leases, and the production in each year. The petitioner, however, contends that the allowances should be computed on the unit of production basis, that is, that the allowance in each year should bear the same ratio to the cost of the quipment that the production in that year bears to the total content of the wells. The respondent has determined that an allowance in each year computed at a flat rate of 10 per cent in reasonable. Under section 214(a)(8) of the Revenue Act of 1918, the3439 partnership is entitled to deduct, in computing its net income for each of the years 1919 and 1920, a reasonable allowance for the exhaustion, wear and tear of the equipment used in connection with its oil leases. However, the petitioner has failed to produce any evidence to show the life of the property in point of time, as related to the life of the resources, or that the unit of production basis of depreciation is properly applicable. Upon the record as made, we see no reason for disturbing the Commissioner's determination. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619594/	APPEAL OF KIRK COAL CO.Kirk Coal Co. v. CommissionerDocket No. 2879.United States Board of Tax Appeals3 B.T.A. 755; 1926 BTA LEXIS 2572; February 15, 1926, Decided Submitted June 15, 1925. 2572 1. An amortization deduction on certain assets acquired by the taxpayer between April 6, 1917, and November 11, 1918, disallowed, since no evidence was presented to show the extent to which they were thereafter employed, or the actual or estimated cost of replacing them under normal postwar conditions. 2. Deduction of certain expenditures allowed as ordinary and necessary business expenses. Other expenditures held to be of a capital nature. 3. On the facts stated the taxpayer is not entitled to include in invested capital as paid-in surplus any cash value which a certain lease may have had. W. P. Sandidge, Esq., and John A. Wells, C.P.A., for the taxpayer. A. H. Fast, Esq., for the Commissioner. MORRIS756 Before IVINS, MARQUETTE, and MORRIS. This is an appeal from a deficiency in income and profits taxes for 1918 in the amount of $39,819.99. The taxpayer assigns the following errors: The disallowance of (a) an amortization claim of $18,537.82, (b) structure repairs of $7,373.30, (c) equipment repairs of $3,636.49, (d) cost of labor on structure repairs of $2,133.40, (e) cost of labor on equipment2573 repairs of $1,807.76, (f) exhaustion in the amount of $6,097.83 on a leasehold valued at $152,445.85, (g) the inclusion of the above-mentioned leasehold in invested capital, and (h) the determination by the Commissioner of a profits tax of 61 per cent under section 328 of the Revenue Act of 1918. FINDINGS OF FACT. The taxpayer is a Kentucky corporation, with its principal office at Beech Creek. Throughout the years of its corporate existence it has been engaged in mining and selling coal. Until 1917 the product of its mines had been marketed in a limited territory south of the Ohio River, in States bordering on Kentucky. After this country became an active participant in the World War, and until about November 11, 1918, from 60 to 70 per cent of the coal produced from the taxpayer's mines was sold to common carriers, munitions plants maintained and operated by the Government, and troop-mobilization cantonments. Prior to 1917 the labor market in the vicinity of the company's mines was such that the taxpayer experienced no difficulty in securing the services of miners. In the fall and winter months, when capacity operations were being carried on, the supply of2574 labor available for the taxpayer's needs was swelled by the addition to its ranks of farmers in the adjacent territory. Available facilities in the immediate neighborhood were ample for the housing of its miners, so that the taxpayer had not found it necessary to construct houses for those employees. It did own, however, either frame houses which had been constructed prior to April 6, 1917, for the purpose of housing its foremen and clerks. After this country became involved in the World War the local supply of labor available to the taxpayer began to diminish, and continued to do so because of the drafting of available laborers into the military service and the migration of others to industrial centers until the taxpayer found it necessary to import laborers and construct houses for them. Between April 6, 1917, and November 11, 1918, the taxpayer constructed 35 miners' houses. These houses were of typical mine construction, being built of soft pine lumber, each having four rooms, and resting on brick or wooden pillars. The 757 total cost of construction was $27,102.32. These houses are still being used, and the taxpayer tries to avoid employing men who will not occupy2575 them. Of the total deduction claimed on account of amortization of war facilities, $9,537.85 represents amortization of the cost of these 35 houses. The balance of the deduction is made up of the following items, all of which were acquired, constructed, erected, or installed during the period April 6, 1917, to November 11, 1918: Cost.1 storehouse$6,481.911 car shop450.761 mining machine2,800.0040 mine cars3,980.00Copper wire805.79The total deduction claimed on the return for structure repairs amounts to $9,014.09. The Commissioner allowed the deduction in the sum of $1,640.79, and disallowed the remainder, $7,373.30. The amount disallowed by the Commissioner is made up as follows: Steel rails for tracks$4,901.40Iron pipe114.02Ties for laying tracks531.70Cinders for roadbed30.00Spikes108.00Iron plates38.18Track repairs5.23Track inspection1.75Track rentals29.18Unidentified expenditures1,613.847,373.30The steel rails, costing $4,901.40, the ties, costing $531.70, the cinders, costing $30, and spikes, costing $108, were acquired for the purpose of keeping tracks from main-entry roads2576 in touch with the face of the coal. Their useful life extended over a period of several years. The iron pipe was acquired at a cost of $114.02 for the purpose of pumping drainage water from the mines. This water is copperas, and iron pipes deteriorate rapidly from contact with it. Iron plates, acquired at a cost of $38.18, were used for patching screens. Track repairs, track inspection, and track rentals are all items billed by the Louisville & Nashville Railroad for repairs and inspection to surface tracks owned by the taxpayer, and rental on tracks and switches of the railroad company used by the taxpayer. Of the total amount disallowed by the Commissioner the taxpayer failed to identify items representing an aggregate expenditure of $1,613.84. 758 The total deduction claimed on the return for equipment repairs amounts to $8,210.60. The Commissioner allowed the deduction in the sum of $4,574.11, and disallowed the remainder, $3,636.49. The amount disallowed by the Commissioner is made up as follows: Mule$125.00Steel rails and frogs1,234.65Sundry items1,725.30Unidentified items551.54Total3,636.49The mule was acquired at2577 a cost of $125 to replace one which had become crippled and worn out. The steel rails and frogs were acquired by the taxpayer at a cost of $1,234.65 for the purpose of keeping tracks from main-entry roads in touch with the face of the coal. They had a useful life of several years. There are approximately 45 items making up the total cost of $1,725 for sundry items. These items are miscellaneous hardware, small tools, repair parts, oils, paints, tar, canvas, etc. Of the total amount disallowed by the Commissioner the taxpayer failed to identify items representing an aggregate expenditure of $551.54. The mining properties operated by this taxpayer are owned by the Beech Creek Coal Co. In 1910 these properties were leased by the owner to the Hendrie Coal Co. for a term of 25 years on a royalty basis of 4 per cent of the selling price of all coal mined and sold by the lessee. Considerable development work was done by the lessee; approximately one-half mile of track was laid; tipple, black-smith shop, and other structures were built; an entry of approximately 1,000 feet was driven, and the mine was producing between 200 and 300 tons of coal per day. The lessee operated2578 the properties until the early part of 1914, when it forfeited the lease. On May 8, 1914, the Beech Creek Coal Co. leased these properties to the taxpayer for a term of 25 years on the same royalty basis as that paid by the former lessee. No consideration was paid by the taxpayer for the lease other than the royalties reserved to the lessor in the lease agreement. At the time this lease was made the capital stock of the taxpayer corporation was owned by L.Z. and H. L. Kirkpatrick, brothers, and C. Kirkpatrick, son of L. Z. Kirkpatrick, while the capital stock of the Beech Creek Coal Co. was owned by L. Z. Kirkpatrick and four of his brothers. In its return for 1918 the taxpayer included this lease in invested capital at a value of $152,445.85 in the form of a paid-in surplus, and in the same return claimed a deduction from gross income of $6,097.83, or one twenty-fifth of the claimed value, on account of 759 exhaustion of the lease. The Commissioner disallowed the claimed value of the lease for invested capital purposes, as well as the deduction claimed for exhaustion. Taxpayer made application to the Commissioner to have its profits-tax liability for the year 19182579 determined under the provisions of section 328 of the Revenue Act of 1918. This application was given favorable consideration by the Commissioner, and the profits-tax liability was fixed by him at an amount equivalent to 61 per cent of the net income. The taxpayer reported a net income of $65,665.34 in its return for 1918, and computed total income and profits taxes thereon of $29,105.75. The Commissioner's action on the deductions claimed by the taxpayer is summarized in the following table: Items.Allowed.Disallowed.(a) Amortization of war facilities$18,537.82(b) Repairs (structures)$1,640.797,373.30(c) Repairs (equipment)4,574.113,636.49(d) Labor (structures)9,951.322,133.40(e) Labor (equipment)4,893.101,807.76(f) Depreciation on leasehold6,097.83During the hearing of this appeal counsel for the Commissioner admitted error with respect to the disallowance of the cost of labor on structure and equipment repairs, and conceded that such amounts thereof as had been disallowed in computing the deficiency constituted proper deductions from gross income as ordinary and necessary business expenses. 2580 DECISION. The deficiency should be computed in accordance with the admissions made by the Commissioner and the following opinion. Final determination will be settled on 15 days' notice, under Rule 50. OPINION. MORRIS: The taxpayer contends that the assets with respect to which the amortization allowance is claimed are "facilities constructed, erected, installed, or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war" within the purview of section 234(a)(8) of the Revenue Act of 1918, and that it is entitled to a reasonable deduction for amortization of the cost of these assets in computing its taxable net income. It has computed the allowance for amortization of the cost of miners' houses by comparison of the actual cost of construction with the estimated cost of replacement under normal postwar conditions, using the ratios in respect of costs of material and labor 760 determined and published in Treasury Decision 3333. By such comparison the actual cost of construction of 35 houses exceeded the estimated postwar cost of replacement by $9,537.85, which is the amount of the amortization claimed2581 with respect to these houses. It claims an amortization allowance with respect to the other assets in an amount equivalent to 50 per cent of their actual cost. The whole deduction claimed has been disallowed by the Commissioner, on the ground that following the termination of the amortization period the taxpayer continued to use all of these assets in the business to their full capacity. That the assets upon which amortization is claimed were employed in the business subsequent to the termination of the amortization period is clear, but no evidence has been presented to show the extent to which they were so employed, or the actual or estimated cost of the replacement of these assets under normal postwar conditions. On the second assignment of error the Commissioner contends that the amount he has disallowed is made up entirely of expenditures for items of a capital nature. We find from the evidence before us, however, that of the total amount disallowed by the Commissioner, $188.36, which was expended for iron pipe, iron plates, track repairs, track inspection, and track rentals, was an ordinary and necessary expense. The assets acquired for the purpose of keeping the tracks2582 from the main-entry roads in touch with the face of the coal, including steel rails, ties, cinders for roadbed, and spikes, totaling $5,571.10, were capital items having a useful life of several years, and therefore the cost thereof is not deductible as an ordinary and necessary expense. Appeal of Union Collieries Co.,3 B.T.A. 540">3 B.T.A. 540. The items making up the balance of the amount of $1,613.84 disallowed by the Commissioner have not been identified by the taxpayer, and we have no knowledge as to their nature. The Commissioner disallowed certain expenditures made for equipment repairs on the ground that they were of a capital nature. We find from the evidence before us that of the total amount disallowed by the Commissioner $1,725.30 was expended for ordinary and necessary expense. The deduction of $1,234.65 expended for steel rails and frogs is disallowed for the reasons set forth, respecting similar expenditures under structure repairs. The cost of the mule was a capital expenditure, and therefore not deductible. The items making up the balance of the amount disallowed by the Commissioner of $551.54 have not been identified by the taxpayer, and we have no knowledge2583 as to their nature. The taxpayer acquired a lease subsequent to March 1, 1913, under the circumstances set out in the findings of fact, without capital outlay. Irrespective of whether the lease had any cash value, the 761 law does not authorize the inclusion in invested capital as paid-in surplus of the value of an asset acquired as herein set forth. The taxpayer failed to prove by any competent evidence its allegation that the Commissioner erred in determining its profits-tax liability under the provisions of section 328 of the Revenue Act of 1918 to be an amount equivalent to 61 per cent of the net income. Our conclusions, therefore, on the issues raised by the taxpayer are as follows: (a) The amortization claim of $18,537.82 should be disallowed, (b) structure repairs of $188.36 should be allowed and $7,184.94 disallowed, (c) equipment repairs of $1,725.30 should be allowed and $1,911.19 disallowed, (d)(e) cost of labor on structure repairs of $2,133.40 and on equipment repairs of $1,807.76 should be allowed on the admission of error by the Commissioner, (f)(g) exhaustion of $6,097.83 on the leasehold and its inclusion in invested capital should*2584 be disallowed, and (h) the Commissioner's determination of the profits-tax rate is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619595/	FARMERS UNION COOPERATIVE EXCHANGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Farmers Union Cooperative Exchange v. CommissionerDocket No. 100552.United States Board of Tax Appeals42 B.T.A. 1200; 1940 BTA LEXIS 890; November 14, 1940, Promulgated 890 1. In computing net taxable income, a cooperative association, making sales to members and nonmembers, is entitled to deduct the profits accruing upon sales to members because refundable to such members as rebates or so-called "patronage dividends." 2. In computing the amount of such deduction under A.R.R. 6967, C.B. III-1, p. 287, the "apparent net income" referred to therein is the net income accruing upon the business for the year, without reduction on account of Federal taxes and penalties paid. Jess Johnson, president of Farmers Union Cooperative Exchange, for the petitioner. James L. Backstrom, Esq., and Stanley B. Anderson, Esq., for the respondent. LEECH1200 OPINION. LEECH: Respondent has determined deficiencies in income tax of $410.02 and $162.10 for the fiscal years ended March 31, 1937 and 1938, respectively, and a deficiency of $29.21 in excess profits tax for the first of these two years. These deficiencies arise because of respondent's decrease of the amounts deducted by petitioner in its return for each year as so-called "patronage dividends." The proceeding was submitted upon a stipulation of facts under Rule891 30 of the Board's Rules of Practice. 1201 Petitioner is a corporation, organized January 20, 1921, under the laws of the State of Oklahoma, pertaining to cooperative associations. It operates a general retail store at Stillwater, Oklahoma, dealing in groceries and farm products and selling to members and nonmembers. It also operates a service station and garage for members and nonmembers. Petitioner claims deductions of $11,022.23 and $7,217.73 for the fiscal years ended March 31, 1937 and 1938, respectively, as patronage dividends. These amounts are the net earnings for the years in question which it determined to be available for the payment of patronage dividends. The parties are in agreement that petitioner, though not exempt from taxation, is entitled to deduct from its gross income the amounts constituting profits upon its business done with members and returnable to them as rebates or so-called patronage dividends. Trego County Cooperative Association,6 B.T.A. 1275">6 B.T.A. 1275; Fruit Growers Supply Co.,21 B.T.A. 315">21 B.T.A. 315; Uniform printing & 892 Supply Co. v. Commissioner, 88 Fed.(2d) 75. It si also agreed that the method to be used for determining the amount available for patronage dividends is as outlined in A.R.R. 6967, C.B. III-1, p. 287. This method is set out as follows: First compute the apparent net income of the cooperative association. From this amount deduct the fixed dividend paid or payable on any outstanding capital stock. The amount of such fixed dividend is the portion of net income properly attributable to the investment made in the association by the holders of any outstanding capital stock. The balance consists of (1) the amount available for refund to the members of the association and (2) the profits made from nonmembers. In the absence of evidence to the contrary, it will be assumed that the dealings with members and nonmembers are equally profitable, and, accordingly, that the amount available for refund consists of that proportion of the apparent net profits, after deducting the fixed dividend on outstanding capital stock, which the amount of business transacted with members bears to the entire amount of business transacted. Up to the amount available for refund thus computed, 893 a distribution by a cooperative association to its members, upon the basis of the business transacted with them, will be deemed to be a true patronage dividend, deductible by the association in computing its taxable net income for Federal income and profits tax purposes. Petitioner's net income for the fiscal year ended March 31, 1937, was $17,618.66 and for the fiscal year ended March 31, 1938, was $7,751. These amounts constitute net income before deduction of Federal taxes, penalties, and patronage dividends. For the fiscal year 1937 the percentage of sales to members represented 62.56 percent of total sales and for the fiscal year 1938 the percentage of sales to members was 92.12 percent of total sales. As there was no fixed 1202 dividend paid or payable on outstanding capital stock, petitioner, in making its returns for the two fiscal years in question, computed its deduction for patronage dividends by applying to the net income for each year the percentage of sales to members and thus determined a deduction of $11,022.23 for the fiscal year 1937 and a deduction of $7,217.73 for the fiscal year 1938. In determining the deficiencies here in question respondent894 adjusted the computations made in only one respect. In each year he reduced the net book earnings by the amount of Federal income and excess profits taxes and penalties paid, before applying the percentage rates of 62.56 and 92.12 as used by petitioner. This computation results in decreases in the deductions for the fiscal years 1937 and 1938 in the amounts of $890.39 and $884.73, respectively. It can thus be seen that the only question presented here is whether in making the computation under the regulation set out above, net income for the year from the business transacted should be reduced by the amount of nondeductible Federal taxes and penalties. The purpose of the computation provided by the regulation is olear. What is sought is the segregation of the earnings from business done with members. These are available for return in rebates to them and, as such, constitute a proper deduction by petitioner, leaving subject to tax only the profit accruing from nonmember business. Keeping this purpose in mind, it is apparent that petitioner's computation in each year is in accord with the regulation. The computation made by respondent not only departs from that regulation*895 but defeats its purpose and results in the imposition of tax upon profits on member business admittedly refundable as a rebate and admittedly subject to deduction by petitioner. If Federal taxes and penalties, which are a burden borne by the profits accruing from nonmember business, are deducted from the total net income before application of the percentage of the member business to the total business, in determining the amount of the profit from the total business returnable in rebates to members, it may be readily seen that the result of the computation is to include with the taxable profit accruing from nonmember business a portion of that derived from sales to members. We find that the amounts as computed and deducted by petitioner in each of the taxable years represented the correct amount of the so-called patronage dividends available for payment to members. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619597/	Dean L. Phillips v. Commissioner.Phillips v. CommissionerDocket Nos. 18410, 18411, 18412.United States Tax Court1950 Tax Ct. Memo LEXIS 179; 9 T.C.M. (CCH) 501; T.C.M. (RIA) 50151; June 9, 1950Willard L. Phillips, Esq., Commercial Bldg., Kansas City, Kan., for the petitioner. Elmer L. Corbin, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: These cases, duly consolidated, involve income taxes. Deficiencies were determined as follows: For 1944, $962.19 with 50 per cent penalty of $481.10; for 1945, $1,062.13, with 50 per cent penalty of $531.07 and 25 per cent penalty of $265.53; for 1946, $369.67, with 50 per cent penalty of $184.84. The question presented is whether there was error in disallowance of certain deductions for expenses, or error in addition of the 50 per cent or the 25 per cent penalty. We make the following Findings of Fact The petitioner, a resident of Independence, 180 Missouri, filed his Federal income tax return for 1944 at Salt Lake City, Utah; for 1945 and 1946 at Baltimore, Maryland. Petitioner, during the taxable years, was married and lived with his wife and children in Alexandria and Arlington, Virginia. During 1944 his wife was, for part of the year, with her parents and his parents. During 1945 and 1946 she was with him practically all of the time. They had an apartment. His post of duty was at Washington, D.C. He considered that his home during all of that time was at Salt Lake City, Utah. About April 15, 1946, he moved to Kansas City, Missouri, but did not move his family there from Arlington, Virginia, until June 1946. During 1944, 1945 and 1946 he was employed by Transcontinental & Western Air, Inc. (hereinafter sometimes called TWA). His duties were those of a flight officer, either pilot, co-pilot or navigator. He was employed under written contract dated September 1, 1942. His contract provided that he should receive per diem allowance of $8 per day for expenses on flights outside the continental United States and $6 per day within the continental limits of the United States; time to be figured by quarter days. During the taxable181 years he flew all of the TWA routes and was in all of the bases of the Air Transport Command, with which TWA was under contract. At the bases to which he flew, facilities for sleeping and food were not adequate. There were barracks on each base and the company made a service charge of $3 regardless of whether he stayed on the base. That charge enabled him to sleep in the quarters at the base for one night. The sleeping accommodations were usually a cot. There was little privacy from noise, or opportunity to get sleep and he felt that he could not get normal sleep at the bases. He often went into the cities adjacent to the bases for accommodations instead of staying at the bases. The cost of transportation from the base to the city varied from $1 to $5 in American money. The hotel situation in the foreign cities was such that getting accommodations was a matter of paying the price asked for whatever he could get. The hotel charges were more than in the United States. A dinner usually cost from $3 to $5, breakfast from 50 cents to $2.50, and hotel accommodations from $5 to $14 a night. He kept a log of his time during the taxable years. This was prepared during each flight because182 a copy had to be turned in at the end of every flight. It was certified by a company official. His log book showed foreign travel time as follows: 1944, 169 days; 1945, 162 days; and 1946, 58 days; also domestic travel, 119 days in 1946. These figures included in full the day of departure and day of arrival of each flight. The records of TWA showed petitioner's foreign travel time, in days, as follows: 1944, 136 1/4; 1945, 157; and 1946, 54; and domestic travel time as follows: In 1944, 13 days; 1945, 2 1/4 days; 1946, 91 days. TWA records also showed reimbursement, on the basis of such figures, as follows: 1944, $1,090.10; 1945, $1,255.50; and 1946, $1,046.15. Petitioner's income tax returns for the years 1944, 1945 and 1946 were made out by one Nimro of the Maury-Henry Company, Washington, D.C. He went to that company upon the recommendation of a man with whom he flew. He had made a telephone appointment before he went and was told to bring his records with him. He took what records he had, including his log books, all receipts that he had, cancelled checks, stubs from salary and expense checks, and an income tax form furnished him by the company. All of these he left with Nimro. 183 At the Maury-Henry office he saw desks and men and girls working, file cases, and bookcases with books of legal appearance. The place appeared to be busy. He had a conversation with Nimro and told him all of the facts pertaining to his income and expenses. He did not tell Nimro that he wanted to claim any particular item as a deduction. Nimro asked him a number of questions and petitioner told him the truth about them. Nimro told him that he was entitled to foreign travel deductions of about $15 a day for every day that he was out of the country, and that he was entitled to the difference in his living expenses in Washington over what they would have been if he had been living in his home in Salt Lake City. Petitioner never discussed the matter with any attorney, or any other person familiar with income tax law, or with any other person. He had never read the income tax law and had been able to glean very little from the instructions, though he read them before he signed his returns. As to each year, when he left Nimro, they had gone over the work sheets of his returns. He received the return for 1944 after it was completed. The return for 1945 he signed in blank due to the fact that184 he was going to be out of the country over the income tax dead-line period. He went over the returns after receiving them. They were made out in accordance with the information that he left with Nimro. The petitioner left his records with Nimro and has never recovered them. They were in the custody of representatives of the Commissioner of Internal Revenue, when a public accountant representing petitioner went to Washington to investigate. The accountant found Nimro's office closed. Though he saw the records, they were refused him by such representatives. Petitioner attributed the difference between the figures in his log book and those of the TWA, in part to the fact that the company had omitted in some cases complete trips and to the fact that he considered that he was on foreign travel when he left Washington, D.C., but TWA considered it to start when he left the continental United States. Petitioner's returns for the taxable years were all signed by him. They all showed place of employment as Kansas City, Missouri. The return for 1944 was filed March 15, 1945; for 1945 on December 4, 1946. The filing date on the return for 1946 is illegible, but the return was sworn to on185 March 11, 1947. Petitioner's return for 1944 shows that he filed a return for 1943 at Baltimore, Maryland. For 1944 the return reported $3,415.35 as received from TWA and other income of $151.93, totaling $3,567.28. The $3,415.35 is explained as follows: Home: Salt Lake City, Utah.Attachment to 1944 Federal Income Tax Returnof Dean L. Phillips, 1136 S. Wakefield Street,Arlington, VirginiaGross Salary$6,700.00Deductible ExpenseTravel Expense U.S. - Wilming-ton, Philadelphia, New York,Chicago, Denver, Burbank, Phoe-nix, Miami, Maine, Boston, D.C.,Virginia.Hotel - Lodging661.00Meals871.00Foreign - South America,Bermuda, Newfound-land, British Isles,France, Azores, Africa160 days at $12.001920.00Business Car.Gas 72.00Grease - Oil 27.50Park - Wash 52.00Repairs349.00Depr. 250.50Tags 20.80Ins. 35.45807.25Supplies161.504420.75Less Reimbursement1136.10Total Ded. Exp.3284.653,284.65Net Salary$ 3,415.35The item of $349 on the return for 1944 was for complete motor overhaul which was due to the fact that the petitioner found it necessary because he left his car at the airport and while186 he was on a trip it froze. He used his car only in going to and from the airport. In his determination of deficiencies for 1944 the Commissioner disallowed traveling expense of $3,284.65, and added to income "reimbursement income" of $284, with the explanation, in effect, that the taxpayer was considered on foreign duty 142 days instead of 160 as claimed; that hotel lodging was disallowed in the amount of $661, anad meals disallowed in the amount of $871; and that items of foreign travel $1,920, car expenses $807, and supplies $161.75 were personal expenses. The car expenses and supplies were disallowed on the basis that the employer furnished all transportation and supplies. Reimbursement income of $284 was included in income "to reflect the profit made from his reimbursement since actual expenditures were less than $6 per day while overseas." Therefore, there was disallowed a total of $4,420.75, less reimbursement of $1,136.10 as claimed, making a net disallowance of $3,284.65. For 1945 petitioner reported $5,299.62 as received from TWA, with explanation as follows: Attachment to 1945 Income Tax ReturnforDean L. Phillipsc/o Maury-HenryCompany1811 H St., N.W.Washington, D.C.Gross Salary (Per Contract) TWA8706.42Partial Travel Reimbursement (Per Con-tract)893.509599.92Expenses - U.S. Travel - 163 daysMiami, New York, Chicago, KansasCity, Denver, Albuquerque, Bur-bank, Pheonix, Washington,Baltimore, VirginiaHotel at3.50Meals4.00Cabs to & from Port1.50Telephone (reports).40Tips & Misc..50163 days at9.901613.70Equipment, replacements180.00R.R., Plane, Car Travel9600 miles at 5"480.00Dues60.00Supplies, (Navigation) & Sub-scriptions90.60Liability Insurance52.00Equipment, Maintenance144.00Foreign Travel: - 112 daysNewfoundland, Labrador, Bermuda,Azores, British Isles, France, Italy,Greece, Egypt, Iran, India, Africa,Iceland, Greenland112 days at 15.001680.004300.305299.62187 For 1945 the Commissioner, in the notice of deficiency, disallowed travel and business expenses in the amount of $4,300.30, with the explanation, in substance, that petitioner's foreign travel was 112 days with reimbursement at $8 a day; that his actual expenditures did not exceed $6 per day; and that on that basis the following adjustment was made: U.S. traveling expenses disallowed$1,613.70Equipment, replacements - disallowedbecause all equipment was furnishedby taxpayer's employer180.00Railroad, plane, car travel - disallowedon the basis of personal travelingexpenses since the taxpayer wouldhave been reimbursed had they beenincurred for official travel480.00Dues, disallowed60.00Supplies and subscriptions - disallowedbecause not deductible in arrivingat adjusted gross income90.60Liability insurance disallowed - Thisrepresents a personal life insurance52.00Equipment maintenance disallowed144.00Foreign travel expenses disallowed -claimed 112 days at $15.00 - $1,680.001,680.00$4,300.305. (a) Traveling expenses al-lowable$893.50Less income for 112days at $2.00224.00$ 669.50After188 about April 15, 1946, petitioner was in domestic travel, under a different contract, with TWA. He had had a training course. Petitioner's income tax return for 1946 reported $3,869.56 as received from TWA. His place of employment is indicated as Kansas City, Missouri. The explanation attached is as follows: Attachment to 1946 Income Tax Return forDean L. Phillips2916 S. CryslerIndependence, Mo.Soc. Sec. No. 529-05-7477Wife - BarbaraSon - Dean RobertDaughter - Dawn CarolGross Salary (Per contract) T.W.A.$5,615.86Partial Travel Reimburse. (Per Con-tract)1,036.706,652.56Expenses: U.S. Travel: Washington,Dayton, Pittsburgh, Chicago, Bos-ton, Detroit, Newark, Los Angeles,Albuquerque, New York.Hotels at 3.50Meals at 4.00Cabs to & fromport at 1.50Telephone (re-ports) at.50Tips & Misc. at 1.00120 days at 10.501,260.00Commercial Rat. Tr. 6,000Mi. at 5"300.00Navigational Supplies &Equip.287.00Maintenance Supp. & Equip.86.00R.R. & Plane Tr.54.00Dues28.00Telephone (Required)48.00Foreign Travel: Newfoundland, Azores, France, Bur-muda [Burmese], Italy, Greece, Egypt,England.60 days at 12.00720.002,783.00$3,869.56189 On petitioner's return for 1946 the item of $300 for " Commercial Rat. Tr. 6,000 Mi. at 5"" represents moving to his training base. The items for "Navigational Supplies & Equip. $287.00" for 1946, or "Equipment, replacements" for 1945 represent maps, computers, plotter, uniforms, navigation kits, and such items. He was required to have them and he actually incurred such expenses. He kept records of navigation expenses and travel. For 1946 the Commissioner's determination of deficiency disallowed traveling expense of $1,746.30, with the explanation in effect that traveling expense had been disallowed in excess of the amount of reimbursement on the basis that all official travel was reimbursed by the employer on an actual expenses basis so that of $2,783 claimed, he disallowed all above the $1,036.70 reimbursement. Opinion We have here for consideration the deductibility of certain expenses claimed, the 25 per cent penalty, for 1945 only, and of the 50 per cent fraud penalty for all years. We dispose at once of the 25 per cent penalty question. There is no evidence thereon except that the return for 1945 was filed December 4, 1946. Under such a record the 25 per190 cent penalty is, of course, not shown to have been improperly imposed under section 291 (a) for failure to file timely return. With reference to deduction of expenses: The petitioner on brief agrees that all disallowance as to domestic travel was proper except as to three items: (a) Domestic travel after April 1946, after which date petitioner was in the domestic division of TWA and traveled in the United States; (b) automobile expense in 1946 when petitioner was sent from Washington, D.C., to Kansas City, Missouri, to attend training school, and the trip made by him to move his family; and (c) the $349 item for motor overhaul caused by freezing of his car when left at National Airport at Washington, while he was on a flight. This is claimed as loss, "not necessarily as a loss incurred in business, but as a loss of property from storm or casualty. Internal Revenue Code, section 23 (c) (3)." As to item (a): From all of the evidence it is clear that petitioner traveled in the United States in 1946 and had expense therefor. He deducted $1,260 (120 days at $10.50) for domestic travel and $720 for foreign travel. The Commissioner disallowed $1,746.30 travel expense191 with explanation in effect that actual expense had been reimbursed. Nothing in the record before us shows otherwise, for this item involves only the domestic travel after April 15, 1946. We have no evidence that, in the period in question, his expense was greater than the reimbursement. There is no evidence as to the amount of his expenses on the domestic travel during this period, and it is nowhere separated from the general items of travel. He reported as income from reimbursement almost the same amount as the reimbursement for travel actually received from TWA, and his actual expense is deductible, but the disallowance by the Commissioner of a total of $1,746.30 left petitioner allowed $587.70 since only $2,334 is claimed on the return as travel. The petitioner, although testifying that his domestic contract in 1946 was an entirely different contract from that under which foreign expense was incurred, did not introduce the contract and stated that he did not recall the basis of his employment after April 15, 1946. Obviously we can not say that the Commissioner erred on this item. (b) Automobile expense allegedly involved in petitioner's transfer and removal of family from Washington, 192 D.C., to Kansas City, Missouri, when he was transferred to the domestic division at Kansas City, Missouri, in 1946. The evidence before us discloses only the fact of removal; the amount of expense in connection therewith is nowhere proven with any definiteness or even so designated on the return, or even on brief. It appears to be the item of $300, " Commercial Rat. Tr. 6,000 Mi. at 5" - $300.00," shown on the return. Petitioner testified, as to the $300.00: "We were paid a minimum mileage rate for moving or for moving to our training base, and that is what this item would represent on commercial rate travel." Later, after testifying about the "Navigation Supplies and Equip." item he said he actually had "those expenses," but we can not reasonably apply this to the $300 item. The amount of reimbursement, and the actual expense, is nowhere shown. Even on the doctrine of Cohan v. Commissioner, 39 Fed. (2d) 540, we have nothing at all upon which to base an allowance of such expense. No error by the Commissioner is shown. (c) $349 for motor overhaul in 1944: This can not be allowed as business loss. The car was left at the airport during a flight and the motor193 froze. Transportation to and from the airport is not allowable and as cost, indirect, of such transportation it can not be allowed. Petitioner seems to so recognize, for he claims this "not necessarily as business loss" but as loss from storm or casualty. Is it allowable as such? We think not. The automobile was not destroyed or stolen. It simply required repair. In Samuel Greenbaum, 8 B.T.A. 75">8 B.T.A. 75, expense of repair of frozen water pipes was disallowed as casualty loss. Moreover, whether there was compensation from insurance, the actual amount expended for the overhaul, the bill rendered or paid, the value of the car before and after the freezing - all are unproven. The amount was designated on the return, and the testimony was that it was for a complete motor overhaul due to the fact that petitioner found it necessary because of the freezing when left at the airport while he was on a trip. But the evidence here does not demonstrate error by the Commissioner in denying the amount claimed. We next consider the $287 item for navigation supplies and equipment. These were not, as the Commissioner held, furnished by TWA and the expense was actually paid by the petitioner from194 his own funds, and the items were required for the performance of duty. They consisted of uniforms, navigation instruments, computers, plotters, etc., replacements and maintenance thereof. Uniforms were worn only on duty, and laundering was required. The various items were not satisfactorily proven, but under the Cohan case, supra, and the evidence, we consider that some amounts should be allowed because thereof as deductions, as follows: For 1944, $100; 1945, $250; 1946, $200. Deductions in these amounts are approved. The next question is the amount of expense while on foreign travel. From all of the evidence it is plain, in our opinion, that it was more than the $8 a day reimbursed by TWA. However, we can not accept as accurate the petitioner's figures, for it is not clear how much of the time was spent at hotels, so that though the expense there was much higher than the amount allowed, it should not be allowed as an average. From all of the evidence we conclude and hold that the average expense of foreign travel was $10 a day for 169 days in 1944, 162 days in 1945, and 58 days in 1946. We come now to the principal issue, as to whether the 50 per cent fraud penalty was properly195 imposed. The burden is upon the respondent. Evidence of fraud must be clear and convincing. Walter M. Ferguson, Jr., 14 T.C. 846">14 T.C. 846 (May 16, 1950). We do not think that fraud has been so proven. The facts are not, in essence, different from those in Charles C. Rice, 14 T.C. 503">14 T.C. 503 (March 30, 1950), another case involving a return filed by a TWA pilot, engaged in the same work as petitioner and employing the same person to prepare returns. So far as the evidence herein shows, that person was qualified to advise on tax matters. He was relied on by the petitioner. The principal question, deductibility of expense of petitioner away from "home" which he claimed as Salt Lake City, Utah, was one along the subject of different views. We can not say that the petitioner, receiving advice that he was entitled to deduct such expense, committed fraud in following such advice. It may have been careless, but carelessness is not fraud. Walter M. Ferguson, Jr., supra; and we are unable to find in the record the necessary clear and convincing evidence that there was fraud by the petitioner. We hold that it is not shown that the deficiencies for the taxable years were*196 due in part to fraud with intent to evade tax. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1943219/	194 F. Supp. 421 (1961) UNITED STATES of America v. Robert Delynn JONES. No. 10107. United States District Court D. Kansas. June 2, 1961. Robert Delynn Jones, pro se. Newell A. George, U. S. Atty., Kansas City, Kan., and Elmer Hoge, Asst. U. S. Atty., Shawnee Mission, Kan., for the United States. ARTHUR J. STANLEY, Jr., District Judge. The defendant, on December 18, 1956, was charged by indictment with entering a bank insured by the Federal Deposit Insurance Corporation, with intent to commit a felony, to-wit, burglary in the second degree, in violation of 18 U.S.C. § 2113(a). On March 22, 1957, the defendant entered a plea of guilty, and on April 8, 1957, was sentenced to imprisonment for a period of five years. On September 19, 1960, the defendant filed a motion pursuant to 28 U.S.C. § 2255 to vacate and set aside the judgment. In that motion the defendant alleged that he was presently confined at McNeil Island, Washington, pursuant to the sentence of this court. He asserted that his plea of guilty resulted from his lack of subjective understanding of the nature of the offense charged and was brought about by the wholly inadequate advice of court-appointed counsel. That motion was denied by this court, such denial being subsequently affirmed by the Tenth Circuit Court of Appeals on April 20, 1961. 290 F.2d 216. On May 19, 1961, the defendant filed a second § 2255 motion, alleging that following his arrest in 1956 he was held in violation of Rule 5(a) of the Federal Rules of Criminal Procedure, 18 U.S.C. The defendant avers that before he was brought before a commissioner he was subjected to physical and mental abuse by federal and local authorities. He also renews his assertion of inadequate advice of counsel at the time of his arraignment and plea of guilty. The question now before the court is whether a second § 2255 motion must be entertained because it alleges grounds not contained in the prior motion. Does the court have discretion to refuse to entertain such a motion? The question appears never to have been squarely ruled 422 upon by the Court of Appeals for this Circuit. The rulings of the other Circuits are in less than complete harmony. See the review of authorities in Bistram v. United States, D.C.N.D.1960, 180 F. Supp. 501 and Belton v. United States, 1958, 104 U.S.App.D.C. 81, 259 F.2d 811, 824-825 (dissenting opinion). Compare Kesel v. Reid, D.C.Cir.1960, 283 F.2d 365 and Moore v. United States, 1960, 108 U.S.App.D.C. 14, 278 F.2d 459 with Smith v. United States, 1959, 106 U.S. App.D.C. 169, 270 F.2d 921. The rulings in this Circuit are clear on two points. "If the motion is denied without hearing because of insufficiency of pleading a further motion, if legally sufficient, should not be considered repetitious." Stephens v. United States, 10 Cir., 1957, 246 F.2d 607; Palmer v. United States, 10 Cir., 1957, 249 F.2d 8. If the second motion presents the same grounds as were pleaded in the first motion, although couched in different language, it is within the sound discretion of the trial court to dismiss the second motion without reaching the merits. Moss v. United States, 10 Cir., 1949, 177 F.2d 438. In 1950, the case of Barrett v. Hunter was decided by the Tenth Circuit Court of Appeals. Although what was said in that opinion with regard to successive § 2255 motions must probably be regarded as dictum, the decision has been cited frequently by the other Circuits. "Section 2255 provides that the sentencing court shall not be required to entertain a second or successive motion for similar relief on behalf of the same prisoner. We do not think it was intended by such provision to give the court unqualified discretion to refuse to entertain a second or successive motion. Rather, we think it was intended to provide that a second or successive motion should be disposed of in the exercise of sound judicial discretion, guided and controlled by a consideration of whatever has a rational bearing on the propriety of the relief sought, among which is a prior refusal to grant relief on a like motion. If the second or successive motion sets up new or dissimilar grounds for relief which are within the purview of the grounds enumerated in the third paragraph of § 2255, and the motion and the records and files in the case do not conclusively show that the prisoner is entitled to no relief, the court should ordinarily entertain such second or successive motion." 180 F.2d 510, 514-515, 20 A.L.R. 2d 965. Later in 1950 the Tenth Circuit spoke again by way of what must be regarded as dictum, this time in the case of Tooisgah v. United States, 186 F.2d 93, 95: " * * Section 2255 affords adequate protection against repetitious motions by expressly providing that the `sentencing court shall not be required to entertain a second or successive motion for similar relief on behalf of the same prisoner.' We have construed this clause as empowering the court to dispose of a `second or successive' motion in the exercise of a sound judicial discretion, `guided and controlled by a consideration of whatever has a rational bearing on the propriety of the relief sought,' thus likening successive motions under Section 2255 to successive applications for writs of habeas corpus." On the authority of Barrett v. Hunter, supra, Judge Wyzanski has held that if the grounds of the second motion are fundamentally different than those of the first motion then there is no discretion to refuse to entertain the second motion. Green v. United States, D.C. Mass.1958, 158 F. Supp. 804. Although Judge Wyzanski's position appears to be conceptually correct, these cases present a problem in that there should be some reasonable limitation on the prisoner's right in his sole discretion to present § 2255 matters by successive motions and in piecemeal fashion. A hearing must be granted on § 2255 motions which are entertained and 423 which raise factual issues, such as inadequate advice of counsel. Frand v. United States, 10 Cir., 289 F.2d 693. In most cases where factual issues are presented, the prisoner's attendance at the hearing is required. Barrett v. Hunter, supra. The prisoner in this case is incarcerated at an institution some 2,000 miles distant from this, the sentencing court. He complains of the action of federal and local police authorities in New Orleans where he was arrested in 1956. The expense, inconvenience and risk of escape inherent in returning a prisoner to the sentencing court were made known to Congress prior to the passage of § 2255. United States v. Hayman, 1952, 342 U.S. 205, 217, 72 S. Ct. 263, 96 L. Ed. 232 (footnote 25). It is believed that a fair balancing of all factors will be achieved by following the rule of Turner v. United States, 1958, 103 U.S.App.D.C. 313, 258 F.2d 165, 166-167: "Where there has been * * a previous 2255 motion, the District Judge has discretion to deny relief as to those allegations which could have been, but were not, raised in the earlier proceeding, unless the petitioner has `some justifiable reason he was previously unable to assert his rights,' or unless he was `unaware of the significance of relevant facts.' Absent some allegation or evidence as to what is the `justifiable reason' or `unawareness,' the District Court is under no duty to grant a hearing on what appear on the face of the petition to be old claims; indeed without such allegations the District Judge cannot even be aware of a possible basis for exercising his discretion to grant a hearing, applying the standards of Price v. Johnston, supra note 4 [334 U.S. 266, 68 S. Ct. 1049, 92 L. Ed. 1356]. Here those of appellant's allegations reviewable on a § 2255 motion could readily have been raised on the first § 2255 motion, and of course all of the allegations could have been raised on the direct appeal. No indication of any `justifiable reason' or `unawareness' is apparent or alleged. Hence, the District Court did not abuse its discretion in refusing relief on the grounds this was a second or successive motion for similar relief." Since the prisoner makes no showing of sufficient reason for failure to include the grounds of his present motion in his first motion, this second motion will not be entertained. The court is not averse to entertaining any legally sufficient motion made by the prisoner in the future. The United States Attorney will prepare and submit an Order.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4619598/	Robert L. Daine, Petitioner, v. Commissioner of Internal Revenue, RespondentDaine v. CommissionerDocket No. 9919United States Tax Court9 T.C. 47; 1947 U.S. Tax Ct. LEXIS 154; July 9, 1947, Promulgated 154 Decision will be entered for the respondent. Taxpayer and his wife voluntarily separated and entered into an agreement dated January 1, 1940, under which he agreed to pay his wife $ 900 a month for a year. The agreement was extended verbally for an indefinite period. In 1944 another agreement was entered into and the wife thereupon brought suit in a New York court for separation from bed and board. On July 1, 1944, a decree in her favor was rendered and entered nunc pro tunc as of January 1, 1940. Held, payments made by taxpayer to his wife in 1942 and 1943 are not deductible from his gross income under section 23 (u), the decree nunc pro tunc being ineffective to bring him or his wife within the descriptions contained in section 22 (k) as required by section 23 (u). Reese D. Alsop, Esq., for the petitioner.Sheldon V. Ekman, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 47 The Commissioner determined a deficiency in income tax for 1943 in the amount of $ 8,863.18. The only question involved is whether the petitioner is entitled to deduct from gross income certain payments made to his wife in 1942 and 1943, under section 23 (u) of the155 Internal Revenue Code. Most of the facts were stipulated.FINDINGS OF FACT.The petitioner is an individual, residing in New York, New York. He filed his income tax returns for the years 1942 and 1943 in the second district of New York.48 On January 1, 1940, petitioner and his wife, Ines Ford Daine, entered into a separation agreement wherein and whereby it was agreed, inter alia, that they would live separate from each other, each to reside at such place or places as he or she should deem proper; that the husband, petitioner, would pay to his wife for the duration of the agreement for the full support and maintenance of the wife and their child $ 900 a month, beginning January 1, 1940, payable in two equal installments on the first and fifteenth day of each month; that in addition to such payments petitioner agreed to pay all extraordinary medical, surgical, dental, optical, or other expenses for professional treatment under medical advice in connection with the child's health, including all hospital, nursing and other charges and expenses connected therewith, provided petitioner was given an opportunity to approve of the same; and that the agreement was to be effective156 for one year beginning January 1, 1940, but the husband was entitled to cancel the agreement on one month's notice, the cancellation to be effective June 30, 1940, or September 30, 1940.On or before December 31, 1940, the agreement of January 1, 1940, was extended orally by the parties for an indefinite period. During 1942 the petitioner paid his wife the sum of $ 10,590 instead of $ 10,800, for the reason that he had paid some old debts for his wife which she had not paid, and the total amount thereof was deducted from the payments to be made under the agreement. During 1943 petitioner paid his wife the sum of $ 12,411.42. Petitioner paid his wife about $ 2,000 more than the $ 10,800 specified in the agreement of January 1, 1940, to cover the increased taxes required to be paid by his wife because of the inclusion in her 1942 taxable income of the amounts received by her from petitioner.During 1943, and in 1944, when the suit for separate maintenance was filed by his wife, the petitioner and his wife were negotiating for a new agreement. In 1944, after the parties had executed an agreement dated May 11, 1944, the wife filed suit for separation from the bed and board of petitioner. 157 From January 1, 1940, and at all times during 1942 and 1943, the petitioner and his wife continuously lived separate and apart from each other.On July 1, 1944, the Supreme Court of the State of New York rendered a decree in the case of Ines Ford Daine v. Robert Daine, wherein it is recited, among other things, that the issues were heard on May 16, 1944, and that the court had made and filed its decision directing judgment in favor of the plaintiff of separation from the bed and board of the defendant forever, as of January 1, 1940, on the ground of abandonment, and ordered, adjudged and decreed as follows:Ordered, Adjudged and Decreed that the plaintiff and the defendant were, on January 1, 1940, and ever since have been legally separated; and it is further49 Ordered, Adjudged and Decreed that the plaintiff, Ines Ford Daine, be, as of January 1, 1940, and ever since, separated from the defendant, Robert Daine, his bed and board forever, as prayed for in the complaint, upon the ground of abandonment of the said plaintiff by the defendant; and it is furtherOrdered, Adjudged and Decreed that the Separation Agreement entered into between the parties January 1, 1940, 158 be, and the same hereby is, approved as incident to this judgment and decree; and it is furtherOrdered, Adjudged and Decreed that the Separation Agreement dated May 11, 1944, amendatory of the said Agreement of January 1, 1940, be, and the same hereby is, approved as incident to this judgment and decree and shall be of full force and effect as though executed by the parties thereto January 1, 1944; and it is furtherOrdered, Adjudged and Decreed that the said Ines Ford Daine shall, subject to the terms and conditions of said Separation Agreements, have the custody of the son, Robert A. Daine; and it is furtherOrdered, Adjudged and Decreed that subject to the terms and conditions of said Separation Agreements, the defendant shall pay to the plaintiff the sums when and as provided in said Amendatory Separation Agreement dated May 11, 1944, for the maintenance and support of the wife and for the maintenance, support and education of the son, Robert A. Daine; and it is furtherOrdered, Adjudged and Decreed that this judgment and decree shall have the same force and effect as if the same had been duly made and entered on the 1st day of January 1940, and that the same be entered by the159 Clerk of this Court, Nunc Pro Tunc as of the 1st day of January 1940.The petitioner's wife included the amounts received by her from petitioner in her taxable income for 1942 and 1943 and her taxes for such years were increased by the inclusion of such payments in her taxable income.On March 14, 1946, petitioner's wife filed a claim for refund of $ 4,957.27 taxes claimed to have been paid by her for the taxable years January 1, 1942, to December 31, 1943, the total amount of tax assessed being $ 5,911.70.The Commissioner included in petitioner's taxable income for the years 1942 and 1943 the payments made by him to his wife of $ 10,590 and $ 12,411.42, respectively. Because of the inclusion of such payments, the Commissioner allowed to petitioner a credit of $ 350 for a dependent child in each year.OPINION.The petitioner contends that a decree of separation rendered July 1, 1944, separating a wife from the husband as of the actual time of separation, January 1, 1940, and entered by express order of the court, nunc pro tunc, January 1, 1940, must be recognized as a decree entered January 1, 1940; and, where such judgment or decree confirms the separation agreement of January160 1, 1940, and adopts it as incident to the judgment or decree, periodic payments made by the husband to the wife under such separation agreement are 50 deductible by the husband and not taxable to him, but are taxable to the wife.Whether the petitioner is entitled to the claimed deductions under section 23 (u), Internal Revenue Code, 1 is dependent upon whether the amounts paid by him to his wife in 1942 and 1943 are includible in her gross income under section 22 (k). 2161 The petitioner and his wife separated and entered into an agreement dated January 1, 1940, to be effective for one year, providing for the payment of $ 900 a month by petitioner to his wife. The agreement was extended orally for an indefinite time.In 1942 and 1943 petitioner paid to his wife $ 10,590 and $ 12,411.42, respectively. There is no evidence that at any time during 1942 or 1943 either party contemplated bringing any action to make legal the voluntary separation or that the agreement of January 1, 1940, was to constitute a property settlement preliminary to, and as a basis for, legal separation or divorce. On the contrary, the evidence shows that, prior to the institution of suit for legal separation, another agreement dated May 11, 1944, was entered into. This latter agreement is not in evidence.In Charles L. Brown, 7 T. C. 715, wherein taxpayer claimed to be entitled to the deduction of monthly payments made to his wife in 1943 pursuant to a voluntary separation agreement, this Court stated:* * * The wife must be "divorced or legally separated from her husband under a decree of divorce or of separate maintenance." The payments in162 question must have been "received subsequent to such decree." And they must discharge an obligation "under such decree or under a written instrument incident to such divorce or separation." (Emphasis in each case added.) Even in the last quotation use of the word "such" to define "separation" demonstrates that what was meant was not any legal separation, as petitioner contends, but only one of a sort to which reference has already been made in the prior language, that is, a separation consummated "under a decree * * of separate maintenance." See Frank J. Kalchthaler, 7 T. C. 625.51 The statutory command is thus so forceful and unambiguous that even were the legislative history more helpful we should not feel justified in resorting to it. * See also George D. Wick, 7 T. C. 723; affirmed per curiam, 161 Fed. (2d) 732; Tuckie G. Hesse, 7 T.C. 700">7 T. C. 700.Is a different rule applicable herein because of the decree rendered July 1, 1944, and entered nunc pro tunc as of January 1, 1940? We think not.Section 22 (k) is applicable to "a wife who is163 * * * legally separated from her husband under a decree * * * of separate maintenance." The payments includible in her gross income are "periodic payments * * * received [by the wife] subsequent to such decree," i. e., the decree under which the wife is adjudged legally separated from her husband and paid by the husband "in discharge of * * * a legal obligation which * * * is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation," i. e., imposed by the same decree under which the wife received the payments. (Emphasis supplied.)The wife herein was not legally separated from her husband under a decree of separate maintenance in 1942 and 1943. The 1942 and 1943 payments were not received by her subsequent to such decree. In 1942 and 1943 the petitioner was not legally obligated under any decree or written instrument incident to such decree, since the suit for legal separation had not even been commenced and was not commenced until sometime in 1944 and after the second agreement dated May 11, 1944, had been entered into by the parties. Although the decree rendered July 1, 1944, approves164 the agreement of January 1, 1940, as incident to the decree, it does not impose any obligation thereunder upon the petitioner. On the contrary, the only obligations imposed upon petitioner under the decree are those created by the agreement of May 11, 1944. The 1940 agreement had been fully performed and needed no judgment or decree of any court for its performance by petitioner.Retroactive judgments of state courts can not affect the rights of the Federal Government under its tax laws. Sinopoulo v. Jones, 154 Fed. (2d) 648; Morris Eisenberg, 5 T. C. 856, 869; affd., 161 Fed. (2d) 506.Freuler v. Helvering, 291 U.S. 35">291 U.S. 35, and Blair v. Commissioner, 300 U.S. 5">300 U.S. 5, are not pertinent, as claimed by petitioner. They hold that the Federal courts are bound by the decisions of state courts as to property rights. Federal law controls as to what is income. Burdick v. Commissioner, 76 Fed. (2d) 672; Lyeth v. Hoey, 305 U.S. 188">305 U.S. 188, wherein the court stated that "Congress165 establishes its own criteria and the state law may control only when the federal taxing act by 52 express language or necessary implication makes its operation dependent upon state law." Nor may a state, "by its decisions and laws governing questions over which it has final say, also decide issues of federal tax law and thus hamper the effective enforcement of a valid federal tax levied against earned income." Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. See also Lucas v. Earl, 281 U.S. 111">281 U.S. 111, wherein assignment of future income by husband to wife, valid under state law, was held ineffective to relieve the husband of Federal income tax; Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, wherein creation of a trust by a husband for the benefit of his wife, valid under state law, was held ineffective to relieve the husband from tax on the trust income; and Burk-Waggoner Oil Association v. Hopkins, 269 U.S. 110">269 U.S. 110, wherein the state laws which, for state purposes, prescribed the relations of members166 of joint stock associations to each other and to outsiders, were held ineffective to frustrate Federal taxing statutes designed to tax income actually earned because of the capital and efforts of each individual member of the joint enterprise.Furthermore, deductions from gross income depend upon legislative grace and "only as there is clear provision therefor can any particular deduction be allowed." New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435. The burden is upon the taxpayer claiming a deduction to show that "the deduction clearly falls within some deduction provision of the taxing act." White v. United States, 305 U.S. 281">305 U.S. 281.It is our conclusion that a decree of a state court, in so far as it attempts to determine retroactively the status of a husband or wife under section 23 (u) and section 22 (k), is ineffective and not binding upon this Court. It is the function of this Court to determine such questions. See Commissioner v. Tower, supra, wherein it is stated:* * * But the Tax Court's authority to make a final authoritative finding on the question of fact is not lessened167 because Michigan might treat the partnership valid for purposes of state law.It is well established that taxable net income must be determined on the basis of facts as they actually existed during the taxable years. Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359; North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417; American Potash & Chemical Corporation, 7 T.C. 1113">7 T. C. 1113.Since the petitioner has failed to bring himself within the purview of the applicable sections, he is not entitled to the deductions claimed.In view of the foregoing, it is not necessary to determine whether the New York court exceeded its power in ordering the entry of its decree nunc pro tunc, as contended by respondent.Decision will be entered for the respondent. Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (u) Alimony, Etc., Payments. -- In the case of a husband described in section 22 (k), amounts includible under section 22 (k) in the gross income of his wife, payment of which is made within the husband's taxable year. * ↩2. SEC. 22. GROSS INCOME. * * (k) Alimony, Etc., Income. -- In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/3267140/	These cases were consolidated in the court below for the purpose of trial, and as consolidated are here on appeal. These are the facts material to the decision of the case: One Luebke, to secure loans from the appellants, executed to each of them mortgages on identical lands, which were duly filed for record on January 29, 1919. Subsequent thereto, being indebted to appellee bank, he executed a mortgage on the same lands to it, subject to the first mortgages, to secure it therefor. All of these debts remaining unpaid, appellants brought their several suits on March 2, 1929, for judgment on their debt and for foreclosure of the mortgage securing them. A decree was rendered in this suit on March 30, 1929, and on May 3d, following, the lands were sold by virtue of the decree and purchased by the appellee for the debts and interest named in the decree and the costs that had accrued. Between the date of the decree of foreclosure and the date of the sale and purchase of the lands by appellee, appellant paid, to-wit, on April 13, 1929, the taxes on the lands which had become due January 1 preceding in the sum of $331.87. The report of the sale was duly made, and the sale confirmed, and a commissioner's deed executed and approved in open court on June 10, 1929, by the terms of which deed the lands were conveyed to the appellee in consideration of the payment of the debt, interest and costs aforesaid. On the 29th day of September, 1929, the appellants brought this suit against the appellee to recover the amounts of taxes paid by them as aforesaid and asked that they have a lien declared on the lands for the payment thereof. On the hearing of the case, the above state of facts was developed, and the chancellor made a general finding in favor of the defendants. Page 435 Generally in judicial sales the rule of caveat emptor applies by reason of which the purchaser is charged with full knowledge of all of the facts affecting the title to the lands purchased and takes it subject to all legal or equitable incumbrances. Guynn v. McCauley, 32 Ark. 112; Green v. Maddox, 97 Ark. 403, 134 S.W. 931; Miller v. Henry, 105 Ark. 265, 150 S.W. 700, Ann. Cas. 1914D, 754. The taxes which became due January 1 were a lien on the land (Crawford Moses' Digest, 10023) and in discharging this lien appellants were not volunteers as contended by the appellee, for the reason that the payment of the taxes was necessary to protect their interest, and ordinarily they would be entitled to be subrogated to the State's lien for reimbursement. N.Y. Life Ins. Co. v. Nichol, 170 Ark. 791, 281 S.W. 21; First National Bank of Mineral Springs v. Hayes-McKean Hdw. Co.,178 Ark. 429, 10 S.W.2d 866; Federal Land Bank of St. Louis v. Richland Farming Co., 180 Ark. 422, 21 S.W.2d 954. This rule does not apply, however, in cases where taxes are due on real estate when it is sold at judicial sale. By act of the General Assembly of 1883, at page 199 of the acts of that year, digested in 10056 of Crawford Moses' Digest, provision is made that "when any real estate shall be sold at judicial sale, * * the court shall order the taxes and penalties and interest thereon against such lands to be discharged out of the proceeds of such sale." This court, in the case of Miners' Bank v. Churchill, 156 Ark. 191, 245 S.W. 829, construed this language to apply to all judicial sales. In that case the question under consideration was whether, under a sale to foreclose a mortgage on real estate, the taxes which had fallen due prior to the date of the sale could be treated as an incumbrance on the land to be borne by the purchaser, or whether it should be paid out of the proceeds of the sale. We there said: "Our statute provides that a lien for taxes as between grantor and grantee shall attach on the first Monday in January of Page 436 each year. Crawford Moses' Digest, 10023. At the time of the sale there was then unpaid taxes due on the land which constituted a lien in favor of the State and county. It was well established at common law that the rule of caveat emptor applied to purchasers at judicial sales, and that the purchaser took the land subject to all incumbrances existing at that time, including tax liens. This rule was changed as to tax liens, however, by statute which is a part of the general revenue laws enacted by the General Assembly of 1883. * * The question suggests itself as to when, under the statute, the order of the court must be made, whether at the time of the decree or later, before the fund is paid out by the commissioner. We think that the statute itself declares that the tax shall be paid out of the proceeds of the sale, and it is not essential that the original decree directing foreclosure shall contain a direction for such payment, but the court may direct the payment at any time before the fund is disbursed." In the case at bar the taxes were due at the time of the institution of the suit and at the date of the decree of foreclosure, and therefore the court might have ordered these paid out of the purchase money. It may be argued that, as the taxes were not included in the judgment of the court, and were paid by appellant to protect the land after the date of the decree of foreclosure and before the sale, the statute would not apply. But this is not so. The appellants might well have discharged the liens at any time before the final decree and secured their reimbursement by amendment to their complaints, and, having failed to do this, might have appeared on the day of sale and themselves bid an amount sufficient to cover the sum named in the decree together with the taxes they had paid. They could not, however, avoid the effect of the statute by neglecting to do this and, after confirmation of the sale and the execution of the commissioner's deed, enforce the payment by the method undertaken. This is especially true when the proceeds *Page 437 of the sale are paid to them, since the court might have made the order for the payment of the taxes out of the purchase money at any time before the fund was distributed, and since they, themselves, have received it, they are in no attitude to complain. The decree of the trial court is correct, and is therefore affirmed.	01-04-2023	07-05-2016
https://www.courtlistener.com/api/rest/v3/opinions/3267705/	Appellee brought suit in the lower court to recover on a promissory note for $2,000, executed and delivered to him by appellant and secured by a chattel mortgage on certain machinery and equipment. Appellant admitted execution of the note and mortgage, but defended on the ground that liability on the note was discharged under the following clause in the mortgage: "The party of the first part [appellant] is to drill a well SE 1/4 NE 1/4, section 15 twp. 17 S range, 14 west. If said well is completed as a commercial well, party of the second part [appellee] is to release said mortgage, for his original 1/8th of oil and gas lease, which has been given. If said well is not a commercial well party of the first part shall pay to the party of the second part the two thousand dollars plus interest from date." Appellant, Page 245 at the time the note sued on was executed, assigned to appellee a one-eighth interest in appellant's oil and gas lease covering the land whereon the well was located, and the parties apparently contemplated that, in event appellant should bring in a producing oil well, appellee would receive sufficient return from his interest in the lease to recompense him for the amount loaned. Appellant alleged that he complied with the requirement by drilling an oil well on the described land which was "a commercial producer." It is undisputed that appellant did drill a well on this land, and the only issue in the case is whether the well which was brought in by him was a "commercial well" within the meaning of the phrase as used in the mortgage. The lower court found that the well drilled by appellant on the said land was not a "commercial well" and rendered decree for debt and foreclosure in favor of appellee. To reverse that decree appellant prosecutes this appeal. One of appellant's associates in the drilling of the well testified that the well "blew in" about December 21, 1940; that "they shot it around eight in the morning, and about nine o'clock the oil was blowing over the top. . . . It was making heads at first, then a few hours after that it was a steady blow, and it blew from about 9 o'clock a.m. to 6 o'clock p.m. On the same day . . ." This witness bought out appellant's interest in the well and tried without success to get the well to producing. He stated that it was not a commercial well at any time; that "when it pays a profit that is a commercial well. . . . The grade has to go down to where it shows less than 2%." He also testified that after he took the well over he operated it for a few days and abandoned it because it was making only about five barrels a day, and "it was just a white elephant." An oil worker who assisted in bringing the well in testified for appellant: "The hinderlite wouldn't function. Got seven or eight joints into the hole in trying to stab Page 246 the hinderlite, the fluid was coming by intervals and it started coming by heads . . . the well blew out, and in trying to kill the water I think there was part of the tubing fell in the well. . . . I would say it was a commercial well . . . Salt water showed up about 10:00 or 11:00 o'clock, and it increased until there was about 90% of water . . . Q. That is your idea about it being a commercial well, it would have been if it had continued the way it came in? A. Yes. Q. You don't know whether any oil was sold off of it? A. not to my knowledge, but there was a good deal of oil." A geologist, witness for appellant, testified: "It was a wild well. . . . It was estimated as flowing 800 barrels of fluid, 5% oil and five million cubic feet of gas per twenty-four hour day. . . . My record covers only the first twenty-four hours completion." In answer to a hypothetical question describing the well the chairman of the Arkansas Oil Commission testified: "I would say it was not an oil well." His definition of a commercial well is a well that produces oil and gas in sufficient quantities to pay the cost of drilling and operating cost. Section 10494 of Pope's Digest provides: "A commercial well is hereby defined as a well that produces one hundred barrels of forty-two gallons each of oil each day of twenty-four hours for a period of thirty successive days." This section, however, is a part of Act 201 of the General Assembly of 1935, which was "An Act to Provide for the Payment of a Bonus for the Location of New Oil Fields or Horizons and Making Appropriation Therefor." The first section of that Act provides for the payment by the state of a bonus for "the first commercial oil well" in new producing areas; and it might be held that the definition provided by the Act was designed by the legislature only as a basis for governing the payment of the bonus offered by the state to encourage drilling in new and unproved territory, rather than as a general definition intended to govern in all future transactions in the state. *Page 247 We do not find it necessary to decide whether, under the rule that "the law existing at the time and place of making a contract is a part of the contract; as much so as the stipulations expressed in the agreement" (headnote 3, Parsel v. Barnes Bro., 25 Ark. 261), the legislative definition controls here. Whether the rights of the parties are determined in the light of the above quoted definition or in the light of the construction placed on the term by those engaged in the oil industry, the evidence in the case at bar clearly showed that the well was not at any time a commercial oil well. It was never possible to save from the well commercial oil in paying quantities, and it was abandoned for that reason a short time after it was completed. United Central Oil Corporation v. Helm, 11 F.2d 760; Helm v. United Central Oil Corporation, 271 U.S. 686, 70 L. Ed. 1151, 46 S. Ct. 638. The decree of the lower court was correct and it is in all things affirmed. McFADDIN, J., not participating.	01-04-2023	07-05-2016
https://www.courtlistener.com/api/rest/v3/opinions/4619599/	APPEAL OF HANFF-METZGER, INC.Hanff-Metzger, Inc. v. CommissionerDocket No. 5079.United States Board of Tax Appeals4 B.T.A. 1214; 1926 BTA LEXIS 2012; September 30, 1926, Decided 2012 1. Personal service classification denied. 2. The action of the Commissioner in including in gross income $6,828.44, a portion of a reserve for advertising short rates, approved. Clarence L. Johnson, C.P.A., for the petitioner. J. Arthur Adams, Esq., for the Commissioner. MORRIS 1214 This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $20,764.74 for the calendar year 1919. The taxpayer claims that the Commissioner erred (1) in refusing to allow it classification as a personal service corporation, and (2) in adding to gross income $6,828.44, a portion of a reserve for advertising short rates. FINDINGS OF FACT. The taxpayer is a New York corporation having its principal office in New York City. It was organized in 1913 and is engaged in conducting the business of an advertising agency. The original issue of capital stock was $25,000, which was paid in in cash. On January 1, 1919, the outstanding stock amounted to $50,000. On December 21, 1919, the outstanding stock amounted to $300,000, consisting of 3,000 shares of a par value of $100, the percentage held by the several stockholders2013 being as follows: Per cent.Joseph A. Hanffapproximately 34Joseph P. Metzgerdo 34A. O. Dillenbeckdo 16D. M. Jonesdo 6 1/2Arthur De Cosseydo 6 1/2L. J. Seeger3C. J. Atkinson2The increase of $275,000 in capital stock was issued to represent good will. The stock issued to Jones, De Cossey, Seeger and Atkinson was given them by the taxpayer for their cooperation. All of the stockholders devoted their entire time to the business of the taxpayer. Hanff, Metzger, and Dillenbeck were the directors and executives of the company. They directed the work of the taxpayer and principally made the contracts with advertisers. 1215 Seeger was the treasurer, Atkinson had charge of sending out orders, and De Cossey was in charge of executing the art ideas. The business of the taxpayer originated for the most part from contact between one of its executives and a prospective client and to some extent through the employment of solicitors. After a contact was made, it was customary for the taxpayer to make a thorough survey and analysis of the advertiser's business, its products, the cost thereof, and the possible market. These factors, 2014 and the items taken into consideration in determining them, were reflected in chart form. At times the taxpayer suggested new products which it believed the advertiser could profitably manufacture and market, and prepared and submitted containers and trade-names designed to aid in marketing the advertiser's products. An example of the taxpayer's method of operation is shown in the case of a firm which, prior to 1919, had made a product for brewers. With the approach of National prohibition this firm found it necessary to put its plant to other uses. It consulted the taxpayer, which, after making a survey of the business possibilities, recommended the manufacture of corn products, such as corn flour, corn meal, hominy grits, and similar foods to which they found the mill could be adapted. The taxpayer then recommended that in this line of goods a leader be adopted which would be advertised extensively and carry most of the line. In order to carry out this idea the taxpayer gave the entire line a distinctive name and designed a series of packages which would make an attractive appearance on grocers' shelves, the package for each product having a different color combination, but2015 all the packages having sufficient similarity to be recognized as belonging to this special group of corn products. The taxpayer wrote all the advertising copy for this firm and assisted its sales manager in the direction of the sales force. In another case, that of an oil company, the advertiser had two kinds of oil, one a light of golden color and the other a dark oil. About 85 per cent of its sales had been the dark oil, as the public was familiar with oil of that color. The taxpayer, after considering the matter carefully, recommended that the golden colored oil be advertised. This was done, the advertisements of a golden colored stream of oil becoming the means of introducing a distinctive product, with the result that within three years the sales of the compa ny's oils had not only increased greatly, but 85 per cent of the company's business was the sale of the golden colored oil. After an advertising campaign had been prepared and the mediums of advertising selected by the taxpayer, the advertisers would either indorse a schedule of advertising or give the taxpayer a written order. The taxpayer would then contract for space, in the name of the advertiser, with the2016 advertising mediums which had 1216 been decided upon, such as magazines, newspapers, trade papers and billboards. The taxpayer neither owned any advertising mediums nor contracted for space in its own name. The publishers of the advertising mediums billed the taxpayer for the amounts due on the space used, showing on the bills the space used by each advertiser and the amount due therefor. The publishers usually gave a discount of 2 or 3 per cent for payment within the month in which the bill was rendered, and this discount was allowed by the taxpayer to the advertisers. The publisher usually billed the taxpayer from 12 to 15 days before the discount date, whereas the taxpayer customarily billed the advertisers from 15 to 40 days before that date. The taxpayer was able to do this for the reason that it knew in each case the amount of space contracted for, the publisher's rate per line, and the rate of discount allowed by each publisher. In most cases the advertiser was allowed the discount on the gross amount of the bill, whereas the discount allowed the taxpayer was computed on net amount, that is, the gross amount less the taxpayer's commission of 15 per cent. The2017 commissions allowed the taxpayer by publishers constituted the greater part of its income. The taxpayer's income and expenses for 1919 were as follows: Income.Expenses.Publication commissions$152,371.05Art department expenses$2,137.41Billboard commissions10,324.22Commissions to solicitors11,002.04Trade commissions1,196.87Traveling3,655.45Service department5,166.22Carfares624.77Discounts earned20,221.69Entertaining1,290.80Messenger service514.65Telephone1,069.02Postage1,515.41Expressage39.03Business getting3,354.77Rent6,000.00Payroll75,117.93Repairs342.89Cleaning737.00Stationery2,221.32Legal746.90Light136.22Depreciation on furnitureand fixtures 776.46Depreciation on library25.65Customers accountwritten off 5,037.38Miscellaneous2,646.73Discounts allowed21,594.63Taxes4,902.74Profit for year43,790.85189,280.05189,280.051217 The item of $152,371.05 listed as publication commissions represents the 15 per cent commissions allowed the taxpayer2018 by publishers, which the taxpayer, in remitting to the publishers, deducted from the payments received from advertisers. The item of billboard commissions represents the taxpayer's commission on advertising placed on billboards. The item of $1,196.87 listed as trade commissions represents the amount received for placing advertising for two hotels. In exchange for the advertising the hotels gave the publishers due bills which were good for trade at the hotels and the publishers paid the taxpayer a 15 per cent commission on the amount of advertising placed with them. The amount of $5,166.22 shown as income from service department is made up of 15 per cent commissions on engraving, electrotyping and other mechanical work handled for advertisers. The taxpayer sent out work of this kind to be done by others and charged the advertisers a commission on the bills rendered. The item of discounts earned represents discounts allowed the taxpayer by publishers for payment of bills within a specified time. The taxpayer always took advantage of these discounts which were figured on the charge for space after deducting the taxpayer's commission. The item of $11,002.04 shown as commissions2019 to solicitors is the amount paid to persons employed to solicit advertising. They were paid one-third of the commissions on the business they obtained. The item listed as expense for "business getting" represents expenditures for experiments made by the taxpayer which it felt could not properly be charged to advertisers. The payroll expense of $75,117.93 included salaries of officers and stockholders. The amount paid employees who were not stockholders, exclusive of officers and solicitors, was $34,432.93. The taxpayer had about 35 or 40 employees who were not stockholders. Included in this number were the following: Average number.Salary range per week.Contract and forwarding department6 $12 - $40Copy and lay-out men340 - 80Stenographers718 - 22Bookkeeping department911-30Telephone and file elerks2(1)Service men2(1)Errand boys1111 to 15The item of discounts allowed represents the amounts allowed advertisers for payment of bills before a specified date. This item is larger than the amount shown in the income column as discounts 1218 earned due to the fact that the discounts allowed2020 advertisers were figured on the amount of the bill before deduction of the taxpayer's commission. The balance sheets for 1919 were as follows: Jan. 1, 1919.Dec. 31, 1919.ASSETS.Cash on hand$59.62$104.03Cash in banks8,185.4616,080.00Accounts receivable61,631.5597,060.65Notes receivable219.001,719.00Commissions receivable579.52Trade investigation advances250.00Furniture and fixtures7,101.386,988.12Library256.57230.92Unbilled art and service6,341.255,565.57Stationery2,302.522,221.32Good will25,000.00275,000.00Stock subscriptions352.00600.00Liberty bonds2,310.191,566.73Advances on pay roll (general)928.77Advances on pay roll (art department)157.10Advances to solicitors9,474.43Total114,589.06417,696.64LIABILITIES.Accounts payable advertising38,341.1761,466.38Accounts payable art and service2,113.776,660.08Reserves for short rates4,191.7111,235.26Reserves for errors2,393.136,134.26H. G. Atkinson93.19A. O. Dillenbeck1,115.28Salaries accrued (general)231.00Salaries accrued (art department)200.00Capital stock50,000.00300,000.00Profit and loss surplus15,909.8132,200.66Total114,589.06417,696.642021 The accounts receivable in both balance sheets represent amounts billed to advertisers. Notes receivable covers amounts loaned to employees. Commissions receivable of $579.52 is the amount due the taxpayer at that time in a case where the publisher billed the advertiser direct and the taxpayer received its commission from the advertiser. The item of advances to solicitors represents the amounts drawn, but not at that time earned, by persons employed as solicitors. The furniture and fixtures account covers the desks and similar furniture. The account listed as unbilled art and service is the amount due from advertisers on work done, such as drawing, in the preparation of advertising. In most of these cases the taxpayer received payment from the advertisers before paying the artist or mechanic who did the work. The good will shown was entered to increase the capital so as to be in keeping with the dividends. The stock subscription items represent the taxpayer's subscriptions for stock in the Outdoor Bureau and the Advertising Agency Association. The Outdoor Bureau is an organization through which advertising 1219 agencies place their billboard advertising and the taxpayer2022 subscribed for stock in order to become a member. The Advertising Agency Association was organized by advertising agents during the World War to assist the Government in its advertising work. The item of Liberty bonds represents bonds purchased by the taxpayer for its employees and for which the employees were permitted to pay on the installment plan. The "accounts payable advertising" are the amounts payable to publishers for advertising placed by the taxpayer for its clients. The reserves for short rates represent reserves accumulated for the purpose of adjusting the amounts finally determined to be due upon the completion or termination of contracts. This situation arises from the fact that publishers have a sliding scale of rates for advertising space, granting to advertisers who use a large amount of space a lower rate than those who use a small amount. The publishers billed the advertisers through the taxpayer for space at the rate contracted for, but it sometimes happened that during the contract period the advertisers would use either more or less space than originally contemplated and in such cases an adjustment of rates would be in order. For example, an advertiser2023 might estimate that it would run 6,000 lines of advertising in a certain publication during the year. This amount of space perhaps could not be obtained for as low a rate as could 10,000 lines, so in this situation the taxpayer, in handling the account, would contract with the publisher for 10,000 lines in the name of the advertiser. The publisher would render bills at the 10,000 line rate. The taxpayer would render its bills to the advertiser at the higher, or 6,000 line, rate and remit to the publisher at the 10,000 line rate, placing the difference in the "reserve for short rate account." If at the end of the year the advertiser had used only 6,000 lines, the publisher would render a bill for the difference between the 10,000 line rate contracted for and the higher rate applicable to the 6,000 lines used. This bill would be paid by the taxpayer out of the reserve created. If, on the other hand, the advertiser used the full 10,000 lines, it would be entitled to the lower rate applicable to such space and the taxpayer would refund to it the excess it had paid on the basis of the 6,000 line rate. In 1919 the taxpayer was a member of the American Association of Advertising Agencies, 2024 the Associated Ad Clubs of the World, and the Outdoor Bureau. The Commissioner denied personal service classification, and added to the taxpayer's gross income $6,828.44, a portion of a reserve for advertising short rates. 1220 OPINION. MORRIS: We are of the opinion that the taxpayer is not entitled to classification as a personal service corporation. , and . With respect to the item of reserve for short rates, the taxpayer contends that this is not income but an increase in its liabilities. This contention, on its face, is unsound. The funds for which this reserve was created were collected by the taxpayer from its clients as a regular part of its business. There does not seem to have been any distinction made, at the time of collection, in billing clients or otherwise, between the amounts which were admittedly income and the amounts placed in the reserve. As far as the record shows, this segregation of receipts was a voluntary act on the part of the taxpayer, for the purpose of providing funds from which payment could be made upon completion2025 of the contract either to the publisher, if the lower rate had not been earned, or to the advertiser, if all the space contracted for by the taxpayer had been used. The question of the deduction of reserves has been before the Board in a number of cases. In the , we said: The revenue laws prior to the 1921 Act have never recognized reserves as being deductible from gross income in determining net income except in the case of insurance companies. * * The statute specifies what deductions are allowable and, except in the case of insurance companies, no provision is made in the 1918 Act for the deduction of a reserve as such. Items of expense must actually have been paid or liability therefor incurred in order to be deductible under that Act. See also ; ; . In , a deduction for a so-called reserve was allowed upon the finding that the amount claimed represented liabilities actually incurred. *2026 In the present appeal, the liability on the part of the taxpayer to refund to the advertiser or to make additional payments to the publisher was not incurred until the completion of its contract with each client. No evidence was offered to show what part, if any, of the reserve was attributable to contracts completed or terminated during the taxable year. Judgment for the Commissioner.PHILLIPS and STERNHAGEN dissent. Footnotes1. Not stated. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619600/	RICHMOND MICA CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Richmond Mica Co. v. CommissionerDocket No. 13065.United States Board of Tax Appeals13 B.T.A. 915; 1928 BTA LEXIS 3162; October 10, 1928, Promulgated 3162 1. Rate of depreciation on machinery and equipment determined. 2. Value of assets salvaged from a fire determined. Bernard D. Hathcock, Esq., for the petitioner. James L. Backstrom, Esq., for the respondent. TRAMMELL915 TRAMMELL: This is a proceeding for the redetermination of a deficiency in income and profits taxes of $4,925.48 for 1920. The respondent reduced by $17,520.58 the amount of a deduction taken by the petitioner as a loss resulting from a fire. The questions raised by the pleadings relate to the rate of depreciation allowable on petitioner's machinery and equipment from March 1, 1913, to March 8, 1920, the date of the fire, the salvage value of the machinery and equipment after the fire and as to whether the petitioner is entitled to have its tax liability determined under the provisions of 916 section 328 of the Revenue Act of 1918. The last question was abandoned at the trial and there remain only the questions relating to the depreciation and the salvage value of the machinery and equipment. FINDINGS OF FACT. The petitioner was a Virginia corporation with its principal offices at Richmond and has been3163 succeeded by the Richmond Mica Corporation. The petitioner was organized about January, 1913, and took over a business originally begun in 1889 but which had gone through one or two reorganizations. The business engaged in by the petitioner was the grinding of mica. Scrap mica was purchased, ground and bolted, and sold to the manufacturers of wall paper and rubber tires. Previously to March 8, 1920, the date when the petitioner's machinery and equipment were partially destroyed by fire the petitioner did not own the building which it occupied. The petitioner's machinery and equipment consisted of screens for washing the mica, grinding mills, rollers, bolters, tables, pipes, shafting and pulleys, electric motors, steam tables, boilers and heating plant. The grinding mills were of simple and plain construction and were built of inexpensive materials. The mills consisted of large tubs with revolving rollers which were made of old field pine. The main wear and tear on the mills was in connection with the wooden rollers, which had an average useful life of about 15 months. The tubs had an average useful life of about 10 years. At the date of the fire the petitioner had in operation3164 8 mills which had a value of about $1,500 each. The mica was bolted through regular uniform flour mill bolters. The main wear of these was in connection with the silk cloth, which had a useful life of about one year. The useful life of the bolters when kept in repair was about 20 years. The shafting in the plant had a useful life of more than 20 years. At the time of the fire the petitioner had 4 large electric motors which had values ranging from $100 to $500 each. These motors had a useful life of 10 years. The petitioner always kept its machinery and equipment in an excellent state of repair and charged the expenditures therefor to expenses. As a result of the fire, which occurred in the petitioner's plant on May 8, 1920, the petitioner's machinery and equipment was damaged to such an extent that, excluding the boiler, not more than 10 per cent of it was of any use in reconstructing the petitioner's new plant. 917 The petitioner in filing its income and profits-tax return took a deduction of $37,787.92 as the amount of its loss sustained on account of the fire and not compensated for by insurance or otherwise. The loss was computed as follows: DebitCreditPlant account at Mar. 8, 1920$33,324.63Labor3,665.65Material1,706.01Emergency and worthless construction12,369.63Insurance$7,278.00Salvage6,000.00Actual loss37,787.9251,065.9251,065.92*3165 In determining the amount of the plant account at March 8, 1920, as it appears in the above computation the petitioner computed depreciation from January, 1913, to March 8, 1920, at the rate of 5 per cent on its plant and equipment. In his determination of the deficiency involved herein, the respondent determined that the depreciation on the petitioner's machinery and equipment should have been computed at the rate of 10 per cent. He also determined that the salvage value of the assets after the fire was $15,000 instead of $6,000 as shown by the petitioner in its return. From March 1, 1913, to March 8, 1920, the petitioner's machinery and equipment depreciated at a composite rate of not more than 5 per cent per annum. The salvage value of that portion of the petitioner's machinery and equipment remaining after the fire on March 8, 1920, did not exceed $6,000. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619601/	JAHNCKE SERVICE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Jahncke Service, Inc. v. CommissionerDocket No. 41685.United States Board of Tax Appeals20 B.T.A. 837; 1930 BTA LEXIS 2020; September 16, 1930, Promulgated 2020 1. The petitioner held to be liable as a transferee. 2. Held that the granting of a motion of the respondent to file an amendment to his answer, wherein he alleged that the prior determination by this Board of the tax liability of the petitioner's transferor was conclusive upon the petitioner, was proper. 3. Where in a proceeding brought by it and in its own name a transferor corporation has its tax liability determined by this Board, held that such determination is conclusive upon a transferee stockholder of such corporation in a proceeding brought by such stockholder to have its liability as a transferee determined under section 280 of the Revenue Act of 1926. John J. Finnorn, Esq., for the petitioner. John D. Foley, Esq., for the respondent. TRAMMELL 838 Under section 280 of the Revenue Act of 1926 the respondent has proposed for assessment against the petitioner as transferee of the assets of the Jahncke Shipbuilding Co., Inc., New Orleans, La., deficiencies in the income and profits taxes of that company in the amount of $2,029.34 for 1918 and $23,751.62 for 1919. 2021 Subsequent to the filing of his answer in this proceeding the respondent, by motion duly granted, amended such answer wherein he alleges that the appeal in the instant case involves the adjustment of the income for 1919 of the petitioner's predecessor and transferor, Jahncke Shipbuilding Co., Inc., and also alleges that the claims or demands made in the appeal in the instant case were litigated and determined by this Board in the appeal of the Jahncke Shipbuilding Co., Docket No. 18349, and reported in 11 B.T.A. 479">11 B.T.A. 479, and further alleges that the former determination and adjudication precludes the petitioner therein and its privy, this petitioner, as to ahl claims therein made and matters or things pleaded or which might or should have been made or pleaded, including the claims, demands and allegations of error set forth in the appeal in the instant case. A motion by the respondent that the hearing be limited to the issue raised by the amendment to his answer having been granted, and the petitioner having excepted to the filing of such amendment and having moved to strike it from the record, hearing was had only on the issue raised by the amendment to the respondent's2022 answer. FINDINGS OF FACT. The petitioner is a Louisiana corporation, organized on July 6, 1915, and having its principal office at New Orleans. On May 5, 1917, the Jahncke Shipbuilding Co., Inc., hereinafter referred to as the Shipbuilding Co., was organized under the laws of Louisiana and thereafter engaged in the business of building ships and other facilities for the account of the United States Shipping Board, Emergency Fleet Corporation, under contract with that Board. On May 1, 1922, the Shipbuilding Co. had outstanding 250 shares of capital stock of a par value of $100 each. On May 1, 1922, the petitioner acquired in exchange for shares of its own capital stock all of the outstanding capital stock of the Shipbuilding Co. and caused the same to be transferred, 247 shares to Paul F. Jahncke, trustee, and 1 share each to Ernest Lee Jahncke, Paul F. Jahncke, and Walter F. Jahncke. These transfers were made upon the books of the Shipbuilding Co. 839 On the same day, May 1, 1922, the petitioner issued to Paul F. Jahncke, trustee, one certificate for 247 shares of its capital stock, being certificate No. 8. On the same day this certificate was returned and2023 canceled and there were issued against it certificates Nos. 15, 16, and 17 to Ernest Lee Jahncke, Paul F. Jahncke, and Walter F. Jahncke, respectively, each certificate being for 82 1/3 shares of the stock of the petitioner. The petitioner on the same day issued to Ernest Lee Jahncke, Paul F. Jahncke, and Walter F. Jahncke certificates Nos. 9, 10, and 11, respectively, for 2 shares each. On the same day and immediately after the issuance of the above mentioned certificates of its stock the petitioner caused to be transferred to itself all of the assets of the Shipbuilding Co. in liquidation of the capital stock of that company owned by the petitioner and acquired by it in exchange for its capital stock. The assets and property of the Shipbuilding Co. so transferred to the petitioner had at the date of the transfer a net value in excess of the tax liability here involved, together with all interest prescribed by law. In addition to the transfer of the assets as aforesaid the petitioner assumed by written contracts all of the liabilities, past, present and future of the Shipbuilding Co. At the time the petitioner acquired the stock of the Shipbuilding Co. and had it transferred2024 to Paul F. Jahncke, trustee, and to Ernest Lee Jahncke, Paul F. Jahncke, and Walter F. Jahncke, the stock of that company was owned in the amounts indicated by the following named persons, who were the duly and regularly elected officers of the company as indicated: Shares ownedErnest Lee Jahncke, president83 1/3Paul F. Jahncke, vice president83 1/3Walter F. Jahncke, secretary-treasurer83 1/3From and after May 1, 1922, until the date of the hearing in the instant case, the capital stock of the petitioner was owned in the amounts indicated by the following named persons who were the duly and regularly elected officers of the petitioner as indicated: Shares ownedErnest Lee Jahncke, president556 2/3Paul F. Jahncke, vice president556 2/3Walter F. Jahncke, secretary-treasurer556 2/3The acquisition of the capital stock and assets of the Shipbuilding Co. by the petitioner as heretofore set out was the result of a merger of all the interests owned by Ernest Lee Jahncke, Paul F. Jahncke, and Walter F. Jahncke and included, in addition to the petitioner and the Shipbuilding Co., the following corporations, whose capital stock2025 was acquired by the petitioner under date of April 1, 1922, 840 and whose capital stock and surplus, according to their respective books, were as indicated: SurplusPar value of capital stockCreditdeficitPontchartrain Express Co$15,000$8,353.96Fritz Jahncke (Inc.)30,000$103,677.27Jahncks Navigation Co. (Inc.)25,000428,084.44Roseland Gravel Co6,00018,414.27Southern Sand & Gravel Co10,00020,944.81Jahncke Realty Co50,000143,361.75136,000669,300.04Prior to April 1, 1922, the petitioner had outstanding 60 shares of capital stock of a par value, as well as a book value, of $6,000. Under date of August 24, 1928, the Shipbuilding Co. was duly and regularly dissolved according to the laws of Louisiana. On May 13, 1926, the respondent notified the Shipbuilding Co. of a determination of deficiencies in income and profits taxes of $2,029.34 for 1918 and $23,751.62 for 1919. An appeal from such determination, verified by Ernest Lee Jahncke, as president of the Shipbuilding Co., was filed with this Board on July 9, 1926, and docketed as No. 18349. 2026 Hearing was duly had on the issues presented in the petition, Ernest Lee Jahncke, among others, testifying in behalf of the Shipbuilding Co. and John J. Finnorn, counsel for the petitioner in the instant proceeding, appearing as counsel for the Shipbuilding Co. The Board's decision sustaining the determination of the respondent was promulgated April 10, 1928, and is reported at 11 B.T.A. 479">11 B.T.A. 479. Pursuant to its decision promulgated April 10, 1928, the Board on April 20, 1928, entered an order determining deficiencies against the Shipbuilding Co. of $2,029.34 and $23,751.62 for 1918 and 1919 respectively. Within a short time prior to the expiration of the period for taking an appeal to the Circuit Court of Appeals for a review of the decision of the Board, Finnorn, counsel for the Shipbuilding Co., prepared a petition for the review of the decision and forwarded a copy to the Commissioner of Internal Revenue, and on September 21, 1928, a copy of the petition for review was filed with this Board. About this time Finnorn discovered that certain other attorneys had theretofore proceeded to liquidate and dissolve the Shipbuilding Co., not having discussed the question of2027 the tax liability of that company and having overlooked the fact that any litigation was pending in regard to such tax liability. Upon learning of this, Finnorn took up the matter with Albert G. Miller, the then internal revenue agent in charge at New Orleans, 841 and discussed with him various phases of the case, more particularly the question of posting a bond and the effect of the dissolution of the Shipbuilding Co. prior to the filing of the petition for review and without having stated in such petition that the corporation had been dissolved. Miller requested Finnorn to submit the matter to him in the form of a letter. Finnorn thereupon addressed the following letter to Miller under date of September 20, 1928: ALBERT G. MILLER, ESQ., Internal Revenue Agent in Charge, New Orleans, La.In re: Jahncke Shipbuilding Co., Inc., versus Commissioner, B.T.A. Docket No. 18,349. DEAR SIR: Reference is made to our recent conversation relative to the petition for review of the decision of the United States Board of Tax Appeals in the above-entitled and numbered cause, and in accordance with your suggestion we will hereinafter recite the facts which have given rise2028 to the perplexities with which we are confronted. We feel that the Board would have decided our case differently had the original petition raised the true error. In short, had error been assigned to cover the action of the respondent in subjecting to tax as income the fees which petitioner received for the express purpose of restoring its property to the condition in which it was prior to undertaking the war contracts of the Shipping Board, instead of questioning the disallowance of the reserve which was created to correct the error resulting from the inclusion of said fees in gross income. Therefore, we are determined to insist on all our rights and privileges in the premises, and, if necessary, we shall seek to have our rights determined by the court of last resort. However, it is here that we are confronted with the problem which I have already brought to your attention. Finding that the Jahncke Shipbuilding Co., Inc., had no further business to transact, a contract was entered into on May 1, 1922, whereby the Jahncke Service Incorporated, took over the remaining assets of the former and assumed all of its liabilities present and future, in consideration for which the latter2029 gave its capital stock to the stockholders of the former. During the latter part of August, 1928, firmly believing that all of its affairs had been definitely and finally settled, and completely overlooking the fact of the existence of the claim of the Government for Income and Profits Tax, the charter of the Jahncke Shipbuilding Co., Inc., was surrendered to the State, and a certificate of dissolution issued under date of September 12, 1928. The petition for review had already been prepared and a copy thereof, together with a notice of appeal, had been transmitted to the respondent before counsel learned of the dissolution of the corporation. Upon learning of the situation, counsel sought to meet the same, and to this end called on you and discussed the matter. Thereafter it was determined that inasmuch as it was held, in the case of Oklahoma Natural Gas Co. vs. State of Oklahoma,47 S. Ct. 391">47 S.Ct. 391; 273 U.S. 257">273 U.S. 257, that the successor of a dissolved corporation is not entitled to be substituted as party appellant, we might jeopardize our interests were we to substituted the Jahncke Service Incorporated. 842 Inasmuch as Section 30 of Act2030 267 of the session of the General Assembly of the State of Louisiana of the year 1914 provides that: "All corporations, whether they expire by limitation or are otherwise dissolved, shall be continued as bodies corporate for the purpose of prosecuting and defending suits by or against them," we decided to prosecute our appeal as though no change had occurred. In this connection, however, we did not post a bond for the reason that it might be held that since the corporation had been dissolved, we were not properly before the court. The appeal having been taken without furnishing bond, the Commissioner is at liberty to assess the tax and proceed with its collection. In this connection, however, since the tax debtor has been dissolved and its assets disposed of, it may be necessary to proceed against the Jahncks Service, Incorporated, under its contract of assumption of liability. You are, therefore, hereby respectfully requested to transmit a copy of this letter to the Commissioner for his consideration and determination of the procedure to be followed in the matter. We feel that the Circuit Court of Appeals for the Fifth Circuit, to which court our appeal has been directed, 2031 will reverse the decision of the Board. Should this happen, we trust that the matter will be considered as closed; but, of course, this will depend upon the disposition of the Commissioner in the premises. On October 23, Finnorn sent the following telegram: MASON B. LEMING, Care General Counsel, Bureau of Internal Revenue, Washington, D.C.Reference Jahncke Ship Building Company dissolved and advice that sixty day letter would be issued against transferee Stop Notice and demand has been received by dissolved corporation aforesaid but sixty day letter has not been received Stop Kindly advise disposition to make notice and demand dissolved corporation has no assets. In response to the foregoing telegram, Finnorn received from C. M. Charest, General Counsel, Bureau of Internal Revenue, the following letter, dated October 29, 1928: In re: Jahncke Shipbuilding Company, Petitioner, v. Commissioner of InternalRevenue, Respondent. B.T.A. Docket No. 18349. U.S.C.C.A. 5th. Reference is made to your telegram of October 23, 1928, directed to Mr. M. B. Leming, relative to the above-entitled case. In reply you are advised that under date of October 4, 1928, the2032 Income Tax Unit was notified that the Jahncke Shipbuilding Company was dissolved and the assets distributed to the Jahncke Service, Inc., and the suggestion was made that a deficiency letter be mailed to the transferee. Accordingly, in due time the deficiency letter will be mailed to the transferee, and will probably reach you in the near future. Under date of November 2, 1928, the respondent mailed the following letter to the petitioner: JAHNCKE SERVICE, Incorporated, New Orleans, Louisiana.SIRS: In accordance with Section 274 of the Revenue Act of 1926 you are advised that the determination of your tax liability for the years 1918 and 843 1919, discloses a deficiency of $25,780.96 as shown in the attached statement as transferee of the Jahncke Shipbuilding Company, Incorporated, New Orleans, Louisiana, under Section 280 of said Act. The section of the law above mentioned allows you to petition the United States Board of Tax Appeals within sixty days from the date of the mailing of this letter for a redetermination of your tax liability. However, if you acquiesce in this determination, you are requested to execute the enclosed Form 866 and forward both original2033 and duplicate to the Commissioner of Internal Revenue, Washington, D.C., for the attention of IT:C:P-7. D. H. BLAIR, Commissioner.By (Signed) C. B. ALLEN, Commissioner.The "attached statement" referred to in the foregoing letter is as follows: IT:AR:D-60D DGS Statement of Returns Examined and Resulting Tax LiabilityRETURNS EXAMINEDCompanyYearFormsJahncke Shipbuilding Co. (Inc.)1918112019191120TAX LIABILITYCompanyYearDeficiencyJanhcke Service (Inc.), New Orleans, La1918$2,029.34191923,751.62Jahncke Shipbuilding Co. (Inc.)25,780.96The adjustments producing these deficiencies were set forth in detail in Bureau letter of May 13, 1926, addressed to the Jahncke Shipbuilding Company, Incorporated. The records of this office indicate that the Jahncke Shipbuilding Company, Incorporated transferred its assets to you on or about May 1, 1922, and was formally dissolved on September 12, 1928. From the determination set out in the respondent's letter of November 2, 1928, the petitioner on November 30, 1928, filed its petition with the Board. The petition is signed by2034 John J. Finnorn, as counsel for the petitioner, and verified by Ernest Lee Jahncke, as president of the petitioner. The respondent on January 29, 1929, filed his answer with the Board, but did not raise in it the question of the amount of the tax liability of the Shipbuilding Co. asserted against the petitioner being conclusive upon it, but plead to the assignments of error set forth in the petition. 844 Thereafter Finnorn received from C. M. Charest, General Counsel, Bureau of Internal Revenue, the following letter, dated March 2, 1929: In re: Jahncke Shipbuilding Company, Inc., v. Commissioner of Internal Revenue. B.T.A. Docket No. 18349. U.S.C.C.A. 5th. Reference is made to the above-entitled cause, wherein you have filed a petition with the Board of Tax Appeals to have its decision reviewed by the United States Circuit Court of Appeals for the Fifth Circuit. In order to dispose of the above-entitled cause, which by virtue of the filing of the petition for review is now pending in the United States Circuit Court of Appeals for the Fifth Circuit, it is necessary that the cause be docketed by that court and dismissed. Accordingly, this office has prepared2035 a motion to be filed with the Clerk of the Circuit Court of Appeals for the Fifth Circuit. The original and two copies of the motion are transmitted herewith. If you consent to the granting of the motion, you are requested to acknowledge service and note your consent on the original and one copy and return the same to this office. You may retain for your files one copy of the motion transmitted. The motion referred to in the foregoing letter is as follows: UNITED STATES CIRCUIT COURT OF APPEALS FOR THE FIFTH CIRCUITJAHNCKE SHIPBUILDING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MOTION TO DOCKET AND DISMISS Comes now the respondent in the above-entitled cause, the Commissioner of Internal Revenue, by and through his attorneys, Mabel Walker Willebrandt, Assistant Attorney General, and C. M. Charest, General Counsel, Bureau of Internal Revenue, and moves that the above-entitled cause be docketed and dismissed. In support of this motion there is produced the certificate of the Clerk of the United States Board of Tax Appeals, showing that on April 20, 1928, the Board rendered a decision showing deficiencies of $2,029.34 and $23,751.62, 2036 respectively, for the years 1918 and 1919; that thereafter on September 21, 1928, the petitioner filed a petition for review of the Board's decision in the United States Circuit Court of Appeals for the Fifth Circuit; that no further documents have been filed by the petitioner since the filing of the above-mentioned petition for review; that no review record has been perfected or prepared for transmission to the Court of Appeals for the Fifth Circuit; and that the time for such preparation and transmission of record has expired. WHEREFORE, respondent prays that the above-entitled cause be docketed and dismissed pursuant to the rules of the Court in such case made and provided. MABEL WALKER WILLEBRANDT, Assistant Attorney General.C. M. CHAREST, General counsel, Bureau of internal revenue.Service of the foregoing motion and consent to the granting of the same is noted hereon this day of , 1929. , Counsel for Petitioner.845 Finnorn signed the motion as requested and, pursuant to the filing of the same with the Circuit Court of Appeals for the Fifth Circuit, together with the certificate of the Clerk of this Board, the petition for review2037 of the decision of the Board in the case of the Shipbuilding Co. was docketed and dismissed on March 12, 1929. Finnorn had not filed and docketed the record with the Circuit Court of Appeals for the Fifth Circuit as a notice of the determination of a deficiency against the petitioner had been sent the petitioner, and according to his interpretation of such notice the petitioner had the right to have the tax liability of the Shipbuilding Co. redetermined by this Board. Also, the answer filed to the petition did not raise the defense of the Shipbuilding Co.'s tax liability having been theretofore determined. Pursuant to a motion filed by the respondent on February 11, 1930, and granted on February 13, 1930, the respondent has amended his answer as follows: AMENDMENT TO ANSWER. The Commissioner of Internal Revenue by his attorney, C. M. Charest, General Counsel, Bureau of Internal Revenue, for further answer to the petition of the above named taxpayer alleges as follows: (1) That the above entitled appeal involves the adjustment of income for the year 1919 of this petitioner's predecessor and transferor which transferred its assets to this petitioner for its stock whereby2038 the same persons who were the stockholders of the transferor corporation and accordingly interested in its assets became likewise and in similar proportion interested in the assets of this petitioner. The identical claims or demands made in this appeal were in substance and effect litigated, passed upon and determined by this Board in the appeal of the Jahncke Shipbuilding Company, Inc., Docket No. 18349, decided April 10, 1928 and reported in Vol. 11 at page 479 of the official reports of the Board, which former determination and adjudication precludes the petitioner therein and its privy, this petitioner, as to all claims therein made and matters of things pleaded or which might or should have been made or pleaded including the claims, demands and allegations of error set forth in the petition in this appeal. Wherefore petitioner's appeal is without merit and should be dismissed. OPINION. TRAMMELL: The questions presented for our decision are (1) whether the petitioner is the transferee of the assets of the Shipbuilding Co. within the meaning of section 280 of the Revenue Act of 1926, (2) whether the Board erred in permitting the respondent to file an amendment to his2039 answer, and (3) if the Board did not err in so doing, whether the Board having determined the tax liability of the Shipbuilding Co. after hearing duly had on the 846 merits raised by the pleadings in that case, the petitioner is entitled to have the tax liability of the Shipbuilding Co. redetermined by having a hearing on the issues raised in the petition in the instant case and the answer filed thereto exclusive of the amendment. With respect to the question as to whether the petitioner is the transferee of the assets of the Shipbuilding Co. the petitioner's brief contains the following: We have admitted that petitioner is liable at law as a transferee of the assets of Jahncke Shipbuilding Company by virtue of the fact that it assumed by written contract all of the liabilities of said shipbuilding company; but we do not agree nor do we admit that petitioner is liable in equity as a transferee, but on the contrary, we contend that there is no liability in equity for the reason that petitioner was never a stockholder of the shipbuilding company, except for the convenience of transferring the physical assets of the latter to itself. It is not necessary under the statute2040 that petitioner be held to be liable both at law and in equity. Liability either at law or in equity is sufficient. Regardless of the contractual liability, the petitioner as a stockholder of the shipbuilding company received as a distribution in liquidation all the assets of that corporation, and we think this constitutes it a transferee within the meaning of section 280 and its liability for any tax due by the transferor is thus established to the extent of the value of assets received, which is conceded to be in excess of the tax liability. In its exception to the filing of the amendment to the answer and its motion to strike such amendment from the record, the petitioner avers among other things (1) that the amendment is not timely, (2) the petitioner having instituted the instant proceeding in reliance upon certain statements, acts and conduct of the respondent, the allowance of the amendment is prejudicial to and destructive of the rights of the petitioner, and (3) that the respondent is now estopped to plead the matters set forth in the amendment. We think that the allowance of an amendment to an answer upon motion timely filed, like the extension of the time prescribed2041 for filing an answer, is, in a proper case, within the sound discretion of the Board. See Shultz Bread Co.,10 B.T.A. 268">10 B.T.A. 268; Charles P. Leininger,19 B.T.A. 621">19 B.T.A. 621. We think that the motion to amend was timely filed and that the respondent was not estopped from raising the question. Nor do we think that the filing of the amended answer deprives the petitioner of any legal rights. Although we have heretofore determined the tax liability of the Shipbuilding Co. and found a deficiency in tax, the petitioner attacks that determination and contends that it is entitled to be heard on the question of such liability by having a hearing on the issues raised by it in the petition in the instant proceeding and the answer 847 thereto. The respondent contends that, the tax liability of the Shipbuilding Co. having been determined by the Board, the petitioner is precluded from having that liability tried again. It seems well settled, in the absence of fraud or collusion, that a judgment rendered by a tribunal of competent jurisdiction is conclusive against the parties to the suit and against all persons represented by the parties. It is also well settled2042 that a corporation represents its stockholders in all matters within the scope of its corporate powers transacted in good faith by its officers. In Hawkins v. Glenn,131 U.S. 319">131 U.S. 319, it was sought to recover from a stockholder the unpaid portion of his subscription to the capital stock of a corporation to be used in the satisfaction of a judgment against the corporation which was insolvent. The stockholder sought to avoid liability on the ground that he was not a party to the cause between the creditor and the corporation. The court said: We understand the rule to be otherwise, and that the stockholder is bound by a decree of a court of equity against the corporation in enforcement of a corporate duty, although not a party as an individual, but only through representation by the company. A stockholder is so far an integral part of the corporation that, in view of the law, he is privy to the proceedings touching the body of which he is a member. Sanger v. Upton,91 U.S. 56">91 U.S. 56, 58 * . The foregoing was quoted with approval in 2043 Glenn v. Liggett,135 U.S. 533">135 U.S. 533, where the same question was again involved. In Hancock National Bank v. Farnum,176 U.S. 640">176 U.S. 640, the court said: This representative character of the corporation has been affirmed by this court in several cases. In Hawkins v. Glenn,131 U.S. 319">131 U.S. 319, it was held that "in the absence of fraud, stockholders are bound by a decree against their corporation in respect to corporate matters, and such a decree is not open to collateral attack." This was a case in which an assessment ordered by a court which had jurisdiction of the corporation was held binding upon stockholders residing in another State; and in the opinion, on page 329, it was said by Chief Justice Fuller: "A stockholder is so far an integral part of the corporation that, in view of the law, he is privy to the proceedings touching the body of which he is a member." See also Glenn v. Liggett,135 U.S. 533">135 U.S. 533; Great Western Telegraph Co. v. Purdy,162 U.S. 329">162 U.S. 329, 337. In 2044 Royal Arcanum v. Green,237 U.S. 531">237 U.S. 531, it was said: In addition it was by the application of the same principle that a line of decisions in this court came to establish: * * and third, that putting out of view the right of the person against whom a liability for a stockholder's subscription is asserted to show that he is not a stockholder, or is not the holder of as many shares as is alleged, or has a claim against the corporation which at law or equity he is entitled to set off against the corporation, or has any other defense personal to himself, a decree against the corporation in a 848 suit brought against it under the state law for the purpose of ascertaining its insolvency, compelling its liquidation, collecting sums due by stockholders for subscriptions to stock and paying the debts of the corporation, in so far as it determines these general matters, binds the stockholder, although he be not a party in a personal sense, because by virtue of his subscription to stock there was conferred on the corporation the authority to stand in judgment for the subscriber as to such general questions. 2045 Selig v. Hamilton,234 U.S. 652">234 U.S. 652; Converse v. Hamilton,224 U.S. 243">224 U.S. 243; Bernheimer v. Converse,206 U.S. 516">206 U.S. 516; Whitman v. National Bank,176 U.S. 559">176 U.S. 559; Hawkins v. Glenn,131 U.S. 319">131 U.S. 319. Respecting the same question, it was said in Marin v. Augedahl,247 U.S. 142">247 U.S. 142: Whether the stockholder against whom the order is here sought to be enforced was personally a party to the suit in which it was made does not appear; nor is it material. Under the rule in Minnesota, as also the general rule, he was sufficiently represented by the corporation to be bound by the order in so far as it determined the character and insolvency of the corporation and other matters affecting the propriety of a general assessment such as was made. This court frequently has recognized and applied that rule. In Hawkins v. Glenn,131 U.S. 319">131 U.S. 319, an assessment ordered by a Virginia court having the corporation before it was sustained as against stockholders residing in another State and not personally brought into the suit, the ground of decision being that "a stockholder is so2046 far an intergral part of the corporation that, in the view of the law, he is privy to the proceedings touching the body of which he is a member." Of similar import are Sanger v. Upton,91 U.S. 56">91 U.S. 56; Glenn v. Liggett,135 U.S. 533">135 U.S. 533; Great Western Telegraph Co. v. Purdy,162 U.S. 329">162 U.S. 329, 336; Hancock National Bank v. Farnum,176 U.S. 640">176 U.S. 640; Bernheimer v. Converse,206 U.S. 516">206 U.S. 516, 532; Royal Arcanum v. Green,237 U.S. 531">237 U.S. 531, 544. With regard to the similarity between unpaid stock subscriptions and other assets of a corporation, the Supreme Court in Hawkins v. Glenn, supra, said: As against creditors there is no difference between unpaid stock "and any other assets which may form a part of the property and the effects of the corporation," (Morgan County v. Allen,103 U.S. 498">103 U.S. 498, 509,) and "the stockholder has no right to withhold the funds of the company upon the ground that he was not individually a party to the proceedings in which the recovery was obtained." 2047 Glenn v. Williams, 60 Maryland, 93, 116. In view of the statements of the Supreme Court in the foregoing cases and as the petitioner does not allege that fraud or collusion was perpetrated in the determination of the tax liability of the Shipbuilding Co. we think that such determination is conclusive upon the petitioner both as to the existence as well as the amount of the deficiency so determined against that company. See also John Robert Brewer,17 B.T.A. 713">17 B.T.A. 713. The petitioner urges that as section 280 of the Revenue Act of 1926 provides that the liability of a transferee shall be assessed, collected and paid in the same manner and subject to the same provisions, with certain statutory exceptions, as a deficiency in tax, it is entitled to have another and further determination made of the tax liability 849 of the Shipbuilding Co. Where the tax liability of a transferor corporation has never been adjudicated, we think that under the provisions of section 280 a transferee stockholder may have the tax liability of the transferor determined in a proceeding brought by the transferee, but we find nothing in section 280 which indicates that2048 Congress intended that, although the tax liability of the transferor corporation has been determined in a proceeding brought by and in the name of the corporation, such determination is to be ignored and the tax liability of the transferor corporation determined anew each time a transferee stockholder comes before the Board and asks that such be done. Under the construction contended for by the petitioner, there could be no finality of the determination of the tax liability of the transferor corporation so long as there remained a transferee stockholder against whom the respondent had determined a liability as transferee and whose case remained undecided. In Coe v. Armour Fertilizer Works,237 U.S. 413">237 U.S. 413, the court said: It may be conceded that a judgment recovered against a corporation, without fraud or collusion, in a court having jurisdiction over the subject-matter and the party, may consistently with the Fourteenth Amendment be treated as concluding the stockholder respecting the existence and amount of the indebtedness so adjudged. 2049 Sanger v. Upton, Assignee,91 U.S. 56">91 U.S. 56, 59; Hawkins v. Glenn,131 U.S. 319">131 U.S. 319, 329; Glenn v. Liggett,135 U.S. 533">135 U.S. 533, 544; Great Western Telegraph Co. v. Purdy,162 U.S. 329">162 U.S. 329, 337. But before a third party's property may be taken to pay that indebtedness upon the ground that he is a stockholder and indebted to the corporation for an unpaid subscription, he is entitled, upon the most fundamental principles, to a day in court and a hearing upon such questions as to whether the judgment is void or voidable for want of jurisdiction or fraud, whether he is a stockholder and indebted, and other defenses personal to himself. See Grant Western Telegraph Co.v. Purdy, ubi supra; Bernheimer v. Converse,206 U.S. 516">206 U.S. 516, 528, 532; Converse v. Hamilton,224 U.S. 243">224 U.S. 243, 256; Selig v. Hamilton,234 U.S. 652">234 U.S. 652, 660. While in a case, such as the one now before us, the prior determination of a deficiency against the transferor corporation is conclusive upon the transferee stockholder as to the existence and amount of such deficiency, the transferee stockholder2050 who is proceeded against under section 280 is, as pointed out in Coe v. Armour Fertilizer Works, supra, entitled to a hearing upon such questions as whether he was liable as a transferee stockholder, whether the prior determination is void or voidable because of fraud or want of jurisdiction, and other defenses personal to himself. The petitioner being liable as a transferee of the assets of the Shipbuilding Co. having received assets in excess of the tax liability of that company, and our prior determination of the tax liability of the Shipbuilding Co. being conclusive on the petitioner, and there being no defenses personal to the petitioner, we are of the opinion *850 that the respondent's action in proposing to assess against the petitioner the deficiencies heretofore determined by us against the Shipbuilding Co. must be sustained. The fact that counsel for the petitioner herein has mistaken his remedy in failing to prosecute its appeal from our judgment in the Circuit Court of Appeals is a circumstance over which we have no control and for which we can afford no relief. 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/4619602/	WILLIAM ZAKON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Zakon v. CommissionerDocket No. 5450.United States Board of Tax Appeals7 B.T.A. 687; 1927 BTA LEXIS 3115; July 22, 1927, Promulgated 3115 1. A license to sell liquor in the City of Boston, which, under a long continued custom, entitled the holder to a renewal from year to year and which renewal privilege was valuable, is property. 2. Petitioner purchased such a license in 1911, paying $11,000 for the renewal privilege. The value thereof was greater on March 1, 1913, than the cost. The license continued to have a substantial value which attached to the renewal privilege until 1919, when it became worthless because of national prohibition. Held, that petitioner sustained a loss in 1919 measured by the cost of the property to him. 3. No deduction may be allowed for loss of good will value in the absence of any evidence of cost. Harry Friedman, Esq., for the petitioner. John D. Foley, Esq., for the respondent. PHILLIPS 687 This is an appeal from the determination of deficiencies in income tax as follows: For the year 1919, $5,803.06; for the year 1920, $22.15; and for the year 1921, $14.03. Errors in determining the deficiency for 1919 are alleged by the petitioner as follows: (1) The March 1, 1913, value of the liquor license of the taxpayer was erroneously determined3116 by the Commissioner as $13,000 instead of $35,000. (2) Failure of the Commissioner to allow any deduction for obsolescence of the petitioner's good will, which had a value of $10,000 on March 1, 1913. (3) Failure of the Commissioner to allow the March 1, 1913, value of the liquor license as a deduction for obsolescence in 1919. (4) Erroneous spreading of obsolescence deductions over a period of from March 1, 1913, to January 16, 1920. FINDINGS OF FACT. The petitioner is an individual, residing at Roxbury, Mass. In 1911 he purchased for $11,000 from one Harding, in the City of 688 Boston, a liquor license of the fourth class, which gave him the right to sell liquor in bottles in any quantity. Harding continued in business under this license until April 1, 1911. During April, 1911, the license was transferred to petitioner by the license board of Boston and he began doing business under the license May 1, 1911. The purchase price did not include any stock or fixtures and, upon acquiring it, the business was moved to a new and different location and fixtures and improvements were installed by the petitioner at a cost of more than $2,500. Under the law of3117 the Commonweath of Massachusetts the number of liquor licenses issued in the City of Boston was limited to 1,000. The license board of Boston had limited the number to 984. Such licenses were issued annually, on May 1, upon payment of the yearly fee, which varied from 1911 to 1919 from $12,000 to $14,000. It was the practice of the license board of Boston to issue annual licenses only to the holders of old licenses unless refused for cause. If the holder of a license sold or transferred such license to another acceptable party, the transferee had a preferred status before the license board as the holder of such license. This practice made such licenses valuable and they commanded high prices from persons desiring to go into the liquor business. On March 1, 1913, the license of the petitioner had a fair market value of over $11,000. The license continued to have a substantial value until after January 1, 1919. Petitioner continued in the liquor business, renewing his license annually until June 30, 1919, when he was forced to discontinue on account of prohibition legislation. He thereupon procured a license for selling 2 3/4 per cent beer in bottles. This business was discontinued3118 in October, 1919, when it was determined that sale of such beer was unlawful. The petitioner did a large wholesale business and had special trade-marks and trade brands of liquors which he advertized and used in his business. He had a large foreign trade with Poles, Lithuanians, Russians, and Jews, all of which languages he spoke. His location near Haymarket Square was particularly good for this class of trade. In his determination of the tax due from petitioner for 1919, the Commissioner allowed a value of $13,000 for the liquor license as of March 1, 1913, but prorated this amount over the period from March 1, 1913, to January 16, 1920, allowing $1,888.15 as a deduction in 1919. In his answer he concedes this method to be in error, but contends that the value of the liquor license on January 1, 1919, was not in excess of $1,970.92. He refused to allow any deduction for the obsolescence of good will in 1919. 689 The net income for 1919 determined by the respondent and upon which he computed the deficiency, was $57,852.91. OPINION. PHILLIPS: It appears that in 1911 and prior thereto the number of liquor licenses which might be issued in the City of Boston3119 was limited by the laws of Massachusetts to not more than 1,000 and that such number might be further limited by the licensing board of the City of Boston in its discretion. This board did limit the number to 984 and refused to issue any larger number. While such licenses were issued annually, expiring on May 1 of each year, it was the established custom of the board to issue such annual licenses to the holders of licenses for the previous year. The holders of any license might transfer it to another, to whom a new license would be issued by the license board, if the purchaser were found to be acceptable by the board. Under such circumstances the holder of such a license had an asset which had a value entirely separate and distinct from the right to conduct the business of a liquor dealer for the remainder of the year for which such license was issued. The courts have recognized that such value existed and constituted property rights. See , where the court said: Because of the large surrender value of old licenses and of the long continued custom of reissuing licenses to old holders until refused for cause, such licenses have3120 been recognized by the courts of Massachusetts as property rights. In 1911 the petitioner purchased such a license to operate in the City of Boston from one Harding, paying therefor $11,000. The transfer was made to the petitioner in April, 1911, at which time the annual license had less than one month remaining. The petitioner never operated under such annual license but, by reason of its ownership, was enabled to secure the annual license under which he began operations on May 1, 1911. These facts conclusively show that the $11,000 was not paid by the petitioner to Harding for the right to operate during the remaining period which the annual license had to run but was paid in order that the petitioner might be placed in a position where he could thereafter secure annual licenses by payment of the prescribed fee. This intangible right which appertained to the ownership of the annual license continued in the petitioner through 1913 and on March 1 of that year had a value in excess of the amount paid in 1911. It is the claim of the petitioner that the March 1, 1913, value of his license was $35,000 and that on that date his business had a good will value of $10,000, all of3121 which were destroyed in 1919 as the result of prohibition legislation. He contends that in computing his 690 net income for 1919 he is entitled to a deduction of such March 1, 1913, value either under the provisions of section 214(a)(4) or of section 214(a)(8) of the Revenue Act of 1918, which subsections provide for the deduction of: (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise if incurred in trade or business. (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. The last-quoted provision of the Act indicates that it is intended to care for losses of capital which took place over a longer period than the taxable year. There is nothing in the record in this case which would indicate that there was any exhaustion, wear and tear, or obsolescence of either the license or the good will prior to the taxable year involved. In fact the testimony here is to the contrary. It all indicates that any loss or damage which was sustained by this petitioner occurred in the year 1919. We therefore conclude that the taxpayer has3122 not brought himself within subparagraph (8) of section 214 of the Act, quoted above. It does appear, however, that the taxpayer sustained a loss in 1919 which he is entitled to deduct under the provisions of subparagraph (4) of the section of the Act quoted above. The deduction, however, is not measured by the March 1, 1913, value as contended by the petitioner, but is limited to the actual loss sustained. ; 5 Am. Fed. Tax Rep. 5373; ; 5 Am. Fed. Tax Rep. 5376. The license cost the petitioner $11,000 in 1911. In 1913, it had a value in excess of that amount. In 1919, it became worthless. The taxpayer sustained a loss of $11,000 which is deductible in 1919. The good will, however, appears to have cost the taxpayer nothing and under the decisions quoted there is no deductible loss on account of that item. Decision will be entered on 15 days' notice, under Rule 50.Considered by MARQUETTE and MILLIKEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619603/	GUARANTY TRUST COMPANY OF NEW YORK, RACHEL LUSTIG, ELIAS LUSTIG, AND LEONARD J. OBERMEIER, AS EXECUTORS OF THE ESTATE OF DAVID L. LUSTIG, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Guaranty Trust Co. v. CommissionerDocket No. 70582.United States Board of Tax Appeals33 B.T.A. 1225; 1936 BTA LEXIS 766; February 28, 1936, Promulgated 766 1. ESTATES - LIFE INSURANCE POLICIES. - Where beneficiary or assignee of policy was designated with proviso, if she survive the insured, held, such designation was not contingent and death of insured did not cause cessation of an interest subject to estate tax. Bingham v. United States,296 U.S. 211">296 U.S. 211. 2. Id. - Where insured did not reserve right to change the assignee, his wife, and under laws of New York, where contract of insurance was executed, her consent was necessary to the insured's exercise of any of the benefits under the policies, held, insured did not have, at death, any incidents of ownership subject to estate tax. 3. Id. - Where the insured's wife was irrevocably designated beneficiary and the policy, a Wisconsin contract, did not provide for loans thereon or the surrender thereof for cash, held, that under the laws of Wisconsin insured did not have, at death, any incidents of ownership subject to estate tax. 4. Id. - Policy made payable to A without reservation of right to change and subsequently the insured and A concurrently assigned the policy to B with specific reservation, to insured, of the right to change767 the beneficiary designated by the assignment, held, such power to change constituted a legal interest of insured in the policy and the termination, by death, of such incident of ownership is a transfer subject to estate tax. Leonard J. Obermeier, Esq., for the petitioners. T. M. Mather, Esq., for the respondent. TYSON 1225 OPINION. TYSON: Petitioners, the duly qualified and acting executors of the estate of David L. Lustig, deceased, who died in November 1929, seek a redetermination of the deficiency of $2,387.69 in estate tax asserted by respondent. The sole issue is whether respondent, in determining the value of the decedent's gross estate, erred in including therein the proceeds of three life insurance policies, under section 302(g) and (h) of 1226 the Revenue Act of 1926. 1 No issue has been raised as to the correctness of the amounts representing the proceeds of the three policies paid to the decedent's surviving wife as beneficiary or assignee, as follows: Insurance CompanyPolicy No.AmountHome Life Insurance Co106190$6,000.00Northwestern Mutual Life Insurance Co3492198,220.00Penn Mutual Life Insurance Co58880550,574.78768 The decedent was a resident of the State of New York at the dates those policies were issued upon his application therefor and, also, at the time of his death. The Home Life Insurance Co. Policy No. 106190, when executed and delivered in the State of New York on December 17, 1901, was made769 payable to David L. Lustig, his executors, administrators, or assigns. It contained no reservation to the insured of the right to change the designated beneficiary. The policy contained provisions regarding the conditions and benefits thereof, including the right of assignment, loan value, and paid-up insurance value. Attached to the policy was an assignment executed by the insured in the State of New York on December 10, 1907, on a form of the Home Life Insurance Co., whereby the insured assigned and transferred unto Rachel Lustig, his wife, the policy No. 106190 and all dividends, benefits, and advantages to be had or derived therefrom. The assignment further provided: "In the event of my surviving the said Rachel Lustig this instrument shall be null and void", but contained no other conditions or reservations. The Northwestern Mutual Life Insurance Co. policy No. 349219, when issued on June 6, 1896, was made payable to Rachel Lustig, wife of the insured, if she survived the insured, otherwise to the insured's executors, administrators, or assigns. The policy contained no reservation to the insured of the right of revocation of the beneficiary. It provided for paid-up insurance770 under certain conditions, but did not provide for loan or cash surrender values. The Penn Mutual Life Insurance Co. policy No. 588805, when issued on August 15, 1912, was made payable to Philip H. Lustig, 1227 "brother of the insured, if he survive the insured, otherwise to the insured's executors, administrators or assigns", without reservation of the right of revocation by the insured. The policy contained provisions regarding the conditions and benefits thereof, including the right of assignment, paid-up insurance, loans, and cash value. Attached to the policy was an assignment executed in the State of New York in July 1919, by the insured and his brother, Philip H. Lustig, on a form of the Penn Mutual Life Insurance Co., whereby they assigned and transferred all their right, title, and interest in and to policy No. 588805 to "Rachel Lustig, wife of the insured (the beneficiary), if she survive the insured, otherwise to the insured's executors, administrators or assigns", subject to the condition that, "The right to change the beneficiary is * * * reserved to the insured." It thus appears that for several years prior to and at date of decedent's death, all three policies771 were payable to the insured's wife as assignee or as beneficiary, if she survived the insured. It is now definitely settled that the phrase as to the beneficiary surviving the insured does not constitute a condition precedent to the vesting of the beneficiaries' interest in the policies. Instead, the title and possession of the beneficiary were fixed by the terms of the policies and assignments thereof beyond the power of the insured to affect prior to his death, which merely ended a possibility which might have occurred. Accordingly, such designation of the beneficiary or assignee is not a ground for the inclusion of the proceeds of the three policies in the decedent's gross estate. and and . The Home Life Insurance Co. policy, having been executed and delivered in the State of New York, was a New York contract. . The insured's wife held the entire beneficial interest in that policy by an unconditional772 assignment and under the laws of New York her consent was necessary to his control, possession, or enjoyment of the privileges contained in the policy, such as loan and cash surrender values and the right of assignment. ; ; . Cf. . The Northwestern Mutual Life Insurance Co. policy irrevocably designated the insured's wife as the beneficiary and the policy did not provide for loans thereon or the surrender thereof for cash. So far as this record shows that policy was a Wisconsin contract, since the only evidence as to where the policy was executed and delivered is shown on the face of the policy 1228 itself to have been in Wisconsin. The property right of the insured's wife in that policy could be defeated by assignment, or otherwise, only with her consent, under the law of Wisconsin; 773 . Accordingly, the death of the insured did not terminate such incidents of ownership of those two policies by the decedent (that is, control, possession, or enjoyment of the policies or the proceeds thereof) as would constitute an appropriate subject of the estate tax and respondent erred in including such proceeds in decedent's gross estate. ;; . The Penn Mutual Life Insurance Co. policy, when issued, was made payable to the insured's brother without the right of revocation by the insured. A life insurance policy, being a nonnegotiable chose in action, is assignable, , the assignment constitutes a contract, ; affd., ; 774 , and the assignee acquires an interest in the policy only to the extent of the specified terms of the assignment, ; ; ; . The assignment may be absolute or conditional, including a reservation to change or cancel the assignment, , and where, as in this proceeding, the beneficiary is irrevocably named in the policy, the insured and the beneficiary may by their concurrent act effect an assignment of the policy to a third party, ; ; . In the latter case the life insurance policy designated A as the beneficiary without reservation to the insured to change the beneficiary and subsequently A, in writing, released his interest in the policy to the insured who assigned the policy to B with775 reservation to the insured to change or cancel the assignment. Thereafter, the insured assigned the policy to C. The court held that B's interest in the policy was, by virtue of the terms of the assignment, subject to the insured's right to change or cancel the assignment to him. Also, cf. We conclude that by the assignment concurrently executed by the insured and his brother in the State of New York in July 1919, the brother released all of his interest in the Penn Mutual Life Insurance Co. policy as beneficiary and that Rachel Lustig became the assignee of the beneficial interest therein subject, however, to the 1229 insured's reserved right to change the beneficiary. By that reservation to change, the insured, until the moment of death, retained a legal interest in the policy which gave him the power of disposition of the policy and the proceeds thereof, as completely as if he were named the beneficiary. The termination, by death, of such power or incidents of ownership is a transfer subject to estate tax, 776 ; ; ; and ; and this is so notwithstanding the fact that the Penn Mutual Life Insurance Co. policy was issued prior to 1918, because he had reserved the power to change the beneficiary and he died subsequent to the enactment of the broad retroactive provisions of section 302(h), supra. ;Newman v. Commismissioner, supra, and . Accordingly, the proceeds of the Penn Mutual Life Insurance Co. policy No. 588805 in the amount of $50,574.78 are includable in the decedent's gross estate, pursuant to the provisions and limitations (as to amount) of section 302, supra. Decision will be entered under Rule 50.Footnotes1. SEC. 302. 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. (h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619604/	GUSTAVA KLUEHN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kluehn v. CommissionerDocket No. 100736.United States Board of Tax Appeals46 B.T.A. 1211; 1942 BTA LEXIS 758; May 22, 1942, Promulgated 758 The petitioner, a nonresident alien individual, was a residuary legatee of an estate in the United States which consisted in part of a prior estate that was in trust pending final distribution. The trustee continued management of the trust through 1936, and thereby managed the petitioner's interest in the trust properties. Held, that the petitioner was not engaged in a trade or business in the United States and did not have an office or place of business therein, and that she is not taxable under section 211(b) of the Revenue Act of 1936. Stanley Suydam, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. MURDOCK 1211 The Commissioner determined a deficiency in income tax for the year 1936 in the amount of $11,596.13. The issue is whether the petitioner, a nonresident alien, was either engaged in a trade or business, or had an office or place of business in the United States so as to become subject to tax under section 211(b) of the Revenue Act of 1936. FINDINGS OF FACT. The petitioner is a nonresident alien residing at Berlin, Germany. She was not in the United States during 1936. She is a residuary759 legatee of the estate of Lilly Busch, who died in 1928. Lilly Busch was a residuary legatee, to the extent of one-eighth, of the estate of Adolphus Busch who died in 1913. The will of Adolphus Busch placed all of the residue of his estate in trust. The trustees were directed to convey one-eighth of the residue to Lilly Busch, absolutely. Not all of the estate of Adolphus Busch 1212 has been distributed. The part retained by the trustees was taken over prior to 1936 by the St. Louis Union Trust Co., as trustee, and was administered in 1936 under the name of Adolphus Busch Trust No. 10,688. That trust included the undistributed portion of the one-eight residue bequeathed to Lilly Busch. The petitioner has a one-thirteenth interest in the residue of the estate of Lilly Busch and, therefore, an interest of one-thirteenth of one-eighth in the Adolphus Busch Trust No. 10,688. The corpus of the trust included real estate. The petitioner's share of the income of the trust for 1936 was $1,887.52. The petitioner is also a beneficiary of an inter vivos trust created by Lilly Busch in 1926. Her interest therein is one-thirteenth. The corpus of that trust consists of corporate760 stock. Dividends were paid on the stock in 1936. The St. Louis Union Trust Co., which was one of the trustees, distributed to the petitioner her share of the trust income for 1936. The undistributed residue of the estate of Lilly Busch, exclusive of her interest in the Adolphus Busch trust, was conveyed in 1931 to Lilly Busch, Inc., a Missouri corporation. The corporation issued 130,000 shares of stock, of which the petitioner received 10,000. The assets of the corporation included securities and real estate. The corporation paid a cash dividend and also distributed shares of stock of another corporation as a dividend in 1936. The dividends were delivered to the St. Louis Union Trust Co., which managed all of the petitioner's property in the United States, except one small trust from which no taxable income was realized. The cash dividend was deposited to the petitioner's account. The stock received as a dividend was sold later in the year by the trust company upon the petitioner's direction. The St. Louis Union Trust Co., as agent for the petitioner, made several sales of securities in 1936. Each sale was made on order of the petitioner. No purchases were made for761 the petitioner. The trust company held a power of attorney from the petitioner and her husband, but made no use of that power in effecting any transactions for the petitioner. The petitioner did not own any real estate in the United States. The St. Louis Union Trust Co. filed a nonresident alien income tax return, Form 1040 NB, on behalf of the petitioner for 1936, with the collector of internal revenue for the first district of Missouri. It reported $55,319.80 as "interest, dividends, rent, royalties, annuities, income from estates and trusts, and other fixed or determinable annual or periodical income * * * including income from Lilly Busch Trust * * ." The amount of tax liability was shown as $5,531.98. 1213 The Commissioner determined that the petitioner realized income from the sources and in the amounts as follows: Interest$913.28Fiduciary income48,216.43Partnership income1,887.52Capital gain10,587.91Dividends8,806.44Total70,411.58He allowed deductions in the amount of $208.50, and determined net income to be $70,203.08. The petitioner was not engaged in trade or business in the United States and she did not have762 an office or place of business in the United States in 1936. OPINION. MURDOCK: The petitioner does not contest the correctness of the amounts involved in the determination made by the Commissioner. She, a nonresident alien, contends that she was not engaged in a trade or business within the United States and did not have a place of business in the United States. If her contention is correct, then she is subject to tax under section 211(a) of the Revenue Act of 1936 at the flat rate of 10 percent and, furthermore, capital gains are not included in her taxable income. The Commissioner contends that she had a place of business and was engaged in business in the United States and is taxable under section 211(b) at the normal tax and surtax rates. The Commissioner advances only two grounds for his conclusion. One is that the petitioner's dealings in securities amounted to a trade or business. The facts clearly show that under , the few sales of securities did not constitute the carrying on of a trade or business. The other ground advanced by the Commissioner is that the absent petitioner, through her agent, the St. 763 Louis Union Trust Co., participated in the management and operation of the properties making up the residuary estate of Adolphus Busch in which she held an undivided one-thirteenth of a one-eighth interest. We may assume that the activities of the Union Trust Co. in managing the trust created by the will of Adolphus Busch constituted the carrying on of a business in 1936, since the facts do not show the contrary. The petitioner did not create that trust and had no voice in the management of it. The trust was created by the will of Adolphus Busch, who died in 1913. The corpus of the trust originally constituting all of the residuary estate of Adolphus Busch had not been entirely distributed in 1928, when Lilly Busch died. The petitioner, 1214 as a residuary legatee of the estate of Lilly Busch, thus acquired an interest of one-thirteenth of one-eighth of the Adolphus Busch testamentary trust estate. She merely accepted that interest and did nothing about it. She never chose the trustee as her agent. Perhaps she could have demanded a partition, but she did not do so. The Commissioner, in Regulations 94, article 211-7(b), has provided: Neither the beneficiaries nor764 the grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in trade or business in the United States or to have an office or place of business therein, merely because the trustee is engaged in trade or business in the United States or has an office or place of business therein. The Commissioner's present contention is in direct conflict with this regulation. We conclude, upon the entire record in this case, that the petitioner was not engaged in a trade or business in the United States and did not have an office or place of business therein. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619606/	Louis A. Edwards v. Commissioner.Edwards v. CommissionerDocket No. 77518.United States Tax CourtT.C. Memo 1960-172; 1960 Tax Ct. Memo LEXIS 108; 19 T.C.M. (CCH) 925; T.C.M. (RIA) 60172; August 31, 1960108 Held: Amount of casualty loss determined for deduction under Section 165(c)(3), 1954 Code. Louis A. Edwards, pro se, 4047 Ida, Detroit, Mich. Donald E. Wynn, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion The Commissioner determined a deficiency in income tax for the year 1954 in the amount of $815.29. In 1954 a severe windstorm caused the loss of many trees on petitioner's property. He sustained a casualty loss within Section 165(c)(3) of the 1954 Code. The only question for decision is the amount of the loss. Findings of Fact The petitioner is a resident of Detroit, Michigan. He filed his return for 1954 with the district director of internal109 revenue for Michigan. The petitioner is a graduate architect, registered in the State of Michigan. He is employed by General Motors Corporation in its Argonaut Realty Division. His duties include making appraisals of property. In 1943, petitioner acquired 3 1/2 lots, about 1 acre, in the Huron-Cedar Lakes Subdivision No. 2 in the Township of Greenbush, Alcona County, Michigan. In 1944, he built a house on the property. By the terms of the recorded plat of the subdivision the use of the lots is restricted to dwelling purposes, and the minimum cost of a house, specifications, ground floor space, and the lines of foundation are prescribed. State Highway 23 runs along the rear of petitioner's lots, and their frontage is on Lake Huron. They were heavily wooded. Also, trees along the highway provided a screen and windbreak. On August 9, 1954, there was a severe tornado in Alcona County. Petitioner's property was in the path of the windstorm. It blew down and damaged 107 trees; 50 were located on petitioner's property and 57 were just beyond the line of his property in the right-of-way between it and the highway. The destroyed trees were from 15 to 70 feet in height and 4 to 18 inches110 in diameter. They were either blown down completely or were blown over and uprooted. The storm substantially reduced the number and density of the trees on petitioner's property and the over-all shade and screening they had provided before the storm. The fallen and dislocated trees constituted substantial devastation and waste on petitioner's property necessitating their removal and the clearing out of breakage and clutter. The number and size of the trees on petitioner's property before the storm contributed to its value. The destruction of trees by the storm reduced the value of the property by $1,000, which was the difference between the fair market value of the entire property immediately prior to and immediately after the storm. In 1954 the petitioner sustained a casualty loss of $1,000, no part of which was compensated for by insurance or otherwise. Opinion HARRON, Judge: Section 165(c)(3) of the 1954 Code applies to the instant case and, as it applies here, a deduction is allowable for a casualty loss sustained by an individual in the taxable year, not compensated for by insurance or otherwise, which arose from a storm which caused damage to nonbusiness property. 111 The only dispute between the parties is whether the windstorm damage to trees on petitioner's property resulted in any decrease in the value of the property, and if so, the dollar amount thereof. The petitioner, on his return for 1954, itemized various deductions totaling $3,514.21, which included a casualty loss deduction of $3,000 for the windstorm damage to his property. The respondent disallowed the entire amount of the casualty loss deduction. He then allowed the standard deduction of $1,000 in lieu of allowable itemized deductions. Since the itemized deductions other than the deduction for a casualty loss amounted to only $514.21, the petitioner in effect received an allowance for the casualty loss, namely, $485.79. The respondent does not contend that no loss was sustained by the petitioner from the windstorm damage to trees on his property. He only disputes the claim that the amount of the casualty loss exceeded what in effect has been allowed. The petitioner contends that the amount of the casualty loss was $3,000. Each party introduced evidence in support of his contention. The established rule is that the amount of an allowable deduction for a casualty loss in the112 case of nonbusiness property is the difference between the fair market value of the property immediately prior to the occurrence of a casualty and its fair market value immediately thereafter, limited to the adjusted basis of the damaged or destroyed property. Helvering v. Owens, 305 U.S. 468">305 U.S. 468. The same rule is applied in the computation of the amount of a loss caused when trees on residential property are destroyed or damaged. Buttram v. Jones, 87 F. Supp. 322">87 F. Supp. 322. In applying this rule in instances where a storm or other casualty has caused damage to trees, the entire property is considered as a unit (land, improvements, and trees), and the loss is measured by the decrease, if any, in the fair market value of the entire property immediately after the occurrence of the casualty as compared with the fair market value of the entire property immediately before. Buttram v. Jones, supra, and cases cited therein; Whipple v. United States, 25 F. 2d 520; Frederick H. Nash, 22 B.T.A. 482">22 B.T.A. 482, and Bessie Knapp, 23 T.C. 716">23 T.C. 716, 719. See also G.C.M. 21013, 1 C.B. 101">1939-1 C.B. 101. Cf., Bliss v. Commissioner, 256 F. 2d 533.113 The Congress has not seen fit, for income tax purposes, to allow the computation of the amount of a casualty loss to be measured by the replacement cost or the value of any particular part of the whole unit of the property affected by the casualty, such as a particular building or part of a building, or the individual trees which have been destroyed. This was noted in Bessie Knapp, supra, where we said, "It appears that in the cases cited * * * there was no practical reason, for tax purposes, to consider the land and buildings or trees separately in determining the amount of the casualty loss." The estabished rules have been applied here, and we have considered all of the evidence of the petitioner and the testimony of the respondent's witness. The entire record has been carefully considered. It is our conclusion that there was a decrease in the fair market value of petitioner's property, considered as a whole, immediately after the damage which the severe windstorm caused, compared with its fair market value immediately before the storm, and that the difference in such value was not more than $1,000. We have made that finding. The petitioner is entitled to a casualty*114 loss deduction in the amount of $1,000. He is, therefore, entitled to itemize all of his allowable deductions rather than be limited to the standard deduction of $1,000. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619607/	Kenneth Leigh, Petitioner v. Commissioner of Internal Revenue, RespondentLeigh v. CommissionerDocket No. 10951-76United States Tax Court72 T.C. 1105; 1979 U.S. Tax Ct. LEXIS 58; September 17, 1979, Filed 58 Decision will be entered under Rule 155. Petitioner was administrator of an estate and employed an attorney to represent the estate in the probate proceedings and tax matters. A few days before petitioner's final accounting was filed and approved by the probate court, the attorney asked petitioner to sign an amended estate tax return reporting additional tax due as a result of after-discovered assets. Petitioner was apparently not told by the attorney to pay the additional tax, and petitioner distributed all of the assets of the estate without paying the additional tax. Held: Under 31 U.S.C. sec. 192, petitioner is personally liable for the additional tax. He had knowledge or notice that the tax was due the United States at a time when he had possession of sufficient assets of the estate to pay the tax, and it was his nondelegable duty to see that the tax was paid. Anthony M. Vienna, for the petitioner.Kenneth G. Gordon, for the respondent. Drennen, Judge. DRENNEN1105 Respondent determined that petitioner in his capacity as fiduciary of the Estate of Charles W. Cooper, deceased, is personally liable for the undischarged estate tax owed by the estate in the amount of $ 27,061.Due to a concession by respondent, 1 the only issue presented for our resolution is whether petitioner can be held personally 1106 liable in his capacity as administrator of the Estate60 of Charles W. Cooper, under R.S. sec. 3467 (1878), 31 U.S.C. sec. 192 (1970 ed.).FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by reference.Petitioner Kenneth Leigh is an individual who, at the time of filing his petition in this case, resided in Los Angeles, Calif.On July 22, 1969, Charles W. Cooper (hereinafter decedent) died intestate. On July 24, 1969, Simon Shankin (hereinafter Shankin) was appointed special administrator of the Estate of Charles W. Cooper, deceased (hereinafter estate).For 8 years prior to decedent's death, petitioner was employed by decedent's corporation, Charles W. Cooper, Inc., a dress manufacturer. Petitioner served the corporation as production61 manager, and in this capacity was involved in every aspect of the decedent's business, with the exception of the sales and bookkeeping departments.Due to petitioner's familiarity with the business and the heirs' desire to continue the operation of decedent's business, petitioner was asked by Shankin and decedent's two brothers to replace Shankin as administrator of the estate. Petitioner accepted and on September 3, 1969, he was appointed administrator of the estate in place of Shankin.Subsequent to becoming administrator, petitioner assumed the duties of president of Charles W. Cooper, Inc. In this capacity, he made all major decisions for the corporation including those involving financial matters.Petitioner had no prior experience with the administration of any estate or the affairs of a deceased person, and, therefore, shortly after his appointment he retained Bernard W. Minsky (hereinafter Minsky) of the firm of Minsky & Garber to represent the estate. Petitioner had previously used this firm in personal legal matters and was entirely satisfied with its work.Subsequent to the retention of Minsky, petitioner followed a course of blindly relying on Minsky's competence to62 administer the estate. When petitioner met with Minsky, it was usually for the purpose of signing checks or documents. It was petitioner's practice to attempt to read these documents before signing. If, 1107 however, the documents were long and legalistic, petitioner would sign them without reading them. Petitioner never questioned Minsky as to the nature or contents of the documents he was signing; it was his feeling that Minsky was doing whatever was necessary to protect him and the heirs.In addition to signing checks and estate documents, petitioner aided in the sale of decedent's house, a piece of property, and decedent's car. He also attended the probate proceedings with Minsky on at least two occasions.On April 21, 1971, an estate tax return (Form 706) was filed with the District Director of Internal Revenue, Los Angeles, Calif. Petitioner was aware at this time that estates paid taxes, and had previously had discussions with Minsky about the general obligation of estates to pay tax, and about the tax liabilities of this estate.On October 13, 1972, petitioner accompanied Minsky to State court where his "Petition for Order Settling Final Account of Administrator63 and for Distribution" was heard.On October 16, 1972, an amended estate tax return was presented to petitioner by Minsky for his signature. The return listed as estate assets certain Totten Trusts 2 maintained by decedent which had not been included in the original estate tax return. Due to the inclusion of these trusts, the return reflected an additional estate tax due of $ 27,061. Appearing clearly on the first page of this return was the caption "Amended Estate Tax Return," the amount of tax paid with the original return, and the amount of $ 27,061, signifying the net estate tax payable. Petitioner looked at this page, but signed the return without questioning Minsky as to its significance.Minsky forwarded the amended return to Special Procedures, Internal Revenue Service in Los Angeles, with a letter of transmittal dated October 17, 1972, which contained64 the following paragraph:You will note that the reason for the Amended Return is the joint tenancy accounts that were discovered very recently. As indicated to you heretofore, each of these accounts has approximately $ 3,000.00 in it for the payment of taxes. Please levy on these sums as soon as possible in that the estate does not have any more funds available for the payment of taxes.1108 On October 20, 1972, petitioner filed a proposed "Order Settling Final Account of Administrator and Decree of Distribution." The order recited that the assets in the possession of the estate on that date amounted to $ 177,043, of which $ 63,302 was in cash. The accounting did not reflect the additional estate tax either as having been paid or as a liability. This order was entered on October 24, 1972, and distribution of all the assets to the beneficiaries was made at that time.On November 6, 1972, petitioner was discharged as administrator of the estate. Petitioner at no time had a beneficial interest in the estate, outside of the statutory fees he was awarded for serving as administrator. The order of October 24, 1972, allowed the administrator a statutory commission of $ 4,516 65 and an extraordinary commission of $ 1,500, based on allegations in the report that he had spent 81 hours rendering extraordinary services in administering the estate, including conferences with real estate brokers, bank executives, accountants, attorneys, and a revenue agent, concerning affairs of the estate.Respondent, in his statutory notice of deficiency, determined a personal liability against petitioner in his fiduciary capacity as executor (administrator) of the estate for the unpaid estate tax of $ 27,061.OPINIONThe ultimate issue for our resolution is whether petitioner is personally liable for the unpaid estate tax owing by the estate. Respondent, in determining that petitioner is liable for the tax in his own person, relies principally on section 2002, I.R.C. 1954, 3 which provides, "The tax imposed by this chapter shall be paid by the executor." Section 20.2002-1, Estate Tax Regs., makes it clear that this duty applies to the entire tax, regardless of the fact that the gross estate consists in part of property which does not come within the possession of the executor or administrator. The regulation also clarifies that this obligation is enforceable only in a fiduciary's66 representative capacity and not personally, unless section 3467 of the Revised Statutes of the United States, 31 U.S.C. sec. 192, also applies. 467 1109 The personal liability of the fiduciary for estate tax is described in 31 U.S.C. sec. 192, which provides:Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid.Section 192, 31 U.S.C., must be read in conjunction with R.S., sec. 3466 (1878), 31 U.S.C. sec. 191 (1970 ed.); King v. United States, 329">379 U.S. 329 (1964); United States v. Lutz, 295 F.2d 736 (5th Cir. 1961). Section 191, 31 U.S.C., establishes the priority of debts due to the United States and provides in part:Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from68 the deceased, the debts due to the United States shall be first satisfied; * See New v. Commissioner, 48 T.C. 671">48 T.C. 671 (1967).Though a literal reading of 31 U.S.C. sec. 191 and sec. 192 seems to impose strict liability on a fiduciary when he makes a distribution which leaves the estate with insufficient funds from which to pay a debt owing to the United States, courts have long departed from such a rigid interpretation. It has been long held that in order to render a fiduciary personally liable under 31 U.S.C. sec. 192, he must first be chargeable with knowledge or notice of the debt due to the United States, at a time when the estate had sufficient assets from which to pay this debt. Want v. Commissioner, 280 F.2d 777 (2d Cir. 1960); Irving Trust Co. v. Commissioner, 36 B.T.A. 146">36 B.T.A. 146 (1937); United States v. Vibradamp Corp., 257 F. Supp. 931">257 F. Supp. 931 (S.D. Cal. 1966).It is this knowing disregard of the debts due to the United 1110 States that imposes liability on the fiduciary, to the extent69 of the value of the assets distributed after knowledge of the debt was obtained. United States v. Crocker, 313 F.2d 946">313 F.2d 946 (9th Cir. 1963).There is no dispute that the unpaid estate tax of $ 27,061 constitutes a debt (see Viles v. Commissioner, 233 F.2d 376">233 F.2d 376 (6th Cir. 1956)), nor that at a time when the estate had sufficient assets with which to pay this debt, there was a payment of a debt to another within the meaning of 31 U.S.C. sec. 192. Sec. 20.2002-1, Estate Tax Regs. See also Champlin, Administrator v. Commissioner, 6 T.C. 280">6 T.C. 280, 285 (1946); Wright v. Commissioner, 28 B.T.A. 543 (1933); Want v. Commissioner, supra;Schwartz v. Commissioner, 560 F.2d 311">560 F.2d 311, 319 (8th Cir. 1977), revg. T.C. Memo. 1975-267 on other grounds. 5 Therefore, the only issue before us is whether petitioner possessed knowledge or notice of the estate tax liability at the time of distribution of the estate.70 The knowledge requirement of 31 U.S.C. sec. 192 may be satisfied by either actual knowledge of the liability or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States. Irving Trust Co. v. Commissioner, supra;Livingston v. Becker, 40 F.2d 673">40 F.2d 673 (E.D. Mo. 1929).It is petitioner's contention that due to his unfamiliarity with the estate tax return, and the nature of the estate tax in general, that he had no actual knowledge of the liability. Furthermore, petitioner argues that as a layman inexperienced with estate matters, his retention of competent counsel relieved him of the duty to inquire as to the proper disposition of the estate, and, therefore, he is not chargeable with knowledge of the facts that a reasonable inquiry would have produced. Although we sympathize with petitioner's plight, we cannot sustain either of petitioner's contentions.On October 16, 1972, petitioner signed the amended estate tax return which gave rise to the liability in question. At that time 1111 he looked at the first page71 of the return where the caption "Amended Estate Tax Return" and the amount of the liability in question appeared clearly. Since petitioner, previous to this time, was aware of the general obligation of estates to pay taxes and in fact had signed the original estate tax return and had paid the tax shown to be due thereon, we believe that his signature on the amended return showing an outstanding tax liability is prima facie evidence that he had actual knowledge of the existence of the debt due to the United States within the meaning of section 192. See United States v. Kaplan, 74 F.2d 664">74 F.2d 664 (2d Cir. 1935).The main thrust of petitioner's argument seems to be, however, that even if he knew that there was additional tax due the Government, he assumed that Minsky would see that it was paid and he was therefore justified and reasonable in not inquiring further into whether the debt to the Government was paid. We disagree for the reasons hereafter discussed.On brief petitioner cites us numerous cases, 673 which stand for the proposition that in some instances reliance on competence of counsel, without more, constitutes "reasonable cause" for the late filing72 of a return or for late payment of tax and will thus prevent the imposition of additions to tax under section 6651. He states that the reasoning of these cases should apply equally to the imposition of liability on the fiduciary, under 31 U.S.C. sec. 192. We do not find these cases controlling, as there is no "reasonable cause" requirement in 31 U.S.C. sec. 192.7 See, however, Estate of Duttenhofer v. Commissioner, 49 T.C. 200 (1967), affd. per curiam 410 F.2d 302">410 F.2d 302 (6th Cir. 1969), wherein this Court held that where the executors of an estate had reason to know that an estate tax return was required, reliance upon an 1112 attorney to file the return did not constitute reasonable cause under section 6651 for failure to file a timely return.In this74 case, unlike in many of the cases cited by the parties, we do not have the question of whether petitioner was put on notice of the debt to the Government before he distributed the assets of the estate. About 1 week before the assets were distributed, petitioner signed, with the intent that it be filed, an amended return which clearly reflects on its face that additional tax was due the Government. There was no mystique about how the tax was computed -- petitioner's own agents had computed it. Certainly petitioner had an obligation, independent of any reliance on his attorney, to look at the face of the return to see whether any additional tax was due, and he does not deny that he looked at the return before signing it. In fact, we think petitioner was definitely aware of the fact that the return was filed for the purpose of showing, and in fact did show, that additional tax was owing. 8 It may be that petitioner assumed that the tax would be paid from some other source, but section 192 required more of him than an honest belief that the Government would be paid; it imposed on him a duty to see that this was done. King v. United States, supra at 339-340.75 To hold that blind reliance on the competence of counsel relieves fiduciaries from the duty to inquire as to the actual payment of the tax would subvert the purpose of 31 U.S.C. sec. 192.Section 192, 31 U.S.C., was founded on "motives of public policy in order to secure an adequate revenue to sustain the public burdens and discharge of public debts and should be liberally construed." Viles v. Commissioner, supra at 390; see United States v. Crocker, supra at 947.Its purpose is to make those who have control and possession of the debtor's property responsible for seeing76 that the Government's priority is paid. United States v. Westchester Fire Insurance Co., 478 F.2d 133">478 F.2d 133 (2d Cir. 1973).In view of its purpose, we are convinced that 31 U.S.C. section 192 requires more than a belief on the part of the executor-administrator that the debt to the Government would be paid. Once the fiduciary has actual knowledge that the debt to the 1113 Government exists, or notice sufficient to put a reasonably prudent person on inquiry, the statute imposes a duty on the fiduciary, to the extent estate assets are available for the purpose, to see that it is paid. King v. United States, supra.The act of payment does not require legal expertise so that responsibility therefor can be delegated to an attorney. If the fiduciary does so, he assumes the risk of his attorney's actions and is chargeable with the knowledge of the facts that an inquiry would have revealed. Compare New v. Commissioner, supra at 679. Any other conclusion would be contrary to the purpose of 31 U.S.C. section 192.Here a reasonable77 inquiry of Minsky should have revealed that the tax had not in fact been paid. That petitioner apparently chose not to make this inquiry does not relieve him from liability. We hold for respondent on this issue.Because of respondent's concession,Decision will be entered under Rule 155. Footnotes1. Originally respondent determined that petitioner was liable for additions to tax pursuant to sec. 6651(a), I.R.C. 1954; however, respondent has stipulated that sec. 6651(a)↩ is not applicable.2. In this case, accounts were opened at various financial institutions by petitioner in his name as trustee for the benefit of various nephews of decedent.↩3. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years at issue, unless otherwise specified.↩4. See also sec. 6901 which provides in part:SEC. 6901. TRANSFERRED ASSETS.(a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred: (1) Income, estate and gift taxes. --* * * * (B) Fiduciaries. -- The liability of a fiduciary under section 3467 of the Revised Statutes (31 U.S.C. 192↩) in respect of the payment of any tax described in subparagraph (A) from the estate of the taxpayer, the decedent, or the donor, as the case may be.5. Sec. 20.2002-1, Estate Tax Regs., provides in part:"As used in said section, the word 'debt' includes a beneficiary's distributive share of an estate. Thus, if the executor pays a debt due by the decedent's estate or distributes any portion of the estate before all the estate tax is paid, he is personally liable, to the extent of the payment or distribution, for so much of the estate tax as remains due and unpaid."Petitioner did not argue that the distribution of estate assets to the beneficiaries was not the payment of a debt of the estate within the meaning of the statute and the parties did not address this point. See, however, Leuthesser v. Commissioner, 18 T.C. 1112">18 T.C. 1112, 1128↩ (1952), which involved payment of corporate funds prior to payment of corporate tax, but which we find to be distinguishable.6. Miller v. United States, 211 F. Supp 758 (D. Wyo. 1962); In Re Fisk's Estate, 203 F.2d 358 (6th Cir. 1953); Clum v. United States, 424 F. Supp. 2↩ (S.D. Ohio 1976).7. Additionally, assuming that the standard under sec. 6651 is controlling, the cases cited by petitioner are contrary to the Ninth Circuit's decision in Ferrando v. United States, 245 F.2d 582 (9th Cir. 1957). In that case, the Ninth Circuit, in finding a fiduciary liable for additions to tax under sec. 6651, stated:"The filing of a tax return when due is a personal, nondelegable duty of the taxpayer; * * * it is no valid excuse for him to say the matter was put in charge of an employee or an accountant or attorney, no matter how trustworthy that person may be. [245 F.2d at 589.]"We believe this reasoning would be applied to the payment of the tax shown to be due as well. Since appeal in the instant case would be to the Ninth Circuit, this standard must be given serious consideration. See also Estate of Duttenhofer v. Commissioner, 49 T.C. 200">49 T.C. 200 (1967), affd. per curiam 410 F.2d 302">410 F.2d 302 (6th Cir. 1969), wherein this Court quoted from and relied on the opinion in Ferrando↩.8. Attorney Minsky did not testify. We have only petitioner's own rather equivocal and unsupported testimony regarding his knowledge of the facts. In sum, petitioner's testimony was simply that he left everything to Minsky. We do not know whether petitioner ever inquired of Minsky whether the tax was paid, but his testimony would indicate that he did not.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619608/	Mary Frances Lewis, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. B. Lewis, Petitioner, v. Commissioner of Internal Revenue, RespondentLewis v. CommissionerDocket Nos. 45576, 45577United States Tax Court23 T.C. 538; 1954 U.S. Tax Ct. LEXIS 12; December 28, 1954, Filed 12 Decisions will be entered under Rule 50. The A. B. Lewis Co. reported its income as a partnership, which included petitioners' two minor children, and filed its returns on a fiscal year basis. The final 13 fiscal year of its existence, for which it filed a return, ended July 1, 1947. Petitioners A. B. Lewis (A. B.) and Mary Frances Lewis (Mary) were husband and wife in a community property State, kept no books recording their individual income, and filed separate individual income tax returns for the calendar year 1947 reporting therein a part of the alleged partnership's net income for its final fiscal year ending July 1, 1947. Held, not only were petitioners' two minor children not partners in the business as conducted by respondent, but as contended by petitioners in their alternative assignment of error, neither was Mary a partner in the business. The A. B. Lewis Co. was in fact, a sole proprietorship conducted by A. B. Inasmuch as there was no partnership petitioners must report their community shares of the income from that sole proprietorship on a calendar year basis. Edward L. Potter, Esq.,14 for the petitioners.M. Clifton Maxwell, Esq., for the respondent. Black, Judge. BLACK 539 The Commissioner has determined the following deficiencies in petitioners' income taxes for the calendar year 1947:DocketNo.PetitionerDeficiency45576Mary Frances Lewis$ 5,063.6945577A. B. Lewis5,063.69The Commissioner's adjustments in net community income which are here in issue as a result of appropriate assignments of error are explained in the statements accompanying the applicable deficiency notices as follows:(d) It is held for Federal tax purposes that your minor children, Joel Jack Lewis and Gail Lewis, are not to be recognized as members of the alleged partnership of A. B. Lewis Company for the period beginning August 1, 1946 and ending June 30, 1947. Accordingly, the entire income of that entity for that period has been included in your community income for the calendar year 1947.* * * (f) As of June 30, 1947, the A. B. Lewis Company reduced its closing inventory of 38 used cars from a book cost of $ 23,072.00 to $ 14,122.00, or by the amount of $ 8,950.00. The reduction, not being in accordance with existing regulations, has been restored15 to taxable income. Your community income for the calendar year 1947 has accordingly been increased by the sum of $ 8,950.00.Petitioners contend (a) that for the period in issue A. B. Lewis Co. was a valid partnership for income tax purposes consisting of the marital community of A. B. and Mary Frances Lewis, and their minor children, Gail and Joel Jack Lewis, and (b) that the reduction of the A. B. Lewis Co.'s June 30, 1947, closing inventory by $ 8,950 was proper. In the alternative, petitioners contend that if the minor children are not recognized as partners then A. B. Lewis Co. was a sole proprietorship conducted by A. B. Lewis and each petitioner's community share of the income from that business must be computed on a calendar (rather than fiscal) year basis. Such a calendar year computation, petitioners contend, results in the conclusion that there are no deficiencies and that they overpaid their income taxes for 1947.FINDINGS OF FACT.During all times here material, petitioners Mary Frances Lewis (hereinafter sometimes referred to as Mary) and A. B. Lewis (hereinafter sometimes referred to as A. B.) were husband and wife and resided in Houston, Texas. They filed separate16 income tax returns for the calendar year 1947 with the collector of internal revenue for the first district of Texas.Since 1919, A. B. has been engaged in the used car sales and automobile financing business in Houston. He married Mary in 1926. At various times prior to 1943, Mary either sold advertising and real estate in order to obtain money for use in A. B.'s business or performed 540 regular duties as A. B.'s collections manager. She also accompanied him on buying trips to New York, aiding in arranging for transportation to Houston of the used cars purchased on those trips. Mary received no salary for any of her services to the business. Rather, A. B. withdrew funds from the business and deposited them in a joint checking account upon which Mary could draw. Petitioners regarded A. B.'s withdrawals, and any profits the business made, as their joint community income.A. B.'s business was conducted as a sole proprietorship at all times prior to 1943, except for a short period during which he was in partnership with a person not a member of his immediate family. Capital was important in the business but the greater part of it was borrowed, rather than invested, capital. 17 On December 9, 1940, A. B. opened an account in the business in the names of his two children, Gail and Joel Jack. The account was captioned "Gail, J. J." From time to time he credited sums of money to that account which he stated were saved by him for the children and put into the business in their names. Those sums were invested in the business rather than deposited in a bank because the business needed capital. Although there are a number of debit entries in the account none of the money therein appears to have been withdrawn for the children's benefit and the children did not even know that the account existed. The account showed a balance of $ 1,324.77 as of January 1, 1943. On that same date there was $ 17,619.18 balance in an account of the sole proprietorship labeled "A. B. Lewis Net Worth."In 1943, the following deed of gift was executed:State of TexasCounty of HarrisKnow All Men By These Presents:That in answer to my urge and desire to make a substantial gift to my two children, Joel Jack Lewis and Gail Lewis, to insure to some extent their care, education and general economic security, and being further of the opinion that my business known as "A. B. Lewis and18 Company" has after many years become established and an interest in that business will be a better investment for my children than any other that I might make through the investment of a cash gift to them;Now, Therefore, for and in consideration of the premises and in consideration of the love and affection I bear toward my two children, Joel Jack Lewis and Gail Lewis, I do hereby grant, give and convey unto each of my said two children, Joel Jack Lewis and Gail Lewis, an equal one-fourth (1/4th) interest in and to my said business, including all property of every kind wherever situated and used by me in connection with said business, this conveyance to be effective as of January 1, 1943.As a result of this deed of gift, my wife and I will own and retain one-half (1/2) of the business and my children together one-half (1/2), the said Joel Jack owning one-fourth (1/4th) and the said Gail owning one-fourth (1/4th).541 The property herein partitioned is located at 1020 and 1023 Polk Avenue, Houston, Texas. The net value as of January 1, 1943 is Eighteen Thousand Nine Hundred Forty-three and 96/100 Dollars ($ 18,943.96). The net value of the interest hereby deeded to Joel Jack19 Lewis is Four Thousand Seven Hundred Thirty-five and 99/100 Dollars ($ 4,735.99), and the net value hereby deeded to Gail Lewis is Four Thousand Seven Hundred Thirty-five and 99/100 Dollars ($ 4,735.99).Witness my hand this 2nd day of January, 1943.(Signed) A. B. Lewis/A. B. LewisI, Mary F. Lewis, wife of A. B. Lewis, hereby join my husband in the execution of the foregoing deed of gift and fully concur in and adopt said instrument as my own act, and hereby agree to be fully bound and obligated by said conveyance in all of its terms and provisions.Witness my hand this 2nd day of January, 1943.(Signed) Mary F. Lewis/Mary F. LewisThe $ 18,943.96 net value placed on the business in the deed of gift represented the sum of the $ 17,619.18 balance in the sole proprietorship's "A. B. Lewis Net Worth" account plus the $ 1,324.77 balance in the "Gail, J. J." account. 1 The deed was neither acknowledged nor recorded. No other written documents evidencing establishment of the alleged A. B. Lewis Co. partnership, such as a partnership agreement, were ever executed.20 On September 12, 1943, A. B.'s accountant sent him a letter, the pertinent part of which is quoted below:I hand you under separate cover estimated income tax and victory tax returns for yourself and your wife, Joel and Gail. Your total estimated tax liability for 1943 is $ 10,276.74, closing the partnership at July 31, 1943. On your old basis estimated tax liability would be $ 39,630.32, a difference of $ 29,253.58. I have prepared exhibits and schedules for your inspection which set out the computation in detail and show you how the tax saving is effected. We will examine your records as soon as time will allow, probably immediately after September 15, and any adjustment necessary will be made at that time. Please feel free to call on me at any time.Capital accounts for each of the children and for A. B. (reflecting the division of interests stated in the aforementioned deed of gift) were then, for the first time, set up and back-dated to January 1, 1943. Moreover, certain debit and credit entries which had been made in the aforementioned "Gail, J. J." account of the proprietorship between January 1 and July 31, 1943, were stricken therefrom. On October 13, 1943, the alleged21 partnership filed a return for its first fiscal year January 1-July 31, 1943, and continued thereafter to keep books and file returns on a fiscal year basis.542 Petitioners' children, Gail and Joel Jack, were ages 12 and 9, respectively, when the alleged partnership was formed in 1943, and were 16 and 13, respectively, during the 1947 fiscal year involved in these proceedings. They were told by A. B. that they were being made partners because the business would someday be theirs, but A. B. did not consider that giving them partnership interests would result in any particular benefit to the business. Neither the economic relationship of the family nor the conduct of the business was in any way altered following the formation of the alleged partnership. In other words, A. B. continued to support the family as before and remained in complete control of all business operations. Policy matters were sometimes discussed with Mary and she continued to accompany A. B. on buying trips to New York but, as before, received no compensation for those services.The children did not participate in the management or supervision of the business and performed no regular duties although occasionally22 they did work of a minor nature after school or during vacations from school. No trusts were set up or legal guardians appointed to handle their interests, nor were their disabilities as minors ever removed. They had no authority to sign business checks or withdraw money from any bank account maintained for the business. They had no control over the income attributable to their alleged capital interests in the business and such income was never distributed to them or used for their benefit, but, rather, was reinvested in the business. Income tax returns were filed for them, and taxes paid from the amounts credited to their capital accounts, for each year of the alleged partnership's existence but neither child ever saw any of those returns, personally signed them, or even knew of their filing and the tax payments.On various Employer's Quarterly Contribution Reports filed during the 1943 calendar year with the Texas Unemployment Compensation Commission, A. B. checked the box, under "Type of [business] Organization," marked "Individual" rather than the one marked "Partnership," stated that there had been no change in the type of the business organization, and signed the reports23 as "Owner." The only capital account shown on balance sheets, dated January 31, April 30, and June 30, 1943, and submitted to the Citizens State Bank, Houston, was A. B.'s account. Moreover, on applications for credit filed with the Pacific Finance Corporation on June 30, 1943, December 31, 1943, and May 31, 1945, A. B. indicated that he was the sole owner of the business and, in two of those applications, checked the box characterizing the business organization as an "Individual Venture," rather than the box captioned "Partnership." (He did not check any of the boxes pertaining 543 to a business organization in the May 31, 1945, application.) Although the applications required the signatures of all partners, if the business was operated as a partnership, A. B. was the only signer. It also appears that A. B. never notified his employees that Gail and Joel Jack were partners in the business, nor was the alleged partnership ever registered under the Texas Assumed Name Statute.The final fiscal year of the alleged A. B. Lewis Co. partnership, which is the year involved in these proceedings, ended on July 1, 1947. A partnership return on Form 1065 was filed in which it was stated24 that it was for the fiscal year beginning August 1, 1946, and ending July 1, 1947. In this return the partners' capital accounts were listed as follows:(a) A. B. Lewis$ 49,007.92(b) J. J. Lewis37,162.35(c) Gail Lewis37,162.35In "Schedule 1. -- Partners' Shares of Income and Credits," appears the following:A. B. Lewis, share of income was listed as$ 36,492.04J. J. Lewis, share of income was listed as4,496.02Gail Lewis, share of income was listed as4,496.02In all but the 1947 fiscal year the business income was allocated to the capital accounts of A. B. and the children, without A. B. first withdrawing any salary. However, since no funds were ever withdrawn from the children's capital accounts except to pay taxes, whereas A. B. drew funds to support the family, this practice would have eventually resulted in the children's account balances exceeding that of A. B. Therefore, for 1947 A. B. first drew a salary of $ 27,500, then allocated the remaining income to the three capital accounts. This was done without first consulting the children (or any representatives thereof) and obtaining their consent in their capacity as partners. On July 2, 25 1947, the business was incorporated and A. B. received a salary from the corporation which totaled $ 12,499.98 for the remainder of the 1947 calendar year.A. B. and Mary kept no books recording their individual income. The only books kept were of the alleged partnership. On September 15, 1948, they filed separate individual income tax returns for the 1947 calendar year in which they each reported adjusted gross income of $ 48,992.02 for the community and specified their "Com. [community] 1/2" as $ 24,496.01. The $ 48,992.02 was composed of $ 36,492.04 from the alleged partnership (A. B.'s "salary" of $ 27,500 plus $ 8,992.04 partner's share of the balance of the income) and his $ 12,499.98 salary from the successor corporation. On the same date that 544 petitioners filed their returns for 1947 (September 15, 1948), they each paid $ 4,177.68 in income taxes for that year. On December 27, 1950, the Commissioner and each petitioner executed an agreement pursuant to section 276 (b) of the Internal Revenue Code of 1939, extending the time within which the Commissioner might assess such petitioner's income taxes for 1947 to June 30, 1952; on March 13, 1952, a second such agreement26 was executed with each petitioner extending the time for assessment to June 30, 1953. The deficiency notices in this case were mailed to petitioners on September 11, 1952.During the period here in issue neither the petitioners themselves, nor the petitioners and their children, intended in good faith and acting with a business purpose to join together as partners in the present conduct of the A. B. Lewis Co. used car and auto financing business. The business was in fact conducted by A. B. as a sole proprietorship and there was no partnership. Petitioners and respondent stipulated at the hearing of this case that, if no partnership is recognized for tax purposes, then the net business income of A. B.'s sole proprietorship for the period January 1-July 1, 1947, is $ 26,500.OPINION.Two major issues are raised by the pleadings in this case. The first is whether the A. B. Lewis Co. was operated by A. B. as a sole proprietorship during the period in issue or whether it was a partnership composed of A. B., his wife, Mary, and his two minor children, Gail and Joel Jack. In their original petitions, petitioners alleged that the Commissioner erred in his determination that their two27 minor children were not partners in the business, thus questioning the Commissioner's determination only in that respect. Later they were permitted to amend their petitions so as to allege in the alternative that if our Court should find and hold that the two minor children were not partners in the business, then there was no partnership at all and A. B. Lewis Co. was operated as a sole proprietorship by A. B. and each petitioner's community share of the income from that business must be computed on a calendar year basis rather than a fiscal year basis.The second issue concerns the propriety of the alleged partnership's reduction in the value of its used car closing inventory at the end of its 1947 fiscal year. It will be seen, however, that because of our decision on the first issue explained hereafter discussion of the inventory question is unnecessary.The family partnership problem may be described as follows: Petitioners A. B. and Mary filed separate returns reporting their community 545 income for 1947 on the calendar year basis. The total community adjusted gross income reported (one-half each) by petitioners included net business income of $ 36,492.04 from the alleged28 partnership for its final fiscal year 229 ending July 1, 1947. 3 Petitioners' two minor children reported the balance of the alleged partnership's income for that fiscal year. Respondent contends that a partnership existed for tax purposes between petitioners only and that, since the children were not recognizable partners for tax purposes, the entire partnership net income for its 1947 fiscal year is taxable to petitioners.Petitioners, on the other hand, argue first that the A. B. Lewis Co. was operated during the period in issue as a three-member partnership composed of the two children and the marital community of A. B. and Mary (rather than A. B. and Mary, individually). However, continue petitioners, if the children are not recognized as partners then, since petitioners were not partners as between themselves, the business was not a partnership at all but a sole proprietorship conducted by A. B., and Mary's interest in the income from the business arose solely as a result of the Texas community property laws. As a sole proprietorship, maintain petitioners, the business income must be reported on a calendar (rather than fiscal) year basis, which means that only the business income during the period January 1-July 1, 1947, is reportable in their individual returns for 1947. And, conclude petitioners, if only the January 1-July 1, 1947, business income is reportable in their individual returns they overpaid their taxes for 1947.We first note that petitioners maintained30 no books recording their individual income. The books which were maintained were of the alleged partnership. Consequently, we think that under such a state of facts petitioners are correct in their contention that, should it be found that no partnership existed, then only the income of the business for the period January 1-July 1, 1947, is reportable by them 546 for 1947. Sec. 41, I. R. C. of 1939; 432 Regs. 111, sec. 29.41-4; 5 see Russell Giffen, 14 T. C. 1272, 1282, affd. 190 F. 2d 188, certiorari denied 342 U.S. 918">342 U.S. 918. In the Giffen case, we said:It is true that if we had held that Russell Giffen & Co. was not to be recognized by us for tax purposes, then the provisions of section 188 would have no application and the income reported on a partnership basis would have to be adjusted to the calendar year basis used by each of the petitioners. But respondent did not challenge the validity of the partnership of Russell Giffen & Co. for tax purposes. He recognized it to the extent of petitioners, but gave no recognition to the partnership status of the four children therein. Necessarily, 31 our determination in this case was limited to whether the young Giffens were bona fide members of the partnership. It follows that the partnership was still in existence taxwise. Therefore, the provisions of section 188 apply and we uphold respondent's computation of petitioners' income from the farming business based on the fiscal year which was elected by Russell Giffen & Co. in keeping its books and filing its returns.It is true that in the instant case respondent, as in the Giffen case, supra, has not challenged the validity of the partnership insofar as to whether it existed between33 husband and wife. But, in the instant case, unlike the Giffen case, petitioners by appropriate amendments to their petitions have alleged in the alternative that if we should hold that the minor children are not members of the partnership then no partnership existed at all and the A. B. Lewis Co. was being operated as a sole proprietorship and petitioners' tax liability should be treated accordingly. For reasons which we shall state more at length later in this Opinion, we hold that Gail and Joel Jack were not members of the alleged partnership and in fact there was no partnership at all but that the business was being operated as a sole proprietorship. This being our holding, it follows, as we said in the Giffen case, supra, that "then the provisions of section 188 would have no application and 547 the income reported on a partnership basis would have to be adjusted to the calendar year basis used by each of the petitioners."Inasmuch as respondent and petitioners stipulated at the hearing that the business net income of A. B. Lewis Co. for January 1-July 1, 1947, was $ 26,500, a holding by us that no partnership existed renders it unnecessary to consider the34 question raised by the second issue regarding the propriety of the aforementioned reduction in the alleged partnership closing inventory. We do not understand there is any disagreement between the parties as to this. If only the stipulated $ 26,500 in business income is to be included in petitioners' taxable income for 1947, rather than the $ 36,492.04 actually reported by them (and on which they paid taxes), is is obvious that they overpaid their taxes for that year. Since it is clear from our findings that each petitioner paid $ 4,177.68 in taxes for 1947 within the 3-year statutory period of limitations prescribed in section 322 (d) (1) (B) of the 1939 Code, 6 they are, to that extent, entitled to credits or refunds of any overpayments determined by us under Rule 50.35 The results described above all turn upon our holding that the A. B. Lewis Co. was conducted not as a partnership between A. B. and either Mary or the children but, rather, was conducted by A. B. as a sole proprietorship. We have so held for the reasons which follow.It is clear from the decided cases that the existence of a partnership for Federal tax purposes depends on the intent of the parties, which is a question of fact. This intent test was stated in Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, as follows:The question is * * * whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent -- the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.548 As regards Gail and Joel Jack, the minor children, the establishment of the alleged partnership was a36 unilateral matter in which the children were passive parties; they were simply told by A. B. that they were being made partners. Batman v. Commissioner, (C. A. 5) 189 F. 2d 107, affirming a Memorandum Opinion of this Court, certiorari denied 342 U.S. 877">342 U.S. 877. Moreover, the very manner in which the alleged partnership was established raises substantial doubts as to its bona fides, it appearing from the failure to set up capital accounts for the children until after the receipt of the September 12, 1943, letter from A. B.'s accountant (quoted in our findings), although the partnership was purportedly formed on January 1, 1943, that the final decision to conduct the business as a partnership was not made until after the tax effects for 1943 were determined. Further, the absence of a partnership agreement plus the fact that, as noted below, the conduct of the parties does not clearly evidence an understanding that the business be conducted as partners is another factor of importance. See L. C. Olinger, 10. T. C. 423; compare Weizer v. Commissioner, (C. A. 6) 165 F.2d 772">165 F. 2d 772.The children 37 were 12 and 9 years old when they were purportedly made partners; no trustee or legal guardian was appointed to look after their interests nor were their disabilities as minors removed; they took no part in the management or supervision of the business, A. B. remaining in complete control thereof; they performed no regular duties in the business; they had no authority to sign business checks; they exercised no control over the income attributable to their alleged capital interests and, in fact, none of that income was distributed to them or used for their benefit but was, instead, reinvested in the business; they did not even know that tax returns were being filed for them and taxes paid on the income attributable to their capital interests. A. B., in addition, had complete control over the distribution of profits. His unilateral action in drawing a salary (during the alleged partnership's 1947 fiscal year) prior to the distribution of profits to the partners' accounts without obtaining the other partners' consent is evidence of that. Lieber v. United States, 128 Ct. Cl. 128">128 Ct. Cl. 128, 119 F. Supp. 951">119 F. Supp. 951. Moreover, A. B. continued to represent38 the business as a sole proprietorship to creditors and to an official body of the State, Maxwell v. Commissioner, (C. A. 4) 208 F. 2d 542, certiorari denied 347 U.S. 1013">347 U.S. 1013, apparently did not notify his employees that the children had been made partners, and never registered the partnership under the Texas Assumed Name Statute.We think it clear from the above that, upon consideration of all the facts, the parties did not "in good faith and acting with a business purpose," Commissioner v. Culbertson, supra, intend that the business 549 of A.B. Lewis Co. be conducted as a partnership in which petitioners' minor children were included as partners. As was said by the Court of Appeals in Batman v. Commissioner, supra, "here is only a family scheme for tax avoidance by anticipatory assignment of income under the pretense of forming and conducting a partnership."Considering next the question raised by petitioners in the alternative as to whether Mary was a partner with A. B. in the conduct of the business, we are compelled to reach the same conclusion. 39 Although Mary at various times prior to 1943 (the year in which the alleged partnership was formed) sold real estate and advertising in order to obtain capital for A. B.'s business, and also performed certain duties in the business itself, there is no contention that Mary was then a partner. Rather, it is conceded by all parties that prior to 1943 the business was a sole proprietorship conducted by A. B. And, in 1943 itself, we think the only action attempted was to make the children partners; we see no evidence of any effort or intent to change Mary's status in relation to the business.The deed of gift dated January 2, 1943, itself indicates this. It purports to make gifts of interests in the business only to the children, was joined in by Mary, and states in part that "As a result of this deed of gift, my wife and I will own and retain one-half (1/2) of the business." We think this language reveals that Mary was intended to have no different interest in the business than theretofore, which in fact means that she had no partnership interest (it being conceded, as aforementioned, that prior to 1943 the business was a sole proprietorship). The fact that Mary was mentioned in 40 the deed at all, and that she joined in its execution, resulted, we think, only from the belief that Mary had some sort of an interest in the business as a consequence of the community property laws of Texas.When tested by the general rules governing partnerships under the Federal statutes as interpreted by the courts, particularly the Supreme Court in the Culbertson case, supra, we think the facts clearly show that Mary was not a partner in the business nor was it intended that she should be. Close analysis of the testimony, considered in the light of all the surrounding circumstances, convinces us that both petitioners regarded Mary's interest in the business as springing from her community property rights under the Texas statutes, rather than as the result of any agreement, either oral or written, that she should be a partner in the business of A. B. Lewis Co. Merely because a wife under Texas community property laws owns a one-half interest in her husband's profits in a business which he is conducting as a sole proprietorship does not make her a partner in the business. We think it is unnecessary to cite any authority on that point.550 For the foregoing reasons, 41 therefore, we hold (a) that A. B. Lewis Co. was during the period in issue operated by A. B. as a sole proprietorship, (b) that the business income therefrom must be reported by petitioners on a calendar year basis and, as a consequence thereof, (c) that petitioners overpaid their income taxes for 1947 and are entitled to credits or refunds of such taxes in amounts to be determined under Rule 50.Decisions will be entered under Rule 50. Footnotes1. Those two figures actually total $ 18,943.95, but 1 cent was added thereto probably so that the division of interests would not be complicated by fractions of a cent.↩2. Internal Revenue Code of 1939.SEC. 187. PARTNERSHIP RETURNS.Every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this chapter and such other information for the purpose of carrying out the provisions of this chapter as the Commissioner with the approval of the Secretary may by regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners.SEC. 188. DIFFERENT TAXABLE YEARS OF PARTNER AND PARTNERSHIP.If the taxable year of a partner is different from that of the partnership, the inclusions with respect to the net income of the partnership, in computing the net income of the partner for his taxable year, shall be based upon the net income of the partnership for any taxable year of the partnership (whether beginning on, before, or after January 1, 1939) ending within or with the taxable year of the partner.↩3. On July 2, 1947, the business was incorporated.↩4. SEC. 41. GENERAL RULE.The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 48↩ or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.5. Sec. 29.41-4. Accounting Period. -- The return of a taxpayer is made and his income computed for his taxable year, which in general means his fiscal year, or the calendar year if he has not established a fiscal year. (See section 48.) The term "fiscal year" means an accounting period of 12 months ending on the last day of any month other than December. No fiscal year will, however, be recognized unless before its close it was definitely established as an accounting period by the taxpayer and the books of such taxpayer were kept in accordance therewith. A person having no such fiscal year must make his return on the basis of the calendar year. Except in the case of a first return for income tax a taxpayer shall make his return on the basis upon which he made his return for the taxable year immediately preceding, unless, with the approval of the Commissioner, he has changed his accounting period. See section 29.46-1↩.6. SEC. 322. REFUNDS AND CREDITS.(d) Overpayment Found by Board. -- If the Board finds that there is no deficiency and further finds that the taxpayer has made an 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. No such credit or refund shall be made of any portion of the tax unless the Board determines as part of its decision (1) that such portion was paid (A) within two years before the filing of the claim, the mailing of the notice of deficiency, or the execution of an agreement by both the Commissioner and the taxpayer pursuant to section 276 (b) to extend beyond the time prescribed in section 275↩ the time within which the Commissioner might assess the tax, whichever is earliest, or (B) within three years before the filing of the claim, the mailing of the notice of deficiency, or the execution of the agreement, whichever is earliest, if the claim was filed, the notice of deficiency mailed, or the agreement executed within three years from the time the return was filed by the taxpayer, * * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619610/	WILLIAM LINDSEY BIDDLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBiddle v. CommissionerDocket Nos. 1705-77, 6411-77.United States Tax CourtT.C. Memo 1979-347; 1979 Tax Ct. Memo LEXIS 179; 38 T.C.M. (CCH) 1361; T.C.M. (RIA) 79347; August 30, 1979, Filed 179 Held, payments to petitioner's exwife on mobile home were part of a property settlement and not alimony. Held, further, payment of first of two parts of a lump sum alimony settlement which were in satisfaction of petitioner's alimony obligations and which were to be made in less than ten years and were not subject to any contingencies does not qualify as alimony. William Lindsey Biddle, pro se. John P. Tyler, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined deficiencies in petitioner's income tax and an addition thereto pursuant to section 6653(a) 1 as follows: Docket No. 2YearDeficiencySec. 6653(a)1705-771974$1,634.03$81.706411-7719751,247.88 In addition to these deficiencies, respondent claimed an increased deficiency of $135.82 for 1975 in Docket No. 6411-77. Due to concessions by petitioner, the only issues remaining for our consideration are: (1) whether certain payments in 1974 and 1975 on a mobile home for petitioner's former wife are deductible as alimony; 180 and (2) whether a payment made by petitioner in 1975 to his former wife pursuant to a Final Order of the divorce court is deductible as alimony. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioner William Lindsey Biddle filed his Federal income tax returns for the taxable years 1974 and 1975 with the Southeast Service Center, Chamblee, Georgia. Petitioner resided in Sylvester, Georgia, at the time he filed his petition herein. On July 23, 1971, petitioner received a final divorce from his former wife, Peggy Biddle. The judgment of the court was based upon a jury verdict (in which petitioner's wife was the plaintiff and petitioner the defendant) and provided, in pertinent part, as follows: THEREFORE, it is hereby ordered and adjudged as follows: 1. That a total divorce be, and the same is, hereby granted on the plaintiff's complaint, that is to say, a divorce avinculomatrimonii, between the parties to the above-stated case, upon legal principles. * * 5. The plaintiff is hereby awarded the legal title and the equity in the mobile home where she 181 now resides, and the legal title and possession of all the furniture in the said mobile home. * * 7. The defendant shall pay the sum of $200.00 per month to the plaintiff, beginning the 23rd day of July, 1971, and continuing on the 23rd day of each month thereafter. * 8. The defendant shall pay the plaintiff the sum of $126.00 per month to be used in making the payments on the said mobile home now in her possession. Said payments are to begin on the 23rd day of July, 1971, and to continue on the 23rd day of each month thereafter until the outstanding indebtedness on said trailer is paid in full. * At this time, the mobile home was subject to a financing agreement with the C & S Bank of Albany. The loan was for $5,997.56 and provided for 72 monthly installments of $126.15 beginning May 15, 1971. 3 On August 2, 1972, petitioner and Peggy executed an agreement which 182 modified the Final Judgment and Decree of July 23, 1971, stating, in part: * * The Second Party [petitioner] has since incurred serious financial reverses, suffering substantial loss of income and bankruptcy. Due to his loss of income and changed financial condition, Second Party has contemplated the bringing of an action for modification of the said alimony award stated above, and in consideration of a compromise settlement of all causes of action which Second Party may have against First Party [Peggy] by virtue of his loss of income and changed financial status, and in further consideration of the mutual promises of each of the parties herein, IT IS HEREBY AGREED: That Second Party shall pay to First Party as alimony the sum of $100.00 per month beginning on the 23rd day of August, 1972, and continuing on the 23rd day of each month thereafter. * On May 2, 1975, the Superior Court for the County of Dougherty, State of Georgia, entered a Final Order which further modified the Final Judgment and Decree of July 23, 1971. This Order provided in pertinent part as follows: WHEREAS, plaintiff has filed his Complaint to Modify Divorce Decree * * and any subsequent agreements purporting 183 to modify such decree; and, WHEREAS, the parties hereto have subsequently agreed to the modifications demanded in Plaintiff's Complaint; NOW, THEREFORE, by consent of the parties hereto, and after inquiry into the allegations set out in said Complaint, this Court does find that there has in fact been a change in circumstances materially effecting Plaintiff's [petitioner's] ability to pay the obligations set out in said decree and any attempted modifications to said decree; IT IS THEREFORE, CONSIDERED, ORDERED AND ADJUDGED that said divorce decree should be and is hereby modified as follows: Plaintiff is hereby ordered to pay to Defendant [Peggy] the sum of $800.00 upon the signing of this Order and is further ordered to pay an additional sum of $400.00 on or before April 1, 1976 in full satisfaction of any and all alimony obligations to Defendant; * * On May 9, 1975, petitioner paid the remaining amount due on the mobile home loan and on May 16, 1975, the bank released its security interest in it. On August 19, 1975, petitioner conveyed title to Peggy. On his 1974 income tax return petitioner claimed an alimony deduction of $2,900 as "payments * * * to be made until ex-spouse remarries 184 or dies." Prior to the issuance of the statutory notice applicable to the year 1974, petitioner contended he was entitled to an additional alimony deduction in the amount of $1,551.75 that was not claimed on his return for 1974. In the statutory notice applicable to 1974, respondent did not disallow any part of the $2,900 which was claimed on the return but did not allow a deduction for the previously unclaimed $1,551.75. Petitioner, therefore, asserted he was entitled to a deduction for this amount in his petition. On his 1975 income tax return petitioner claimed a deduction for alimony in the amount of $4,300. In the statutory notice of deficiency applicable to that year respondent disallowed $3,396 of the claimed amount and allowed a deduction of $904, computed as follows: $400(Four $100 payments to ex-spouse)504(Four $126 payments as trailer payments) $904 In his answer to the petition in Docket No. 6411-77 applicable to the year 1975 respondent affirmatively alleged that he erroneously failed to disallow the $504 on the grounds that the $504 represented a portion of a property settlement with the petitioner's ex-wife or, alternatively, represented installment payments of 185 an amount payable in less than ten years which are, therefore, not deductible. OPINION The record is not entirely clear as to the amounts and identity of the payments that petitioner claimed on his 1974 and 1975 returns as alimony or now claims he should have deducted as such but did not. Respondent agrees, however, that in 1974 petitioner made payments to his ex-wife for payment on his mobile home trailer loan that totaled $1,551.75 and that these are the payments that are in issue for 1974. Respondent also agrees that in 1975 petitioner made payments totaling $4,300 made up of the following items: $ 800Per order of the Court dated May 2,1975400Four $100 payments direct to ex-wife504Four $126 payments as monthly trailerpayments2,596Additional payment on mobile hometrailer$4,300We will first determine whether the payments of $504 and $2,596 in 1975 and $1,551.75 in 1974 relating to payments on the mobile home are deductible as alimony. Section 215 provides that a husband shall be allowed a deduction for amounts includable under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. Section 71(a)(1) provides that if a wife is divorced 186 or legally separated from her husband under a decree of divorce or of separate maintenance, her gross income includes periodic payments received after such decree in discharge of a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree. Section 71(c)(1) provides that for the purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments, except that under section 71(c)(2), if by terms of the decree, the principal sum is to be paid over a period ending more than 10 years from the date of such decree, then the installment payments shall be treated as periodic payments for the purposes of subsection (a) to the extent of 10 percent of the principal sum. Section 1.71-1(d)(3), Income Tax Regs., provides that when payments are to be paid over a period of ten years or less, such payments are not installment payments discharging a part of the specified principal sum, but are considered periodic payments if such payments meet the following 187 two conditions: (a) such payments are subject to any one or more of the contingencies of death of either spouse, remarriage of the wife, or change in the economic status of either spouse, and (b) such payments are in the nature of alimony or an allowance for support. It is clear that the payments on the loan were not to be paid over a period ending more than 10 years from the date of the decree: the payments on the loan commenced May 15, 1971, and were to extend over 72 months, until May 15, 1977; the decree was entered July 23, 1971. Nothing in the decree subjects the payments to a contingency. Petitioner contends, however, that such payments were subject under Georgia law, Ga. Code Ann. secs. 30-201, 30-209, and 30-2204188 189 , to any one or more of the contingencies of change of death of either spouse, remarriage of the wife, or change in economic status of either spouse, and, therefore, are periodic payments. n5 Petitioner argues only that since these payments 190 were contingent they meet the definition of periodic and must be considered as alimony. In order to qualify under the Regulations as periodic payments for purposes of section 71, however, it is necessary that the payments meet two conditions. First, such payments must be subject to the contingencies listed previously and second, such payments must be in the nature of alimony or an allowance for support. Sec. 1.71-1(d)(3)(i), Income Tax Regs.Even if such payments were contingent, 6 we believe the decree is clear that the mobile home and the loan payments thereon are property which was awarded to petitioner's wife. The decree specifically awarded legal title and the equity in this property to Peggy.Petitioner finished making payments on the home; immediately after the C & S Bank of Albany released its security interest petitioner conveyed title to her. The fact that petitioner was required to make the monthly payments due with respect to the loan with which the mobile home was purchased does not of itself cause the award of payments on the mobile home to be anything other than a part of the disposition between the two spouses of their property. Cf. Van Orman v. Commissioner,418 F.2d 170">418 F.2d 170 (7th Cir. 1969); 191 Sydnes v. Commissioner, 68 T.C. 170">68 T.C. 170 (1977), revd. on other grounds 577 F.2d 61">577 F.2d 61 (8th Cir. 1978). n7 The original agreement contains specific provisions for support in terms of alimony in addition to the loan repayments. The modification on August 2, 1972, stated that petitioner was to pay his wife "as alimony" $100 per month rather than the $200 per month set forth in the original decree but made no modification of the monthly loan payments. The Final Order issued May 2, 1975, required petitioner to pay $800 upon signing the Final Order and an additional $400 later. Petitioner, in addition to this $1,200, paid the balance due on the loan and transferred title in the home to Peggy. Thus, the amount to be paid on the loan *192 was fixed and definite and not contingent upon other factors. Our review of the agreement and modifications leads us to believe that payment of the loan constitutes a portion of a property settlement and is not alimony. We now deal with the payments made by petitioner in 1975 pursuant to the May 2, 1975, Final Order. The $800 was the first of two parts of a lump sum settlement in full satisfaction of the alimony obligations, with the remaining $400 due by April 1976. Obviously, the payments required by the Final Order were to be made in less than ten years and were not subject to any contingency. Accordingly, they do not qualify under section 71 even though in satisfaction of petitioner's alimony obligations. Loverin v. Commissioner, 10 T.C. 406">10 T.C. 406 (1948). In order to reflect the increased deficiency claimed in Docket No. 6411-77, Decisions will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years at issue.↩2. These cases are consolidated for trial, briefing, and opinion.↩3. The agreement also indicated the following additional information: ↩1. Amount of loan$5,997.562. Credit Life Insurance326.963. Credit Disability Insurance354.214. Other Charges5. Amount Financed (1+2+3+4)6,678.736. Finance Charge2,404.077. Total of Payments (5+6)9,082.808. ANNUAL PERCENTAGE RATE10.71%4. Ga. Code Ann. § 30-201. Definition. Permanent and temporary. -- Alimony is an allowance out of the husband's estate, made for the support of the wife when living separate from him. It is either temporary or permanent. Ga. Code Ann. § 30-209. Jury may provide permanent alimony; factors in determining amount; effect of remarriage by wife. -- The jury rendering the final verdict in a divorce suit may provide permanent alimony for the wife, either from the corpus of the estate or otherwise, according to the condition of the husband. In all cases where alimony is awarded to the wife, her separate estate and earning capacity, as well as any fixed liabilities of the husband for the support of minor children, shall be taken into consideration in fixing the amount. All obligations for permanent alimony to the wife, whether created by contract, verdict, judgment, or decree, the time for performance of which has not yet arrived, shall cease upon her remarriage unless otherwise provided in the decree. Ga. Code Ann. § 30-220. Revision of judgment for permanent alimony; grounds; petition; hearing. -- The judgment of a court providing permanent alimony for the support of a wife or child or children, or both, shall be subject to revision upon petition filed by either the husband or the wife showing a change in the income and financial status of the husband. Such petition shall be filed and returnable under the same rules of procedure applicable to divorce proceedings. Such petition shall be filed in the same county in which the original judgment was granted. No petition may be filed by the wife under this law [§§ 30-220 through 30-225.1] within a period of two years from the date of the filing of a previous petition by the wife under this law. No petition may be filed by the husband under this law within a period of two years from the date of the filing of a previous petition by the husband under this law. After hearing both parties and the evidence, the jury, or the judge where a jury is not demanded, may modify and revise the previous judgment so as to provide for the wife, or child or children, or both, in accordance with the changed income and financial status of the husband, if such a change in the income and financial status of the husband is satisfactorily proved, so as to warrant such modification and revision. In the hearing upon a petition filed as provided herein, testimony may be given and evidence introduced relative to the income and financial status of the wife. n5 Section 1.71-1(d)(3)(ii)(a), Income Tax Regs.↩, provides that contingencies may be imposed by local law.6. See Stock v. Commissioner, 551 F.2d 614">551 F.2d 614 (5th Cir. 1977), affg. T.C. Memo. 1976-134 (Georgia statutes in question do not impose contingencies on installment payments of a fixed or lump sum on an award made from the corpus of the estate; see Ga. Code Ann. sec. 30-222). See also Hogan v. Commissioner, T.C. Memo 1977-258">T.C. Memo 1977-258. n7 See also Williamson v. Commissioner, T.C. Memo. 1978-279; Sharp v. Commissioner, T.C. Memo. 1972-159; Luhman v. Commissioner, T.C. Memo. 1970-81↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669063/	ACCEPTED 08-20-00224-CR 08-20-00224-CR EIGHTH COURT OF APPEALS EL PASO, TEXAS 3/11/2021 12:07 PM ELIZABETH G. FLORES CLERK IN THE EIGHTH DISTRICT COURT OF APPEALS EL PASO COUNTY, TEXAS EX PARTE: MELISSA BUCKLEY FILED IN 8th COURT OF APPEALS EL PASO, TEXAS 3/11/2021 12:07:03 PM Trial Court No. 20190D03405 ELIZABETH G. FLORES Appeal No. 08-20-00224-CR Clerk APPELLANT'S MOTION TO DISMISS APPEAL TO THE HONORABLE COURT: Comes now Melissa Buckley, Appellant and Petitioner (below) in the petition for writ of habeas corpus filed at the trial level in cause number 20190D03405. Appellant moves to dismiss the instant appeal. The underlying case, cause number 20190D03405 is now dismissed; therefore, the instant appeal, 08-20-00224-CR, has been rendered moot. Please see a copy of the order dismissing, attached as exhibit I. The state does not oppose this motion. PRAYER: WHEREFORE, PREMISES CONSIDERED, Appellant Melissa Buckley respectfully requests this Court to dismiss the instant appeal. -1- Ma eKoatz Attorney for Appellant Texas Bar No. 05722300 718 Myrtle Ave. E1Paso,Texas79901 (915) 235-5330 mateodekoatz@yahoo.com ~ £1/ r· 3/11/M M6lissa Buckley, Appellant-Defendant Certificate of Service I certify that a copy of the above instrument on this the 11 th day of March, 2021, was sent by email, through an electronic-filing-service provider, to the Hon. 24yct District Court Judge Selena Solis, and Hon. Tom Darnold, Assistant District Attorney, tdarnold@epcounty.com. -2- 0JNTHE243rd DISTRICT COURT □ IN THE COUN1Y CRIMJNAL COURT AT LAW NO. □ IN THE COUNTY COURT AT LAW NO.- - - --- OF EL PASO COUNTY, TEXAS ST ATE OF TEXAS vs. NO. 20190D03405 MELISSA BUCKLEY MOTION TO DISMISS TO THE HONORABLE JUDGE OF SAID COURT: NOW, comes the State of Texas by and through her Assistant District Attorney and moves the Cou1t to dismiss the above entitled and numbered cause in which the above referenced Defendant is charged with the offense of Aggravated Perjury for the reason that: I. The evidence is insufficient; 2. The said Defendant was convicted in another case: - - - - - -- - - - 3. __ The complaining witness has requested dismissal; 4. The case has been refiled: 5. ------------------- The case has been 12.45'd into ----------------- 6. __ The evidence has been suppressed or is suppressible; 7. __ The necessary witness(es) cannot be located: 8. __ The said Defendant is a juvenile; 9. The said Defendant died on ! 0. X Other - - - - - - - - - - - - - -- - - - Prosecutorial Discretion and for the cause would show the comt the following: Respectfully submitted, ~k-a. Ass~t DistriZney For YVONNE ROSALES Bar ID #24029805 ORDER The above-entitled and numbered cause is hereby dismissed on the foregoing motion for reasons herein above stated. . A f'h l\ j IfJ._v-e,~'L \o ENTERED this the_·_ day of_ \ '_ t _,_______, 20£!._. '7 , JUDGE 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. Matthew DeKoatz Bar No. 05722300 mateodekoatz@yahoo.com Envelope ID: 51384509 Status as of 3/11/2021 1:40 PM MST Case Contacts Name BarNumber Email TimestampSubmitted Status TOM DARNOLD tdarnold@epcounty.com 3/11/2021 12:07:03 PM SENT Associated Case Party: MELISSA BUCKLEY Name BarNumber Email TimestampSubmitted Status MATEO DEKOATZ mateodekoatz@yahoo.com 3/11/2021 12:07:03 PM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619666/	Myra C. Brown v. Commissioner.Brown v. CommissionerDocket No. 108926.United States Tax Court1943 Tax Ct. Memo LEXIS 134; 2 T.C.M. (CCH) 714; T.C.M. (RIA) 43403; August 31, 1943134 J. L. Lockett, Esq., 2201 Gulf Bldg., Houston, Tex., for the petitioner. Wilford H. Payne, Esq., and L. R. Van Burgh, Esq., for the respondent. ARNOLD Memorandum Findings of Fact and Opinion ARNOLD, Judge: Petitioner is an individual residing at 707 Holman Avenue, Houston, Texas. Her income tax returns for the calendar years 1937, 1938 and 1939 were filed with the collector of internal revenue for the first district of Texas at Austin, Texas. The taxes in controversy are proposed deficiencies in income tax, as follows: 1937$1,815.2619381,290.341939484.73Total$3,590.33The petitioner alleges that the respondent erroneously included in her income for 1937, 1938 and 1939, the amounts of $12,741.23, $9,805.48, and $5,419.05, respectively, designated in the notice of deficiency as "profit on sales of lots." She further alleges that the respondent erroneously included in her income for the year 1937 the amount of $2,009.48, designated in the notice of deficiency as "Depletion restored to income." Other adjustments in the deficiency notice are not here contested. Findings of Fact Prior to the death of petitioner's husband, Ed. R. Brown, in November, 1928, petitioner135 and her husband owned as community property approximately 500 acres of unimproved land, formerly used for cattle grazing purposes, located about three miles from Baytown, Harris County, Texas, near a settlement called "Wooster". Under the will of her deceased husband, petitioner acquired the undivided one-half interest in said land which had formerly been owned by him, thus becoming full owner of the land. The estate of Ed. R. Brown had no assets other than the land. There was an outstanding indebtedness of approximately $20,000 secured by a mortgage upon the land, held by the First National Bank in Houston, Texas. About 1930 the bank requested payment and petitioner, through her son, Edwin Brown, negotiated a new loan with the Hermann Hospital Estate in Houston in an amount sufficient to pay off the bank and leave a surplus from which could be paid interest accruing on the new loan until the land could be sold. Revenue from the land was insufficient to pay taxes thereon. Early in 1929, petitioner listed the land for sale in its entirety with Roderick M. Montgomery, a licensed real estate broker residing in Houston, Texas, and a friend of the Brown family. Upon Montgomery's suggestion, 136 after unsuccessful attempts to sell the property, it was listed for sale with several other real estate agents, but also without success. In 1936, the first sales were made of two small tracts, one of 5 acres and one of 2 1/2 acres, which could easily be segregated from the main body of theland. Montgomery ascertained in that year that there was a strong demand for larger lots than the average city lots then available in Baytown and after contacting a number of people he was convinced that he could sell considerable of petitioner's property in half acre and acre tracts. Petitioner had three adult children, a son, Edwin, who lived in Boston, Massachusetts, and two married daughters, one of whom lived in Iowa and the other in Tampico, Mexico. She felt that her children should have a voice in determining what should be done about selling the land, for it would go to them after her death. She depended largely upon her children for advice as to her affairs. She herself had no business experience and the children knew nothing of the real estate business. In 1937, Montgomery advised the Brown family that he could dispose of the property if it was subdivided into small tracts. He was authorized137 by the Browns to subdivide the property and develop it for sale, provided it could be financed without help from them. Petitioner knew about the negotiations between her children and Montgomery, authorized the children to make arrangements for the sale of the land, and approved of the instructions they gave Montgomery pertaining to its subdivision. No formal contract was entered into with Montgomery, the arrangements having been made orally and through an interchange of correspondence. The details of planning and arranging subdivisions were worked out by Montgomery. Annually, generally around Christmas time, petitioner's family would come to Houston for the holidays and Montgomery would take them to the land, show them what had been done and give them an outline of what he had in mind for the coming year. Petitioner did not concern himself with any of the details, but she had a general knowledge of what was going on all the time. Everything done by Montgomery in regard to the subdivisions and sales of lots was with her general consent, knowledge and approval. She felt that Montgomery was representing her in taking care of these matters. In regard to the first subdivision, Montgomery138 went to see two surveyors and a grading contractor, told them that he had customers ready to buy lots but that he couldn't sell until the lots were staked and platted, and that they could not be paid for the necessary work until sales were made. He undertook personally to recompense them to some extent if sales were not made. The men agreed to undertake the work on this basis and they laid out a block of 30 lots, about one acre each, 25 of which were sold in 1937. The surveyors and grading contractors were paid by petitioner from the proceeds. No improvement work was done on the lots themselves, the purchasers taking them "as is". Streets were cleared, graded and shelled to a width of about 16 feet with shells taken from shell banks on the property. There were no sidewalks or curbs. Storm sewers were put in at street intersections. Another subdivision was laid out in 1937, making a total of 106 lots that year; one subdivision was completed in each of the years 1938 and 1939, consisting of 57 lots and 37 lots, respectively. These four subdivisions covered 103 acres of land owned by petitioner. In all, 32 lots were sold in 1937, 29 in 1938 and 19 in 1939. Since 1939, 64 more acres 139 were platted into 131 lots. 19 lots were sold in 1940, 17 in 1941 and 6 in 1942, to the date of the hearing. The plats of all of the subdivisions were executed by the petitioner herein. In them she dedicated to public use the necessary streets and parks. The subdivisions are generally known as "Brownwood". Contracts of sale were prepared by Montgomery and signed by petitioner, or by her sister, Miss Anne Cabaniss, acting under a power of attorney from petitioner. Deeds were executed by petitioner when sufficient amounts had been paid under the contract of sale. Purchasers' notes were made payable to petitioner. Payments by purchasers were made either to Montgomery or to petitioner's sister. All amounts collected by Montgomery were turned over to petitioner's sister who deposited all collections in a bank account opened in petitioner's name. Petitioner's sister kept a set of books for petitioner relating to the subdivisions. All bills were presented to petitioner or to her sister for payment and they were paid by petitioner by checks drawn upon her bank account. Montgomery's commissions upon sales were also so paid. Montgomery testified that his commission rate was 5 percent in 1937, 140 but was increased to 10 percent for subsequent years due to the increased work in connection with the subdivisions. By 1938, sufficient funds had accumulated from the sale of lots to permit petitioner to enter into contracts with public utilities to construct electric and gas lines to supply the subdivisions. The details of these contracts were negotiated by Montgomery, who presented them to petitioner for signature. Petitioner signed them without careful scrutiny, relying upon Montgomery's judgment. Under the terms of these contracts, the costs of the extensions were to be paid by petitioner out of the proceeds of the sales, a certain amount thereof to be refunded by the companies when thelines were placed on a paying basis. Petitioner had a well dug and put in, and maintained a water supply system at her expense to supply those parts of the subdivisions where there was no water already available. There was no sales office on the property. Montgomery would obtain leads from a man otherwise employed in the Humble Oil Company refinery at Baytown, Texas; would call upon the prospects so obtained; and, in the event of a sale, he would pay his man a small commission out of his own. 141 Montgomery ran only one advertisement at his expense in 1938. Petitioner did not concern herself with sales methods. In the taxable years 1937, 32 lots were sold for the sum of $26,661.03, resulting in a profit of $19,235.47, of which $10,999.53 represents gain with respect to the undivided half interest in the land which was owned by the petitioner prior to her husband's death and which had been held for more than ten years prior to sale, and $8,235.94 represents profits in respect of the undivided half interest in the property which had been acquired by petitioner by devise from her husband and which had been held for more than five years but less than ten years prior to sale. In her 1937 return, petitioner reported the $10,999.53 as capital gain, of which 30 percent, or $3,299.86, was treated as taxable, and the $8,235.94 was also reported as capital gain, of which 40 percent, or $3,294.38 was treated as taxable. In 1938, 29 lots were sold for $30,706.35, resulting in a profit of $19,610.96, all of which represents profit in respect of property held for more than 24 months prior to sale. In her 1938 return, petitioner reported the profit as capital gain, of which 50 percent or142 $9,805.48, was treated as subject to tax. In 1939, 19 lots were sold for $15,995, resulting in a profit of $10,838.10, all of which represents profit in respect of property held for more than 24 months prior to sale. In her 1939 return, petitioner reported said profit as capital gain, of which 50 percent or $5,419.05 was treated as subject to tax. In computing the deficiency in controversy for each of the taxable years, the respondent included as taxable income the entire amounts of the profits derived from sales of lots in each of such years, denying the petitioner the benefits of section 117 of the Revenue Act of 1936 for 1937, of the Revenue Act of 1938 for 1938, and of the Internal Revenue Code for 1939, and treating such profits as ordinary gains rather than as capital gains. The only facts submitted with regard to the second allegation of error were those pleaded in the petition and admitted in the answer, as follows: Under date of July 3, 1934, Petitioner executed and delivered to F. A. Ashby, as Lessee, an oil and gas lease covering part of the above mentioned land in Harris County, Texas. receiving in payment for said lease a bonus of $7,307.27; in her income tax return143 for 1934 Petitioner reported and included said receipt of $7,307.27 but deducted therefrom as depletion 27 1/2% of said amount, to wit, $2009.48. There was no production of oil or gas on said land under the terms of said lease, and on or about the 23rd day of July, 1937, said lease was finally terminated. In the computation of the deficiency now complained of for the year 1937 Respondent has included as taxable income to Petitioner the sum of $2009.48 on account of the said depletion deduction taken by Petitioner in 1934. Petitioner did not include any part of said amount of $2009.48 in her return of taxable income for 1937. Opinion The first issue presented is whether the gains derived by the petitioner from the sale of lots in her Brownwood subdivisions during 1937, 1938 and 1939 are taxable as ordinary gains or as capital gains. This issue turns upon an application to the facts herein of the definition of "capital assets" contained in section 117 (b) of the Revenue Act of 1936, section 117 (a)(1) of the Revenue Act of 1938, and section 117 (a) (1) of the Internal Revenue Code. Petitioner contends that the lots sold were "capital assets," as defined in such sections, and the 144 gains therefrom taxable as capital gains; respondent has held that the lots are not "capital assets" because excluded from the definition of that term as "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." The petitioner's argument, in brief, is that the land had not been acquired by her for subdivision; that the sale of the lots was not conducted as a business, for there was no office on the premises and there was no advertising program; that the purchasers were not ordinary customers, for they did not come to any established place of business but instead were sought out by the broker; and that, if the sale of the lots was a business, it was the broker's and not the petitioner's business, for she was not a business woman and the broker was not supervised and directed by her to such a degree as to justify a holding that he was her agent and it was her business. A consideration of these arguments in the light of the facts and the applicable authorities demonstrates their ineffectiveness. It is not material that the petitioner did not acquire the land for the purpose of subdividing it into lots. More relevant than the facts145 of acquisition is that she subsequently subdivided the land and proceeded to sell the lots, doing whatever else was necessary to effectuate the sales. Neither is it material that there was no office on the premises and there was no advertising program. These are merely methods of getting buyer and seller together, and apparently they were not needed here, for petitioner quite successfully sold her lots frequently and continuously without them. The method which was used, one quite common in the real estate business, was for Montgomery to seek out and approach prospects. These prospects, when they made purchases, were none the less customers. In view of the facts, it can not be said that the lots sold in the taxable years were not property held for sale to customers in the ordinary course of business. Ehrman v. Commissioner, ( C.C.A., 9th Cir. 1941) 120 Fed. (2d) 607, certiorari denied 314 U.S. 668">314 U.S. 668; J. R. Richards, 30 B.T.A. 1131">30 B.T.A. 1131, affd., Richards v. Commissioner, ( C.C.A., 9th Cir., 1936) 81 Fed. (2d) 369. It remains to determine whether the business was that of 146 petitioner. This she denies, arguing that she was not a business woman, had never had any business experience and did not supervise Montgomery's activities. Little need be said about these arguments. The type of business here involved was one in which the prime prerequisite was capital in the form of land. This petitioner had and she did not part with the title thereto until a sale had been consummated. Business experience was unnecessary for petitioner so long as competent people were placed in charge of the business. In this respect, at least, she showed good business judgment, for Montgomery appears to have been well chosen. As to Montgomery, it is clear from his testimony and petitioner's that the relationship between them in regard to the land was none other than that of principal and agent. They understood it to be such and acted accordingly. It is true that petitioner did not supervise and direct each detail of Montgomery's activities, but it can not be denied that she had the right to do so and exercised that right on occasion to the extent necessary to assure the continued success of the venture. Montgomery took no important step without consulting with petitioner or with 147 some member of her family upon whom she relied to determine general policy, and whose determination she ratified. All important papers were executed by petitioner or in her name, all funds were deposited in her bank account and all expenses were paid out of this account by checks signed by her. Montgomery's commissions were paid in the same manner as any other operating expense. From the manner in which the business was conducted it is clear that it was petitioner's business and that Montgomery was merely her agent in regard thereto. We hold, therefore, that, as determined by respondent, the lots sold by petitioner during the taxable years were not "capital assets" as defined in section 117 (b) of the Revenue Act of 1936, section 117 (a) (1) of the Revenue Act of 1938, and section 117 (a) (1) of the Internal Revenue Code. The gain realized is, therefore, taxable as ordinary and not as capital gain. Commissioner v. Boeing, ( C.C.A., 9th Cir., 1939) 106 Fed. (2d) 305, cert. denied 308 U.S. 619">308 U.S. 619; Welch v. Solomon, ( C.C.A., 9th Cir., 1938) 99 Fed. (2d) 41; James Lewis Caldwell McFaddin, 2 T.C. 395">2 T.C. 395;*148 and cases cited, supra. The second issue raised upon the pleadings is whether respondent properly restored to income for 1937 the amount of $2009.48, deducted by petitioner in 1934, as depletion upon bonus paid to her under an oil and gas lease, there having been no production under the lease and it having been terminated in 1937. It is well settled that under the circumstances here present the previously deducted depletion must be restored to income for the year in which the lease is finally terminated without production. J. T. Sneed, Jr., 40 B.T.A. 1136">40 B.T.A. 1136, affd. Sneed v. Commissioner, ( C.C.A., 5th Cir., 1941) 119 Fed. (2d) 767, certiorari denied 314 U.S. 686">314 U.S. 686; Dolores Crabb, 41 B.T.A. 686">41 B.T.A. 686, affd. Crabb v. Commissioner, ( C.C.A., 5th Cir., 1941) 119 Fed. (2d) 772, Clarion Oil Co., 1 T.C. 751">1 T.C. 751, 758; Grace M. Barnett, 39 B.T.A. 864">39 B.T.A. 864. We, therefore, hold for the respondent upon this issue. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669050/	FILE COPY M A N D A T E TO THE COUNTY CRIM CT NO 4 OF TARRANT COUNTY, GREETINGS: Before our Court of Appeals for the Eighth District of Texas, on November 23, 2020, the cause upon appeal to revise or reverse your judgment between JOHN WAYNE WISENBAKER, III, Appellant, No. 08-19-00034-CR and THE STATE OF TEXAS, Appellee, was determined; and therein our said Court made its order in these words: The Court has considered this cause on the record and concludes there was no reversible error in the judgment. We therefore affirm the judgment of the court below. This decision shall be certified below for observance. WHEREFORE, WE COMMAND YOU to observe the order of our said Court of Appeals for the Eighth District of Texas, in this behalf, and in all things have it duly recognized, obeyed and executed. WITNESS, the Clerk of the Court of Appeals, with the Seal thereof affixed, at the City of El Paso, this March 12, 2021. Elizabeth G. Flores, Clerk Trial Court No. 1485651	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619611/	NORMAN W. SAUKERSON AND GLADYS M. SAUKERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSaukerson v. CommissionerDocket No. 652-73.United States Tax CourtT.C. Memo 1975-188; 1975 Tax Ct. Memo LEXIS 186; 34 T.C.M. (CCH) 814; T.C.M. (RIA) 750188; June 16, 1975, Filed 186 Petitioner, a waitress, failed to keep records of her cash tips during 1969. Held, respondent's determination of additional income is sustained. Gladys M. Saukerson, pro se. Gerald W. Leland, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined a deficiency in petitioners' income tax for the taxable year 1969 in the amount of $228.39. The sole issue presented for our determination is whether respondent erred in determining187 that petitioners had additional tip income for the year in issue. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners, Norman W. Saukerson and Gladys M. Saukerson, are husband and wife and resided in Minneapolis, Minn., at the time of the filing of their petition with this Court. For the taxable year 1969 petitioners timely filed a joint Federal income tax return with the Internal Revenue Service. During 1969 Gladys M. Saukerson (hereinafter petitioner) was employed as a waitress in the Norse Room of the Leamington Hotel, Minneapolis, Minn. The Leamington Hotel was considered one of the better hotels in Minneapolis and handled many of that city's hotel conventions. The Norse Room was a quality dinner room and bar, serving lunch and dinner. The only other restaurant in the hotel during 1969 was the Koffee Klatch, a coffee shop serving only breakfast and lunch. Petitioner did not work in the Koffee Klatch. During 1969 petitioner worked as a waitress in the Norse Room approximately 250 days for a total of 1,802 hours. Her work shift was usually 5:00 p.m. to 1:00 a.m. After 10:30 p.m. food orders were no longer taken and waitresses would188 no longer be assigned to specific stations, but would rotate, serving customers as they came in. During 1969 petitioner had the lowest seniority and, as a result, would usually be the first waitress asked to leave when there were few customers. Petitioner ceased working in the Norse Room in June 1970. During 1969 guests of the Leamington Hotel could pay for food and beverages served in the Norse Room by charging the bill to their room. Gratuities could also be charged to the room bill. Whenever a hotel guest charged to his or her room bill a gratuity for service in the Norse Room, the cashier would immediately thereafter pay the waiter or waitress the amount of the gratuity. During 1969 the waiters and waitresses in the Norse Room and Koffee Klatch worked a total of 45,656 hours. 1 The total food and beverage sales for the Norse Room and Koffee Klatch for 1969 were $647,211.40. 2189 The Leamington Hotel would furnish its waiters and waitresses with printed forms to maintain tip records. Monthly reports would then be given to the hotel by the seventh of each month reflecting the tips received during the preceding month. At the end of the year the hotel would report these tips on the employees' W-2 forms. Pursuant to section 451(c), 3 tips received in December of each year and reported to the hotel in January were reflected in the W-2 forms for the following year. Petitioner, in her monthly tip records for 1969, recorded only tips on credit cards and other charge accounts. She did not maintain a record of cash tips. During 1969 petitioner reported receiving no tips on credit charges on 44 days of the approximately 250 days she worked. She reported tip income of less than $1.50 on 30 days and tip income between $1.51 and $5.01 on 73 days. Petitioner's monthly record of tips from December 1968 through December 1969, and the amounts furnished to her employer, were as follows: Petitioner'sReported MonthRecordsto HotelDecember 1968$ 47.41$ 60.00January 1969127.24130.00February111.00111.00March80.6890.00April135.34136.00May135.02135.25June75.0780.00July61.18Not reportedAugust63.1785.00September141.45145.00October89.5195.00November86.5590.00December54.2060.00190 For the taxable year 1969 petitioner received wages of $2,565.75 and reported to her employer tips totaling $1,157.25. Petitioner's W-2 form reflected a gross income of $3,723. On their 1969 return petitioners reported, in addition to the $3,723, the $61 in tip income not reported to the hotel for July. On audit respondent determined that petitioner should have reported tip income in the amount of $2,270, thereby increasing petitioners' gross income by $1,052. Respondent reconstructed petitioner's tip income as follows: First the total sales of food and beverages for the Norse Room and Koffee Klatch were obtained. This amount was divided by the total number of hours worked by all the waiters and waitresses, resulting in a sales per hour average. Respondent then determined that a reasonable tip factor would be 10 percent. In reaching this percentage respondent took random samplings of all room billings for food and beverages sold in the Norse Room which also had gratuities included. Of 1,843 billings examined, 848 had gratuities for food and beverages. A five-day random sampling reflected an average gratuity of 16.03 percent. 4 The highest, lowest, and average month for food191 and beverage sales for the Norse Room were August, December and January, respectively. 5 A random sampling of 15 days in December 1969, 12 days in January 1969, and 12 days in August 1969 reflected average gratuities of 16.25 percent, 16.57 percent and 15.35 percent, respectively. 6The ten percent tip factor was applied to the average sales per hour producing an average hourly tip. The resultant figure was then multiplied by the number of hours petitioner worked to determine her gross tip income. This amount was reduced by 10 percent to cover any payments192 petitioner may have made to busboys. The actual computation was as follows: Average sales per hour = $647,211.20 (total sales) / 45,656 (total hours) = $14.17/hr. Average tip per hour = 10% (respondent's tip factor) X $14.17/hr. = $1.41/hr. (rounded to $1.40/hr.) 7Petitioner's gross tips = $1.40/hr. X 1,802 hrs. (hours petitioner worked) = $2,522 10 percent reduction for any payments to busboys = 10% X $2,522 = ( $252) Petitioner's tip income as determined by respondent = $2,270OPINION The sole issue concerns the amount of tips petitioner received during 1969. Respondent's determination of petitioner's tip income is presumptively correct and petitioner bears the burden of proving it erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Anson v. Commissioner,328 F. 2d 703, 706 (10th Cir. 1964), affg. a Memorandum Opinion of this Court; Barry Meneguzzo,43 T.C. 824">43 T.C. 824, 834 (1965); Rule 142, Tax Court Rules of Practice and Procedure.As petitioner has failed to keep any record of her cash tips respondent was clearly justified in reconstructing193 her tip income. Section 446(b) 8; Barry Meneguzzo,supra at 831-833; Dorothy L. Sutherland,32 T.C. 862">32 T.C. 862, 866-867 (1959). See also Anson v. Commissioner,supra.We believe respondent's formula to be a fair and reasonable method of determining petitioner's tip income, given the information available. Cf. Barry Meneguzzo,supra;Carroll F. Schroeder,40 T.C. 30">40 T.C. 30, 33 (1963). 9The ten percent tip factor was certainly reasonable in this instance. Compare Mendelson v. Commissioner,305 F. 2d 519 (7th Cir. 1962), affg. a Memorandum Opinion of this Court, certiorari denied 371 U.S. 877">371 U.S. 877 (1962). In our opinion it took into account any194 of the various factors which would tend to reduce the average tip received by any particular waiter or waitress. Petitioner argues that respondent's formula is unfair; however, she has presented no credible evidence to suggest that the formula, as applied to her, was arbitrary, erroneous or unreasonable. Reconstructions are seldom, if ever, exact; nor are they required to be. All that is required is that the reconstruction be reasonable in light of all the surrounding facts and circumstances. Carroll F. Schroeder,supra.Consequently, respondent's determination is sustained. Decision will be entered for the respondent.Footnotes1. Although petitioner worked only in the Norse Room, respondent was unable to break down the hours between the two restaurants. Generally, larger gratuities were left at the Norse Room, it being the more formal of the two restaurants. ↩2. ↩Norse Room - food$357,359.51 - beverages207,501.39Koffee Klatch - food82,350.50$647,211.403. All statutory references are to the Internal Revenue Code of 1954, as amended.↩4. ↩Total Tips Tips/ChargedSales Sales5-day random sampling$157.44$982.03.1603(2-15-69; 3-19-69; 5-16-69;6-13-69; 6-14-69)5. ↩ Norse Room: Sales MonthFoodBeverageAugust (highest)$39,305.09$16,577.65December (lowest)21,610.7014,656.83January (average)28,409.4518,780.956. ↩Total TipsTips/ DateChargesSalesSalesAugust (12-day random sampling)$418.52$2,727.18.15346December (15-day random sampling)178.731,099.93.16249January (12-day random sampling)300.781,815.39.165687. The tip income reported by petitioner averaged 67 cents per hour.↩8. SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING. * * * *(b) Exceptions.--If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income.↩9. See also Arthur J. McQuatters,T.C. Memo. 1973-240↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/372036/	610 F.2d 471 61 A.L.R.Fed. 524 Daniel F. RICE, Jr. and Mary L. Rice, Plaintiffs-Appellees,v.The RICE FOUNDATION, an Illinois Corporation, et al.,Defendants-Appellants.Daniel F. RICE, Jr., Plaintiff-Appellee,v.The RICE FOUNDATION, an Illinois Corporation, et al.,Defendants-Appellants. Nos. 79-1955, 79-1956. United States Court of Appeals,Seventh Circuit. Argued Oct. 25, 1979.Decided Dec. 4, 1979. Don H. Reuben, Chicago, Ill., for defendants-appellants. Louis G. Davidson, Chicago, Ill., for plaintiffs-appellees. Before SPRECHER, Circuit Judge, VAN DUSEN,* Senior Circuit Judge, and BAUER, Circuit Judge. SPRECHER, Circuit Judge. 1 This is an appeal from an order of the district court denying the motion of certain attorneys to appear as counsel for the defendant Rice Foundation and granting the motion of the plaintiffs and various defendants to disqualify these attorneys as counsel for the Foundation. We will not address the propriety of this order at this time because there is a serious question as to the subject matter jurisdiction of the federal court in these cases. In addition, a decision of the Illinois Appellate Court handed down immediately prior to oral argument in this appeal1 substantially alters the factual context in which the district court's order was entered. Accordingly, we vacate the district court's order and remand these cases for consideration of the jurisdictional issue; if subject matter jurisdiction exists and is exercised, the order must be reconsidered in light of the recent Illinois Appellate Court decision. 2 * Our disposition of this appeal obviates the need for a detailed recital of the complicated factual background of the disqualification order. A brief description of the nature and course of the proceedings below and of the related state court proceedings will be sufficient for purposes of our ruling. 3 These diversity actions involve a dispute as to the proper distribution of the estates of two decedents, Daniel Rice, Sr., and his wife, Ada Rice. The plaintiff, Daniel Rice, Jr., is the adopted son and sole heir of the decedents; the defendant, Rice Foundation, is an Illinois non-profit corporation, founded by the Rices, which is the principal beneficiary of the wills of Daniel, Sr., and Ada. The gist of the plaintiff's claim is that he was deprived of his rightful share of the estates of his parents by acts on the part of various defendants amounting to the exertion of undue influence upon both decedents and fraud in concealing his rights from him. He seeks damages, a declaration that Ada's will is invalid, and any other legal and equitable relief the court deems appropriate. 4 A number of suits are pending in the Illinois state courts regarding the disposition of the Rice estates, including the probate proceedings for both estates. During the course of one of these suits, it was brought to the attention of the state court that there was a dispute as to which of two competing groups of directors was entitled to control the Rice Foundation. This dispute underlies much of the conflict which has arisen during the federal proceedings. The competing groups of directors are the Nolan directors, represented by Reuben & Proctor, and the Medical Institutions directors, represented by Sonnenschein, Carlin, Nath & Rosenthal. Each group bases its claim to control on a different set of purported by-laws of the Foundation. The state court ruled that the by-laws offered by the Medical Institutions group (the 1974 by-laws) were the legitimate by-laws of the Foundation. This ruling had the effect of removing the incumbent Nolan group from control and placing the Foundation under the direction of the Medical Institutions. Subsequently, the Illinois Appellate Court stayed the lower court's ruling and then, on the day before oral argument in this court, reversed the ruling as to control of the Foundation. 5 The federal suits on appeal here were pending while this control struggle was proceeding in the state courts; the status of the state court dispute determined, to a large extent, which attorneys attempted to represent the Rice Foundation.2 After the initial state court decision vesting control of the Foundation in the Medical Institutions group, that group's counsel, the Sonnenschein firm, was permitted to appear as the Foundation's counsel in the court below. When the Illinois Appellate Court stay was issued, Reuben & Proctor, on behalf of the Nolan group, moved for leave to appear as the Foundation's counsel on the ground that the stay had the effect of returning control to the Nolan group. This motion was opposed both by the Medical Institutions group and the plaintiffs on the grounds that the stay did not return control to the Nolan group and that representation of the Foundation by counsel for the Nolan group would give rise to substantial conflicts of interest.3 The district court ruled that because of the potentially differing interests of Nolan and the Foundation in the litigation before it, Reuben & Proctor, having represented the Nolan group in the state court control dispute, must be disqualified from representing the Foundation in the federal litigation.4 The court decided that, in view of the control dispute, the only reasonable course would be to appoint independent counsel for the Foundation. The order appealed from directed the competing groups to seek agreement on such independent counsel; if no agreement could be reached, the district court suggested that it would undertake to appoint counsel for the Foundation. An immediate appeal was taken from this order. II 6 * The initial inquiry in any suit filed in federal court must be whether the federal court possesses subject matter jurisdiction. None of the parties to this appeal raise the jurisdictional issue and the record reveals that the court below did not explicitly consider it. Because subject matter jurisdiction determines whether a court has power to act in a given case, a federal court, including a court of appeals, must raise the issue on its own motion where the parties fail to bring it to the court's attention. See City of Kenosha v. Bruno, 412 U.S. 507, 511-12, 93 S.Ct. 2222, 37 L.Ed.2d 109 (1973); Basso v. Utah Power and Light Co., 495 F.2d 906, 909-10 (10th Cir. 1974); Fed.R.Civ.Pro. 12(h)(3). 7 The cases on appeal here were filed in the Northern District of Illinois with jurisdiction based upon diversity of citizenship under 28 U.S.C. § 1332(a).5 It is undisputed that the plaintiffs are citizens of California, that none of the defendants are citizens of California, and that the amount in controversy exceeds $10,000. The complaints, therefore, allege the facts necessary to establish federal diversity jurisdiction. There are, however, well-established exceptions to the diversity jurisdiction of the federal courts which may require dismissal of a suit for lack of jurisdiction even where the requisite citizenship and amount in controversy have been established. Lamberg v. Callahan, 455 F.2d 1213, 1216 (2d Cir. 1972); Buechold v. Ortiz, 401 F.2d 371, 372-73 (9th Cir. 1968); C. Wright, Handbook of the Law of Federal Courts § 25, at pp. 97-99 (3d ed. 1976). Of particular importance in this appeal is the judicially created exception which places matters of probate and estate administration outside the power of the federal courts. Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 90 L.Ed. 256 (1946); 1A Moore's Federal Practice P 0.201, at p. 2023 (2d ed. 1979); P. Bator, P. Mishkin, D. Shapiro, H. Wechsler, The Federal Courts and the Federal System 1186-88 (2d ed. 1973). 8 The probate exception is historical in origin, having its roots in the fact that matters of probate and administration were, in 1789, within the exclusive jurisdiction of the English ecclesiastical courts and outside the reach of the High Court of Chancery and the common law courts. The Supreme Court has held that Congress, in drafting the jurisdictional section of the Judiciary Act of 1789, intended that this limitation be imposed upon the federal courts, and that probate matters be within the exclusive jurisdiction of the state courts.6 Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 90 L.Ed. 256 (1946); Starr v. Rupp, 421 F.2d 999, 1004 (6th Cir. 1970). The exception has survived to the present and has been recognized in all of the courts of appeals in which the issue was presented, including this court. See Republic of Iraq v. First National Bank of Chicago, 350 F.2d 645, 648 (7th Cir. 1965), Cert. denied, 382 U.S. 982, 86 S.Ct. 556, 15 L.Ed.2d 556 (1966).7 9 Despite its long history and undisputed viability, the probate exception is not easily applied to particular cases. It is clear that "pure" probate matters are outside federal jurisdiction. Waterman v. The Canal-Louisiana Bank & Trust Co., 215 U.S. 33, 44, 30 S.Ct. 10, 54 L.Ed. 80 (1909); Mitchell v. Nixon, 200 F.2d 50, 51 (5th Cir. 1952). It is equally clear, however, that "(t)he exception from the diversity jurisdiction as to probate matters is far from absolute." C. Wright, Supra, at 98 (citations omitted). In fact, the federal courts construe the meaning of "probate" quite narrowly to limit the scope of the exception. Phillips, Nizer, Benjamin, Krim & Ballon v. Rosenstiel, 490 F.2d 509, 514 (2d Cir. 1973); Akin v. Louisiana National Bank of Baton Rouge, 322 F.2d 749, 751 (5th Cir. 1963). As formulated by the Supreme Court, the touchstone in applying the exception is the desire of the federal courts to avoid interference with state probate proceedings: 10 (F)ederal courts of equity have jurisdiction to entertain suits "in favor of creditors, legatees and heirs" and other claimants against a decedent's estate "to establish their claims" so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court. 11 Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 298, 90 L.Ed. 256 (1946) (citations omitted). 12 Once a suit can be characterized as not involving "pure probate," the inquiry then becomes whether resolution of the suit by the federal court will result in "interference" with the state probate proceedings or the assumption of general probate jurisdiction. The courts of appeals have approached this inquiry in two ways. The first approach, developed by the Fifth Circuit, looks to the nature of the plaintiff's claim. If the plaintiff's claim rests upon an assertion that a decedent's will is invalid, the federal court will be required to rule upon the validity of the will and thus will directly interfere with state court probate. However, where the plaintiff admits the will's validity and merely asserts a right to share in the distribution of the estate, the federal court can decide the suit before it without any direct impact upon state probate of the will. Akin v. Louisiana National Bank of Baton Rouge, 322 F.2d 749, 753-54 (5th Cir. 1963); Mitchell v. Nixon, 200 F.2d 50, 51-52 (5th Cir. 1952).8 The plaintiff's position vis-a-vis the will is the determinative factor under this approach. 13 The second approach, rather than examining the plaintiff's claim, looks to the route the suit would have taken had it been brought in state court. As the Second Circuit held: 14 The standard for determining whether federal jurisdiction may be exercised is whether under state law the dispute would be cognizable only by the probate court. If so, the parties will be relegated to that court; but where the suit merely seeks to enforce a claim Inter partes, enforceable in a state court of general jurisdiction, federal diversity jurisdiction will be assumed. 15 Lamberg v. Callahan, 455 F.2d 1213, 1216 (2d Cir. 1972). Thus, the federal courts may exercise diversity jurisdiction over suits which "arise out of or pertain to probate proceedings, but are independent in character and not merely incidental or ancillary to the probate." 1A Moore's Federal Practice P 0.157(4.-11), at p. 171. Of the federal courts which have addressed the issue, most have opted for this approach to the jurisdictional inquiry.9 16 We express no view at this time as to whether either or both approaches should be used by the district court on remand, or whether an entirely new test should be devised. The approaches outlined above are not hard and fast rules; rather, they were formulated to aid in the resolution of the difficult jurisdictional issue presented when probate-like actions are filed in federal court. They are set out here for illustrative, not directive, purposes.10 17 While it is not uncommon for courts of appeals to raise jurisdictional issues on their own motion and to resolve them without remand, we believe that remand is appropriate in this case for a number of reasons. First, shortly before the notice of appeal was filed in this court, a motion to dismiss for lack of subject matter jurisdiction was filed below.11 The record reveals that the district court has not had an opportunity to consider this motion. In view of this, the district court should be given the first opportunity to resolve the jurisdictional issue. Second, as the discussion above reveals, application of the probate exception requires detailed analysis of state law in terms of both the characterization of the plaintiff's claims and the niceties of state probate procedure. This analysis of local law and policy can be conducted most effectively in the first instance by the trial court.12 See Ledbetter v. Taylor, 359 F.2d 760, 762 (10th Cir. 1966). Finally, "(w)e have had the benefit of neither briefs, arguments, nor explicit consideration by the District Court of the jurisdictional questions" presented in these cases. City of Kenosha v. Bruno, 412 U.S. 507, 514, 93 S.Ct. 2222, 2227, 37 L.Ed.2d 109 (1973). A jurisdictional issue as complex as the one presented here is best resolved after careful consideration of local law and policy, the facts necessary to identify the underlying issues raised by plaintiff's claims, and the arguments of the parties.13 The district court is better equipped to conduct this inquiry. B 18 There is yet another factor requiring remand in these cases. Even where a particular probate-like case is found to be outside the scope of the probate exception, the district court may, in its discretion, decline to exercise its jurisdiction. The nature of the issues presented in such cases can make discretionary abstention particularly appropriate. The Eighth Circuit has noted: 19 The area of probate and decedents' estates presents many varied problems. State courts deal with these problems daily and have developed an expertise which should discourage federal court intervention. These local problems should be decided by state courts. 20 Bassler v. Arrowood, 500 F.2d 138, 142 (8th Cir. 1974), Cert. denied, 419 U.S. 1116, 95 S.Ct. 796, 42 L.Ed.2d 815 (1975). 21 The fact that a federal suit may not directly interfere with state probate proceedings merely permits the exercise of federal jurisdiction, it does not require it. We agree with the Second Circuit that the scope of the probate exception does not necessarily define the area in which the exercise of federal judicial power is appropriate: 22 (T)here is particularly strong reason for abstention in cases which, though not within the exceptions for matters of probate and administration or matrimony and custody actions, are on the verge, since like those within the exception, they raise issues "in which the states have an especially strong interest and a well-developed competence for dealing with them." 23 Phillips, Nizer, Benjamin, Krim & Ballon v. Rosenstiel, 490 F.2d 509, 516 (2d Cir. 1973) (citations omitted). 24 Discretionary abstention in probate-related matters is suggested not only by the strong state interest in such matters generally but also by special circumstances in particular cases. Where the state courts are already familiar with the litigation before the district court and the federal suit is intertwined with state court proceedings, the district court may properly decline to exercise its jurisdiction. Bassler, supra, 500 F.2d at 143. The procedural context of the cases before us indicates that abstention is an issue deserving the district court's careful attention. 25 On remand, the district court must first consider whether either or both of these suits are within the probate exception.14 If the district court, after this inquiry, finds that federal jurisdiction does extend to all or some portion of this litigation, it must then decide whether abstention principles indicate that this litigation would be more appropriately handled in the state courts. III 26 If this litigation remains in federal court after the jurisdictional issue is resolved, the district court must then reconsider its disqualification order in light of the Illinois Appellate Court decision in In the Matter of the Estate of Rice, Deceased, etc., 77 Ill.App.3d 641, 33 Ill.Dec. 73, 396 N.E.2d 298 (2d Dist. 1979). Throughout the federal litigation, the parties apparently have considered the state court control struggle to be intimately related to the selection of counsel for the Rice Foundation. In fact, after the initial state court ruling vesting control in the Medical Institutions directors, counsel for the Nolan group stated: 27 At this precise moment, (counsel for the Nolan group) do not have the right to represent the Rice Foundation in this Court since the (state court decree) is admittedly operative. However, this situation would change dramatically in the event the Appellate Court does grant the stay or if the ultimate result in the Appellate Court was a reversal. 28 Memorandum in Support of Motion of Kirkland & Ellis to Appear as Counsel for the Rice Foundation, filed March 14, 1978, at 3.15 To be considered on remand is whether the "situation (has) change(d) dramatically" since "the ultimate result in the Appellate Court was a reversal." 29 The district court, initially at least, shared this perception of the situation. The record reveals numerous instances in which the district judge expressed his view that selection of counsel for the Foundation was inextricably linked with the state court control dispute.16 In addition, the district court will now have the opportunity to consider memoranda, to be submitted by the parties in accordance with the district court's order, on the issue whether the district court has authority to appoint counsel for the Foundation. On remand, therefore, the district court must consider the significance of the Illinois Appellate Court's decision and, if it finds that neither party should be allowed to select counsel for the Foundation, it must then decide whether it has that power. 30 We vacate the disqualification order appealed from in these cases and remand for consideration of the subject matter jurisdiction of the federal court. If jurisdiction exists and is exercised, the district court must then consider the effect on the disqualification order of the Illinois Appellate Court ruling and its own power to appoint independent counsel for the Rice Foundation. Each party shall bear its own costs on this appeal. 31 Vacated and remanded. * Senior Circuit Judge Francis L. Van Dusen of the United States Court of Appeals for the Third Circuit is sitting by designation 1 In the Matter of the Estate of Rice, Deceased, etc., 77 Ill.App.3d 641, 33 Ill.Dec. 73, 396 N.E.2d 298 (2d Dist. 1979) 2 The federal suits on appeal here were filed in 1977. The record reveals that since that time, apart from sporadic discussion of discovery matters, the attention of the district court has been occupied primarily with the appearance, withdrawal, and disqualification of various attorneys for various parties 3 A conflict was also asserted between Mr. Reuben's position as a trustee of Northwestern University and his firm's appearance as counsel for the Rice Foundation. Northwestern University is one of the members of the Medical Institutions group involved in the struggle for control. The district court did not rely on this asserted conflict, focusing instead upon the state court representation of the Nolan group by Reuben & Proctor. In view of our disposition of this appeal, we express no opinion as to the propriety of the district court's reliance, or lack thereof, on either alleged conflict 4 The description in the text of the events leading up to the disqualification order is greatly simplified. Since we do not reach the merits of the disqualification issue, this simplified description is sufficient for purposes of this opinion 5 Section 1332(a) is the general grant of diversity jurisdiction and provides: (a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $10,000, exclusive of interest and costs, and is between (1) citizens of different States; (2) citizens of a State, and foreign states or citizens or subjects thereof; and (3) citizens of different States and in which foreign states or citizens or subjects thereof are additional parties. 6 This limitation of jurisdiction was implicit in the language of the Judiciary Act of 1789 which conferred jurisdiction in "suits of a civil nature at common law or in equity." This language was given meaning by reference to the jurisdiction in 1789 of the English common law and chancery courts; since probate matters were outside the jurisdiction of both, they were outside the jurisdiction of the federal courts in this country. Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 90 L.Ed. 256 (1946); C. Wright, Supra, at 97. Although the wording of the jurisdictional grant has since been changed to "all civil actions," 28 U.S.C. § 1332(a), this phrase is given the same meaning as the language of the 1789 Act. Jackson v. United States National Bank, 153 F.Supp. 104, 107 (D.Or.1957). The exception, therefore, is still with us, reconfirming Mr. Justice Frankfurter's observation that "legal history still has its claims." Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 609, 62 S.Ct. 736, 754, 86 L.Ed. 1037 (1942) (Frankfurter, J., concurring) It has been suggested that the probate exception is based upon Article III of the federal Constitution, the argument being that because probate matters were outside English legal and equitable jurisdiction they are not "cases or controversies" within the meaning of Article III. Galleher v. Grant, 160 F.Supp. 88, 94 (N.D.Ill.1958). Because the jurisdictional grant in 28 U.S.C. § 1332(a) is given the same meaning as that in the 1789 Judiciary Act, it is unnecessary in this case to determine the true basis for the exception. We note, however, that the weight of authority clearly supports the statutory basis. 7 See also Starr v. Rupp, 421 F.2d 999 (6th Cir. 1970); Ledbetter v. Taylor, 359 F.2d 760 (10th Cir. 1966); Beach v. Rome Trust Co., 269 F.2d 367 (2d Cir. 1959); Mitchell v. Nixon, 200 F.2d 50 (5th Cir. 1952); Bassler v. Arrowood, 500 F.2d 138 (8th Cir. 1974), Cert. denied, 419 U.S. 1116, 95 S.Ct. 796, 42 L.Ed.2d 815 (1975) 8 The Fifth Circuit approach has its roots in the Supreme Court's decision in Waterman v. Canal-Louisiana Bank & Trust Co., 215 U.S. 33, 44, 30 S.Ct. 10, 54 L.Ed. 80 (1909). In Waterman, federal jurisdiction was supported by the fact that the plaintiff did not seek to set aside the validity of probate of the will. See Akin, supra, 322 F.2d at 754 9 See, e. g., Ledbetter v. Taylor, 359 F.2d 760, 761 (10th Cir. 1966); Fakouri v. Cadais, 147 F.2d 667, 670 (5th Cir.), Cert. denied, 326 U.S. 742, 66 S.Ct. 54, 90 L.Ed. 443 (1945); Bassler v. Arrowood, 500 F.2d 138, 142 (8th Cir. 1974), Cert. denied, 419 U.S. 1116, 95 S.Ct. 796, 42 L.Ed.2d 815 (1975). Accord, C. Wright, Supra, § 25 at p. 99. This approach probably has its origin in language in Sutton v. English, 246 U.S. 199, 205, 38 S.Ct. 254, 62 L.Ed. 664 (1918) 10 The district court also may find it helpful on remand to consider reported cases involving similar factual circumstances. For example, in O'Donnell v. Dunspaugh-Dalton Foundation, 391 F.2d 226 (5th Cir. 1968), a suit seeking to set aside a bequest to a charitable foundation on grounds of undue influence and fraud was dismissed for lack of subject matter jurisdiction. Similarly, in Bassler v. Arrowood, 500 F.2d 138 (8th Cir. 1974), Cert. denied, 419 U.S. 1116, 95 S.Ct. 796, 42 L.Ed.2d 815 (1975), a suit challenging a bequest to a charitable foundation in the midst of a state court control dispute was dismissed on the basis of abstention. Facially both cases bear a remarkable resemblance to the cases before us 11 This motion to dismiss was filed on July 25, 1979; it was reasserted in Beatrice Sheridan's Response to Notice to Produce, filed on August 10, 1979, and in Continental Bank's Response to Plaintiff's Request to Produce Documents, filed on August 13, 1979. The disqualification order was filed on August 9, 1979, and the notice of appeal was filed on August 14, 1979 The record also reveals that a motion to dismiss for lack of jurisdiction was filed on December 8, 1977. A memorandum filed in support of the motion explicitly raises the probate exception to federal diversity jurisdiction. Apparently, no action has been taken on this motion. 12 The opinion in Jackson v. United States National Bank, 153 F.Supp. 104, 112-16 (D.Or.1957) provides an example of the detailed analysis of state law which may be necessary in such cases 13 The record reveals that the parties themselves consider at least one of the federal suits little more than a will contest. Plaintiff's counsel described the suit as "involv(ing) a will contest. It is an in rem action," Transcript, November 22, 1977, at 9, and as "a will contest case." Transcript, February 22, 1978, at 44. Counsel for one of the defendants agreed, terming the suit "essentially a will contest proceeding and codicil contest proceeding." Id. at 49. District Judge Marshall, involved in some of the proceedings below, shared this perception, remarking that "number four alleges that Ada was incompetent and couldn't make a valid will, and that her will is invalid. . . ." Judge Marshall felt he was presiding over "a good old-fashioned family fight. . . ." Transcript, November 28, 1977, at 3, 7 14 We note in passing that the district court might find that certain of the plaintiff's claims belong in state court while others, at least on their face, may appropriately be considered in federal court. Such a bifurcation of the litigation is not inherently improper. See Jackson v. United States National Bank, 153 F.Supp. 104, 116 (D.Or.1957). It is clear, however, that if allegations which could form the basis for an independent suit are predicated upon a probate issue, such as the validity of a will, the entire suit should be dismissed. Kausch v. First Wichita National Bank, 470 F.2d 1068, 1071 (5th Cir. 1973) 15 The firm of Kirkland & Ellis originally represented the Nolan group. This representation was transferred to Reuben & Proctor after the Nolan group attorneys left the Kirkland firm and formed Reuben & Proctor 16 See, e. g., Transcript, March 3, 1978, at 12-13, 29, 33; Transcript, March 14, 1979, at 4-5, 7; Transcript, April 4, 1979, at 16-18. In the disqualification order, the district court relied solely on the finding of a potential conflict of interest and expressly stated that the control dispute was not relevant in these cases. It is clear, however, that someone must select counsel for the Foundation. Under ordinary circumstances, the selection would be made by those entitled to control according to state law. While the state court rulings may not affect the alleged conflicts of interest, they may indicate which group is presumptively entitled to select counsel for the Foundation. The district court must clarify its position on the relationship between the state court control dispute and the selection of counsel for the Foundation. The district court also must consider whether it has the authority to appoint counsel for the Foundation in light of the peculiar nature of the litigation before it	01-04-2023	08-23-2011
https://www.courtlistener.com/api/rest/v3/opinions/4619612/	Estate of Arthur Sinclair, Deceased, United States Trust Company of New York, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentSinclair v. CommissionerDocket No. 3667United States Tax Court6 T.C. 1080; 1946 U.S. Tax Ct. LEXIS 189; May 20, 1946, Promulgated 189 Decision will be entered under Rule 50. 1. Decedent created a trust in 1928, with the income payable to his wife for life and after her death to their daughter. Upon the wife's death, or on January 1, 1948, if she should die before that date, the trust corpus was to be distributed to the daughter. If the daughter should predecease the wife the corpus was to be paid upon the wife's death to the daughter's issue surviving the wife, if any, or, if none, it was to be paid to the grantor if living, or, if deceased, to those whom he should appoint in his will. Upon his failure to appoint the remainder interests were to revert to his estate. The decedent died in 1941, survived by both his wife and his daughter. Held, that only the value of the remainder interests of the trust corpus is includible in the gross estate.2. In 1935 petitioner created a trust the income of which was to be paid to his daughter, then 22 years of age, for life. The trust corpus was to revert to the grantor if the daughter predeceased him, leaving no issue surviving. However, if he predeceased the daughter, or if the daughter predeceased him leaving issue surviving, the trust corpus was to go to her190 appointees or her estate. Held, that the remainder value of the trust corpus, after exclusion of the daughter's life estate, is includible in the gross estate under section 811 (c), Internal Revenue Code, as construed in Helvering v. Hallock, 309 U.S. 106">309 U.S. 106. Henry S. Hooker, Esq., John McG. Goodale, Esq., and Arnold Furst, Esq., for the petitioner.Bernard J. Long, Esq., for the respondent. Smith, Judge. Opper, J., concurs only in the result. SMITH 1081 OPINION.This proceeding involves an estate tax deficiency of $ 68,643.74. The questions for our determination are whether there should be included in decedent's gross estate either the entire values or the remainder values of the corpora of two trusts which he created during191 his life, one on September 20, 1928, for the benefit of his wife and others, and the other on November 26, 1935, for the primary benefit of his daughter. Certain other issues raised in the pleadings have been settled by stipulation. The parties have also submitted a stipulation of facts, which we adopt as our findings of fact herein.The decedent, Arthur Sinclair, died testate on June 3, 1941, a resident of the State of New York. He was survived by his wife, Elizabeth Darnall Sinclair, and a daughter, Elizabeth Shelby Sinclair Hoyle.An estate tax return was filed by decedent's executor, the United States Trust Co. of New York, on August 3, 1942, with the collector of internal revenue for the third district of New York. In that return the optional valuation date, June 3, 1942, was used in the valuation of the estate.On September 18, 1928, the decedent and his wife, who were then living apart, entered into a separation agreement in which they made a final division of their estates and settled all of their financial and marital affairs. They agreed to establish a "custodian account" and a "trust fund" for the support of the wife and their daughter. The wife agreed to place in192 the custodian account with the United States Trust Co. $ 73,000 cash and 100 shares of stock of Commonwealth Edison Co., the income from which was to be paid to her for life. The decedent was to have a voice in the management of the fund. On his part decedent agreed to establish an irrevocable trust, with the United States Trust Co. as trustee, consisting of certain designated securities the income from which was also to be paid to the wife for life. Decedent further agreed that he would pay to the United States Trust 1082 Co. monthly on and after October 1, 1928, for the account of his wife a sum of money which, when added to the income from the custodian account and the trust fund, would yield the wife an annual income of $ 12,000 during her life. The wife was to have custody of their daughter, then 15 years of age, until the daughter should become 18 years of age and was to provide a certain part of the cost of the daughter's maintenance and support out of the income which she was to receive from the United States Trust Co. Decedent was to bear the cost of the daughter's schooling, clothing, and medical care, with certain specified limitations, until she became 19 years193 of age.The decedent created the trust referred to in the separation agreement on September 20, 1928, naming the United States Trust Co. sole trustee. Under the terms of the trust agreement the trustee was to pay the net income to the wife for life in equal monthly payments. It was further provided that:2 - Upon the death of the said Elizabeth Darnall Sinclair, should it occur on or prior to January 1, 1948 and should my daughter, Elizabeth Shelby Sinclair be then alive, the Trustee shall pay the net income therefrom, after deducting all proper charges and expenses, to Elizabeth Shelby Sinclair for and during her natural life until January 1, 1948 when the Trustee shall pay and transfer the said entire trust estate to Elizabeth Shelby Sinclair outright should she then be living.3 - Should the death of Elizabeth Darnall Sinclair occur after January 1, 1948, then upon the death of the said Elizabeth Darnall Sinclair the Trustee shall pay and transfer the said entire trust estate to Elizabeth Shelby Sinclair outright should she then be living.4 - Should Elizabeth Shelby Sinclair predecease Elizabeth Darnall Sinclair then upon the death of the said Elizabeth Darnall Sinclair the 194 Trustee shall pay and transfer the said entire trust estate to any lawful issue per stirpes of Elizabeth Shelby Sinclair living at the time of the death of Elizabeth Darnall Sinclair, and in default of any such lawful issue then living, the Trustee shall pay and transfer the said entire trust estate to the Grantor outright; but should the said Grantor also not be living at that time, then to such persons as he may by his last will and testament appoint, and in default of such appointment, said trust estate shall constitute and be disposed of as part of his estate.5 - Should Elizabeth Darnall Sinclair predecease Elizabeth Shelby Sinclair and should Elizabeth Shelby Sinclair die before January 1, 1948, then and in that event the Trustee shall pay and transfer said entire trust estate to the lawful issue per stirpes of Elizabeth Shelby Sinclair living at the time of her, Elizabeth Shelby Sinclair's death, and in default of any such lawful issue, then the Trustee shall pay and transfer the said entire trust estate to the Grantor outright, but should the said Grantor also not be living at that time, then to such persons as he may by his last will and testament appoint, and in default of195 such appointment then the said trust estate shall constitute and be disposed of as part of his estate.It is stipulated that the value of the property transferred to the trust was $ 204,893.64 at the date of death of the decedent and $ 179,250.14 on June 3, 1942, the valuation date, and that the value of the 1083 wife's life estate "shall for the purposes of inclusion or exclusion from the gross estate of the decedent be deemed to be $ 48,722.89, and the value of the remainder interests after said life estate shall be deemed to be $ 130,527.25." It is further stipulated that the trust was not made in contemplation of death.In his will the decedent appointed his sister and stepdaughter and two cousins to receive the remainder of the trust fund "whenever and if ever all of the conditions precedent set out in Paragraphs 4 and 5 of said Indenture permit, and subject to all the conditions and obligations contained in said Indenture." He also directed that three-fourths of his residuary estate be set aside and as much of the income therefrom as might be required to be used to pay his wife the amounts guaranteed her under the separation agreement.The respondent has included in decedent's196 gross estate under section 811 (c), Internal Revenue Code, the entire value of the trust corpus at the valuation date, $ 179,250.14. Petitioner contends that all of such amount should be excluded.But for the fact that the decedent in granting the property hereunder to trust created a presently vested intervening life estate in his wife, this case is in all material respects comparable to Fidelity-Philadelphia Trust Co. ( Stinson Estate) v. Rothensies, 324 U.S. 108">324 U.S. 108. Here, as in that case, the grantor retained the right to appoint by will the recipients of the remainder interests in the event the remaindermen did not survive him, or in the event of failure of remaindermen after his death. In the Stinson case the daughters were the holders of life estates, but, if they did not survive the grantor or leave issue surviving, the grantor had the right to dispose of the property by will, which power, in such circumstances, the Supreme Court said constituted the string which held the corpus of the trust within the grantor's estate for Federal estate tax purposes. In the instant case there were a number of conditions upon which the vesting of the197 remainder interests was contingent. Some of these contingencies are in addition to the comparable contingencies found in the Stinson case. For instance, the remainder interests would vest at January 1, 1948, if the daughter or her issue survived, and her mother, the holder of the intervening life estate, had died before that date; or after January 1, 1948, they would vest upon the death of the mother if the daughter or issue survived. As in the Stinson case, however, it was necessary that the daughter or her issue survive the grantor, for unless there was such survivorship the trust estate would already have reverted to the grantor unless the mother, the holder of the life estate, still lived, and in that event the grantor's power of appointment would still exist. The facts show that both the daughter and her mother did survive the 1084 grantor. It accordingly follows that unless and until the daughter does survive the mother or leave issue surviving, the grantor's power of appointment by will exists and will control the disposition of the remainder interests, since the facts show that the grantor, by his will, did take the steps necessary to make that power of 198 appointment effective in the event of failure of the conditions prescribed by him in his grant to trust. Since the string retained by the grantor to the corpus of the trust was not severed prior to his death and can not be severed until the happening of contingencies at some date subsequent to his death, what the Supreme Court said in the Stinson case might just as well have been said in the instant case. Thus, the Supreme Court said in that case:* * * Only at or after her death was it certain whether the property would be distributed under the power of appointment or as provided in the trust instrument. * * * The remainder interests of the descendants of the daughters were contingent upon their surviving both the decedent and the daughters and took effect in possession only after the death of the decedent. Thus until the moment of her death or until an undetermined time thereafter the decedent held a string or contingent power of appointment over the total corpus of the trust. The retention of such a string, which might have resulted in altering completely the plan contemplated by the trust instrument for the transmission of decedent's property, subjected the value of199 the entire corpus to estate tax liability. * * It is enough if he [the grantor] retains some contingent interest in the property until his death or thereafter, delaying until then the ripening of full dominion over the property by the beneficiaries. * * * [Emphasis supplied.]The above pronouncements of the Supreme Court appear to apply directly and specifically to the situation here. At the time of his death the power to appoint the recipients of the remainder interests in the corpus of the trust stood in the grantor, as it does even at the present time, subject only to divestment if the grantor's daughter or her issue survive the contingencies which the grantor prescribed as sufficient to defeat his retained power of appointment.There is one feature of the instant case which is unlike the Stinson case. The decedent here, under the terms of his grant to trust, not only reserved the power to appoint the recipients of the corpus of the trust, subject to the contingencies prescribed, but he also specifically retained a possibility of reverter. That possibility of reverter is remote, however, and in that respect is comparable to the possibility of reverter retained in 200 Estate of Harris Fahnestock, 4 T. C. 1096. See also Frances Biddle Trust, 3 T. C. 832, and Estate of Mary B. Hunnewell, 4 T. C. 1128. Under the rule in those cases such remote possibility of reverter is not sufficient to bring the corpus of the trust into the estate of the grantor for Federal estate tax purposes. The fact, however, that the possibility of reverter is too remote to bring the corpus of the trust into 1085 the estate of the grantor gives us no license to ignore the Stinson case and its applicability to the instant case where there is a retained power of appointment, subject to contingencies which are not determined until at and after the death of the grantor. To use the words of the Supreme Court in the Stinson case, "It is enough if he retains some contingent interest in the property until his death or thereafter."Making a further comparison between the instant case and the Stinson case, there does seem to be in this case sufficient grounds for concluding that, since the retained right of the grantor applies only to the interests succeeding the intervening201 life estate of his wife, only those succeeding interests should be included in the gross estate. The life estate of the wife was carved out at the time of the grant to trust and it was subject to no power retained by the grantor or to any other contingency. That the Supreme Court at the time it considered and decided the Stinson case took note of such cases as those above cited is evidenced by reference to the statement by Mr. Justice Douglas in his concurring opinion to the comparable situation which existed in Helvering v. Hallock, 309 U.S. 106">309 U.S. 106, wherein he pointed out that in that case the life estate was excluded, saying, "It was excluded because it took effect in possession or enjoyment when the trust was created." Such was the situation here. Cf. Estate of Peter D. Middlekauff, 203">2 T. C. 203, wherein we held in a similar situation that the value of the surviving wife's life interest in a trust was not includible in the gross estate of her deceased husband. In the Stinson case the value of the entire estate was included in the grantor's gross estate because there the grantor had not, at the time of creating202 the trust, created an intervening life estate, but had reserved the life estate unto herself, as well as the contingent power over the remainder interests.We conclude that the respondent erred in including in the gross estate of decedent the value of the surviving wife's life interest, which was stipulated to be in the amount of $ 48,722.89; but that he did not err in including in the gross estate the value of the remainder interest of the trust corpus, which it is stipulated was $ 130,527.25.The second trust involved in this case was created by decedent on November 26, 1935, and was for the sole benefit of his daughter, Elizabeth Shelby Sinclair. The trust agreement provided that the income was to be paid to her for life and that:Should Elizabeth Shelby Sinclair predecease the Grantor, leaving no issue her surviving, the principal and any accumulated income of this trust shall be paid and transferred by the Trustee to the Grantor outright, and this trust shall terminate.Should Elizabeth Shelby Sinclair predecease the Grantor, leaving issue her surviving, or should the Grantor predecease Elizabeth Shelby Sinclair, then in either of those events, upon the death of said Elizabeth203 Shelby Sinclair, the Trustee shall pay and transfer the entire trust estate to such persons as Elizabeth 1086 Shelby Sinclair may by her last will and testament appoint, and in default of such appointment said trust estate shall constitute and be disposed of as part of her estate.It is stipulated that the value of the transferred property on the valuation date, June 3, 1942, was $ 93,958.30; the value of the life interest given decedent's daughter was $ 66,401.15, and the value of the remainder interests therein was $ 27,557.15.It is further stipulated that decedent filed a gift tax return covering the transfer in trust and paid a gift tax thereon in the amount of $ 3,734.54.The transfer in trust was not made in contemplation of death.In his deficiency notice the respondent determined that the entire value of the trust property at the valuation date is includible in the decedent's gross estate. He now concedes, however, that the value of the daughter's life estate should be excluded.Read together, the two above quoted clauses of the trust agreement spell out a trust conveyance for the benefit of the daughter for life, with remainder to her appointees if she should survive204 the grantor, or even if she should predecease the grantor leaving issue surviving, with a right of reversion in the grantor should the daughter predecease him leaving no issue. Obviously, the grantor's death cut off the possibility of reverter and enlarged the daughter's estate to the extent of giving her the right to dispose of the property by appointment in her will, or, upon her failure to appoint, to have the property disposed of as a part of her estate. The daughter had no issue at the time of the grantor's death.At the time the trust was created the daughter was 22 years of age and had no issue. It was not a very remote possibility that the daughter would predecease the grantor, leaving no issue surviving, in which case the trust principal was to revert to him. On the other hand, there was only a remote possibility that the daughter would predecease the grantor leaving issue surviving her, which was the only contingency that could result in the ultimate vesting in possession and enjoyment of the trust property before the death of the grantor.In any event, we think that the provision of the trust agreement under which the trust corpus would revert to the grantor if his 205 daughter should predecease him, leaving no issue surviving, brings this trust under the rule of Helvering v. Hallock, supra, and Fidelity-Philadelphia Trust Co. ( Stinson Estate) v. Rothensies, supra, and like cases.At the hearing counsel for the petitioner conceded as much, but he takes the position that, nevertheless, the value of the remainder interest in the trust estate is to be excluded from the gross estate 1087 under the provisions of section 81.17 of Regulations 105. The provisions of that regulation upon which petitioner relies read as follows:Sec. 81.17. Transfers conditioned upon survivorship. * Where the transfer was made during the period between November 11, 1935 (that being the date upon which the Supreme Court of the United States rendered its decisions in the cases of Helvering v. St. Louis Union Trust Co. (296 U.S. 39">296 U.S. 39) and Becker v. St. Louis Union Trust Co. (296 U.S. 48">296 U.S. 48)), and January 29, 1940 (that being the date upon which such Court rendered its decisions in Helvering v. Hallock and companion 206 cases (309 U.S. 106">309 U.S. 106)), and the Commissioner, whose determination therein shall be conclusive, determines that such transfer is classifiable with the transfers involved in such two cases decided on November 11, 1935, rather than with the transfer involved in the case of Klein v. United States (283 U.S. 231">283 U.S. 231), previously decided by such Court, then the property so transferred shall not be included in the decedent's gross estate under the provisions of this section, if the following condition is also met: Such transfer shall have been finally treated for all gift tax purposes, both as to the calendar year of such transfer and subsequent calendar years, as a gift in an amount measured by the value of the property undiminished by reason of a provision in the instrument of transfer by which the property, in whole or in part, is to revert to the decedent should he survive the donee or another person, or the reverting thereof is conditioned upon some other contingency terminable by decedent's death.The respondent contends that his determination under the quoted regulation is conclusive and is not reviewable by this or any other 207 court.The obvious purpose of the regulation is to give relief in certain cases and upon certain conditions from the rule of Helvering v. Hallock, supra, as applied to those trust conveyances which may have been made in reliance upon the decisions of the Supreme Court in Helvering v. St. Louis Union Trust Co. and Becker v. St. Louis Union Trust Co., and before the decision in Helvering v. Hallock. The regulation was not promulgated in response to any mandate of Congress and it does not purport to interpret or implement any provision of the statute or to give effect to any ruling of the courts. Whether the regulation is authorized by law and would under any circumstances be enforceable by this or any other court, we do not need now to decide. By its own terms the regulation is to be applied only where the Commissioner determines "that such transfer is classifiable with the transfers involved in such two cases [Helvering v. St. Louis Union Trust Co. and Becker v. St. Louis Union Trust Co.]." The Commissioner has not made any determination that the transfer under consideration is classifiable with the transfers208 involved in the cited cases. Thus, the regulation is not applicable here, whatever may be said of its validity or enforceability.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619613/	HASKELL & BARKER CAR CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Haskell & Barker Car Co. v. CommissionerDocket No. 7009.United States Board of Tax Appeals9 B.T.A. 1087; 1928 BTA LEXIS 4302; January 7, 1928, Promulgated 4302 (1) DEDUCTIONS. - Petitioner is entitled to deduct, in computing net income, the difference between the value of its own stock as stipulated between the parties, purchased in the open market for sale to employees, and the sale price thereof. (2) Petitioner is entitled to include in invested capital accounts receivable from employees on account of stock purchased, from date of acceptance of contract of purchase. James H. Winston, Esq., and Edward G. Ince, Esq., for the petitioner. John D. Foley, Esq., for the respondent. MORRIS 1087 This appeal is from the determination of deficiencies in income and profits taxes for the fiscal years ended January 31, 1919, and January 31, 1920, of $20,743.08 and $10,379.93, respectively. The petitioner assigned a number of errors, all of which may be included in two distinct assignments of error: (1) Whether or not the respondent erred in disallowing as a deduction in the taxable year a sum representing a stock bonus. 1088 (2) Whether certain alleged accounts receivable resulting from stock sales to employees may be included in invested capital for the taxable years in question. Both4303 of the assignments of error arise out of the same transaction. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of New York in 1916, for the purpose of engaging in the manufacture and sale of railroad cars and similar equipment. The general offices and the manufacturing plant were located at Michigan City, Ind. The petitioner had authorized capital stock of 250,000 shares (no par value) of which 220,000 shares were issued and outstanding. The stock was listed and was actively traded in on the New York Stock Exchange. At a meeting of the board of directors on November 21, 1918, a committee appointed to devise ways and means of purchasing stock of the company and selling the same to the employees of the petitioner at a reduced price by way of additional compensation reported and the following minutes were taken and resolutions adopted: In the absence of Mr. Marcy, Chairman of the Committee appointed at the meeting held October 31, 1918, to devise a plan for the purchase of the stock of the Company in addition to that already held in the Company's treasury, and to recommend terms and conditions for the sale thereof to officers and employees4304 of the Company, Mr. Corey, a member of the Committee stated that on behalf of the Chairman he was authorized to report the Committee's recommendations as follows: For the purpose of providing compensation to the President, chief executive and operating employees of the Company in addition to their respective salaries, for services actually rendered during that year, the Committee recommends that the Company purchase out of surplus profits 5,000 shares of its capital stock in addition to the 5,000 shares now held in the treasury, and that said 10,000 shares be sold. (1) 5,000 shares thereof to the President of the Company, Mr. Edward F. Carry, at $25 per share. In the opinion of the Committee the difference between that price on said 5,000 shares and the present market price, is a reasonable compensation to the president, in addition to his salary, for his service actually rendered to the Company during the year. (2) 5,000 shares thereof to the chief executive and operating employes at $25 per share, in such proportion as in the opinion of the President will make the difference between said price of $25 on the number of shares sold to each and the present market price, a reasonable4305 compensation to such chief executive or operating employee, in addition to his salary, for his services actually rendered to the Company during the year. Upon motion duly made, seconded and carried, Mr. John R. Morron was elected Chairman pro tem. Following discussion of the foregoing recommendations, on motion duly made, seconded and adopted (Mr. Carry not voting), it was 1089 Resolved, That the Committee appointed at the meeting of the Board of Directors of this corporation held on October 31, 1918, be continued and that said Committee be authorized and empowered to buy on behalf of this corporation out of surplus profits, five thousand (5,000) shares of its capital stock at such price or prices as in their judgment is deemed advisable; and Further resolved, That the Company sell 5,000 shares of its capital stock now held in the treasury to Mr. Edward F. Carry at the price of $25 per share, as compensation, in addition to his salary, for his services actually rendered during the year, and that 5,000 shares when purchased pursuant to the preceding resolution be sold to the chief executive and operating employees of the Company, in such proportions as in the opinion4306 of the President will make the difference between said price of $25 on the number of shares sold to each and the present market price, a reasonable compensation to such chief executive or operating employee, in addition to his salary for his services actually rendered to the Company during the year. Pursuant to the above resolution the petitioner actually used 10,145 shares and the average cost to the company per share was $43.16. The vice president of the company, who was not a lawyer, for the purpose of carrying into effect the resolutions of the board of directors, prepared a form of contract to be entered into between the petitioner and its employees. Thereafter 68 employees were selected and were allotted a certain number of shares, determined by the president, which allotment was based upon the quality of the employee's services. The following is a typical form used for each of the 68 employees, varying only with respect to the number of shares and the name of the employee: To In recognition of the special service of officers and employees in meeting the difficult conditions of war time operations, and as special compensation therefor, the Board of Directors of4307 the Company have authorized the offer to you of a bonus in the form of subscription right to stock acquired for this purpose, under the following terms and conditions: 1st. The Company offers you the right to subscribe for shares of the above-mentioned stock of the Company, at a price of $25.00 per share. 2nd. Payment of all or any part of the subscription price of such stock may be made as of the first day of any calendar quarter, but payment must be completed in any event within five years from January 1, 1919. Failure to complete payment within the specified period shall cause the subscription right to lapse, and the Company will return to you the net profit, if any, accruing to you over carrying charges. 3rd. Pending completion of payment for above subscription, the certificate of stock shall remain in the Company's possession, and upon completion of payment for entire lot shall be delivered to you. 4th. Dividends paid by the Company on this stock after the date hereof and pending completion of your payment therefor, shall be credited on the balance due on your subscription. 5th. Interest at the rate of 5 per cent per annum will be charged on the balance due4308 on your check, but in any event the interest charged shall not exceed the amount of dividend credited on your subscription during the year. 6th. In the event of your death prior to completion of payment on the subscription, the Company will, as directed by your administrator or other legal 1090 representative, either return to your estate the entire amount, if any, credited to you on this subscription, without deduction for carrying charges, and cancel the contract, or will accept complete payment thereon from your administrator or legal representative and deliver the certificate of stock to such person. 7th. In the event of your departure from the employ of this Company, for any cause, prior to completion of payment of this stock, or upon your written request at any time while still in its employ, the Company will repay to you the net credit, if any, accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein. 8th. This subscription contract is made with you individually, and is not assignable or transferable to any other person without the consent of the Company in writing. This subscription offer4309 has been executed in duplicate on the part of the Company and your acceptance thereof in writing in the form appended will constitute this a contract between yourself and the Company, but only for the purpose and to the effect herein stated. HASKELL & BARKER CAR CO. INC.By E. F. CARRY, President.Attest: D. A. CRAWFORD, Asst. Secretary.In witness of my acceptance of the terms and conditions of the above subscription offer: I have subscribed my name hereto this 29th day of Jan. 1919. Witness In the month of January, 1919, within the petitioner's fiscal year, all of the 68 employees selected to receive a bonus executed one of the above forms. At the time the shares of stock were purchased they were charged to an asset account entitled "Securities Owned." When the foregoing contract was entered into between the petitioner and these employees, an entry was made in the books of account as follows: DebitCreditEmployees' stock account$253,625Securities Owned$253,625Explanation made in the books of account to support this entry was "10,145 shares of Haskell & Barker Car Co. Inc., stock sold to employees at $25.004310 per share as authorized by the board of directors under date of November 21, 1918." At about the same time another entry was made in the books of account as follows: DebitCreditProfit and Loss$123,814.47Securities Owned$163,127.19Cost Account Lot 517820,018.89Cost Account Lot 517919,293.83The explanation given in support of this entry was "For difference between the selling value of 10,145 shares of Haskell & Barker Car Co. Inc., stock sold to employees and the cost value of the same. Cost 1091 value per share $41.079565 and selling price $25.00; 10,145 shares at $16.079565." There was also a charge made to cost-plus accounts for a part of this bonus because of the fact that petitioner had cost-plus contracts with the United States Railroad Administration, whereby the said Administration was to be charged with a proportionate part of the company's expense, which said expense was in fact accepted by the Railroad Administration as proper. The market value of the stock of the petitioner was not less than $42.50 per share during the month of January, 1919. The petitioner kept its books of account and made its returns4311 on the accrual basis. As the name of the employee who was to receive a bonus was selected he was called into the office of D. A. Crawford, vice president, W. N. Oehm, general manager, or G. P. Rogers, the auditor, who explained in detail that the company proposed to pay him as additional compensation for services rendered during the year the sum of the difference between $25 a share which he would be required to pay the company and the market value of the stock at that date, which was between $42 and $43 per share; that by acceptance and signing of this contract the employee created an obligation to pay the company the sum of $25 a share for his stock; that the company would advance the purchase price and that the employee could pay the company at any time within five years. The employee was further told by these men that the stock was his to do whatever he wanted to with it; that he could make a loan at the bank, take up the stock and sell it if he so wished; that the company would hold his stock certificate as collateral until full payment had been made; that the company would credit him with dividends, and would charge him with interest on the balance due. Furthermore, the4312 employee was told that the company would protect him in any event and should the stock decline in value, the company would take the stock back and pay him the net balance due him. The petitioner made this offer without placing any limitations upon the employee with respect to leaving the services of the company. Two of the employees paid for their stock and received certificates therefor after leaving the company. In fact, one employee was discharged for excessive use of liquor and he received the full market value of his stock, which was then $58.50 per share. During the month of January, 1919, 5,225 shares of the total of 10,145 shares so allotted and sold to employees were paid for and they were immediately given possession of their stock certificates. The remaining 4,920 shares were held by D. A. Crawford, vice president of the company, as trustee, which shares were placed in a safe-deposit box and marked as collateral for these contracts. As was the custom with the petitioner it mailed a notice to all of its employees at the end of the calendar year telling them the amount of compensation 1092 which they had been paid during the year, and there was a special notice4313 sent to each of the 68 employees hereinbefore referred to. A copy of typical notice was mailed as follows: DEAR SIR: For your information in connection with your income tax return for the calendar year 1919, we have secured from the company's counsel an opinion that those employees who contracted to purchase this company's stock in January, 1919, at the fixed price of $25.00 per share, should report as part of their compensation received from the company in 1919, the difference between the above price of $25.00 and the price of $42.66268 per share, the cost price of stock purchased by the company for this purpose. The above basis applies to those employees only who have not sold their stock. For your information, there is attached to this letter a memorandum showing the total compensation paid you by this company including the total "compensation value" of the stock allotted to you. There is also shown thereon, a statement showing the number of shares subscribed for by you under your contract with the company, the amount of dividends received by the company and credited to your account on the company's books and the amount of interest charged to your account on the deferred4314 payments on your stock subscription. The amount of the dividends received by you on the above stock allotment should be accounted for by you as income, whether the dividend checks were received by you direct or credited up to you by the company, and, similarly, the amount of interest charged to you should be reported as a deduction on your income tax return. Those employees who sold all or any part of their stock during the year 1919 should report as a profit on the sale of such portion of the stock the difference between the $42.66268 price and the price they actually received for the stock. Those employees who sell all or any part of their stock in any calendar year after 1919, should report as income in the year in which such sale is made, the difference between the above value of $42.66268 per share and the price at which they sell. If this information is not entirely clear to you, either the writer or Mr. Dudley will be glad to go into the matter further with you. G. P. ROGERS. There was also a computation appended to this notice and sent to each of the 68 employees, a copy of which is given below: ACCOUNT NO. Statement of salary, bonus and other compensation4315 paid to you during the calendar year 1919. Monthly salary for 12 months, 1919 Semi-annual cash bonus Production bonus Stock bonus, on basis of shares at $17.66268 per share, as per letter furnished you under date of Feb. 18th, 1920 herewith attached Total compensation or Wages For your information, it is suggested, and believed advisable that whether or not you have sold, during the year 1919, any stock which you purchased from the company, you should on your income tax return, show the amount given 1093 above as "Total Compensation" paid you by this company and should be entered under item "B" on Form 1040 or Form 1040-A. Any amount derived from the sale of stock in excess of the $42.66268 per share should be shown on your tax return as "profit" resulting from the sale of stock and should be entered under Item "D" on Form 1040 or Form 1040-A. For your information, the company's records show you were credited on your stock subscription account during the calendar year 1919 with dividends accruing thereon amounting to: Your stock subscription was charged during the same period with interest amounting to It will be noted that the above notice carries a4316 figure of $42.66 per share. That figure is in error, accounted for by the fact that the petitioner misinterpreted the Treasury regulations and the company used "cost" of the stock instead of the market value thereof on the date of the sale to the employees. The correct figure should have been $43.16 per share which was the actual cost. These witnesses who testified by deposition at the hearing included this bonus in their income-tax return for the year 1919 as additional compensation. This was done regardless of whether or not payment had been made for these shares and a certificate of stock received. All of the 10,145 shares of stock have been paid for by employees and certificates delivered to them with the exception of one, an employee who purchased 35 shares and who disappeared and could never be located. The respondent allowed the deduction of $17.50 per share on each of the 5,225 shares paid for and delivered to the employees during the month of January, 1919, but denied the deduction on the remaining shares. He also reduced invested capital for 1920 by the sum of the unpaid amounts on the stock assigned to the employees as hereinabove set forth. OPINION. MORRIS: 4317 The first allegation of error is the failure of the respondent to allow as a deduction for the fiscal year ended January 31, 1919, an amount of $17.50 per share (difference between the stipulated market price of $42.50 and sale price to employees) on the stock which had not been paid for in full in the computation of net income. The respondent alleges and contends that there was no binding obligation upon the petitioner, certainly not more than contingent liability until the stock in question was fully paid for by the employee and his certificate of stock delivered to him. Therefore, the respondent contends, the bonus of $17.50 should not be allowed as a deduction until the payments are completed by the employee. The petitioner, on the other hand, contends that there was a binding and enforceable contract between the petitioner and its employees and that the bonus sought to be paid by this agreement was for services 1094 actually rendered within the fiscal year ended January 31, 1919, and therefore the sum claimed as a deduction in that year should be allowed as provided for in section 234(a) of the Revenue Act of 1918. Section 234(a)(1) of the Revenue Act of 1918 provides4318 that in computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions, "(1) 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 words "paid or incurred" as used in the above section are defined in section 200 of the same Act as follows: The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" or "paid and accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212. Section 212(b) of the same Act provides that, "The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer." In this case there seems to be no dispute over whether the sums in question were "ordinary and necessary" or4319 whether the sums constitute a "reasonable allowance." Nor is there any doubt expressed as to the right of the petitioner to deduct a bonus as such in computing its net income. . Therefore we are only called upon to determine whether or not the $17.50 per share on stock contracted to be sold to the employees but not already paid for within the fiscal year ended January 31, 1919, is "paid or incurred during the taxable year" as provided for in the statute. In deciding this point in issue it will be necessary, not only to construe the writing entered into between the parties, but to determine from the oral testimony of witnesses and all the surrounding circumstances which caused the parties to contract with each other, what the intention of these parties was. , and . Let us first, therefore, examine briefly some of the pertinent terms of the minutes of the board of directors of November 21, 1918, referred to in the findings of fact. The committee appointed to work out the plan of the stock bonus "for the4320 purpose of providing compensation to the president, chief executive and operating employees of the company, in addition to their respective salaries for services actually rendered during the year * " recommended the purchase of 5,000 shares of stock in addition to the 5,000 shares held in 1095 the treasury and that 5,000 shares be sold to the president at $25 per share, the committee stating with respect to this sale "the difference between that price on said 5,000 shares and the present market price, is a reasonable compensation to the president, in addition to his salary, for his services actually rendered to the company during the year." There was also a similar provision with respect to the chief executive and operating employees. The terms of the above committee's recommendation were adopted by resolution of the board of directors. Therefore, insofar as the intention of the petitioner is concerned, there can be no question but that it intended the amount in controversy to cover compensation in addition to the salaries already paid for services actually rendered to the company "during the year." Some obligation was certainly incurred within the taxable year in question. 4321 An agreement was drawn up to carry out the resolution of the board of directors by the vice president of the company, who was not a lawyer and skilled in the drafting of legal instruments. The preamble to the contract simply recites that the company is desirous of compensating the employee further and that it has authorized the offer of a bonus in the form of subscription right. The first numbered paragraph of the contract recites "the company offers you a right to subscribe for shares of the abovementioned stock of the company, at a price of $25.00 per share." The second numbered paragraph provides for the manner of payment and specific provisions that the failure to complete payment within the specified period shall cause the subscription right to lapse. That paragraph further provides "and the company will return to you the net profit, if any, accruing to you, over the carrying charges." The third numbered paragraph provides that the company shall have possession of the certificate of stock pending completion of payment. The fourth numbered paragraph provides that the company shall pay dividends on this stock pending completion of the payment therefor, which dividends4322 were to be credited on the balance of the employee's subscription. The fifth numbered paragraph provides for the charge of interest on the balance. That paragraph also provides "but in any event the interest charged shall not exceed the amount of dividend credited on your subscription during the year." The sixth numbered paragraph provides briefly that in the event of the death of an employee before payment, the company will, at the option of the employee's personal representative, either return to his estate the entire amount, if any, credited on his subscription "without deduction for carrying charges" and calcel the contract, 1096 or will accept complete payment from his personal representative and deliver the certificate of stock to such person. Paragraph seven of the contract, which seems to be the one in controversy, or at least more so than any other one, reads as follows: In the event of your departure from the employ of this company, for any cause, prior to the completion of payment of this stock, or upon your written request at any time while still in its employ, the company will pay to you the net credit, if any, accrued to you on this subscription and4323 your subscription will thereupon be canceled with no further interest to you therein. The eighth numbered paragraph provides that the contract is not transferable or assignable without consent of the company in writing. The final paragraph provides, "This subscription offer has been executed in duplicate on the part of the Company and your acceptance thereof in writing in the form appended will constitute this a contract between yourself and the Company, but only for the purpose and to the effect herein stated." This contract was executed by the president for the petitioner, attested by the secretary and signed by the employees. All the elements of a binding contract to sell stock, on the one hand, and to purchase, on the other, are present. There is the element of offer and acceptance required in all binding contracts. It is true that the acceptance on the part of the employee is not in the exact words of the offerer, but as we understand it, that is not necessary to create a legally binding contract. At page 128, Volume I, of Williston on Contracts, the author says, "in order to make a bargain it is necessary that the acceptor shall give in return for the offerer's promise4324 exactly the consideration which the offerer requests. If an act is requested, the very act and no other must be given. If a promise is requested, that promise must be made absolutely and unqualifiedly. This does not mean necessarily that the precise words of the requested promise must be repeated, but by a positive and unqualified assent to the proposal the acceptor must in effect agree to make precisely the promise requested." In , cited by the petitioner, wherein the agreement between the parties was that the defendant deliver certain rifles, the plaintiff did not in terms agree to buy the rifles nor did he promise in terms to pay for them. The court said, "clear and explicit words were used to express the terms of the contract and agreement, leaving no doubt as to the subject matter thereof, the time and place for the delivery of the goods to be delivered, and the price or sum to be paid, and when such payment was to be made; and the assent of both the contracting parties also appears, that of the sellers, by subscribing their firm name at the end of the contract, and that of the buyer by the acceptance thereof. 4325 Although there is no distinct 1097 and express promise in terms by the plaintiff to pay the price specified, the terms, 'cash on delivery,' imply a promise, and create an obligation to make such payment when the rifles are delivered." In the light of the words used in the above citation it seems clear that in this case there was clearly an offer and acceptance. Let us consider for the moment paragraph seven of this contract, which simply says, in effect, "if you wish to return your stock any time before payment of your subscription, you may do so." We can see no reason why this provision in the contract should alter its legal efficacy. The testimony of the officers of the company with respect to paragraph seven of the contract was to the effect that the company wished to give the employee every advantage, that it wished to protect him in the event of a possible decline in the market value of his stock. Indeed, we are inclined to the belief that if such a provision had not been made in this contract, it might have been inconsistent with the giving of a bonus and would have amounted to nothing more than a strict contract between the parties for the sale and purchase of stock. 4326 If the stock in question had not been protected by that provision a decline in the market value of the stock could have deprived the employee not only of the $17.50 sought to be paid to him as a bonus, but also could have deprived him of a portion or all of his purchase price. We can not segregate paragraphs in this contract and consider them separately from all of the other provisions. The entire contract must be construed in the light of all of the terms therein and of the surrounding circumstances which tend to show the intention of the parties. In , the court said: The elementary canon of interpretation is, not that particular words may be isolatedly considered, but that the whole contract must be brought into view and interpreted with reference to the nature of the obligation between the parties, and the intention which they have manifested in forming them. The testimony discloses that all of the 68 contracts in question were executed in the presence of one of the officers of the company and as each employee executed his contract, the terms thereof were clearly explained to him. He was told that the company proposed4327 to pay him additional compensation for services rendered during the year; that the sum which the company would give him would be the difference between $25 which he would pay and $42 or $43 per share; that by accepting and signing this contract the employee created an obligation to pay the sum of $25; he was told that he could take the stock up at any time he wanted to and sell it or do anything else that he wanted to with it; that he could borrow money at the bank and take it up. Furthermore, he was told the company would protect him in the event of a decline in value. The testimony was clear 1098 that the company offered this stock to its employees without any obligation on the employee other than to pay the $25 mentioned in the contract. Some of the employees testified that they understood that this was a contract between the company and themselves and they were obligated to pay $25 per share; that they understood that paragraph seven was designed for their protection in case of a decline in the market value; that they understood that they could take this stock up at any time they wanted to. It seems to us that the practical construction placed upon the contract by4328 the parties should be considered rather than a theoretical construction. In , the court said, "The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There is no surer way to find out what parties meant, than to see what they have done." It was further said in , "We think that the practical construction which the parties put upon the terms of their own contract, and according to which the work was done, must prevail over the literal meaning of the contract, according to which the defendant seeks to obtain a deduction in the contract price." The testimony of all the parties concerned was to the effect that they understood and intended that this writing between themselves was a contract. Another important consideration is the fact that the company credited dividends to the account of each employee on the amount of stock so purchased from the date when the contract was entered into. Taking into consideration the purpose4329 for which this contract was designed and the intention of the parties as expressed in oral testimony and all of the surrounding circumstances, we believe that the petitioner is entitled to deduct in the fiscal year ended January 31, 1919, not only $17.50 per share for the stock paid for and taken up by the employee, but also that amount per share for the stock covered by the contracts, but not paid for. The second allegation of error relates to the deduction from invested capital for 1920 by the respondent of the balance due from employees on the contracts as of January 31, 1919, less the payments made on those contracts during the following year prorated in accordance with the date received. We have held that the agreements between the company and the 68 employees were binding contracts. The question therefore narrows itself down to the proposition whether the accounts receivable, secured by stock held as collateral by a trustee, the fair market value of which was in excess 1099 of the amount due, may be included in invested capital under section 326 of the Revenue Act of 1918. That section provides, "That as used in this title the term 'invested capital' for any year4330 means (except as provided in subdivisions (b) and (c) of this section): (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 * * ." Section 325(a) of the same statute defines the term "tangible property" to mean "stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property." Under the facts in this proceeding there can be no question that the actual cash value of the accounts receivable is equal to their face value. We are therefore of the opinion that these accounts receivable evidenced by the contracts should be included in invested capital and that the respondent was in error in reducing invested capital by the amount of the balance due from employees on the contracts as of January 31, 1919. See . Reviewed by the Board. Judgment will be entered for the petitioner on 15 days' notice, under Rule 50.MILLIKEN did not participate. TRAMMELL dissents. STERNHAGEN, PHILLIPS, MVRDOCK 4331 STERNHAGEN, dissenting: In my opinion, the decision should be for the respondent on the first point. I can not see how the purchase by a corporation of its own stock and its subsequent transfer can be an expense either paid or incurred. The only outlay by the corporation was the purchase price of some outstanding stock. This was not an expense. The resale or reissuance of the stock for less than the purchase price involved no loss, Simmons & Hammond Mfg. Co.,1 B.T.A. 803">1 B.T.A. 803, and since it carried with it no further outlay or liability, it seems to me there was no expense to deduct. The employees bought at a cheap price, but so far as the corporation was concerned there was simply a change in the personnel of its stockholders. The corporation avoided an expense by giving the employee at an advantageous price an opportunity of sharing in future earnings or liquidation. PHILLIPS, dissenting: Upon the basis of the decision of the Supreme Court in ; 4332 47 Sup.Ct. 520; 6 Am.Fed.TaxRep. 6747, I concur in the decision that the bonus to be paid the employees of the petitioner was a deduction in the fiscal year ended January 31, 1919. I can not, however, agree with the result reached upon the second point involved. The agreement between the employees and the 1100 company appears to me to be no more than an accepted subscription agreement. Certainly there was a meeting of the minds of the parties, and certainly there was a contract; but it does not follow that the employees thereby became stockholders of the corporation or that the amount of their unpaid subscriptions became accounts receivable. Nor do we know that they ever would become stockholders. For example, under paragraph 7 of the agreement, if an employee severed his relationship with the company, his only right was to recover the "net credit accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein." Entirely aside from the language used in designating the agreement as a subscription, how is the result consistent with the theory that the subscriber was the owner of the stock? *4333 If he was he would be entitled to pay his obligation to the company and receive his stock, for there was no agreement to resell. What is the purpose and effect of paragraph 8th if the employee owns the stock? What is the meaning of the last paragraph of the contract and especially of the words of limitation contained in the last sentence? That dividends should be credited and interest debited on the balance due seems an equitable arrangement for the protection of both parties, but is far from establishing that the subscriber owned the stock. My opinion is that we have here only an executory contract for the purchase of stock under which the subscribers become stockholders only when the subscription price is paid. I therefore conclude that the respondent was correct when he included in invested capital only the amounts paid on these subscriptions. MURDOCK, dissenting: I dissent on both of the points covered by the prevailing opinion. However, I concur in the dissent of Mr. Sternhagen on the first point.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619614/	CLARA L. PREVO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPrevo v. Comm'rNo. 5805-04L United States Tax Court123 T.C. 326; 2004 U.S. Tax Ct. LEXIS 50; 123 T.C. No. 21; December 14, 2004, Filed Respondent's motion to dismiss granted. 50 On Feb. 23, 2004, R issued to P a Notice of Determination Concerning Collection Action(s) for the taxable years 1989, 1990, 1993, 1996, 1998, and 2000. On Mar. 1, 2004, P filed a bankruptcy petition under ch. 13 of the Bankruptcy Code. On Mar. 29, 2004, P filed a petition with the Court challenging R's notice of determination. On Mar. 31, 2004, the bankruptcy court dismissed P's bankruptcy petition. On May 24, 2004, P filed an amended petition. R filed a motion to dismiss for lack of jurisdiction in this case on the ground that the petition was filed in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a)(8) (2000). Held: The Court lacks jurisdiction in this case on the ground the petition was filed in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a)(8). R's motion to dismiss for lack of jurisdiction will be granted. Clara L. Prevo, pro se.Brianna Basaraba Taylor, for respondent. Gerber, JoelGERBER327 OPINIONGERBER, Chief Judge: This matter is before the Court on respondent's motion51 to dismiss for lack of jurisdiction. Respondent's motion presents an issue of first impression regarding the application of the automatic stay imposed under 11 U.S.C. section 362(a)(8) (2000) in a collection review proceeding brought in this Court pursuant to section 6320. 1 As discussed in detail below, we shall grant respondent's motion to dismiss.BackgroundOn February 23, 2004, respondent issued to petitioner a Notice of Determination Concerning Collection Action(s) for the taxable years 1989, 1990, 1993, 1996, 1998, and 2000. The notice of determination stated in pertinent part: Summary of Determination After discussion of the Notice of Federal Tax Lien filing at conference, verification that all legal and procedural requirements were met, review of the compliance case file and information submitted by the taxpayer, it was determined52 that the issuance of the Notice of Federal Tax Lien Filing was appropriate, and the action is sustained. The Lien was filed at the time the taxpayer's offer in compromise was being rejected. The Taxpayer's proposed offer in compromise was not an acceptable collection alternative. The taxpayer reports her current employment is a short term situation, and is unable to fund an offer or an installment agreement. The taxpayer's account was previously closed as currently not collectible under hardship provisions and should revert to that status.The record does not include a copy of the notice of Federal tax lien that is referred to in the notice of determination.On March 1, 2004, petitioner filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Northern District of Georgia.328 On March 29, 2004, petitioner filed with this Court a petition for lien or levy action challenging respondent's notice of determination. 2 At the time the petition was filed, petitioner's bankruptcy case had not been closed or dismissed, nor had the bankruptcy court granted or denied53 petitioner a discharge. See 11 U.S.C. sec. 362(c)(2) (2000).On March 31, 2004, the bankruptcy court dismissed petitioner's bankruptcy case. On May 24, 2004, petitioner filed an amended petition with the Court.On August 4, 2004, respondent filed a motion to dismiss for lack of jurisdiction. Respondent contends that the Court lacks jurisdiction because the petition was filed with the Court in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a)(8). On August 18, 2004, petitioner filed a response in opposition to respondent's motion to dismiss.DiscussionThe Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). Our jurisdiction in a collection review proceeding brought54 pursuant to section 6320 generally depends upon the issuance of a valid notice of determination and a timely filed petition. See Sarrell v. Commissioner, 117 T.C. 122">117 T.C. 122, 125 (2001); Offiler v. Commissioner, 114 T.C. 492">114 T.C. 492, 498 (2000).This case presents an issue of first impression, whether the bankruptcy automatic stay under 11 U.S.C. section 362 (2000) bars the commencement of a proceeding with the Court pursuant to the collection review procedures established under section 6320. Before proceeding with our analysis, we briefly review both the automatic stay provisions and the collection review procedures.The Automatic StayTitle 11 of the United States Code provides uniform procedures designed to promote the effective rehabilitation of the bankrupt debtor and, when necessary, the equitable distribution of the debtor's assets. See H. Rept. 95-595, at 340 (1977). One key to achieving these aims is the automatic 329 stay, which generally operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy estate. See Allison v. Commissioner, 97 T.C. 544">97 T.C. 544, 545 (1991); Halpern v. Commissioner, 96 T.C. 895">96 T.C. 895, 897 (1991).55 The automatic stay provisions are set forth in 11 U.S.C. section 362(a). Significantly, 11 U.S.C. section 362(a)(8) expressly bars "the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor." Unless relief from the automatic stay is granted by order of the bankruptcy court, see 11 U.S.C. sec. 362(d), the automatic stay generally remains in effect until the earliest of the closing of the case, the dismissal of the case, or the grant or denial of a discharge, 11 U.S.C. sec. 362(c)(2); see Allison v. Commissioner, supra at 545; Smith v. Commissioner, 96 T.C. 10">96 T.C. 10, 14 (1991).It is worth noting that the Commissioner is authorized, pursuant to the exception to the automatic stay set forth in 11 U.S.C. section 362(b)(9), to issue a notice of deficiency to a taxpayer in bankruptcy. See Kieu v. Commissioner, 105 T.C. 387">105 T.C. 387, 391 (1995). Even though, as previously discussed, such a taxpayer would be barred from filing a petition for redetermination with this Court so long as the automatic stay remained56 in effect, Congress established a procedure to permit such a taxpayer to invoke the Court's deficiency jurisdiction under section 6213(a) after the bankruptcy proceedings are completed. Specifically, section 6213(f) provides that the statutory period for filing a timely petition with the Court under section 6213(a) is suspended for the period during which the taxpayer is prohibited by reason of the automatic stay from filing a petition for redetermination and for 60 days thereafter. See Olson v. Commissioner, 86 T.C. 1314">86 T.C. 1314, 1318-1319 (1986) (and cases cited therein). We observe that the benefits of section 6213(f) may apply whether a notice of deficiency is mailed before or after the filing of a bankruptcy petition. See McClamma v. Commissioner, 76 T.C. 754">76 T.C. 754 (1981).Collection Review ProceduresSection 6321 imposes a lien in favor of the United States on all property and rights to property of a person liable for 330 taxes when a demand for the payment of the person's taxes has been made and the person fails to pay those taxes. Such a lien arises when an assessment is made. Sec. 6322. Section 6323(a) requires the Secretary to file a notice of Federal tax lien if57 the lien is to be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor. Lindsay v. Commissioner, T.C. Memo 2001-285">T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800">56 Fed. Appx. 800 (9th Cir. 2003). From the taxpayer's perspective, the filing of such a lien may have the negative effects of creating a cloud on the taxpayer's title to property and impairing the taxpayer's creditworthiness. See, e.g., Magana v. Commissioner, 118 T.C. 488">118 T.C. 488 (2002).In the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3401, 112 Stat. 746">112 Stat. 746, Congress enacted new sections 6320 (pertaining to liens) and 6330 (pertaining to levies) to provide specified protections for taxpayers in tax collection matters. Section 6320 provides that the Secretary shall furnish the person described in section 6321 with written notice of the filing of a notice of lien under section 6323. The notice required by section 6320 must be provided not more than 5 business days after the day of the filing of the notice of lien. Sec. 6320(a)(2). Section 6320 further provides that the person may request administrative review of the matter (in the form of58 an Appeals Office hearing) within 30 days beginning on the day after the 5-day period. Section 6320(c) provides that the Appeals Office hearing generally shall be conducted consistent with the procedures set forth in section 6330(c), (d), and (e).Section 6330(d) provides for judicial review of the administrative determination in the Tax Court or a Federal District Court, as may be appropriate. To obtain judicial review, the person must file a petition with the appropriate court within 30 days of the mailing of the notice of determination. Sec. 6330(d)(1); Offiler v. Commissioner, 114 T.C. at 498. Notably, there is no provision analogous to section 6213(f) in section 6320 or 6330 that tolls the statutory period for filing a timely petition for lien or levy action for the period during which the person is prohibited by reason of the automatic stay from filing such a petition. 359 331 AnalysisConsistent with the plain language of 11 U.S.C. section 362(a)(8), which expressly bars "the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor", we conclude that the petition for lien or levy action in this case was filed in violation of the automatic stay, and, therefore, we lack jurisdiction. In short, there is no exception to the automatic stay under 11 U.S.C. section 362(b) permitting the commencement of a proceeding in this Court, nor is there any suggestion in the record that the bankruptcy court granted petitioner relief from the automatic stay under 11 U.S.C. section 362(d). Under the circumstances, the automatic stay remained in effect until March 31, 2004 -- the date that the bankruptcy court dismissed petitioner's bankruptcy case. See 11 U.S.C. sec. 362(c)(2).Unfortunately here, where the petition in bankruptcy was voluntary, petitioner has fallen victim to a trap for the unwary. As the notice of determination was issued to petitioner on February 23, 2004, petitioner normally would have had 30 days -- until March 24, 2004 -- 60 to file a timely petition for lien or levy action with the Court. However, upon the filing of the bankruptcy petition on March 1, 2004, the automatic stay was invoked, and petitioner was barred from commencing a proceeding in this Court. 4 Further, the automatic stay remained in effect until March 31, 2004 -- 7 days after the 30-day statutory filing period under sections 6320(c) and 6330(d) expired. Thus, but for the provisions of section 11 U.S.C. section 362(a)(8) and the lack of a tolling provision analogous to section 6213(f), this Court would have jurisdiction over this case. 561 We emphasize and note that Congress did not include in sections 6320 and 6330 a tolling provision comparable to section 6213(f)332 that would extend the period for petitioner to file a petition for lien or levy action with the Court. Although the outcome in this case appears harsh, the gap in the collection review procedures that this case highlights is not one that can be closed by judicial fiat. A remedy, if any, must originate with Congress. In the end, we are obliged to grant respondent's motion to dismiss for lack of jurisdiction.To reflect the foregoing,An order of dismissal for lack of jurisdiction will be entered. Footnotes1. Unless otherwise indicated, section references are to sections of the Internal Revenue Code, as amended.↩2. At the time the petition was filed, petitioner resided in Austell, Ga. The envelope in which the petition was mailed was postmarked Mar. 24, 2004.↩3. Sec. 6320 is effective with respect to collection actions initiated more than 180 days after July 22, 1998 (Jan. 19, 1999). See Internal Revenue Service Restructuring and Reform Act of 1998,Pub. L. 105-206, sec. 3401(d), 112 Stat. 750">112 Stat. 750↩.4. Had petitioner first filed a petition with this Court and then filed a bankruptcy petition, the proceeding before this Court would have been active and then stayed, thereby preserving petitioner's ability to contest respondent's determination.↩5. See, however, sec. 6330(d)↩, which provides in part: "If a court determines that the appeal was to an incorrect court, a person shall have 30 days after the court determination to file such appeal with the correct court". We do not decide herein whether our determination in this opinion that we lacked jurisdiction over the petition filed during the pendency of petitioner's bankruptcy case means that we are or are not the "incorrect" court for purposes of the above-quoted flush language. If we were the "incorrect" court, petitioner would have 30 days from the date decision is entered in this case to refile in the "correct" court. That issue, however, is not currently before the Court and was not briefed by the parties.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619615/	TRANS-COASTAL EQUIPMENT LEASING, LTD., ELMER C. PRATT, GENERAL PARTNER, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Trans-Coastal Equipment Leasing, Ltd. v. CommissionerDocket Nos. 22378-87; 22379-87; 22380-87; 22381-87; 22382-87; 22383-87; 4235-88; 4236-88United States Tax CourtT.C. Memo 1990-67; 1990 Tax Ct. Memo LEXIS 67; 58 T.C.M. (CCH) 1379; T.C.M. (RIA) 90067; February 13, 1990Elmer C. Pratt, for the petitioners. Robert P. Crowther and Kay Hill, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent mailed Notices of Final Partnership Administrative Adjustment ("FPAA") pursuant to section 6223 2 with respect to related partnerships in these consolidated cases as follows: PartnershipNature ofYears and Amount ofNameAdjustmentsAdjustments198319841985Trans-CoastalDisallowance of$ 1,584,621$ 1,035,298Equipment Leasing,Ordinary LossLtd.Disallowance of6,627,07831,705Claimed Cost ofInvestment TaxCredit PropertyDisallowance of125,00039,999Claimed Cost ofInvestment TaxCredit PropertyGold Exploration,Disallowance of3,180,00060,921$ 11,562Ltd. #17Ordinary LossGold Exploration,Disallowance of3,234,61069,45712,777Ltd. #18Ordinary Loss68 In these consolidated cases, the issue for decision is petitioners' entitlement to investment tax credits, depreciation deductions, and other deductions relating to the purported leasing of a dredge and the purported exploration and mining of gold. This case illustrates the important role of a tax matters partner in representing a TEFRA 3 partnership during an audit by respondent and in litigation in this Court. Elmer C. Pratt, the tax matters partner for each of the three partnerships involved herein, failed to present an organized case at trial and failed to file with this Court carefully researched and written legal briefs. Prior to trial, the Court, sua sponte, notified the various limited partners of the litigation, of pretrial problems associated with Mr. Pratt's status as the tax matters partner for the partnerships, and the Court indicated that any motions to designate a new tax matters partner would be entertained. The partners not settling their tax liabilities69 with respondent chose to rely on Mr. Pratt and to await our decision in these cases. For the reasons stated, our factual findings are made from a difficult record. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner Trans-Coastal Equipment Leasing, Ltd., is a Utah limited partnership formed in 1983 with the stated business purpose of leasing equipment to be used in the exploration of gold mining claims. Petitioners Gold Exploration, Ltd., No. 17 and Gold Exploration, Ltd., No. 18 are Utah limited partnerships formed in 1983 with the stated business purpose of exploring mining claims. The equipment leasing and exploration activities of the partnerships related to certain gold exploration claims pertaining to property located in the waters off the coast of Nome, Alaska. At the time the petitions in these consolidated cases were filed, the principal place of business of each of the limited partnerships was in Salt Lake City, Utah. The promoter and general partner of each of the three limited partnerships was and is Elmer70 C. Pratt. Mr. Pratt also was and is the designated tax matters partner for each of the limited partnerships. A partial understanding of the background of Elmer C. Pratt is appropriate. He grew up in rural areas of the Pacific Northwest. As a child working with his father, Mr. Pratt had some limited experience mining for gold. As a teenager, he worked in his family's ranching and logging businesses. Mr. Pratt's formal education, for the most part, ended in 1948 upon graduation from high school. He continued working in the logging business until 1965 when business difficulties forced him into bankruptcy. Seeking a new start, Mr. Pratt moved to Alaska in 1965 and began earning a living by preparing income tax returns, providing tax planning advice, and selling tax shelters. In 1983, Mr. Pratt and Jim Lawler, for whom Mr. Pratt had prepared tax returns, discussed the prospect of organizing a gold exploration project relating to 28 exploration or mining claims Mr. Lawler had subleased from a Canadian company and to exploration or mining permits Mr. Lawler had obtained from the State of Alaska with respect to the waters off of Nome, Alaska. During the years in issue, Mr. Lawler71 also was an on-site oil field manager for Arco Alaska, Inc.In June of 1983, Mr. Pratt, with the assistance of an attorney named Richard C. Landerman, began to promote, and he subsequently became the sole general partner of, various limited partnerships formed as tax shelter investments with the stated purpose of engaging in equipment leasing and offshore gold exploration and mining activities that were to use Mr. Lawler's exploration or mining claims and permits. Three of the limited partnerships were known as Trans-Coastal Equipment Leasing, Ltd. ("Trans-Coastal"), Gold Exploration, Ltd., No. 17 ("Gold Exploration 17"), and Gold Exploration, Ltd., No. 18 ("Gold Exploration 18"), petitioners in these consolidated cases. Trans-CoastalThe stated purpose of Trans-Coastal was to acquire and lease mining equipment. Thirty-five limited partnership units in Trans-Coastal were to be sold. Each unit represented a cash investment of $ 60,000, reflecting total anticipated invested capital in Trans-Coastal of $ 2,100,000, if all partnership units were sold. Each limited partner also was to assume a pro rata share of partnership debt obligations. The record does not clearly72 indicate how many partnership units in Trans-Coastal actually were sold. The private placement memorandum relating to Trans-Coastal does not include economic projections or any other financial information projecting cash flow or profits of Trans-Coastal. The most that is said in the private placement memorandum in that regard is the following, "The General Partner intends to seek a reasonable current return on invested funds * ." The private placement memorandum relating to Trans-Coastal emphasized tax aspects of the proposed investments. Gold Exploration 17 and 18Gold Exploration, Ltd. ("Gold Exploration"), a Utah limited partnership, served as a master or model partnership for a series of partnerships, including Gold Exploration 17 and 18, each of which was to be formed for the purpose of investing in the exploration of one of the mining claims and permits held by Mr. Lawler. Apparently, 35 limited partnership units were to be sold with respect to each partnership. Each partnership unit was to represent a cash investment of $ 15,000, reflecting an anticipated total cash investment in each partnership of $ 525,000. Each investor also was to assume personal liability73 for a pro rata share of partnership debt obligations. The record does not indicate how many limited partnership units in the various partnerships actually were sold. The private placement memorandum of Gold Exploration contained what were described as "hypothetical" projections of cash flow, revenues, and profits of each partnership to be formed. During 1983, when the partnerships were being formed and when partnership units were being sold, no feasibility or market studies were prepared with respect to the gold exploration or mining activities of Gold Exploration, nor of Gold Exploration 17 or 18. The private placement memorandum relating to Gold Exploration also emphasized tax aspects of the proposed investments. In managing the partnerships, Mr. Pratt intermingled the funds of Gold Exploration, Gold Exploration 17, and Gold Exploration 18. For example, Mr. Pratt made payments on behalf of Gold Exploration 17 and 18 with checks drawn on a bank account held in the name of Gold Exploration. Acquisition of a DredgeIn June and July of 1983, Mr. Pratt, Mr. Lawler, and an individual named Max Mott negotiated for the purchase of a dredge with Ike Arnn of Arnco, Inc. 74 ("Arnco"), a company doing business in Arizona and Nevada. Mr. Mott is a geologist in Alaska whose consulting services apparently were sought by Mr. Pratt and Mr. Lawler with regard to the contemplated offshore exploration and mining activities. With regard to the negotiations with Arnco, Mr. Pratt claims that he acted on behalf of an entity known as Bonneville Equipment Corp. ("Bonneville"), a Nevada corporation, and that Mr. Lawler and Mr. Mott acted on behalf of themselves. On July 4, 1983, Mr. Pratt, on behalf of Bonneville, allegedly reached an agreement with Arnco under which Arnco was to sell the dredge to Bonneville. The alleged purchase price of the dredge is the subject of litigation in another court. For purposes of this case, however, Bonneville apparently was to pay Arnco either $ 1 million in cash or $ 600,000 in cash along with a partnership interest in Trans-Coastal with a stated value of $ 600,000. Bonneville was to purchase the dredge for immediate resale to Trans-Coastal. Mr. Lawler paid several thousand dollars to Arnco as a deposit on Bonneville's purported purchase of the dredge. At the time of the negotiations, Mr. Mott appraised the value of the dredge75 at $ 900,000. In October and November of 1983, Mr. Pratt signed various checks in the total amount of $ 552,000, drawn on a Trans-Coastal bank account and all made payable to Bonneville. The word "Equipment" was reflected on the memo line of each check. These funds apparently were used by Bonneville to pay Arnco a portion of the alleged purchase price for the dredge. Delivery and Testing of the DredgeAccording to Mr. Pratt, Arnco, as part of the alleged purchase agreement with Bonneville, was to transport the dredge to a site in southern Utah for testing. The dredge, however, was transported in late 1983 to the Yuba River in California. Bonneville never took possession of the dredge. Mr. Pratt considered Trans-Coastal the owner of the dredge at the time the dredge was delivered in California. The record contains no evidence that insurance was obtained on the dredge by or for the benefit of Bonneville or Trans-Coastal. Apparently on its delivery in California, there was no place to store the dredge. The United States Forest Service eventually granted Mr. Pratt a temporary permit to store the dredge at a designated place on the Yuba River. Also, according to Mr. 76 Pratt, the person or entity that transported the dredge to California allegedly hijacked the dredge and held it for ransom. Mr. Pratt claims he paid the ransom in February of 1984 and recovered the dredge. During February and March of 1984, the dredge was tested. By April of 1984, Bonneville had paid Arnco a total of approximately $ 600,000 toward the alleged purchase price of the dredge. Arnco then sued Mr. Pratt and Bonneville for the balance due on the dredge plus damages. The outcome of that lawsuit is not disclosed in the record. Purported Sale of Dredge to Trans-CoastalOn December 14, 1983, Bonneville allegedly sold the dredge to Trans-Coastal for a stated purchase price of $ 6,225,000. Initially, Trans-Coastal made a $ 600,000 cash downpayment on the purchase of the dredge and financed the balance purportedly owed Bonneville with a promissory note. At the time Trans-Coastal allegedly purchased the dredge, Mr. Pratt was aware of the stated terms of the alleged sale transaction between Arnco and Bonneville, and he also knew that Mr. Mott had appraised the value of the dredge at $ 900,000. The difference of approximately $ 5 million between the amount Bonneville77 allegedly agreed to pay for the dredge and the amount Trans-Coastal allegedly agreed to pay for the dredge represented, according to Mr. Pratt, the value to Trans-Coastal of Bonneville's alleged obligations to transport the dredge to Alaska and to assist Trans-Coastal in the operation of the dredge. No written contract or agreement was executed reflecting the terms of the purported purchase of the dredge by Trans-Coastal from Bonneville. There is in the record a bill of sale reflecting the purported sale of the dredge to Trans-Coastal for $ 6,225,000 and a promissory note executed by Trans-Coastal reflecting Trans-Coastal's purported debt obligation of $ 5,625,000 relating to the alleged purchase. Under the terms of the note, interest is to accrue on the outstanding balance of the note at 10 percent per year, and payment of the principal and interest are due no later than July 31, 1995. Apparently, Trans-Coastal made a $ 600,000 payment on the note sometime in 1984 and a $ 20,000 payment on the note in 1988. No other payments have been made. In August of 1984, a shipping company hired by Mr. Pratt transported the dredge from California to Alaska at a cost to Mr. Pratt of approximately78 $ 50,000. Bonneville apparently did not honor its alleged obligation to transport the dredge to Alaska and to assist in its operation, nor did Trans-Coastal take any legal action against Bonneville. Use of the DredgeIn Alaska, the dredge was leased to a company by the name of Coastal Exploration, Inc. ("Coastal Exploration"), a company apparently owned by Mr. Lawler. The 28 subleases and exploration permits owned by Mr. Lawler authorized him or his company to explore the commercial mining potential of the claims but apparently did not technically permit him or his company to commercially mine the claims. It appears, however, that under the mining or exploration claims and permits, Mr. Lawler and Coastal Exploration were entitled to retain any gold recovered in the process of dredging the ocean floor in the course of its exploration activities. The sale of gold recovered in such manner apparently was to be the source of income allegedly anticipated by Coastal Exploration, Trans-Coastal, Gold Exploration 17 and 18, and the other partnerships. Prior to agreeing to lease the dredge to Coastal Exploration, Mr. Pratt did not obtain any credible appraisals or other opinions79 concerning the value of the exploration permits held by Mr. Lawler, and Mr. Pratt did not determine Mr. Lawler's credit-worthiness. After the dredge was leased to Coastal Exploration, the dredge was used briefly during 1984 in connection with the above-described exploration activities. After a month or two of dredging operations, a barge collided with the dredge and damaged it. The dredge was repaired, but it was not used again until May of 1987. Petitioners presented no credible evidence that any gold was recovered through use of the dredge. Mr. Lawler and Coastal Exploration were to make lease payments to Trans-Coastal for the use of the dredge based on the amount of gold recovered through the dredging operation. No lease payments actually were made by Mr. Lawler or Coastal Exploration to Trans-Coastal. In May of 1987, Mr. Lawler arranged to sublease the dredge to a third party. Under the terms of the sublease, the third party paid Mr. Lawler a substantial deposit and monthly payments were due in the amount of $ 10,000. The monthly payments that were due were not contingent on whether gold or other mineral actually was mined. Of the payments Mr. Lawler received on this80 sublease, $ 20,000 was forwarded at Mr. Pratt's direction to Bonneville with respect to Trans-Coastal's note to Bonneville. Miscellaneous Equipment Acquired by Trans-CoastalTrans-Coastal acquired in 1983 a car, a motor home, a pickup truck, mining equipment, and a storage container. During the years in issue, Mr. Pratt used the car and the motor home for personal use. The record contains no evidence that Mr. Pratt paid any consideration to Trans-Coastal for his personal use of the car and the motor home. The cost of this equipment has not been substantiated. Alaska Geological Research Corp.Alaska Geological Research Corp., Inc. ("AGR") was incorporated as an Alaskan corporation on January 10, 1984. The record is not clear as to the ownership or corporate officers of AGR, but Mr. Pratt controlled and managed all aspects of AGR's business. The purpose of AGR apparently was to manage the investment activities and funds in Alaska of Gold Exploration, Gold Exploration 17, Gold Exploration 18, and of the other partnerships to be formed. However, no written agreement existed reflecting AGR's responsibilities or duties vis-a-vis the other entities. Through81 AGR, funds invested by the limited partners in Gold Exploration 17 and 18 were provided to Mr. Lawler and Coastal Exploration to provide operating funds for Mr. Lawler's dredging activities. Gold Exploration 17 and 18 were to receive a percentage of the gold recovered by Coastal Exploration on two of its claims in exchange for funding the dredging operation. On November 1, 1983, Mr. Pratt, as general partner of Gold Exploration and/or Gold Exploration 17 and 18, executed three promissory notes in favor of AGR in the respective amounts of $ 2,751,000, $ 2,751,000, and $ 390,000. The notes were due on July 1, 1995, at 10-percent interest per year. The record is not clear as to the purpose of these notes nor as to the consideration received in exchange for the notes. Various checks of Gold Exploration were given to AGR in November and December of 1983, purportedly to assist Coastal Exploration in its dredging activities. The source of the funds used to cover the checks is unclear. Funds were transferred through a number of bank accounts held in the names of the various partnerships and corporations controlled by Mr. Pratt in multiple and simultaneous bank transactions in an apparent82 attempt to create the appearance of bona fide payments of much larger sums of money. Trans-Coastal's Forms 1065 Federal Partnership ReturnsOn its Forms 1065 Federal partnership returns for 1983 and 1984, Trans-Coastal reported, under the accrual method of accounting, gross income, deductions for depreciation and other expenses, and net losses as follows: 19831984Gross Income$ 750 $ 366,443 Deductions:Depreciation962,185 556,225 Interest Expense94,604 834,712 Administrative Expense525,000 Office Expense15 19 Contracted Services1,900 Amortization1,667 Bank Charges34 Commissions Paid400 Insurance200 Organizational Costs10,000 Miscellaneous150 Net Losses($ 1,584,621)($ 1,035,297)Forms K-1 attached to Trans-Coastal's 1983 and 1984 Federal partnership returns reflected a claimed unadjusted basis with respect to new recovery property eligible for the investment tax credit of $ 6,627,078 for 1983 and $ 31,705 for 1984 and a claimed unadjusted basis with respect to used recovery property eligible for the83 investment tax credit of $ 125,000 for 1983 and $ 39,999 for 1984. Of the $ 366,443 in gross income reported by Trans-Coastal for 1984, $ 41,063 represented lease payments received and $ 306,880 represented accrued interest. The record contains no evidence that Trans-Coastal received such interest. During 1983 and 1984, Trans-Coastal earned no gross income with respect to the gold exploration or mining claims in Alaska. Gold Exploration 17's Forms 1065 Federal Partnership ReturnsOn its Forms 1065 Federal partnership returns for 1983, 1984, and 1985, Gold Exploration 17 reported, under the cash method of accounting, gross income, deductions for depreciation and other expenses, and net losses, as follows: 198319841985Gross Income$ 24,110 Deductions:Interest Expense13,000 Administrative Expense$ 30,000 66,881 $ 52 Business Entertainment10 Exploration Costs3,150,000 Commission Paid150 Organizational Costs5,000 5,000 Royalty6,500 Net Losses($ 3,180,000)($ 60,921)($ 11,562)The exploration expenses of $ 3,150,000 claimed for84 1983 related to the checks and the promissory notes Mr. Pratt made and executed as general partner of Gold Exploration in favor of AGR. During the years in issue, Gold Exploration 17 reported no gross income relating to the gold exploration and mining claims in Alaska. Gold Exploration 18's Forms 1065 Federal Partnership ReturnsOn its Forms 1065 Federal partnership returns for 1983, 1984, and 1985, Gold Exploration 18 reported, under the cash method of accounting, gross income, deductions for depreciation and other expenses, and net losses, as follows: 198319841985Gross Income$ 6,745 Deductions:Interest Expense$ 4,585 Administrative Expense80,000 70,672 $ 1,238 Office Expense15 80 Exploration Costs3,150,000 Bank Charges10 39 Commission Paid450 Organizational Costs5,000 5,000 Royalty6,500 Net Losses($ 3,234,610)($ 69,457)($ 12,777)The exploration expenses of $ 3,150,000 claimed for 1983 related to cash payments and the promissory notes Mr. Pratt executed as general partner of Gold Exploration in favor of AGR. Gold85 Exploration 18 reported no gross income relating to the gold exploration and mining claims in Alaska. On audit, respondent disallowed all deductions and investment tax credits claimed by Trans-Coastal, and by Gold Exploration 17 and 18. OPINION Trans-CoastalWith respect to investment tax credits, depreciation deductions, and other deductions claimed by Trans-Coastal, respondent argues that the purported purchase of the dredge by Trans-Coastal was not a bona fide, arm's-length transaction for Federal tax purposes. Respondent therefore argues that Trans-Coastal never acquired an interest in the dredge that would entitle investors in Trans-Coastal to any deductions or investment tax credits relating to ownership of the dredge. Respondent also argues that Trans-Coastal failed to meet its burden of substantiating expenses necessary to establish entitlement to the other deductions claimed. Respondent also argues that Trans-Coastal did not engage in leasing activities with an actual and honest profit objective under section 183. Petitioners argue summarily that the transaction was what it purported to be and that all deductions claimed are allowable. In determining whether86 Trans-Coastal's transaction with Bonneville constituted a valid purchase for Federal income tax purposes, we must decide whether the benefits and burdens of ownership of the dredge passed to Trans-Coastal. Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221, 1237 (1981). See also Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332, 348 (1985). This question is factual in nature and must be ascertained from the intention of the parties as evidenced by the relevant documents read in light of the relevant facts and circumstances. Haggard v. Commissioner, 24 T.C. 1124">24 T.C. 1124, 1129 (1955), affd. 241 F.2d 288">241 F.2d 288 (9th Cir. 1956); Falsetti v. Commissioner, 85 T.C. at 348; Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. at 1237. In Grodt v. McKay Realty, Inc. v. Commissioner, 77 T.C. at 1237-1238, we enumerated several factors to analyze in determining whether a transaction constituted a sale or purchase for Federal income tax purposes, as follows: (1) Whether legal title passed; (2) how the87 parties treated the transaction; (3) whether an equity was acquired in the property; (4) whether the transaction created a present obligation on the seller to execute and deliver the property and a present obligation on the purchaser to make payments; (5) whether the right of possession was vested in the purchaser; (6) which party paid property taxes; (7) which party bore risks of loss or damage associated with the property; and (8) which party received profits from the operation and sale of the property. See also Falsetti v. Commissioner, 85 T.C. at 348. Another factor relevant to the determination is the presence or absence of arm's-length dealing. Falsetti v. Commissioner, 85 T.C. at 348 citing Estate of Franklin v. Commissioner, 64 T.C. 752">64 T.C. 752 (1975), affd. 544 F.2d 1045">544 F.2d 1045 (9th Cir. 1976). Mr. Pratt, on behalf of Trans-Coastal, claims to have purchased the dredge for $ 6,225,000, even though Mr. Pratt knew the dredge was appraised at $ 900,000 and even though he knew of Bonneville's purported purchase of the dredge for $ 1.2 million. Mr. Pratt's explanation for the inflated purchase price (namely, that the $ 5.0588 million increase in Trans-Coastal's stated purchase price for the dredge over Bonneville's stated purchase price for the dredge reflected Bonneville's alleged obligations to transport the dredge to Alaska and to assist in its operation) is incredible. Bonneville never assisted Trans-Coastal in moving or operating the dredge, and Trans-Coastal took no actions to enforce Bonneville's purported obligations in that regard. One attribute of an arm's-length sale is a purchase price at least approximately equal to fair market value. The grossly inflated purchase price Trans-Coastal agreed to pay for the dredge weighs heavily against petitioners' contention that Trans-Coastal made a valid purchase of the dredge for Federal income tax purposes. Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. at 1240-1241. Trans-Coastal's proposed acquisition of the dredge with a grossly inflated tax basis was merely an attempt to enable the limited partners of Trans-Coastal to claim inflated depreciation deductions and investment tax credits. Because Mr. Pratt controlled both Bonneville and Trans-Coastal, it is likely that Trans-Coastal could abandon its substantial debt obligations89 to Bonneville relating to the purported purchase of the dredge without consequence. In order for Trans-Coastal to pay Bonneville for the dredge and to make a profit, Trans-Coastal needed to earn millions of dollars in lease revenues. No good faith effort was made to determine whether the gold exploration and mining claims and permits for which the dredge was to be used could realistically produce such revenues. The lease agreement between Trans-Coastal, Coastal Exploration, and Mr. Lawler was not an arm's-length agreement. Lease payments were contingent on the recovery of significant amounts of gold from the dredging operations. Mr. Lawler operated the dredge only for a short time. The evidence does not indicate that any gold was recovered. No lease payments were made to Trans-Coastal for the use of the dredge. The structure of the financing of the purported purchase of the dredge by Trans-Coastal was illusory and compliance with the terms of the unwritten purchase agreement was minimal. There was no substance to the purported transaction between Bonneville and Trans-Coastal apart from the desired tax benefits. Mr. Pratt, the promoter and general partner of Trans-Coastal, 90 had virtually no knowledge or experience with respect to equipment leasing. Notably absent from the private placement memorandum relating to Trans-Coastal was a discussion of profits investors could expect to earn from investments in Trans-Coastal. We conclude that Trans-Coastal's purported purchase of the dredge cannot be recognized as a purchase for Federal income tax purposes. The transaction was a sham in substance, and the tax benefits claimed with respect thereto are disallowed. Falsetti v. Commissioner, 85 T.C. at 346-355; Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. at 1236-1246. See also Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184 (1983), affd. in part 752 F.2d 89">752 F.2d 89 (4th Cir. 1985). Petitioners also failed to meet their burden of substantiating all other expenses claimed with respect to Trans-Coastal for the years in issue. Rule 142(a). See also sec. 1.6001-1(a), Income Tax Regs. Respondent's adjustments with respect to Trans-Coastal are sustained in their entirety. Gold Exploration 17 and 18With respect to the investment tax credits, depreciation91 deductions, and other deductions claimed by Gold Exploration 17 and 18, respondent argues that the partnerships engaged in sham transactions not recognizable for Federal income tax purposes. Respondent also argues that the partnerships failed to meet their burden of substantiating the claimed expenses. Respondent also argues that the partnerships did not engage in activities with an actual an honest profit objective under section 183. For Federal income tax purposes, transactions will be regarded as shams and will be disregarded where they are entered into for the sole purpose of obtaining tax benefits and where the transactions are devoid of economic substance because no reasonable opportunity for economic profit exists apart from tax benefits. Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 209-210. An examination into the business purpose and economic substance of transactions is factual in nature. Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 203. Taxpayers have the burden of proving that they entered into the transactions at issue92 with a business purpose other than obtaining tax benefits and that the transactions had economic substance apart from tax benefits. Rule 142(a); Larsen v. Commissioner, 89 T.C. 1229">89 T.C. 1229, 1253 (1987). In analyzing transactions for Federal income tax purposes, the substance of the transactions controls, not their form. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 469 (1935). The business purpose inquiry concerns taxpayers' subjective motives for entering into the transactions. Rice's Toyota World, Inc. v. Commissioner, 81 T.C. at 203. The economic substance inquiry involves an analysis of objective factors that bear upon whether the transactions had a reasonable opportunity of producing a profit apart from tax benefits. Rice's Toyota World, Inc. v. Commissioner, 752 F.2d at 94; Levy v. Commissioner, 91 T.C. 838">91 T.C. 838, 854 (1988). We conclude that Gold Exploration 17 and 18 entered into the transactions in question with no valid business purpose apart from obtaining tax benefits. Our conclusion is based primarily on the following findings: (1) Mr. Pratt, the general partner, had virtually no gold mining experience, 93 and he failed to research seriously the practical and financial viability of dredging for gold; (2) the transactions were not entered into at arm's length; (3) the private placement memoranda for the partnerships heavily emphasized tax benefits of the investments; (4) the claims and permits held by Mr. Lawler and on which, among other things, the profits of the partnerships were dependent, entitled Mr. Lawler and Coastal Exploration only to explore but not to commercially mine for gold; (5) the prospect of any significant quantities of gold being recovered from exploration of the claims held by Mr. Lawler was highly speculative; and (6) the non-businesslike manner by which the activities of the partnerships were conducted. We also conclude that the transactions between Gold Exploration 17 and 18 and AGR were devoid of economic substance. In order for Gold Exploration 17 and 18 to earn a profit, substantial returns were required on these purported investments. Such returns were purely speculative and did not reflect true economic transactions that we can recognize for Federal income tax purposes. In fact, Gold Exploration 17 and 18 earned no gross income from the exploration of94 the gold claims in Alaska. The transactions Gold Exploration 17 and 18 entered into with AGR, and with Mr. Lawler and Coastal Exploration constituted sham transactions that cannot be recognized for Federal income tax purposes. Because of the terms of the purported partnership notes, the unlikelihood of repayment of the notes, the lack of arm's-length dealing between the parties to the notes, the lack of a written agreement between AGR, Mr. Lawler, and Coastal Exploration, and the lack of collateral for the notes, we conclude that the notes of Gold Exploration 17 and 18 at issue in this case are to be disregarded for Federal income tax purposes. The notes do not represent genuine debt obligations. Horn v. Commissioner, 90 T.C. 908">90 T.C. 908, 938-940 (1988). The checks of Gold Exploration also are to be disregarded because they do not represent actual payment of funds, but only the movement of money or checking account entries among entities controlled by Mr. Pratt. Petitioners failed to meet their burden of substantiating all other expenses claimed with respect to Gold Exploration 17 and 18 for the years in issue. Respondent's adjustments with respect to Gold Exploration95 17 and 18 are sustained in their entirety. Rule 142(a). See also sec. 1.6001-1(a), Income Tax Regs.Decisions will be entered for the respondent. Footnotes1. Cases of the following petitioners are consolidated herein: Trans-Coastal Equipment Leasing, Ltd., docket Nos. 22378-87 and 22380-87; Gold Exploration, Ltd. #17, docket Nos. 22381-87, 22382-87, and 4235-88; Gold Exploration, Ltd. #18, docket Nos. 22379-87, 22383-87, and 4236-88.↩2. 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.↩3. "TEFRA" is the acronym for the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 648.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/3264762/	Gail H. Stone, Executive Secretary Arkansas State Police Retirement System One Union National Plaza 124 West Capitol, Suite 400 Little Rock, Arkansas 72201 Dear Ms. Stone: This is in response to your request for my opinion concerning A.C.A. § 24-6-304, which addresses benefits under the Arkansas State Police Officers Deferred Option Plan. I will refer to this plan as the "State Police DROP."1 Your question pertains specifically to subsection 24-6-304(b), which states as follows with respect to interest earned on the accounts of State Police DROP participants: (1) A member who participates in the plan shall earn interest at a rate set by the Board of Trustees of the State Police Retirement System that shall not be greater than the actuarially assumed investment rate of return for that time. Page 2 (2) The interest shall be credited to the individual account balance of the member on an annual basis.2 As you note, this subsection was enacted under Act 404 of 2007.3 Prior to the adoption of Act 404, legislation enacted in 2005 amended the interest formula under subsection 24-6-304(b) to provide that for the first five years of their participation, all members will earn interest at a rate two percentage points below the rate of return of the System's portfolio or the actuarially assumed interest rate, whichever is higher; and that for the final two years of their participation, all members will earn interest at the actuarially assumed interest rate.4 Act 404 of 2007 thus authorized the Board to set a lower rate of return than the rate specified in the former A.C.A. § 24-6-304(b). This has prompted your question, which I have paraphrased as follows: Are those members who entered the State Police DROP prior to the effective date of Act 1969 of 2005 entitled to receive the higher rate of return over the life of their participation despite the changes made in the law by Act 404 of 2007? Page 3 RESPONSE A definitive answer to this question can only be provided by a court. In my opinion, a court faced with the issue might conclude that the interest rate changes made by Act 404 of 2007 cannot be constitutionally applied to those DROP participants who entered the Plan before Act 404's effective date. But a definitive answer is impossible in the absence of a case squarely on point. Your question raises a difficult constitutional issue involving the prohibition against the impairment of contracts.5 As I and several of my predecessors have previously explained, the Arkansas Supreme Court has held that legislation violates the so-called "impairment of contract" prohibition if it operates retroactively so as to divest previously existing contractual rights, and specifically rights arising under a public retirement plan.E.g., Op. Att'y Gen. Nos. 2008-057, 2006-138 and 97-435 (citingPyle v. Webb, 253 Ark. 940, 489 S.W.2d 796 (1973) andJones v. Cheney, 253 Ark. 926, 489 S.W.2d 785 (1973)). Seealso Op. Att'y Gen. Nos. 2009-049 and 2008-052. In Attorney General Opinion 2006-138, my predecessor opined generally that a change in the prescribed benefits after a member enrolls in the Teacher Deferred Retirement Option Plan ("T-DROP") would be constitutionally suspect.6 My predecessor so opined based on the above constitutional principle prohibiting the impairment of contracts, and Arkansas case law concerning rights arising under public retirement plans. I have similarly opined that the elimination of DROP for members of the Arkansas Public Employees Retirement System who meet the requirements to participate in the plan would probably be constitutionally suspect. Op. Att'y Gen. 2008-057. I will not repeat the analysis in these opinions. The analysis has been restated and elaborated upon in other opinions issued by my administration. E.g., Op. Att'y Gen. Nos. 2009-102 and 2008-052. I believe a similar analysis applies with respect to changes in the State Police DROP. The issue is two-fold: whether there are valid protectable contractual obligations in place, and whether the enactment ofAct 404 of 2007 impairs any such rights to an unconstitutional extent.Id. Page 4 The Arkansas Supreme Court has not addressed the impairment of contract proscription in the context of a retirement plan such as the State Police Retirement System or the State Police DROP. It is thus impossible to predict how our court would approach the issue.Compare Op. Att'y Gen. 2008-052 (regarding service credit under the Arkansas Public Employees Retirement System). Assuming the existence of a contract between the participants in the State Police DROP and the State so as to implicate the contracts clause, the constitutional inquiry then turns to whether the enactment ofAct 404 of 2007 impairs the contract to any unconstitutional extent. This will require identifying the terms of the retirement benefit contract, sometimes referred to as the "prescribed benefits."See Op. Att'y Gen. 2008-052 at 7; Op. Att'y Gen. 2009-049 at 4. If a contract exists, and if the interest formula specified byAct 1969 of 2005 is included among the contract's terms, then in my opinion a court faced with the question might conclude that the interest rate changes made by Act 404 of 2007 cannot be constitutionally applied to those State Police DROP participants who entered the plan before Act 404's effective date. However, I am unable to opine definitively whether either of these contingencies is met in this case. As noted above, the court's approach to the contract issue remains an open question. Additionally, while this office has previously expressed concerns regarding the constitutionality of changes in benefits for those qualified to participate in state-supported deferred retirement option plans, guidance is lacking on what precise changes might trigger this concern. On the one hand, it would seem reasonable to surmise that the crediting of annual interest on individual DROP accounts is part of the prescribed benefits. On the other hand, the statute does not prescribe a set interest rate. This may undermine the argument that the State Police DROP participants were assured of earning a particular rate of interest on their account balances. Compare Op. Att'y Gen. 2009-102 (regarding a proposed reduction in pension benefits that had been increased for members of a local pension and relief fund, where the applicable statute plainly provided for the increased benefits). This may in turn lend support for the view that the interest rate formula is subject to subsequent modification, even as to those who may have protected contractual rights in the DROP. The uncertain resolution of these issues makes it impossible to determine whether those members who entered the State Police DROP prior to the effective date of Act 1969 of 2005 are entitled to receive the higher rate of return despite the Page 5 changes effected by Act 404 of 2007. Resort to the courts will likely be necessary to definitively resolve the matter. Deputy Attorney General Elisabeth A. Walker prepared the foregoing opinion, which I hereby approve. Sincerely, DUSTIN McDANIEL Attorney General 1 To be eligible to participate in the State Police DROP under A.C.A. § 24-6-301 et seq. (Repl. 2000 and Supp. 2009), a member must have at least thirty years of credited service in the State Police Retirement System. Id. at-301 (Supp. 2009). Those meeting the requisite conditions may elect to participate and defer the receipt of retirement benefits in lieu of terminating employment and accepting a service retirement pension. Id. The monthly retirement benefits that would have been payable if the officer had chosen regular retirement will be paid into the State Police DROP account. Id. at-303 (Repl. 2000). The participant will have the option of receiving a lump-sum payment equal to the payments to the State Police Drop account, a true annuity, or any other method of payment approved by the System's Board of Trustees.Id. at-305 (Rep. 2000). 2 A.C.A. § 24-6-304(b) (Supp. 2009). 3 Acts 2007, No. 404, § 3. 4 Acts 2005, No. 1969, § 2. As amended by the 1969 act, Subsection 24-6-304(b) provided in full: (b)(1) Except as provided in subdivision (b)(2) of this section, a member who participates in this plan shall earn interest at a rate of two (2) percentage points below the rate of return of the investment portfolio of the State Police Retirement System, but no less than the actuarially assumed interest rate as certified by the actuary. (2) Any member participating in the Arkansas State Police Deferred Option Plan for any period of time beyond his or her fifth complete year shall earn interest equal to the actuarially assumed interest rate for that time. Section 1 of Act 1969 amended another Code section, A.C.A. § 24-6-306, to extend the State Police DROP participation period from 5 to 7 years. Another act was passed during the 2005 legislative session to amend the interest rate formula under A.C.A. § 24-6-304(b).See Acts 2005, No. 1024. However, the Arkansas Code Revision Commission determined that this latter act was superseded by Act 1969; and this office has agreed with that determination.See Op. Att'y Gen. 2006-012 (opining that Acts 1024 and 1969 of 2005 are irreconcilable and that Act 1969 controls because it was enacted later in time). 5 Ark. Const. art. 2, § 17 and U.S. Const. art. 1, § 10. 6 T-DROP is codified at A.C.A. §§ 24-7-1301 — 1316 (Repl. 2000 and Supp. 2009). *Page 1	01-04-2023	07-05-2016
https://www.courtlistener.com/api/rest/v3/opinions/4619616/	ESTATE OF SHIRLEY JOY THODA, DECEASED, WILLIAM H. THODA, EXECUTOR, and CONNIE MACK GURLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Thoda v. CommissionerDocket Nos. 1529-77, 4536-77.United States Tax CourtT.C. Memo 1979-219; 1979 Tax Ct. Memo LEXIS 307; 38 T.C.M. (CCH) 880; T.C.M. (RIA) 79219; May 30, 1979, Filed 307 1. Held: Payments made by Gurley to Mrs. Thoda referred to in settlement agreement as installment payments of a specific sum of alimony in solido were in the nature of a property settlement rather than alimony and were not taxable to Mrs. Thoda under sec. 71, I.R.C. 1954, nor deductible by Gurley under sec. 215, I.R.C. 1954. 2. Amount of Gurley's charitable contributions determined. G. Patrick Arnoult,William H. Lawson, Jr.,Clayton D. Smith, and J. Richard Rossie, for petitioners. Wesley J. Lynes, for respondent. DRENNEN308 MEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: In these consolidated cases the respondent determined the following deficiencies in the 1973 income tax of petitioners: Docket No.PetitionerDeficiency1529-77Estate of Shirley Joy Thoda,Deceased, William H. Thoda,Executor$1,153.754536-77Connie Mack Gurley2,935.22Petitioner estate was substituted as a party in docket No. 1529-77 for the original petitioner, Shirley Joy Thoda (hereinafter Mrs. Thoda), who died after the filing of the petition but prior to trial. 1 After concessions309 by both petitioners 2 two issues remain for decision: (1) Whether $2,700 in payments made by petitioner Gurley (hereinafter Gurley) to Mrs. Thoda under the terms of a divorce decree are includable in Mrs. Thoda's gross income pursuant to section 71(a), I.R.C. 1954, 3 and deductible from Gurley's gross income pursuant to section 215(a); and (2) whether Gurley is entitled to a charitable contribution deduction pursuant to section 170 in excess of $52, the amount allowed by respondent. 310 As to the first issue, the respondent is in the position of a stakeholder, having taken inconsistent positions in the notices of deficiency in order to insure the consistent treatment of the payments by Gurley to Mrs. Thoda. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts, the supplemental stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference. Mrs. Thoda maintained her legal residence in Memphis, Tenn., when she filed the petition in docket No. 1529-77 and when she filed her 1973 Federal income tax return. She filed that return with the Director, Memphis Service Center, Memphis, Tenn. She also filed two amended income tax returns for the taxable year 1973. On her original 1973 income tax return, dated March 30, 1974, Mrs. Thoda included $2,700 of alimony in income. On her first amended return, dated April 13, 1974, she included an additional $450 of alimony in income. On her second amended return, dated April 10, 1975, she excluded from income the $3,150 previously reported as alimony on the ground that the amount represented a property settlement rather than alimony.311 4Gurley maintained his legal residence in Memphis, Tenn., when he filed the petition in docket No. 4536-77 and when he filed his 1973 Federal income tax return. He filed that return with the Director, Memphis Service Center, Memphis, Tenn. Gurley deducted $7,598.43 from his 1973 income tax return as "Alimony paid" to Mrs. Thoda. During trial Gurley conceded that all but $3,150 of this amount represented payments for property and, accordingly, was not deductible pursuant to section 215. Also deducted on Gurley's 1973 income tax return was an itemized charitable contribution of $720. In the deficiency determinations, respondent included in Mrs. Thoda's income $7,598.43 as alimony and disallowed the same amount as a deduction from Gurley's income. Due to concessions by petitioners, only $2,700 of this $7,958.43 amount is at issue. This $2,700 (6 monthly payments of $450312 each) was paid by Gurley to Mrs. Thoda in 1973 pursuant to the terms of the divorce decree. Respondent disallowed all but $52 of Gurley's charitable contribution deduction for lack of substantiation. AlimonyMrs. Thoda and Gurley were married to each other from August 5, 1962, until July 19, 1973, when they were divorced in the Circuit Court of Shelby County, Tenn. The decree of divorce entered by the Circuit Court of Shelby County, Tenn., on July 19, 1973, referred to, and substantially adopted the terms of, a "Property Settlement Agreement" (hereinafter agreement) into which Mrs. Thoda and Gurley had entered. The agreement was signed on the morning of July 19, 1973, shortly before the court proceedings. This agreement was the result of negotiations between Mrs. Thoda and Gurley individually, and through their respective attorneys. During the course of negotiations, Mrs. Thoda rejected two proposed property settlement agreements submitted by Gurley. The first, a handwritten draft prepared by, Gurley individually, provided for a property division and for biweekly payments of $75 to Mrs. Thoda until either party died or Mrs. Thoda remarried. The second proposal, 313 a draft prepared by Gurley's attorney in the divorce action, Kemper Durand, provided for a property division and for the payment of both pendente lite and permanent alimony. The alimony was to be paid in decreasing amounts, eventually decreasing from $450 per month to $100 every 2 weeks, and it was subject to termination upon the occurrence of certain contingencies. In June 1973, Mrs. Thoda's attorney in the divorce proceedings, Ike Clinton, prepared a proposed "Property Settlement Agreement" which was rejected by Gurley. This proposal provided for the payment of both pendente lite and permanent alimony in decreasing monthly amounts. This alimony was also subject to termination upon the occurrence of certain contingencies. Both the agreement and the divorce decree contained provisions for the payment of a specific sum as alimony in solido. With one minor exception not here important, the decree contains the same terms as the agreement. Accordingly, only the relevant provisions of the decree will be set forth. In pertinent part, the decree provided: 1. [Mrs. Thoda] * * is hereby awarded judgment in the sum of $21,600.00 as alimony in solido, payable in installments314 as follows: $2,000.00 cash to be paid into the Clerk of this Court on or before August 19, 1973; $450.00 per month to be paid * * [for 6 months]; $400.00 per month to be paid * * * [for 3 months]; $350.00 per month to be paid * * * [for 3 months]; $300.00 per month to be paid * * * [for 3 months]; $250.00 per month to be paid * * * [for 3 months]; $100.00 every other week to be paid * * * beginning on Friday, January 3, 1975 and a like amount on every other Friday thereafter until the entire judgment of $21,600.00 has been paid in full. In the event any installment is not paid when due, the entire amount then owing on said judgment shall become due and payable immediately, for which execution may issue as at law. 52. The said judgment in the amount of $21,600.00 shall constitute a lien against the real property known as and located at 1530 Dardon Avenue, Memphis, Shelby County, Tennessee, * * * * * 3. * * [Title to an automobile is hereby vested in Mrs. Thoda]. 4. * * * [Gurley shall move certain specified furniture and personal property to a place of Mrs. Thoda's choosing in Memphis]. [Mrs. Thoda] * * * and [Gurley] * * 315 will mutually agree upon an equitable and equal division of other items of property contained in the house * * . 5. [Mrs. Thoda] * * will execute a Quitclaim Deed conveying to [Gurley] * * * all of her right, title, and interest in and to the real property known as and located at 1530 Dardon, Memphis, Shelby County, Tennessee, * * . 6. [Gurley] * * will obtain and/or continue in full force and effect a policy of insurance in the smount [sic] of $10,000.00 upon his life in which [Mrs. Thoda] * * * is named as beneficiary and will not change the designated beneficiary of said policy until all of his obligations have been fulfilled under the judgment herein. The divorce decree was recorded by Ike Clinton so as to fix the lien on the residence to secure the payment of the $21,600. The residence was sold by Gurley in June 1976. In July 1976 the sum of $9,200 was paid to Mrs. 316 Thoda as final payment on the $21,600 amount and the lien on the residence was released. For the years 1962 through 1972, Gurley had gross income (before Federal income and FICA taxes) of $165,591 For the same period, Mrs. Thoda had gross income of $36,474. The residence Gurley and Mrs. Thoda owned at the time of their divorce was acquired by Gurley in 1961 prior to the marriage, and title was taken in his name alone. Title to the property was changed to reflect ownership by both Mrs. Thoda and Gurley, as tenants by the entirety, on April 14, 1969. The only consideration for the change of title was love and affection. Immediately preceding, and as a result of, the divorce decree, Mrs. Thoda and Gurley each received the following property: PropertyValueThodaGurleyResidence $33,000$21,920.00$21,920.00($11,080 mortgage)Savings account 62,790.43$ 2,790.43Credit Union account 7(less liabilities)(592.94)(592.94)Checking account 81,336.901,336.90Joint savings account4,697.004,697.00Various personal prop-erty7,534.003,809.003,725.00Household furnishings4,193.00650.003,543.00$41,878.39$11,946.43$29,931.96317 One factual question contested by the parties at trial was whether Mrs. Thoda, as part of the property division, received glass crystal which was worth approximately $10,000. We find, based on the evidence, that Mrs. Thoda did not receive crystal worth $10,000. 9Charitable contributionGurley regularly attended and contributed to the Holmes Road Church of Christ. He did not, however, keep any records of his contributions. OPINION AlimonyThe Federal tax law applicable in this case is clear. 318 Section 215(a) allows a husband to deduct amounts paid to the wife which amounts are includable under section 71 in the gross income of the wife. Section 71(a) includes in the wife's income periodic payments received in discharge of a legal obligation which, because of the marital or family relationship, is incurred by the husband. For purposes of section 71(a), section 71(c)(1) excludes installment payments in discharge of a principal sum of money specified in a decree from the term "periodic payments." Section 1.71-1(d)(3), Income Tax Regs., however, provides an exception to the rule contained in section 71(c)(1). Under that exception, the term "periodic payments" includes installment payment of a principal sum specified in a decree if (1) the payments are subject to termination upon the occurrence of one or more specified contingencies; and (2) the payments are in the nature of alimony. Contingencies imposed by local law are sufficient for purposes of the exception. Thus, the issues are whether the payments in question were (1) in discharge of a legal obligation which Gurley incurred because of the marital or family relationship; and (2) "periodic" because they were subject319 to contingencies under Tennessee law. Both issues must be answered in the affirmative in order for Gurley to be entitled to a deduction pursuant to section 215(a) and for Mrs. Thoda to be required to include the amounts in income pursuant to section 71. Payments which effect a property division or which satisfy property rights are neither includable in the wife's gross income under section 71(a) nor deductible by the husband under section 215 since the amounts paid are capital in nature. Thompson v. Commissioner,50 T.C. 522">50 T.C. 522 (1968). Whether the payments of the alimony insolido were in discharge of a legal obligation which Gurley incurred because of the marital or family relationship (i.e., alimony) or whether they were in consideration of Mrs. Thoda's property interest is a question of fact. 10Ryker v. Commissioner,33 T.C. 924">33 T.C. 924 (1960). 320 Petitioner estate argues that the following "facts" indicate that the payments were part of a division of property: (1) The absence of any contingency provisions in the agreement or the divorce decree concerning the payments; (2) the comparative value of the other property received by Mrs. Thoda and Gurley pursuant to the agreement and decree; and (3) the acceleration, lien, and life insurance provisions in the agreement and decree. The gist of Gurley's argument is that the $2,700 payment must have been alimony because Mrs. Thoda received property other than the payments which satisfied her property rights under Tennessee law. Respondent at trial and on brief argues in favor of Mrs. Thoda and against Gurley but does not concede that Mrs. Thoda properly excluded the $2,700 from income. Respondent bases his position on a reading of the agreement and divorce decree and the inclusion therein of "too many indicia of a division of jointly owned property, or property settlement, to be ignored." In resolving the factual question whether particular payments are in the nature of alimony or of a property settlement, courts have utilized myriad factors. A necessary factor is the intent321 of the parties. Wright v. Commissioner,62 T.C. 377">62 T.C. 377, 389 (1974), affd. 543 F. 2d 593 (7th Cir. 1976). Courts have also looked to: (1) Presence of fixed sum; (2) other division of property; (3) whether the payments are related to the husband's income; (4) continuation of payments regardless of contingencies; (5) negotiations preceding the divorce; and (6) similarity of payments before and after entry of the divorce decree. See Ryker v. Commissioner,supra;Bardwell v. Commissioner,38 T.C. 84">38 T.C. 84 (1962), affd. 318 F. 2d 786 (10th Cir. 1963); Wright v. Commissioner,supra.A weighing of all the factors in this case leads to the conclusion that the payments of alimony in solido were in the nature of a property settlement. The divorce decree provided for the payment of the $21,600 in installments "until the entire judgment of $21,600.00 [was] paid in full." The failure to pay any installment when due would result in the entire amount outstanding on the judgment becoming immediately due. The judgment was to constitute a lien on real property, and Gurley was to maintain life insurance which322 designated Mrs. Thoda as the beneficiary until his obligations under the divorce decree had been fulfilled. Additionally, no contingencies were provided in the agreement or the decree which would relieve Gurley of his obligation to pay the entire amount of the judgment. These factors are more indicative of a property settlement than of alimony. Equally as important is the parties' division of their other property. Of property with a total value of $41,878, Gurley received property worth $29,931 and Mrs. Thoda received property worth $11,946. Although it does not necessarily follow from the unequal division of the other property that the alimony in solido must have been part of a property settlement, 11 it is a factor which can be considered.Gurley argues that the unequal division is not indicative of a property settlement because Mrs. Thoda's property rights and interests under Tennessee law were satisfied by her receipt of property worth $11,946. 12 The premise of this argument is that these property rights are to be determined by reference to the parties' relative contributions and that Gurley's323 greater contribution, principally in the form of gross income, entitles him to a greater share of the marital property. Gurley's argument is not persuasive. While it is true that Tennessee courts have taken into account contributions in dividing jointly owned property, they have done so in a broad, equitable sense, and not based on a mathmatical formula as urged by Gurley. 13 With the exception of the equity value in the residence, the parties divided the property in a roughly equal manner, with Mrs. Thoda receiving more cash and Gurley receiving more of the household furnishings. The difference in the total value of the property received by Mrs. Thoda and Gurley can primarily be traced to the equity value in the residence. Mrs. Thoda had a vested interest in the residence as a tenant by the entirety. It is not reasonable to believe that Mrs. Thoda received nothing for this interest. 324 In determining that the alimony in solido payments were, in substance, a property settlement, little reliance can be placed upon the testimony introduced concerning the respective parties' intent concerning the agreement and the divorce decree. This testimony, while definite and unequivocal, must be tempered with the nonsubjective actions of the parties. Mrs. Thoda claimed 14 that the alimony in solido represented her half of the property acquired during her marriage and that she had insisted that she receive her due. Nevertheless, she initially reported these amounts as income and it was not until a year later that she amended her return to exclude the amounts from income. Gurley testified that he intended the alimony in solido to be for Mrs. Thoda's support and that he had no idea that the amounts he was required to pay were anything but deductible "alimony." Nevertheless, after proposing two agreements which clearly identified payments as "alimony" and which specifically provided for325 the termination of the payments upon the occurrence of certain contingencies, he signed an agreement which denominated the payments as alimony in solido and which omitted any reference to contingencies. Similarly, the testimony of the two attorneys, Clinton and Durand, must be balanced by the proposed property settlement agreements which each prepared and the forms in which the agreement and the decree were structured. Having resolved that the payments of alimony in solido were in the nature of a property settlement, it is not necessary to address the question of whether such payments were "periodic." Suffice it to say, however, that were an opposite conclusion reached concerning the nature of the payments, the determination that the payments were subject to contingencies pursuant to State law, and thus periodic, is uncertain at best. 15Charitable contributionGurley deducted $720 from income for contributions of $15 per week in eash to his church. 16 Respondent disallowed all but $52 of326 the deduction for lack of substantiation. Respondent's determinations are presumed to be correct, and Gurley has the burden of proving them wrong. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933). Gurley's only evidence in support of the amount of the deduction was his testimony and a statement by Durand that one factor in determining what Gurley could afford to pay to Mrs. Thoda pursuant to the divorce decree was that Gurley was paying $60 a month to the church. Finding that Gurley did contribute some amount, but not being convinced that the amount was $720, the rule enunciated in Cohan v. Commissioner,320 F. 2d 540 (2d Cir. 1930), will be applied. Using our best judgments and bearing down on Gurley whose burden it is to substantiate the deduction, we find that Gurley contributed $300. Accordingly, Gurley is entitled to a charitable contribution deduction of $248 in excess of the amount allowed by respondent. Decisions will be entered under Rule327 155.Footnotes1. Rule 63(a), Tax Court Rules of Practice and Procedure.↩2. In his petition, petitioner Gurley prayed that reasonable attorney's fees be awarded pursuant to P.L 94-559, 90 Stat. 2641, Oct. 19, 1976, which amended 42 U.S.C. sec. 1988. This Court has held that it does not have the authority to make an allowance of attorney's fees to a petitioner. Key Buick Co. v. Commissioner,68 T.C. 178">68 T.C. 178↩ (1977) (reviewed by the Court) (on appeal to 5th Cir.). Accordingly, respondent's motion for summary judgment on this issue was granted.3. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect in the taxable year in issue.↩4. Petitioner estate has conceded that the $450 originally included in income by Mrs. Thoda on her first amended return and excluded on her second amended return is properly includable in income since it was paid, pursuant to a consent order for temporary alimony, by Gurley for Mrs. Thoda's support.↩5. Gurley conceded at trial that the $2,000 initial payment was in partial satisfaction of Mrs. Thoda's property interest and, thus, not deductible as alimony. Payment of the alimony in solido↩ according to this schedule would have resulted in full payment in 6-1/2 years.6. This savings account was in the then sole name of "Shirley Joy Gurley." This account included an $1,815 retirement fund of Mrs. Thoda, part of which was earned prior to, and part of which was earned after, her marriage to Gurley. ↩7. The credit union account was in the sole name of Gurley. ↩8. This checking account was in the sole name of Gurley.↩9. Evidence was introduced that Mrs. Thoda had received cut glass worth approximately $200 rather than crystal worth $10,000. We find that she did receive cut glass worth approximately $200 and said amount was included in the value of "various personal property" found by the Court to have been received by her.↩10. In Wright v. Commissioner,T.C. Memo 1978-77">T.C. Memo. 1978-77, the Court held, based on the facts, that an award of alimony in solido pursuant to a Tennessee divorce decree was in the nature of alimony rather than part of a property settlement. The court specifically found that the parties had intended that the alimony in solido↩ (a 10-year leasehold estate in business real estate of the husband) be in lieu of alimony and that the wife had received other property in settlement of her property interests. Such facts are not present in the instant case.11. Brown v. Commissioner,16 T.C. 623">16 T.C. 623↩ (1951).12. On brief Gurley states this result is reached without regard to the question of the crystal since such crystal would have been Mrs. Thoda's property in any event.↩13. Tenn. Code Ann., sec. 36-825 (1955, as amended 1959); Kittrell v. Kittrell,56 Tenn. App. 584">56 Tenn. App. 584, 409 S.W. 2d 179 (1966); Langford v. Langford,220 Tenn. 600">220 Tenn. 600, 421 S.W. 2d 632 (1967); Edwards v. Edwards,501 S.W. 2d 283↩ (Tenn. 1973).14. Mrs. Thoda's deposition was taken pursuant to Rule 81, Tax Court Rules of Practice and Procedure↩, prior to her death. This deposition was received in evidence at trial.15. See Naron v. Naron,218 Tenn. 125">218 Tenn. 125, 401 S.W. 2d 766 (1966); Pendergrass v. Pendergrass,56 Tenn. App. 227">56 Tenn. App. 227, 405 S.W. 2d 666↩ (1966).16. Contributions of $15 per week for 52 weeks would equal $780. No explanation was offered as to how Gurley calculated the $720 figure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619618/	JOHN G. AND ELEANOR E. JONES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJones v. CommissionerDocket No. 26214-91United States Tax CourtT.C. Memo 1994-20; 1994 Tax Ct. Memo LEXIS 22; 67 T.C.M. (CCH) 1979; January 18, 1994, Filed 22 Decision will be entered under Rule 155. P purchased shares of stock, subject to a 5-year transfer prohibition, at a bargain price from his employer. Pursuant to an arrangement between the employer and a bank, P financed the acquisition with a loan secured by the shares purchased. R determined that P incurred income 5 years after the transaction on account of the lapse of the transfer prohibitions. Ps contend that the restrictions were waived when the stock was pledged as collateral to the bank. Held: The restrictions remained in effect until the 5-year prohibition lapsed. R's determination is sustained. For petitioners: Edward N. Lerner. For respondent: John Aletta. HALPERNHALPERNMEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Judge: By notice of deficiency dated August 12, 1991, respondent determined deficiencies against petitioners as follows: YearDeficiency1972$ 24,42619733,47719743,898Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Certain issues have been conceded. The only issue remaining for23 decision is the timing of income realized by petitioner John G. Jones on account of the lapse of restrictions affecting the value of certain shares of stock received by him pursuant to his participation in a stock purchase plan maintained by his employer, Chesebrough-Pond's, Inc. 1FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts filed by the parties and attached exhibits are incorporated herein by this reference. Petitioners are husband and wife, who, for the years in issue, made joint returns of income, computed on the basis of a calendar year. At the time the petition in this case was filed, petitioners resided in Darien, Connecticut. 24 Petitioner John G. Jones (petitioner) was employed by Chesebrough-Pond's, Inc. (the company), from 1962 through 1970. During 1967 and 1968, pursuant to a plan entitled Stock Purchasing Plan for Officers and Administrative Employees of Chesebrough-Pond's, Inc. (the plan), petitioner was entitled to purchase shares of common stock of the company at a price determined under a formula set forth in the plan. The plan provided that participating employees could not sell, pledge, or transfer any interest in the shares they received pursuant to the plan for 5 years after purchasing such shares. The plan also permitted a legend to be placed on such shares denoting that transfer prohibition. The company's board of directors or a special committee, however, was authorized by the plan to release purchasers from the transfer prohibition. The plan also contained a limited forfeiture provision granting the company an option to purchase a participating employee's shares in the event that his or her employment was severed for any reason other than death within 1 year of the date of the purchase of such shares. The purchase price to the company under the option was equivalent to the amount paid25 by the employee for the shares. In 1967 and 1968, pursuant to the plan, petitioner purchased shares of the company as follows: Table 1Fair Market Value (FMV) FMV Less PurchaseShares & Purchase Price At Time of Purchase Price of SharesNumberPerPerYearSharesShareTotalShareTotal19672,700$ 13.50$ 36,450$ 35.3125$ 95,343.75$ 58,893.7519682,40015.4337,03241.375099,300.0062,268.00To purchase those shares, petitioners entered into purchase agreements (the agreements) with the company that contained the following restriction: I will continue in the ownership of shares issued pursuant to this agreement and will not sell, pledge or transfer any interest in the same for a period of five (5) years after the date of your [the company's] acceptance hereof.Like the plan, the agreements contained limited forfeiture provisions. Additionally, the agreements required that the shares bear a legend restricting transferability for 5 years. In the event of a conflict between the provisions of the plan and those of the agreements, the terms of the agreements were to prevail. In accordance26 with an arrangement between the company and Chase Manhattan Bank (Chase), petitioner financed his 1967 and 1968 stock purchases by obtaining a loan from Chase. The shares purchased were pledged to Chase as collateral for the loan. Those shares could only be pledged for a value equal to the purchase price paid by petitioner. The type of arrangement entered into between petitioner and Chase had been approved by the company's board of directors. The pledged shares bore a legend restricting transferability. In 1972, petitioner sold all of the shares that he had purchased through the plan in 1967, and, in 1973, he sold such shares purchased in 1968. Shares of stock of the company purchased by petitioner pursuant to the plan in 1967 and 1968 were, when acquired, subject to restrictions that had a significant effect on their value. Such restrictions lapsed in 1972 with respect to the shares of stock purchased in 1967 and in 1973 with respect to the shares of stock purchased in 1968. OPINION In her notice of deficiency, respondent determined that petitioners had omitted from their 1972 and 1973 returns certain income realized by petitioner on account of the lapse, during those years, 27 of transfer restrictions encumbering shares of stock acquired by petitioner in 1967 and 1968. These shares had been acquired by petitioner pursuant to the plan of the company. Petitioners contend that no such income was realized by petitioner during 1972 and 1973, since the restrictions in question had lapsed in years prior thereto. The burden of proof is on petitioners. Rule 142(a). Generally, if property is transferred by an employer to an employee for an amount less than its fair market value, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is treated as compensation that must then be included in the employee's gross income. Sec. 1.61-2(d)(2), Income Tax Regs. If such property has restrictions significantly affecting its value, however, and, if the property was transferred before June 30, 1969, then section 1.421-6(d)(2), Income Tax Regs., applies to determine the timing and amount of such income inclusion. 2Id. Those regulations state in pertinent part: If * * * property is subject to a restriction which has a significant effect on its value, the employee realizes compensation at 28 the time such restriction lapses or at the time the property is sold or exchanged, in an arm's length transaction, whichever occurs earlier, and the amount of such compensation is the lesser of -- (a) The difference between the amount paid for the property and the fair market value of the property (determined without regard to the restriction) at the time of its acquisition, or (b) The difference between the amount paid for the property and either its fair market value at the time the restriction lapses or the consideration received upon the sale or exchange, whichever is applicable. * Sec. 1.421-6(d)(2)(i), Income Tax Regs.Pursuant to the plan, petitioner purchased shares of stock from the company at a bargain price in both 1967 and 1968. Both the plan and the agreements entered into by petitioner imposed29 a 5-year restriction on petitioner's ability to sell, pledge, or transfer the shares acquired. Moreover, a legend to that effect was printed directly on the stock certificates themselves. In respondent's view, those restrictions significantly affected the value of the shares acquired, with the result that no income was realized by petitioner in 1967 and 1968, but that income was realized by petitioner in 1972 and 1973, when the 5-year transfer prohibitions expired. See sec. 1.421-6(d)(2), Income Tax Regs.Petitioners have no quarrel with section 1.421-6(d)(2), Income Tax Regs. Moreover, they concede that, when first acquired, the shares here in question were subject to restrictions that had a significant effect on their value, within the meaning of that section of the regulations. They argue, simply, that any value-limiting transfer restrictions lapsed prior to 1972 and 1973, the only years here in issue, and, thus, respondent cannot prevail. Petitioners' logic is as follows: Petitioner pledged his shares to a bank (Chase) as collateral for the loans that financed the purchases of such shares. Such pledges violated the explicit terms set forth (1) in the plan, (2) in the agreements, 30 and (3) on the share certificates themselves. The pledges had been approved by the company's board of directors, as part of an optional financing arrangement the board had worked out with Chase. That logic leads petitioners to the conclusion that the directors' waivers of the transfer prohibitions, which allowed petitioner to pledge his shares as collateral, represented not a limited waiver but, rather, a general nullification of all transfer restrictions previously imposed with respect to the shares. Petitioners nevertheless concede that, from the time the shares were pledged, one value-limiting restriction remained in operation. That restriction was a limited forfeiture provision, granting the company an option to purchase a participating employee's shares if employment was severed for any reason other than death within 1 year of the stock purchase (the 1-year restriction). In the event that employment ceased within that 1 year, the company could repurchase the stock for the price initially paid by the employee. According to petitioners, the 1-year restriction alone, rather than the waived transfer prohibitions, accounts for the circumstance that the shares pledged to Chase31 were valued, for purposes of securing their obligations, based on the purchase prices paid by petitioner, rather than on the shares' fair market values. With regard to the shares acquired in 1967, petitioners reason that, upon the lapse of the 1-year restriction in 1968, no restrictions remained in force. They reason similarly with regard to the shares acquired in 1968. Thus, as stated, they contend that income should have been recognized to them in 1968 and 1969, rather than in the years currently before the Court. Petitioners' argument, however, is long on assertion and short on support. Petitioners ask us to infer a complete waiver of the transfer prohibitions from a discrete action taken by the company's board of directors in allowing petitioner to avail himself of the stock financing arrangement established with Chase. We are presented with no evidence, however, to support the contention that, because the directors allowed the pledging of stock as collateral to Chase in furtherance of a financing program, they effectively waived all transfer prohibitions (except the 1-year restriction) with respect to the stock. Petitioners do not argue, nor on these facts would we32 accept, that a partial waiver by the company, solely to allow a pledge to Chase for the purchase price of the stock, would cause a taxable event to petitioner, under the regulation, as soon as the 1-year restriction expired. Petitioners argue, as they must, that, following expiration of the 1-year restriction, no value-limiting restrictions remained. The record before us simply contains nothing to shed any light on the actual or intended scope of the company's waiver. At trial, petitioner explained that he was unable to locate the pledge agreements he entered into with Chase. Moreover, although petitioner testified that minutes of the company's board meetings and formal board resolutions existed on the subject of the transfer waiver with respect to Chase, no such minutes or resolutions have been produced. While we do not attribute the failure of such proof to bad faith on the part of petitioners, we are not persuaded by the available evidence that the transfer prohibitions were completely waived (following the 1-year restriction) on account of petitioner's authorized stock pledge to Chase. Indeed, petitioner testified that, had he defaulted in his obligation to Chase, 33 he did not believe that Chase would have been able to sell the pledged shares. He testified that he believed that the legended restrictions would apply to Chase. We are unconvinced that, in permitting a pledge of the shares in question, the company intended anything more than a limited waiver. Moreover, petitioners have not convinced us that, if the company's intent were so limited, local law would provide for a broader waiver. The evidence does not support the conclusion that, on account of the company's permitting a pledge of the shares in question, at the termination of the 1-year restriction affecting such shares, all restriction significantly affecting the value of the shares ended. We have found that shares of stock of the company purchased by petitioner pursuant to the plan in 1967 and 1968 were, when acquired, subject to restrictions that had a significant effect on their value and that such restrictions lapsed in 1972 with respect to the shares of stock purchased in 1967 and in 1973 with respect to the shares purchased in 1968. Accordingly, we sustain respondent's determination that petitioner incurred income upon the lapse of those restrictions in 1972 and *34 1973, respectively. Decision will be entered under Rule 155. Footnotes1. Respondent concedes that, if she prevails, an adjustment must be made to the basis of such shares. On account of that concession, gain realized by petitioner John G. Jones in 1972 and 1973 on the disposition of those shares would be reduced. There is no argument as to that consequence and, therefore, we will not further address it.↩2. Sec. 83, which also deals with transfers of property in connection with the performance of services, was added to the Code in 1969, and is inapplicable to transfers of property in 1967 and 1968.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619619/	JOANNA HARRINGTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHarrington v. CommissionerDocket No. 10490-92United States Tax CourtT.C. Memo 1994-258; 1994 Tax Ct. Memo LEXIS 262; 67 T.C.M. (CCH) 3060; June 7, 1994, Filed 262 For petitioner: John Gigounas. For respondent: Allan D. Hill. RAUMRAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined an income tax deficiency in the amount of $ 64,690.50 for the taxable year ended December 31, 1984, and additions to tax for that year under sections 6653(a) and 6661 in the amounts of $ 3,234.55 and $ 16,172.75, respectively. 1 The present controversy relates to the taxability of profit realized by petitioner upon a division of property between petitioner and her ex-husband at the time of their divorce. The facts have been stipulated. Petitioner resided in Atherton, California, when she filed her petition with this Court. On November 17, 1982, she filed for divorce against her husband, Walter J. Harrington, by submitting a Petition for Dissolution of Marriage with the Superior Court of the State of California, County of San Mateo. As of January 1, 1984, petitioner263 was still legally married to Mr. Harrington, but the marital dissolution proceeding was pending in the Superior Court. On June 12, 1984, an Interlocutory Judgment of Dissolution of Marriage between petitioner and Mr. Harrington was filed in the Superior Court. A property settlement agreement was incorporated in the interlocutory judgment and became part of the judgment. One day prior thereto, on June 11, 1984, petitioner and her husband, Mr. Harrington, distributed properties to each other in accordance with the terms of the property settlement agreement incorporated in the interlocutory judgment. Among the properties transferred by petitioner to Mr. Harrington were 50-percent community interests in each of 11 different partnership interests owned by petitioner and/or her husband. As of the date of the property distribution, the fair market value of petitioner's 50-percent community interests in the partnership interests was $ 1,450,105, and her allocable 50-percent share of the aggregate of tax basis in the partnership interests was $ 902,107. The value of property interests transferred by petitioner on that date to Mr. Harrington exceeded the value of property that she received264 from him by approximately $ 1,250,000. In order to equalize the terms of the settlement, the settlement agreement required Mr. Harrington to pay petitioner an additional $ 1,250,000 as follows: (a) $ 750,000.00 cash payable on June 1, 1984 * ; and (b) a 5 year promissory note for $ 500,000.00 * , payable to petitioner in annual installments of $ 100,000.00 with the first installment payable on February 21, 1985.Pursuant to the terms of the settlement agreement, Mr. Harrington, on June 11, 1984, paid petitioner $ 750,000 in cash from his separate property. The remaining installments totaling $ 500,000 are not at issue herein. On December 24, 1984, a Final Judgment of Dissolution of Marriage between petitioner and Mr. Harrington was filed in the Superior Court. Petitioner's 1984 return did not include in gross income any portion of the gain realized on the transfer of her 50-percent community interests in the 11 partnerships to Mr. Harrington, in accordance with the property settlement agreement. The Commissioner determined a deficiency in tax plus additions to tax under sections 6653(a) and 6661 against petitioner for 1984. The deficiency notice explained265 the proposed adjustments as follows: 1.a. You realized a long term capital gain of $ 323,459.00 from the transfer of your property to Walter Harrington in 1984. The gain is taxable income subject to the deduction provided by Section 1202 of the Internal Revenue Code. See computations below.Computation of gain realizedFMV of property transferred$ 1,450,105 Less: Adjusted basis( 902,107)Expense of Sale2 ( 8,900)GAIN REALIZED539,098 Gain Recognized - 1984Cash Received - 1984750,000Total Cash1,250,000Less: 1202 deduction (60%)(194,075)GAIN RECOGNIZED129,384 266 In view of the Commissioner's concessions in respect of various other matters (see supra note 2), the only issue remaining for decision is whether petitioner erroneously excluded the gain attributable to the transfer of her community property interests from her 1984 gross income. We hold that she did. Petitioner disputes the deficiency determination on two alternative grounds. First, she argues that the property settlement transfer qualifies for nonrecognition under section 1041. Second, petitioner contends that even if section 1041 does not apply, the property settlement nonetheless represents a nontaxable division of the community property rather than a sale of petitioner's community property interests to her ex-husband. We consider each of these arguments in turn. 1. Applicability of Section 1041Section 10413 was added to the Internal Revenue Code by section 421 of the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 793-795, which was enacted July 18, 1984. Section 1041(a) provides for nonrecognition of gain or loss on transfers of property between spouses or between former spouses "incident to the divorce", and, pursuant to section 1041(b), 267 the transferred property is required to be treated by the transferee as acquired by gift. The effective268 date of section 1041 is specified in section 421(d) of DEFRA, 98 Stat. 795, as follows: (d) EFFECTIVE DATES. -- (1) IN GENERAL. -- Except as otherwise provided in this subsection, the amendments made by this section shall apply to transfers after the date of the enactment of this Act in taxable years ending after such date. (2) ELECTION TO HAVE AMENDMENTS APPLY TO TRANSFERS AFTER 1983. -- If both spouses or former spouses make an election under this paragraph, the amendments made by this section shall apply to all transfers made by such spouses (or former spouses) after December 31, 1983. (3) EXCEPTION FOR TRANSFERS PURSUANT TO EXISTING DECREES. -- Except in the case of an election under paragraph (2), the amendments made by this section shall not apply to transfers under any instrument in effect on or before the date of the enactment of this Act unless both spouses (or former spouses) elect to have such amendments apply to transfers under such instrument. (4) ELECTION. -- Any election under paragraph (2) or (3) shall be made in such manner, at such time, and subject to such conditions, as the Secretary of the Treasury or his delegate may by regulations prescribe. 269 [Emphasis added.]To summarize, the general rule reflected in DEFRA section 421(d)(1) and (d)(3) is that section 1041 of the Code applies only to property transfers made after the date of enactment of DEFRA, which was July 18, 1984. Under the exceptions provided in DEFRA section 421(d)(2) and (d)(3), section 1041 does apply to certain pre-enactment transfers if both spouses (or former spouses) explicitly so elect. In petitioner's case, however, nothing in the record suggests that any such election was made. 4To determine whether section 1041 applies, one must therefore ascertain the date on which the properties at issue -- in this case, petitioner's community property interests -- were transferred for purposes of DEFRA section 421(d). And that in turn requires a determination of what is meant by the term "transfer" 270 in DEFRA section 421(d). Preliminarily, we note that when one speaks of a "transfer" of property, it is commonly understood as referring to a transaction by which such property changes hands or title. Regardless of the particular form of the transaction, e.g., sale, exchange, gift, distribution, etc., the term "transfer", at least in everyday parlance, connotes a physical delivery or divestment of legal title. We think that the term should be similarly interpreted for purposes of section 421(d) of DEFRA absent a sufficient reason to the contrary. Petitioner on brief fails to advance even a single persuasive reason for interpreting it differently. Moreover, there is precedent in this Court for interpreting the term "transfer" in the manner suggested above. In Godlewski v. Commissioner, 90 T.C. 200">90 T.C. 200 (1988), the taxpayer's wife, on July 20, 1984, executed a deed in her husband's name conveying title to their home in exchange for $ 18,000. The deed was recorded on September 20, 1984, and there was no evidence in the record as to the actual delivery date of the deed to petitioner. In that case, the Court stated: to determine whether section 1041271 applies to the facts presented here, we must decide whether the house was "transferred" after July 18, 1984, * * . The answer to * * [this] question is fairly straightforward. The house was titled in Mrs. Godlewski's name and she executed a warranty deed in favor of petitioner on July 20, 1984. Since Mrs. Godlewski executed the deed on July 20, 1984, the transfer necessarily occurred after July 18, 1984. [Id. at 204.]In the present case, the parties have stipulated that petitioner and her ex-husband divided their community property on June 11, 1984. In addition, they also stipulated that the community property was distributed in accord with the terms of the interlocutory decree and property settlement agreement that was filed the following day, June 12, 1984. It is therefore clear from the parties' stipulations that the community property at issue was "transferred", as the term was used in Godlewski, on June 11, 1984, 37 days prior to DEFRA's enactment on July 18, 1984, which was the effective date of section 1041. As already noted, section 1041 can apply to certain preenactment transfers, but only where both spouses (or former spouses) 272 explicitly so elect. And we reiterate that nothing in the record indicates that such an election was ever made. Petitioner suggests that section 1041 applies to the transfer at issue, because the property settlement agreement was part of an interim decree of divorce, which under California law did not become final until December 24, 1984, i.e., more than 5 months after the enactment date of DEFRA (the effective date of section 1041). Petitioner's brief states: Section 1041 became effective July 18, 1984, and * * [petitioner Joanne Harrington's] divorce became final on December 24, 1984. Therefore, the division of the community property was incident to a divorce making the transfer of property from Joanne [Harrington] to [her ex-husband] Walter non-taxable. [Pet. Opening Brief at p. 12]Petitioner is correct in noting that the final decree of divorce was entered after the effective date of section 1041. And if section 1041 were in fact applicable, the division of the Harringtons' community property would undoubtedly be considered "incident to a divorce" within the meaning of that provision. However, petitioner's argument is wholly irrelevant here. The pivotal issue273 here is how the effective date provisions in DEFRA section 421(d) affect the applicability of section 1041 to petitioner's transfer on June 11, 1984. The fact that the final decree of petitioner's divorce was entered after section 1041 went into effect proves nothing. In determining the applicability of section 1041, by reason of the effective date provisions, the critical fact is neither the date of the final divorce decree nor the date of the interim decree, but rather the date on which the properties were transferred, namely, June 11, 1984. And that occurred prior to July 18, 1984, the date on which section 1041 of the Code became effective. We hold that section 1041 is inapplicable here. 2. Whether the Transfer Was a Nontaxable Division of Property or a Taxable Sale Under Section 1001Petitioner contends that even if the transfer of her 50-percent community interests does not qualify for nonrecognition pursuant to section 1041, she nonetheless is not required to recognize gain on the transfer, because it amounted to a nontaxable division of community assets rather than a taxable property sale under section 1001. We disagree. In cases decided under the law in effect274 prior to section 1041, it had long been recognized that the division of community property incident to a divorce or a property settlement is under certain circumstances a taxable event. Johnson v. United States, 135 F.2d 125">135 F.2d 125 (9th Cir. 1943), revg. 45 F. Supp. 377">45 F.Supp. 377 (S.D. Cal. 1942); Rouse v. Commissioner, 6 T.C. 908">6 T.C. 908, 913-914 (1946), affd. 159 F.2d 706">159 F.2d 706, 707 (5th Cir. 1947). The issue was framed in terms of whether the division represents a nontaxable partition or a taxable sale of the community property. Siewert v. Commissioner, 72 T.C. 326">72 T.C. 326 (1979); Edwards v. Commissioner, 22 T.C. 65">22 T.C. 65 (1954); Rouse v. Commissioner, supra; Walz v. Commissioner, 32 B.T.A 718 (1935). In Carrieres v. Commissioner, 64 T.C. 959">64 T.C. 959, 964 (1975), affd. per curiam 552 F.2d 1350">552 F.2d 1350 (9th Cir. 1977), this Court discussed the approach to be followed in distinguishing a nontaxable partition from a taxable sale: Where community275 property is divided so that each spouse holds as his separate property an undivided one-half interest in the whole of each asset, or an equal number of units of fungible assets (like cash) are set aside to each spouse, the conversion of the community property into separate property is nontaxable. Moreover, where the whole of certain assets of the community (including cash) is set aside to one spouse and the whole of the other assets to the other spouse, but the aggregate value of assets set aside to each spouse equals one-half the value of the entire community property, the equal division of the community is considered a nontaxable partition of the property. In the case of such a nontaxable division, the basis of the property set aside to each spouse is its basis to the community prior to the division. Not all divisions of community property are nontaxable, however. Taxable divisions of community property take one of two forms. An unequal division, where one spouse receives property having an aggregate value equal to more than half the value of the entire community property, causes recognition of gain, if any, to the spouse transferring the larger portion. Likewise, an allegedly276 "equal division" of the community where one spouse gives his note or separate property for all or substantially all 5 of the other spouse's community property set aside to him is a recognizing transaction. * * * [Emphasis added; citations omitted.] See also Gaughan v. Commissioner, T.C. Memo. 1993-320. It is clear from the parties' stipulation of facts that the division of the spouses' community property in the present case fits the description of the second form of taxable division described above, i.e., "an allegedly 277 'equal division' of the community where one spouse gives his note or separate property for * * the other spouse's community property". Carrieres v. Commissioner, supra at 964. The parties stipulated that under the terms of the property settlement, petitioner's husband was required, inter alia, to pay her "$ 750,000.00 cash"; that he did in fact pay $ 750,000 to her "in accordance with the terms of the [settlement] agreement"; that "The cash [he] * * * used to meet this $ 750,000.00 obligation to petitioner was not community property"; and, finally that the purpose of the $ 750,000 payment was "to equalize the fair market value of the total properties distributed to each party". Plainly, this case is governed by Carrieres v. Commissioner, supra, which reflects the case law in effect prior to the enactment of section 1041. Petitioner does not contend otherwise, and indeed specifically so recognizes in her opening brief, which states: the decided cases involving community property divisions * * * [have held that] either, or sometimes both of the following factors rendered the division taxable: (a) an unequal division278 or (2) [sic] the division was * * [equal] but only because it was equalized by separate property, * * * [Pet. Opening Brief at pp. 15-16; fn. refs. omitted.]But petitioner asks us to overrule Carrieres. We decline to reject such long standing interpretation of the statute. But petitioner asks us to overrule Carrieres. We decline to reject such long standing interpretation of the statute. Moreover, petitioner's argument fails even on its own terms. She argues on brief that "From an economic point of view, an equalizing payment leaves the parties in the same position as if there was an equal division"; and that "since an equal division of community property is not a taxable event, neither should a division with an equalizing payment". (Pet. Opening Brief at pp. 17-18) Petitioner rightly states that each party leaves the table with approximately equivalent economic value, which in any event is what one would expect of any exchange transaction, taxable or otherwise. But it is a far different thing to suggest, as petitioner does, that the recipient's economic position is not altered by the receipt of cash instead of an equivalent amount of community property. 279 By receiving cash, petitioner terminated her economic stake in any future increase or decrease in value of the community property transferred. Indeed, the receipt of cash or other outside property derived from the husband's separate property is from petitioner's standpoint no different from a taxable sale to a stranger. We are unpersuaded by the "logic" of petitioner's argument, which in any event is totally unsupported by any legal authority called to our attention. We hold that the gain realized by petitioner upon the transfer of her 50-percent community interests to her ex-husband was properly taxable to her. In order to reflect concessions of the parties, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year at issue.↩2. Petitioner has stipulated that the allowance of $ 8,900 as an offset against sales proceeds was erroneous and should be reversed. The Commissioner has, however, agreed that petitioner should be allowed to deduct this $ 8,900 amount for legal and accounting fees, thus conceding the only other adjustment made in the deficiency notice based on the computation of the tax. The Commissioner has also conceded that petitioner erroneously included $ 60,000 as alimony income on her 1984 return, and that therefore her taxable income for 1984 should be reduced by that amount.↩3. Sec. 1041 reads as follows: SEC. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR INCIDENT TO DIVORCE. (a) General Rule. -- No gain or loss shall be recognized on a transfer of property from an individual to * * -- (1) a spouse, or (2) a former spouse, but only if the transfer is incident to the divorce.(b) Transfer Treated As Gift; Transferee Has Transferor's Basis. -- In the case of any transfer of property described in subsection (a) -- (1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and (2) the basis of the transferee in the property shall be the adjusted basis of the transferor.(c) Incident To Divorce. -- For purposes of subsection (a)(2), a transfer of property is incident to the divorce if such transfer -- (1) occurs within 1 year after the date on which the marriage ceases, or (2) is related to the cessation of the marriage.↩4. Indeed, it is doubtful whether petitioner's ex-husband would have agreed to join in any such election since he would be burdened by petitioner's lower basis in the property transferred to him.↩5. A later case expands the range of taxable transfers by stating that the note or other separate property need not be received for all or substantially all of the community assets but instead only "for a substantial portion" of such community assets. See Siewert v. Commissioner, 72 T.C. 326">72 T.C. 326, 333 (1979), which refers to and follows the methodology of Carrieres v. Commissioner, 64 T.C. 959↩ (1975).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619620/	Angelo Vitale, Petitioner v. Commissioner of Internal Revenue, RespondentVitale v. CommissionerDocket No. 821-72United States Tax Court59 T.C. 246; 1972 U.S. Tax Ct. LEXIS 27; November 13, 1972, Filed 27 Held: On the facts (1) the Commissioner's notice of deficiency was mailed to petitioner on Oct. 27, 1971; (2) the petition was received more than 90 days after Oct. 27, 1971. Accordingly, the Court lacks jurisdiction. C. John Forge, for 28 the petitioner.James T. Finlen, for the respondent. Tietjens, Judge. TIETJENS246 OPINIONThe matter before us is the Commissioner's motion to dismiss on the ground that petitioner failed to file a timely petition with this Court. Evidence was taken at a hearing on the motion held in Kansas City, Mo., on June 6, 1972. The Commissioner determined deficiencies for 1967 and 1968 in the income tax liability of Angelo Vitale, a resident of Kansas City, Mo., in the amounts of 247 $ 463.73 and $ 11,576.75, respectively; substantial additions to the tax under sections 6651(a) and 6653(a), I.R.C. 1954, 1 for failure to file a timely return and for negligence or intentional disregard of the rules and regulations respectively were also determined. Since petitioner is a U.S. resident we have no jurisdiction to redetermine these deficiencies if petitioner did not file the petition which we have received within 90 days of the mailing of the statutory notice of deficiency. Sec. 6213(a); Vibro Mfg. Co. v. Commissioner, 312 F. 2d 253 (C.A. 2, 1963); Estate of Frank Everest Moffat, 46 T.C. 499 (1966).29 We conclude that the petition was filed later than 90 days after the mailing of the statutory notice. It is unlikely that there would have been much doubt about this except for the fact that the postmark on the envelope in which the petition was mailed is not legible.The petition was received by this Court more than 90 days after October 27, 1971, which is the date we determine below to be the date the statutory notice was mailed. This is not necessarily fatal to petitioner. Sec. 7502(a)(1). Petitioner might have protected himself by using certified mail, or by using registered mail and observing section 301.7502-1(c)(2), Proced. & Admin. Regs. Petitioner's lawyer, counsel in this proceeding, did not send the document by certified mail, and although he did send it by registered mail, the sender's receipt was not postmarked by the U.S. postal employee to whom the document was presented. Therefore the postmark date on the envelope would have to be deemed by us the filing date, regardless of the actual mailing date, sec. 301.7502-1(a) and (c)(1), Proced. & Admin. Regs.; Nathaniel A. Denman, 35 T.C. 1140 (1961); and where the postmark is illegible30 the sender has the burden of proving that the petition was timely postmarked. Sec. 301.7502-1(c)(iii)(a), Proced. & Admin. Regs.; Alexander Molosh, 45 T.C. 320">45 T.C. 320 (1965), and the cases therein cited.Counsel for petitioner testified that he personally delivered the petition to the post office on January 24, 1972, the date 89 days after October 27, 1971 (the former date did not fall on a Saturday, Sunday, or legal holiday in the District of Columbia). However the petition was verified on January 25. Counsel also stated on cross-examination that he recalled that it was Tuesday that he mailed the petition; January 25, 1972, fell upon a Tuesday. That the petition was mailed January 25 comports with the fact that counsel did not have a copy of the statutory notice until Monday, January 24. In view of all this we are inclined to agree with the Commissioner that 248 counsel was not sure of the date he mailed the document. Since it was received in Washington on January 28, it is not impossible that it was mailed January 25. Even if counsel did in fact mail the petition on January 24, the envelope might still have been postmarked on a later date. We31 hold that petitioner has not sustained his burden of proving that the petition was postmarked on or before January 24.Petitioner is thus thrown back on his weaker factual contention that the statutory notice was mailed later than October 27, 1971, the date which is 90 days previous to January 25, 1972. The Commissioner clearly established that the standardized procedures of the St. Louis Review Staff for mailing and logging notices of deficiency were followed in petitioner's case. Compare Nash v. U.S., F. Supp. (D. Neb. 1972). The Commissioner put in evidence a copy of a certified mail sheet listing the name and address of petitioner and 19 other taxpayers to whom notices were mailed and bearing the round stamped legend "Oct 27 1971 Central Sta-St. Louis, Mo." that was placed on the sheet by the U.S. postal employee to whom the notices were delivered. We think the petitioner's statutory notice was mailed on October 27, 1971.An appropriate order will be entered. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619621/	MARIE W. KRAFSKY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKrafsky v. CommissionerDocket No. 17452-89United States Tax CourtT.C. Memo 1991-256; 1991 Tax Ct. Memo LEXIS 299; 61 T.C.M. (CCH) 2834; T.C.M. (RIA) 91256; June 6, 1991, Filed 299 Decision will be entered for the petitioner. John R. Crayton, for the petitioner. Lisa Primavera-Femia, for the respondent. PETERSON, Chief Special Trial Judge. PETERSONMEMORANDUM FINDINGS OF FACT AND OPINION This case was heard pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182. All section references are to the Internal Revenue Code as amended and in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined a deficiency in petitioner's Federal income tax for the year 1986 in the amount of $ 6,337.00 and additions to tax pursuant to the provisions of section 6653(a)(1)(A) and (B) in the amounts of $ 298.00 and 50 percent of the interest due on the deficiency of $ 6,337.00, respectively. Respondent also determined that petitioner was liable for an addition to tax under section 6661 in the amount of $ 1,577.00. The issues for decision are (1) whether petitioner is an innocent spouse within the meaning of section 6013(e), (2) whether petitioner is liable for the additions to tax under section 6653(a)(1)(A) and (B) for negligence or an intentional disregard of rules or 300 regulations, and (3) whether petitioner is liable for the addition to tax under section 6661 for substantially understating her 1986 income tax. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Edison, New Jersey, at the time her petition was filed. Petitioner Marie Krafsky was married to Melvin Krafsky for almost 25 years when he died in May of 1987. Throughout their marriage she provided most of the financial support for their household. Mrs. Krafsky paid the mortgage, utilities, food, and other household expenses out of her salary as a teacher. Although her husband had his own business and worked for several companies, he was never successful enough to provide other than occasional support. Mr. Krafsky's contributions to the household occurred mainly in the latter months of summer when Mrs. Krafsky was not receiving her teacher's salary. At trial Mrs. Krafsky generally described her husband as financially irresponsible. Throughout the course of their marriage, Mr. Krafsky was in one kind of financial difficulty after another. He was not able to stay301 with jobs after he became bored with them. In the 1970s he was forced to declare bankruptcy as a result of an auto parts business he had bought. At another time he had difficulties with his State and Federal taxes. Mr. Krafsky had a gambling problem and several times Mrs. Krafsky discovered cash advances from casinos charged to her credit card. Mr. Krafsky also borrowed money from Mrs. Krafsky when he needed extra funds. On occasion, Mr. Krafsky had overdrafts on his checking account; Mrs. Krafsky had to cover the overdrafts. To protect his wife from his financial difficulties, Mr. Krafsky insisted that he and Mrs. Krafsky keep their finances separate. Petitioner and Mr. Krafsky each maintained their own bank accounts. They also filed separate tax returns each year. When Mr. and Mrs. Krafsky filed jointly for 1986, it was the first time they had done so in the course of their marriage. They filed jointly that year because Mr. Krafsky had assured petitioner that he was now "all caught up" with his taxes and that they could safely file a joint return. In 1986 Mrs. Krafsky had wages of approximately $ 28,000 from her teaching job. She also had small amounts of interest income. 302 Mr. Krafsky had his own business that year, a sole proprietorship under which he contracted his services to New Jersey Bell and Gray's Appraisal Service. He reported gross income of approximately $ 28,000 and net income of approximately $ 18,000 from his business. Mr. Krafsky understated the income from his business in 1986 by approximately $ 16,000 and failed to report $ 631.00 of winnings he had received from the New Jersey State Lottery Commission. He also failed to report two other small items of income. Respondent thus determined a deficiency in the Krafsky's income tax for that year in the amount of $ 6,337.00. Respondent also determined that petitioner was liable for additions to tax under sections 6653(a) and 6661. Petitioner contends that she should be relieved of the joint and several liability imposed by section 6013(d)(3) for the deficiency because she is an "innocent spouse" under section 6013(e). OPINION When a husband and wife file a joint return, they are generally jointly and severally liable for the tax due thereon. Sec. 6013(d)(3). Therefore, notwithstanding the fact that petitioner's efforts did not produce the omissions from income, she is individually303 liable for the tax resulting from these determinations unless she qualifies as an "innocent spouse." An "innocent spouse" will be relieved of liability if all of the following elements are met: (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement * . [Sec. 6013(e)(1)] All four statutory requirements must be met for petitioner to be afforded relief, , and petitioner bears the burden of proving that each element has been satisfied. ; Rule 142(a). As the parties have stipulated to the first two elements, petitioner must prove only304 that she did not know and had no reason to know that there was a substantial understatement and that it would be inequitable to hold her liable for the deficiency. To satisfy the "knowledge" requirements of section 6013(e)(1)(C), petitioner must establish that in signing the 1986 joint return she did not know and had no reason to know that there was a substantial understatement of tax. Thus, it is not enough for petitioner to show that she lacked actual knowledge of the understatement. She must also show that she had no reason to know of the understatement. ; This issue is essentially factual. In order to prove that petitioner had no reason to know of the understatement, she must convince us that a reasonably prudent person with her knowledge of the surrounding circumstances would not and should not have known of the omissions, keeping in mind her level of intelligence, education, and experience. . We stated in ,305 that "the standard to be applied is whether a reasonable person under the circumstances of the taxpayer at the time of signing the return could be expected to know" of the understatement. We conclude that petitioner did not know and had no reason to know of the understatement. Throughout petitioner's marriage to Mr. Krafsky, it was her salary that was the primary source of support for their household. Mr. Krafsky was never able to make more than occasional contributions toward household expenses. Beyond the Krafsky's domestic circumstances, other facts would prevent a reasonable person from knowing that he had unreported income. Petitioner's knowledge of her husband's finances was that he had overdrafts at his bank, that he had charged cash advances to her credit card, and that from time to time he had to borrow money from her to meet his business expenses. Given these facts and circumstances, we also conclude that it would be inequitable to hold petitioner liable for the deficiency attributable to the understatement. As petitioner has satisfied the elements required by section 6013(e), she is entitled to be relieved from the liability for the deficiency arising from the unreported306 income. Consequently, we also hold that she is not liable for the additions to tax under sections 6653(a) and 6661. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619622/	Estate of Joseph Wittmann, Deceased, Fred O. Adams, Administrator C.T.A. v. Commissioner.Estate of Joseph Wittmann v. CommissionerDocket No. 24888.United States Tax Court1952 Tax Ct. Memo LEXIS 171; 11 T.C.M. (CCH) 633; T.C.M. (RIA) 52202; June 20, 1952J. Harlin O'Connell, Esq., 120 Broadway, New York 5, N. Y., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined a deficiency of $296,341.29 in Federal estate tax against petitioner. Several adjustments to the net estate put in issue by the pleadings have been abandoned. These adjustments and certain stipulated administration expenses respondent concedes to be deductible from the gross estate will be given effect pursuant to Rule 50. The remaining questions are as173 follows: Did respondent err by including in decedent's gross estate under section 811 of the Internal Revenue Code(1) an item of $790,560 determined to be the value of certain property decedent transferred in trust in 1918 and four items charged as transfers by decedent to his son consisting of: (2) $15,000 determined to be decedent's equity in property known as 33-33 Manor Drive, Phoenix, Arizona; (3) $55,000 determined to be the difference between $90,000 transferred in December 1941 by decedent to his son to settle certain of decedent's outstanding claims and the $35,000 paid by the son in settlement of the claims; (4) $3,500 paid by decedent in January 1942 to release certain property for the benefit of his son; and (5) $13,292.42 withdrawn by decedent's son on November 6, 1942, from decedent's special bank account with the Valley National Bank, Phoenix, Arizona? Did respondent err by disallowing as a deduction from the gross estate (6) $6,706.33 of a reported debt for 119,760 allegedly due decedent's son by decedent, and (7) a reported debt of $47,270.23 allegedly due Elizabeth M. Van Syckle by decedent? By an amendment to his answer respondent contends174 in the alternative that "In the event it is held that the amount of $790,560.00 is not includible in the decedent's gross estate [question (1) set out hereinbefore] * * , then it is alleged * * that the value of * * * 4,160 shares of the common capital stock of Spingler-van Beuren Estates, Inc., in the amount of $156,000.00, is includible * * * under the provisions of Section 811(a) and/or 811(c) of the Internal Revenue Code." Some of the facts have been stipulated. Findings of Fact The stipulated facts are hereby found. Joseph Wittmann (hereinafter referred to as decedent) died on November 9, 1942, at the age of 69 years, leaving a son, Joseph van Beuren Wittmann (hereinafter sometimes referred to as Joseph), and a stepdaughter, Eleanor von Erden Orr Drury Dorsey (hereinafter sometimes referred to as Eleanor), surviving him. A Federal estate tax return was filed with the collector for the district of Arizona on the 20th day of June 1946. Decedent left a Last Will and Testament, dated January 6, 1940, which was filed for probate in the Superior Court of the County of Maricopa, State of Arizona, on February 1, 1943. Albert G. Redpath and Joseph175 were named executors. Joseph renounced his right to act, and Redpath was disqualified for non-residence, whereupon Fred O. Adams was appointed to act as administrator cum testamento annexo. In or about May 1950 Adams filed his first and final account and report, and petition for distribution, and on June 7, 1950, a decree of distribution was entered. Decedent was married to Eleanor C. Wittmann (hereinafter sometimes referred to as Mrs. Wittmann) who died a resident of Morristown, New Jersey, on December 23, 1917, survived by decedent and their son Joseph and her daughter Eleanor as her only heirs at law and next of kin. The daughter was then known as Eleanor von Erden Orr. Mrs. Wittmann left a Last Will and Testament, dated June 2, 1916, together with a codicil dated September 27, 1917, and a second codicil dated November 16, 1917. At the time of her death Mrs. Wittmann owned an undivided 78/300ths interest as a tenant in common in the Spingler-van Beuren Estates properties consisting of over 150 separate parcels of real estate in the City of New York. Mrs. Wittmann's interest had been inherited from her father. She also died owning real estate and personal property located in176 Jefferson County, New York, in Arizona, and in Morristown, New Jersey. Decedent, prior to Mrs. Wittmann's death, had no interest in such property. Mrs. Wittmann's will, together with the first codicil, was filed for probate in the Surrogate's Court of Morris County, State of New Jersey, on January 5, 1918. Her will provided for this disposition of her properties: * * "THIRD: I give, devise and bequest to my beloved husband JOSEPH WITTMANN for his own benefit and advantage forever, the following: "(a) The real estate * * known as the Isle of Pines, situated in * * * the County of Jefferson, State of New York, * * * it being my intention that my said husband shall receive the said property * * * absolutely. "(b) * * * any and all real estate of which I may die possessed situate in the State of Arizona, * * . "(c) * * all the property to which I may be entitled as heir at law of the late Henry S. Van Beuren, or as a beneficiary of his estate * * . "FOURTH: I give, devise and bequeath a life interest to my said husband JOSEPH WITTMANN in the following properties: "(a) All of the realty situate at Morristown, New Jersey, known as "The Towers Farm," "The Prall177 Farm" and the residence property known as "The Towers"; * * * and upon his death I give, devise and bequeath to my son JOSEPH VAN BEUREN WITTMANN all of the realty known as "The Towers Farm" and "The Towers" residence, together with all buildings and improvements thereon. The personal property of whatsoever nature thereon or connected therewith * * * I give and bequeath to my children ELEANOR and JOSEPH, share and share alike. * * * upon the death of my said husband * * , I give, devise and bequeath the property known as "The Prall Farm" * * to my daughter ELEANOR VON ERDEN ORR for her own benefit and advantage absolutely. "FIFTH: I give, devise and bequeath to my beloved husband * * * for the term of his natural life, all my right, title and interest as beneficiary of the Spingler and van Beuren Estates * * * with power to act in relation to said property as I might, could or would have acted if living * * ; and upon the death of my husband I give and bequeath all property both real and personal derived through the Spingler and van Beuren estates * * to * * * ELEANOR and * * * JOSEPH, share and share alike * * . "SIXTH: I further give and bequeath to my husband * * for178 his life all * * personal property not hereinbefore disposed of * * , and at his death I give and devise the same to my daughter ELEANOR and to my son JOSEPH, share and share alike, * . * "EIGHTH: All the rest, residue and remainder of my property, both real and personal, which may have remained undisposed of or the devise or bequest of which may have lapsed * , I give, devise and bequeath to my beloved husband * * absolutely. * * "NINTH: In addition to the life estate of my said husband JOSEPH WITTMANN I hereby grant and give to him full power and authority to dispose of any or all realty or personal property of which he may have a life interest and also including the property which is devised and given to him absolutely and also including the residuary estate, to sell and dispose of the same * * authorizing and empowering him to use such portion of the proceeds as in his judgment may be necessary for his own proper needs and for the education and maintenance of our children. * * * in the event of such sale the proceeds thereof remaining at his death, if any, shall belong to my children in lieu of the property hereinbefore-mentioned and in which my179 husband may have a life interest. "TENTH: In the event of the death of both my husband and myself under such circumstances as to make the priority of the death of either one of us undeterminable, I hereby declare and order for the purpose of the determination of the rights under this WILL and the management of the affairs of my estate, that my death shall be construed as having occurred prior to the death of my said husband. "It is my earnest hope and desire that my said children be guided by the judgment of my said husband JOSEPH WITTMANN and that they seek his advice in all affairs of life which may affect their future to the end that their welfare may be safeguarded by him. "It is to be distinctly understood, however, that the bequests and devisees [devises] to my daughter ELEANOR are strictly upon condition that she shall never marry anyone without the approval and consent of myself and of my husband, and should she marry without our consents then all devises and bequests to her shall be void and I thereupon give and bequeath the same to my son JOSEPH." The first codicil added to the condition contained in the tenth paragraph of the will the requirement that Eleanor deport180 herself in a manner meeting Mrs. Wittmann's and decedent's approval. Should she fail to comply with these conditions the property willed to her was to go to Joseph, or if he predeceased decedent, then the life estate conveyed to decedent was to become "absolute." By the second codicil Mrs. Wittmann disinherited Eleanor and left to decedent that share of the estate originally given and bequeathed to Eleanor. Upon the death of her mother Eleanor retained an attorney, Henry W. Baird, of New York, New York, to represent her in connection with the probate of her mother's will and codicils thereto. There followed a series of negotiations designed to settle her claim against her mother's estate. Preliminary settlement agreements were drafted but none was executed. By the terms of the first proposed agreement Eleanor was to agree not to contest the will of her mother, nor the codicils thereto, and decedent was to agree that her interest in the estate should be as set forth in the will and first codicil, but not the second. By the terms of the second proposed agreement Eleanor was to agree to accept the sum of $100,000 as an outright settlement, in exchange for which she was to release to181 decedent all her right, title, and interest in and to the property of her mother. On April 27, 1918, decedent, individually and as executor of the Estate of Eleanor C. Wittmann, executed a trust indenture to the Guaranty Trust Company of New York as trustee, providing in part: "THAT the party of the first part [decedent, individually and as executor of Mrs. Wittmann's estate] in consideration of One Dollar ($1.00), lawful money of the United States, and other good and valuable considerations, to him in hand paid and given, does hereby grant, release and assign unto the party of the third part. [Guaranty Trust Company of New York] its successors and assigns, an undivided one-half of the interest of the late Eleanor C. Wittmann in all the real property in the City of New York of which the said Eleanor C. Wittmann died seized or possessed, which said properties are hereinafter more particularly described, including all interest of the party of the first part as life tenant therein, IN TRUST, nevertheless, for the uses and purposes hereinafter mentioned. * "That the said property is under the control and management of Frederick T. Van Beuren, Frederick T. Van Beuren, 182 Jr., and John W. A. Davis, as Attorneys in Fact, with offices at No. 65 Fifth Avenue, in the Borough of Manhattan of the City of New York. The conveyance to the Trustee herein is upon the distinct understanding that the administration and control of the property by the Attorneys in Fact, or their successors, shall not be disturbed, and the Trustee hereby is absolved of any responsibility or liability in relation to such administration and control in connection therewith. The primary object of the trust is to receive the income which may be paid from time to time by the above Attorneys in Fact, or by their successors; or which is distributable among the owners; and to disburse the same under the terms of this trust. "THAT the said Eleanor C. Wittmann died at Morristown, New Jersey, December 23, 1917, leaving her surviving JOSEPH WITTMANN, her husband, ELEANOR VON ERDEN ORR, over the age of twenty-one years, daughter by a first marriage with Henry Orr, now deceased, and JOSEPH VAN BEUREN WITTMANN, under the age of fourteen years, son of marriage with Joseph Wittmann. That the last will and testament of Eleanor C. Wittmann, dated June 2nd, 1916, and the codicil thereto dated September183 27th, 1917, were duly probated in the County of Morris, State of New Jersey, on the 5th day of January, 1918. That under the said will and codicil a life estate was given to JOSEPH WITTMANN with remainder to ELEANOR VON ERDEN ORR and the said JOSEPH VAN BEUREN WITTMANN, in the properties known as Spingler and Van Beuren Estate properties, and in which Eleanor C. Wittmann had an undivided 78/300ths interest. That this trust agreement is made to secure the payment of annual income to ELEANOR VON ERDEN ORR and JOSEPH WITTMANN as herein provided and to secure the vesting of the fee in the issue of ELEANOR VON ERDEN ORR, should she die with issue, and failing such issue, in JOSEPH VAN BEUREN WITTMANN, as in this agreement provided." * Following a description of the property transferred is this recitation: "The property herein mentioned is conveyed to the above named Trustee, IN TRUST, nevertheless, for the following uses and purposes: - "FIRST: To receive the net income from the property and interests hereby granted and assigned, the first payment to be received on or about April 1st, 1919, and to pay over the same to JOSEPH WITTMANN as collected during his life subject to184 the following deductions: - "(a) To pay to ELEANOR VON ERDEN ORR of Morristown, New Jersey, the sum of six thousand dollars $6,000.00) per annum for three (3) years beginning April 1st, 1919, in installments as payments may be received by the Trustee, and to pay to the said ELEANOR VON ERDEN ORR, after the expiration of said period of three (3) years the sum of Seventy-five hundred Dollars ($7500.00) per annum for the following three (3) years; and upon the expiration of that period, to wit, April 1st, 1925, the sum of Ten thousand Dollars ($10,000.00) per annum to the said ELEANOR VON ERDEN ORR during the joint lives of said JOSEPH WITTMANN and said ELEANOR VON ERDEN ORR, without deduction from any of the aforesaid sums of any trustees' fees for receiving or paying out said sums or of any inheritance or estate taxes on the estate of Eleanor C. Wittmann or the interest therein of the parties of the first and second parts, now imposed either by the United States or any State thereof. Should any additional inheritance or estate taxes be imposed at any time hereafter the same shall be borne by the proportionate shares in the trust income of JOSEPH WITTMANN and ELEANOR VON ERDEN ORR185 pro rata as their interests may bear to the whole of said income. * Provision was made for payment of the entire trust income to Eleanor should decedent predecease her, and for payment of her share to her issue per stirpes if she predeceased him. If in the latter case she left no issue, the trust was to cease with the trust property vesting in fee in the son Joseph subject to decedent's life estate. The sixth paragraph of that trust provided that: "SIXTH: ELEANOR VON ERDEN ORR, party of the second part hereby agrees and assigns to the Trustee all of her right, title and interest in and to the properties and estate hereby granted and assigned to the Trustee and hereby consents to and ratifies all the terms and conditions of this instrument. On the 27th day of April, 1918, decedent likewise conveyed to Eleanor by warranty deed that parcel of real property located in Morris County, State of New Jersey, known as the Prall Farm, to which reference was made in the will of decedent's wife. By an instrument dated April 27, 1918, Eleanor acknowledged the conveyance to her of the Prall Farm in accordance with Mrs. Wittmann's will and first codicil and the conveyance of an186 undivided one-half of the residuary estate and released decedent individually and as executor of his wife's estate from further liability to her as a beneficiary. She also executed a general release to decedent similarly dated for the stated consideration of the conveyance to her of the Prall Farm and a one-half interest in the "* * * Spingler-Van Beuren Estates property in New York City * * " with the recital that it was " * * in accordance with agreement between myself and Joseph Wittmann, dated April 4, 1918; * * ." On April 27, 1918, a written agreement between Eleanor and Henry W. Baird was entered into for his services which provided, in part, as follows: "Eleanor von Erden Orr claimed a large share of the estate of her said mother; and claimed that the said Will was not the Will of her said mother but had been procured by fraud and undue influence. "Henry W. Baird, as an attorney and counsellor at law was heretofore duly retained by said Eleanor von Erden Orr, to represent her in the matter of her said mother's estate and to prosecute her claims against said estate and represent her in any action or proceeding brought by her for that purpose; and, in the event of a contest187 involving the validity of said Will, she agreed to pay him twenty-five per cent (25%) of any recovery obtained for her, either in cash or property, either as a result of such action or proceeding or through compromise, or otherwise; and, in the event of a settlement of said claims of said Eleanor von Erden Orr against said estate being effected, without contest or other litigation, she agreed to pay said Henry W. Baird twenty per cent (20%) of whatever recovery was obtained for her, either in cash or in property, and" * * On July 23, 1919, decedent, by an instrument denominated an "Estoppel Certificate," waived all right to question Eleanor's title to the Prall Farm by reason of any authority given to him by his wife's will. The instrument recited that Eleanor sought to convey the farm to a third party for value, that the third party objected to the title because of the power to object to Eleanor's conduct granted decedent by Mrs. Wittmann's will, and that the waiver by decedent was intended to induce the proposed purchaser to accept title. The second codicil to the will of decedent Eleanor C. Wittmann was thereafter filed for probate in the Surrogate's Court of Morris County, 188 State of New Jersey, and was admitted to probate in said Court on the 27th day of January 1921. On April 29, 1920, Henry W. Baird, Eleanor's representative in the matter of her mother's estate, instituted an action in the Supreme Court of the State of New York, New York County, against the Guaranty Trust Company of New York as trustee, and others, to establish his right to 20 per cent of all cash and property secured for Eleanor as compensation claimed to be due him under the terms of the employment agreement. The referee assigned by the Court to hear the case filed his report with the Court stating his findings of fact, in part, as follows: "* * * plaintiff [Baird] accepted such retainer and employment and rendered to her, said defendant Eleanor * * * extensive, valuable and meritorious legal services in the matter of preparing contemplated objections and in and about the examination of the Law of the State of New Jersey applicable to the said Will and codicils and to a contest or attack upon same on behalf of said defendant * * , and instituted, conducted and concluded negotiations, all which resulted in a settlement in favor of said defendant * * and which was accepted189 by her, whereby there was secured for her in consideration of the withdrawal and abandonment on her part of all such contemplated objections and attack upon said Will and codicils and her waiver of all other interest in her said mother's estate, certain valuable interests and property and payments, all of which were secured to her by a certain deed in trust, bearing date April 27th, 1918, duly made, executed, acknowledged, delivered and accepted by the said Eleanor * * said Joseph Wittmann [decedent] and the defendant Guaranty Trust Company of New York * * ." On February 28, 1921, a judgment was entered in favor of Henry W. Baird which ruled that the agreement was intended to and did operate as an equitable assignment to Baird of 20 per cent of all moneys, rights and benefits obtained by him for Eleanor in settlement of her claim against her mother's estate. On April 18, 1929, decedent individually and as executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, sold the property located in Morris County, State of New Jersey, commonly known as the "Towers Farm," and received therefor the sum of $100,000, less commissions and other expenses totaling $4,324.11, 190 leaving a balance of $95,675.80. That sum was deposited with the Guaranty Trust Company of New York in April, 1929 in the name of decedent and entered in the books of account of Eleanor C. Wittmann's Estate as a credit to the estate. On January 5, 1931, the Spingler-van Beuren Estates properties, in which Eleanor C. Wittmann owned an undivided 78/300ths interest at the time of death, were incorporated under the laws of the State of New York, as Spingler-Van Beuren Estates, Inc. A certificate of increase of the amount of capital stock and the number of shares of Spingler-van Beuren Estates, Inc. was filed with the Secretary of State of New York, on November 19, 1931, whereby the authorized capital stock was increased from $1,000 to $6,000,000 and the number of shares of capital stock was increased from ten to sixty-thousand shares, having a par value of $100 each. On March 31, 1931, decedent executed a Supplemental and Amended Indenture amending the Trust Indenture of April 27th, 1918 which provides in pertinent part as follows: * * "WHEREAS, on the 27th day of April, 1918, the parties of the first and second parts executed a certain trust deed conveying to the party of191 the third part, as Trustee, upon the trusts therein expressed an undivided one-half of the interest of the said Eleanor C. Wittmann, deceased, in all the real property in the City of New York of which the said Eleanor C. Wittmann died seized or possessed, and in said Trust Deed attempted to describe said property by street numbers or locations, and by certain section, block and lot numbers; and "WHEREAS, it has subsequently been discovered that there was included in the description of said property through error and inadvertence certain parcels of land of which said Eleanor C. Wittmann was not seized or possessed at the time of her death and in which she had no interest at that time, and in which the said grantors have not and never had any title or interest, and certain other parcels were therein erroneously described, and there is also some question whether such description was broad enough to convey an undivided one-half of the interest formerly of said Eleanor C. Wittmann in all of the property in the City of New York of which she died seized or possessed although it was intended so to do." After a recitation of the corrected description of the property transferred in trust, 192 the instrument concluded as follows: "This Indenture is intended to be supplemental to and amendatory of the said trust indenture dated April 27, 1918, and all the other terms and conditions in said trust indenture of April 27, 1918, are hereby ratified and confirmed." Pursuant to an order of the Supreme Court of the State of New York, in and for the County of New York, entered on the 7th day of October, 1931, decedent as an individual and as executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, together with the Guaranty Trust Company of New York, as trustee under the Trust Indenture of April 27, 1918, Henry W. Baird and Eleanor executed an indenture of conveyance dated November 12, 1931, whereby they conveyed to Spingler-van Beuren Estates, Inc. in exchange for stock and bonds of the corporation, their respective right, title and interest in the Spingler properties of which Mrs. Wittman died seized. The court order authorizing the conveyance read, in part, as follows: "Upon the petition of Joseph Wittmann, individually and as Executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, and Guaranty Trust Company of New York, as Trustee under193 a certain Trust indenture dated April 27, 1918, which petition was duly verified on the 14th and 17th days of April, 1931, and filed in the office of the Clerk of the County of New York on April 29, 1931, praying for an order of this Court authorizing and permitting said Petitioners to convey certain real property to Spingler-van Beuren Estates, Inc., in exchange for the stock and bonds of said Corporation. * * "ORDERED, That the Petitioners Joseph Wittmann, individually and as Executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, and Guaranty Trust Company of New York, as Trustee under a certain Trust Indenture dated April 27, 1918, as amended by the Supplemental Indenture dated March 31, 1931, be and hereby are authorized and permitted by deed or deeds duly made, executed and delivered, to unite with Henry W. Baird in the conveyance of the right, title and interest of which Eleanor C. Wittmann, deceased, was seized or possessed at the time of her death in the real estate referred to in the Petition as said real estate, and described in the Referee's Report, and comprising all real estate in the Borough of Manhattan, City and County of New York, in which194 she had any right, title or interest at the time of her death as tenant in common, and which interest consisted of an undivided 78/300ths interest in all the said real estate, to Spingler-van Beuren Estates, Inc., in exchange for 78/300ths of the capital stock and 6% debenture bonds, due September 1, 1962, issued by the said Corporation for the entire fee of the said real estate, which said interest is entitled to receive upon the division of the said stock and bonds pro rata among all of the interests in said real estate, namely, in exchange for $1,560,000 par value of such stock and $1,438,400 principal amount of such bonds, provided, however, that the other undivided 222/300ths interest in the real estate referred to in the Petition as said real estate shall be also exchanged for stock and bonds of said Corporation; and it is further "ORDERED and DIRECTED, That $780,000 par value of such stocks of said Corporation and $719,200 principal amount of such bonds of said Corporation so issued by said Spingler-van Beuren Estates, Inc., be issued and delivered by said Corporation to the Petitioner Joseph Wittmann, as Executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, 195 in exchange for the conveyance by him as executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, of an undivided one-half of the 78/300 interest in said premises, of which Eleanor C. Wittmann died seized, and that 780,000 par value of such stock and $719,200 principal amount of such bonds which are given in exchange for the conveyance to it by Joseph Wittmann, as Executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, and by the Guaranty Trust Company of New York, as Trustee under the Trust Indenture dated April 27, 1918, as amended by the Supplemental Indenture dated March 31, 1931, and by Henry W. Baird, of the other undivided one-half of the 78/300 interest, which is the subject of conflicting claims, be issued and delivered to Guaranty Trust Company of New York, to be held by it until the further order of this Court; * " The indenture of conveyance executed pursuant to the court order recited, after a statement of the consideration for the exchange, that " * * Joseph Wittmann, individually, and as Executor of the Last Will and Testament of Eleanor C. Wittmann, deceased, and the said Guaranty Trust Company of New York as Trustee under196 a certain trust indenture dated April 27th, 1918, between Joseph Wittmann, party of the first part, Eleanor von Erden Orr, party of the second part, and Guaranty Trust Company of New York, as Trustee, party of the third part, and deed amendatory thereof, and the said Henry W. Baird, [parties of the first part] do hereby grant and release unto the party of the second part, [Spingler-van Beuren Estates, Inc.] its successors and assigns, forever: "1. All the right, title and interest of which Eleanor C. Wittmann, deceased, was seized or possessed at the time of her death, in the parcels of land in the Borough of Manhattan, City, County and State of New York, respectively designated by street numbers or locations and also designated by section, block and lot numbers on the block map of taxes and assessments of the Borough of Manhattan, City of New York, being an undivided 78/300ths interest in said real estate, as follows:" * Then followed a description of the properties. By a Certificate of Reduction of the amount of capital stock and of the par value of the shares, dated February 8, 1933, the par value of the stock of Spingler-van Beuren Estates, Inc., was reduced197 from $100 to $10 per share, and the authorized capital stock was reduced from $6,000,000 to $600,000. The same par value of $10 per share was that of the shares of stock of Spingler-van Beuren Estates, Inc., at the time of decedent's death on November 9, 1942. Between January 10, 1939, and December 27, 1940, decedent sold $291,000 principal amount of the 6 per cent debenture bonds of Spingler-van Beuren Estates, Inc., to said corporation, and received therefor the sum of $234,760 as principal, and $3,317.63 as interest, or a total of $238,077.63. Decedent deposited the proceeds in an account in his own name with the Chase National Bank of New York. The deposits were entered in the books of account of the Eleanor C. Wittmann Estate as credits to the estate. On or about November 3, 1941, decedent withdrew the sum of $160,000 against this account and deposited that sum with the Valley National Bank of Phoenix, Arizona. At least $151,191.33 of this amount was part of the proceeds of property of the Eleanor C. Wittmann Estate. Subsequent withdrawals 1 against this account left a balance, as of November 9, 1942, the date of death, of $6,706.33. 198 On December 1, 1930, decedent executed a note acknowledging an indebtedness to Charles E. Heydt of $70,000, payable in 10 years with interest at 5 per cent. On the same date decedent executed a note acknowledging an indebtedness to Margaret S. Heydt, wife of Charles E. Heydt, of $141,500, payable in 10 years with interest at 5 per cent on $70,000 and at 6 per cent on $71,500. Both notes were executed by decedent individually and as executor of his wife's estate. On or about January 24, 1942, Charles E. Heydt and wife instituted actions in the New Jersey Supreme Court, Morris County, against decedent individually and as executor of the estate on these notes, which actions were culminated in an agreement of arbitration dated April 7, 1942. Pursuant to arbitration an award of $7,500 was made by the arbitrator in favor of the law firm of Heydt and Heydt (of which Charles E. Heydt was the then surviving partner) against decedent individually, and an award of $70,500 with interest thereon at 6 per cent from October 1, 1940, was made in favor of Margaret S. Heydt against decedent, individually. Judgment on the award was entered by the Supreme Court of New Jersey as of October 14, 1942, in199 the sum of $7,500 in favor of Charles E. Heydt and $79,230.25 in favor of Margaret S. Heydt. On or about December 30, 1941, decedent withdrew from the Valley National Bank of Phoenix, Arizona, the sum of $90,000, all of which was a part of the proceeds of property of the Eleanor C. Wittmann Estate, and transferred that amount to his son, Joseph, for the purpose of negotiating a settlement of these judgment claims against himself. On or about January 20, 1944, Joseph negotiated a settlement of the judgment claims against decedent by the payment of the sum of $35,000 to the claimants in exchange for their general releases in favor of decedent's estate and/or any other persons against whom the judgment claims might be or become enforceable. The $55,000 balance remaining was retained by Joseph. On or about May 8, 1941, certain real property, known as 33-33 Manor Drive, Phoenix, Arizona, was purchased at a total purchase price of $18,000, subject to a mortgage held by the Home Owners' Loan Corporation in the amount of $10,624.49. Decedent made at least the following payments on account of the purchase price as shown on his books of account: $7,542.68 at the time of the purchase and200 eight monthly payments thereafter on account of the mortgage totaling $865.53 Of these amounts $7,364.81 is a part of the proceeds of property of the Eleanor C. Wittmann Estate. The deed to this property was taken in Joseph's and his wife's name. From the date of purchase of this property decedent, Joseph and his wife resided in it as their home. At various times between 1920 and 1934, the owners of the property known as Spingler-van Beuren Estates, sold eight separate parcels outside of the City of New York. The Estate of Eleanor C. Wittmann, deceased, as the owner of 78/300ths of each of these eight separate parcels was entitled to 78/300ths of the proceeds thereof or $11,543.65. Decedent received one-half or $5,771.82, which amount was entered as a credit to Mrs. Wittmann's estate in his books of account. Elizabeth M. Van Syckle, a trained nurse, came to work for decedent in about 1907, when decedent's son, Joseph, was about six weeks old. She remained in the home as nurse until the latter part of 1915. After the death of Eleanor C. Wittmann in December 1917, she returned to act as nurse-housekeeper and continued to live in the house until decedent went to Phoenix, in 1940. 201 In the summer of 1941 and 1942, she visited the family at Phoenix, traveling with them to California in the latter year. About May 1945, she went to Phoenix, Arizona, to live with Joseph. Beginning on July 1, 1922, and continuing through December 1926 Miss Van Syckle allowed her $1,500 annual salary to accrue at 6 per cent interest. Decedent's business was not prospering at that time and he needed money to keep his property intact and to administer his wife's estate. During that period she also loaned him money in varying amounts up to $3,800. On December 31, 1927, decedent's books of account listed a balance owed to her of $21,537.94, which figure includes loans of $5,900 during the year and the $1,500 accrued annual salary. The total annual payments on account were small from 1928 through 1935, the top figure being $930.21 in 1932; but thereafter and continuing up until decedent's death the payments on account were regular and in total amounts averaging over $200 a month. The credit balance outstanding on November 9, 1942, the date of decedent's death, was $47,270.23 which included the principal and interest accruals to date. Although Miss Van Syckle filed no claim against decedent's202 estate, Joseph became aware of it in the course of an accounting in 1941. He acknowledged the obligation and since decedent's death had paid interest annually. On January 28, 1942, decedent drew a check for $3,500 on his Valley National Bank account, which sum is part of the proceeds of property of the Eleanor C. Wittmann Estate, to the order of the Arizona Title and Guaranty Trust Company for the release from escrow of 18 lots. He made the property available to Joseph to enable him to build some houses. Title was taken in Joseph's name. On November 6, 1942, Joseph withdrew the sum of $13,292.42 from decedent's special checking account with the Valley National Bank, at Phoenix, Arizona, thereby closing out the account. Decedent had transferred to this special account at least $19,000 of the proceeds of property of the Eleanor C. Wittmann Estate. The balance remaining of $13,292.42 is a part of those proceeds. The withdrawal was made pursuant to a power of attorney signed by decedent, dated October 24, 1942, which stated in part in explanation of the appointment of Joseph as his "attorney in fact" that decedent "[wished] him [Joseph] to become fully acquainted with all phases203 * * * [of the management of my property]" and because he was forced to minimize his labors in accordance with his physician's orders. Decedent had gone to Arizona for his health. In 1939 he had a serious stroke; in January 1941 he had a prostate operation. While in Arizona decedent had several minor strokes, the cause of death on November 9, 1942, being an additional stroke. During the period from the death of Mrs. Wittman to his own death, decedent assumed the full support of his son, Joseph. Joseph was never gainfully employed until after decedent's death. He was educated by private tutors at home, and attended Columbia University from which he graduated in 1939. Decedent paid all of his tuition fees and college expenses. In addition decedent gave Joseph a monthly allowance of $500, purchased automobiles for him, and a boat, paid club dues, railroad transportation when he traveled, and paid part of the expenses of his trip to Europe in 1936. In addition to the monthly allowance of $500, decedent made gifts to his son each year in varying amounts. The total gifts to his son from 1933 to his death in 1942, varying annually from $6,574.78 in 1942 to $18,251.98 in 1936, aggregated204 about $110,000, and averaged approximately $11,000 annually. Gift tax returns were filed by decedent for each of the years 1933 to 1942, inclusive, wherein decedent reported the "monthly allowance and extras" given to Joseph. Beginning with the returns filed for 1939, and continuing through 1942 gift taxes were reported and paid in the following respective amounts. $135.30, $93.91, $282.71, and $270.35. Decedent also paid approximately $3,000 annually as alimony for Joseph from the date of the latter's divorce in 1935 until the date of decedent's death. By a complaint dated March 13, 1942, Guaranty Trust Company of New York, as trustee under the Indenture of Trust of April 27, 1918, as amended, commenced an accounting action in the Supreme Court of New York, New York County, praying for permission to render an accounting and for judicial construction of the Indenture of Trust. Decedent was one of the parties defendant in this action. Before this matter could be brought to trial decedent died and an amended complaint was filed substituting, among other defendants, Fred O. Adams, the administrator c.t.a. of decedent's estate, and Joseph, as administrator c.t.a. of Mrs. Wittmann's estate. 205 Joseph filed an answer to the amended complaint challenging the validity of the trust and all steps taken in connection therewith, including the judgment Henry W. Baird had obtained as Eleanor's attorney which placed a lien upon the trust income. This matter was never brought to trial but by mutual concurrence among all the parties to the suit was settled by an agreement dated December 24, 1945. By this agreement it was decided among other matters that 4,160 shares of stock of Springler-van Beuren Estates, Inc., which constituted part of the trust corpus, were to be transferred to Joseph and Fred O. Adams, as administrator c.t.a. of decedent's estate, upon the furnishing to the Trust Company by both of enumerated documents and certain evidence proving the payment of various taxes. These documents have not been furnished to the Trust Company. By an order of the Supreme Court of New York, dated December 24, 1945, and filed July 1, 1946, in the office of the Clerk of the County of New York, the December 24, 1945, agreement was approved and ratified. Following the entry of this order a proceeding was initiated by petition of Fred O. Adams as administrator, c.t.a. of decedent's206 estate in the Superior Court of Maricopa County, State of Arizona, the court in which the estate was being administered. After a formal hearing was held on the petition a final order was entered on March 21, 1947. The order first recited that the December 24, 1945, settlement agreement authorized the delivery of 4,160 shares of common stock of Spingler-van Beuren Estates Inc., to Joseph van Beuren Wittmann, individually, and to Fred O. Adams as administrator c.t.a. of the estate of Joseph Wittmann, deceased. It then determined that the 4,160 shares of stock were the property of Joseph, individually, and that the estate of Joseph Wittmann, deceased, has no interest therein. Petitioner's estate tax return listed a total gross estate of $228,667.30 and total deductions of $300,966.84. Reported debts of the decedent composed $294,084.59 of the latter figure. No tax was reported as due. In his deficiency notice advising petitioner of the deficiency of $296,341.29, respondent explained the adjustments to the net estate in summary as follows: Additions to value of net estateand decreases in deductions: (a) Transfers$877,352.42(b) Debts of Dece-dent314,395.91$1,191,748.33Total$ 919,448.79Reductions in value of net estateand increases in deductions: (c) Real estate$ 6,495.00(d) Other miscella-neous property18,193.50(e) Executors' com-missions1,500.00(f) Attorneys' fees6,500.00(g) Miscellaneous ad-ministration ex-penses6,108.1538,796.65Net estate for basic tax as adjusted$ 880,652.14Net estate for additional tax asadjusted920,652.14Net basic tax40,145.65Net additional tax256,195.64Deficiency$ 296,341.29207 Adjustments put in issue by the petition and respondent's answer and not conceded thereafter are more particularly described in the deficiency notice as follows: "(a) Transfers * * * "Item 1 representing decedent's equity in property known as 3333 Manor Drive, Phoenix, Arizona, is held to be includible in decedent's gross estate at the value determined, [$15,000.00] in accordance with * * * section 811 (c) of the Internal Revenue Code. "Item 2 - This item, reported on Schedule G of the return [Transfers During Decedent's Life - where the April 27, 1918 trust indenture and subsequent amendment are described] but not returned for tax, is held includible in the gross estate, at the value determined [$790,560.00] in accordance with the provisions of sections 911 (a) and/or 811 (c) of the Internal Revenue Code. "Item 4 - It is held that the amount of $13,292.42 withdrawn on November 6, 1942 by Joseph Van Beuren Wittmann from the decedent's special account with the Valley National Bank, Phoenix, Arizona, is includible in decedent's gross estate in accordance with the provisions of sections 811 (a) and/or 811 (c) of the Internal Revenue Code208 . "Item 5 - This item representing the difference between $90,000.00, advanced by decedent to Joseph Van Beuren Wittmann to effectuate settlement of certain claims against decedent, and $35,000.00 the amount for which the claims were actually settled, is held to be includible in decedent's gross estate in accordance with the provisions of sections 811 (a) and/or 911 (c) of the Internal Revenue Code. 78Item 6 - It is held that the amount of $3,500.00 paid by decedent to the Arizona Title Guarantee Trust Company on January 28, 1942, on behalf of Joseph Van Beuren Wittmann, is includible in decedent's gross estate in accordance with the provisions of section 811 (c) of the Internal Revenue Code. "(b) Debts of decedent * * "[Item 12, relating to a claimed debt of $119,760 reported to be owing to Joseph as the result of a sale by decedent for his own use of $291,000 principal amount of 6 per cent debenture bonds of Spingler-van Beuren Estates Inc. in which he held only a life estate and which bonds vested in Joseph on decedent's death, less credit for recovery by Joseph of $115,000] held not to constitute * * * [an allowable deduction] 209 under * * section 812 (b) of the Internal Revenue Code. "Item 13 [relating to debt claimed as owing to Elizabeth M. Van Syckle for an unpaid balance of loans] - This item has been disallowed in full for the reason that no competent evidence or appropriate information was submitted in substantiation thereof." At the outset of the hearing of the present proceeding respondent made a motion for leave to file an amendment to his answer pleading affirmatively that, in accordance with the order of the Supreme Court of New York, New York County, filed July 1, 1946, at least 4,160 shares of stock of Spingler-van Beuren Estates, Inc., were includible in decedent's gross estate under section 811 (a) or 811 (c), Internal Revenue Code. The motion was granted; the amended answer was filed, and by agreement of the parties no further pleading on the part of petitioner was filed. Decedent did not transfer in contemplation of death Items 1, 4, 5 and 6 listed in the deficiency notice, described as "property known as 3333 Manor Drive"; "the amount of $13,292.42 withdrawn * * * by Joseph * * * from the decedent's special account * * "; "the difference210 between $90,000.00, advanced by decedent to Joseph * * * to effectuate settlement of certain claims * * * and $35,000.00 the amount for which the claims were actually settled * * "; and "$3,500.00 paid by decedent to the Arizona Title Guarantee Trust Company * * on behalf of Joseph * * ," respectively. No part of the $119,760 debt allegedly owed by decedent to Joseph, including the $6,706.33 remaining in controversy, represented a personal obligation of decedent existing at the time of his death. The reported debt of $47,270.23 represented as due Elizabeth M. Van Syckle was a personal obligation of decedent to Van Syckle existing at the time of his death. I - Issue 1 In order to avoid the effect of May v. Heiner 2 and of the Technical Changes Act 3 reestablishing the principle of that case, 4 respondent fastens upon an instrument executed by decedent 28 days after the passage of the March 3, 1931, Joint Resolution, 5 and refuses to recognize the effect of the conveyance originally executed by decedent in 1918 and of which the 1931 document was merely a formal amendment. We cannot view the Technical Changes Act as having this effect. 211 Respondent's contention on this first and principal issue is indeed required to travel over a difficult path. It is necessary to assume that decedent in his settlement of his stepdaughter's threatened contest of his wife's will made the transfers and created the trust in dispute under circumstances which do not bring into play the doctrine of Lyeth v. Hoey, 305 U.S. 188">305 U.S. 188, and its extension for estate tax purposes through Milner 6 and Reed 7 to cover similar situations. It is then necessary to assume that decedent's life estate under the trust - the same interest he would have taken under the then probated portion of his wife's will - was, within the purport of section 811 (c), the retention for his life of the possession, enjoyment or right to the income from property which he rather than his deceased wife had transferred. Decedent executed the trust agreement not only in his individual capacity but as executor of his wife's will, and presumably conveyed to the trustees not only all his own interest212 but also the interest of the estate. He could validly accomplish this because all those actually or potentially interested under his wife's will were beneficiaries under the trust and agreed to its execution. 8 And the original conveyance was not ineffectual for want of an existing res as respondent would have us hold both because decedent acted not only in his individual capacity but also as executor in settling the threatened will contest, and because the trust covered his own life estate as well as the ultimate disposition of the property, although respondent seems to concede that even the remainder was also subject to his control at the time. 9213 It seems to us to follow that there was nothing left upon which any future conveyance by decedent could operate. The probate of the second codicil in 1921 which purported to give decedent a fee could not in our view be effective to revest title in him. The settlement of the will contest culminating in the 1918 trust would have estopped him to claim any interest opposed to his stepdaughter, the adverse party. 4 Page on Wills, sections 1402, 1757; Simes, Law of Future Interest, Vol. 1, section 234; Shellabarger v. Commissioner (C.A. 7), 38 Fed. (2d) 566; Westport Paper-Board Co. v. Staples, 127 Conn. 115">127 Conn. 115, 15 A. 2d 1; Cole v. Cole, 292 Ill. 154">292 Ill. 154, 126 N.E. 752">126 N.E. 752. See Dare v. New Brunswick Trust Co., 122 N.J. Eq. 349">122 N.J. Eq. 349, 194 A. 61">194 A. 61; Kane v. Lodor, 56 N.J. Eq. 268">56 N.J. Eq. 268, 38 A. 966">38 A. 966. But even if we assume in respondent's favor both of these premises, there remains what seems an insuperable dilemma. Decedent did not purport to make any transfer whatsoever by the 1931 document but merely to correct certain descriptions included in the original trust. If there was a transfer at all, it must have been effective by reason of the 1918 agreement214 to which concededly the Technical Changes Act would apply. Otherwise the property would have remained in decedent's ownership at all times. This alternative, however, is inadmissible in view of the fact that in the deficiency notice and on brief respondent charges petitioner with the value of the trust property only as a "transfer." We are satisfied that decedent's retention of interests in the trust property was not adequate to warrant its inclusion in the gross estate. II An alternative contention involving some 4,000 shares of the Spingler-van Beuren corporation, the form into which some of the trust property was transmuted, is presented affirmatively by respondent's amended answer. The question is whether the settlement after decedent's death of a dispute involving the 1918 Trust pursuant to which these shares were to be delivered to petitioner and decedent's son requires their inclusion as a part of the estate. It is unnecessary to determine whether the decree incorporating that settlement retroactively modified the 1918 agreement so as to retain in the decedent the fee ownership of a part of his wife's estate, represented by this property and carved out of the stepdaughter's215 share which was to go to her issue under the trust; or, if not that, whether it was a claim existing at decedent's death, the extent of which would be measured by the value of the shares themselves. If we grant either of these two propositions, there remains as a necessary element of proof the value of the shares at the date of death. In view of the manner in which the issue is presented, the burden rested upon respondent, Rules of Practice before the Tax Court of the United States, Rule 32; and petitioner's counsel made it clear at the trial that he intended to hold respondent strictly to this requirement. There is no evidence in the record on this question. It is of course true that as far as the principal issue is concerned petitioner would have been defeated on this question because no evidence was produced and on the issue as presented by the deficiency notice and his petition the burden was his. But that cannot be viewed as a concession on his part in respect of any phase of the case as to which respondent has the burden. Where that situation exists the party upon whom the burden lies must fail if it is not carried. Nathan Cohen, 7 T.C. 1002">7 T.C. 1002. On this alternative216 issue the determination must accordingly be in petitioner's favor. III - Issues 2, 3, 4 and 6 Once the conception is accepted that decedent inherited from his deceased wife a life estate with remainder over to their son, most of the remaining issues fall into place. Although decedent could consume the corpus in case of need, 10 any of this property remaining at his death in its primary form or as converted would go to the son, not from decedent but from the original testator. Estate of Gertrude Leon Royce, 46 B.T.A. 1090">46 B.T.A. 1090; see also Hugh D. Rhodes, et al., Administrators, v. Commissioner, 41 B.T.A. 62">41 B.T.A. 62, affirmed (C.A. 8), 117 Fed. (2d) 509. The traceable proceeds of the original property thus cannot have been the subject of a transfer by decedent in contemplation of death. The balance is conceded to be includible in the estate. By the same token, however, decedent was not chargeable with any indebtedness to his son on account of estate property dissipated in decedent's lifetime. No claim on this account against the estate is allowable. The foregoing items are disposed of in detail in our findings. Respondent makes217 much of the fact that both decedent and the son filed gift tax returns covering some of the items in controversy. But in view of the conceded transfer of decedent's life estate, some gift, and hence some gift tax, and so some gift tax return might well have been involved. It does not follow that decedent was making a transfer in the nature of a testamentary disposition of a remainder over after his own life estate over which he had no power of disposition by will. 11IV - Issue 5 Two additional items must be discussed in greater detail. Respondent refuses to concede the traceability of the balance in decedent's Special Account at the Valley National Bank which was withdrawn by the son and has been determined to be a gift in contemplation of death; and we think petitioner incorrectly asserts that respondent's counsel made any such concession at the hearing. Nevertheless, the undisputed facts218 permit of no other conclusion. It is stipulated that of the proceeds of the sale of bonds of decedent's wife's estate $19,000 was deposited in the Special Account. The $13,292.42 item with which we are now concerned was the entire balance then remaining in that account. Even assuming, as respondent insists, that decedent's personal funds could have been commingled in the same account, we must presume that he expended these funds first and refrained from invading the corpus of his wife's estate any further than was necessary. Bogert, Trusts and Trustees, Vol. 4, part 2, section 926; Scott on Trusts, Vol. 3, section 517; Hammons v. National Surety Co. (Ariz.), 287 P. 292">287 P. 292; General Motors Acceptance Corp. v. Larson, 110 N.J. Eq. 305">110 N.J. Eq. 305, 159 A. 819">159 A. 819. This would mean that the entire remaining balance as finally withdrawn was traceable to the wife's estate, and we have so found as a fact. That being so, decedent had no remainder estate of which he could make a transfer in contemplation of death, and the item must be treated similarly to those in the preceding paragraph. V - Issue 7 Finally, the claimed deduction for the Van Syckle indebtedness must in our view219 be allowed. Respondent concedes that "There is therefore no doubt that decedent owed this money to Miss Van Syckle when he died." His only resistance to the scheduling of the item is that no claim was filed or allowed in the probate proceedings. But it appears to be conceded that interest payments on the debt are being maintained. And there seems no disposition to deny it as a valid and continuing obligation of the estate. Under the circumstances we think its disallowance was error. Estate of Walter Thiele, 9 T.C. 473">9 T.C. 473. Decision will be entered under Rule 50. Footnotes1. They consisted in part of withdrawals for living and household expenses of decedent and Joseph; allowances to Joseph, payments of life insurance premiums, a $90,000 withdrawal transferred to Joseph to negotiate settlement of the Charles E. and Margaret S. Heydt claim, and payments of Federal income taxes.↩2. 281 U.S. 238">281 U.S. 238↩. 3. P.L. 378, 81st Cong., 1st Sess., (1949); 63 Stat. 891, 895-896: "* * * The provisions of section 811 (c) (1) (B) of [] code shall not, in the case of the decedent dying prior to January 1, 1950, [extended by the Revenue Act of 1951, sec. 608, to January 1, 1951] apply to - "(1) a transfer made prior to March 4, 1931; * *" ↩4. Pruyn's Estate v. Commissioner (C.A. 2), 184 Fed. (2d) 971↩. 5. 46 Stat. 1516.↩6. Estate of Mary Clare Milner, 6 T.C. 874">6 T.C. 874↩. 7. Reed's Estate v. Commission (C.A. 8), 171 Fed. (2d) 685, reversing 10 T.C. 537">10 T.C. 537↩.8. Decedent's son Joseph, then a minor, was a beneficiary but did not sign. His interest was not adversely affected. ↩9. "Decedent had a life interest in this property under his wife's will, together with the full power and authority to dispose of the same by sale, when and how he chose, and to use the proceeds for such uses and purposes as in his judgment were necessary for his own proper needs and for the education and maintenance of the son and daughter. Under the will, the children were to have a remainder interest only in the proceeds, if any, which remained upon his death." Respondent's brief, p. 51.↩10. See footnote 9.↩11. Although not argued, it may be well to note that Internal Revenue Code, section 811 (f)↩, is inapplicable by its terms, see Act of December 17, 1942 (Pub. 209), section 403 (d); Powers of Appointment Act of 1951, section 2; S. Rept. 382, 82nd Cong., 1st sess.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619624/	ERNEST C. SWIGERT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSwigert v. CommissionerDocket Nos. 255-80, 15780-80.United States Tax CourtT.C. Memo 1982-500; 1982 Tax Ct. Memo LEXIS 244; 44 T.C.M. (CCH) 992; T.C.M. (RIA) 82500; August 31, 1982. 244 Held: Petitioner's chartering of a canal barge was not an activity engaged in for profit. Homer W. Keller,James D. Broadway,Steven H. Vogel, and Cheryl Dunlavey Ogolin, for the petitioner. Gerald Beaudoin, for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to tax in the following amounts: Addition to TaxYearDeficiencySec. 6651(a) 11970$22,270.56$5,567.64197117,478.904,369.72197240,181.8310,045.46197321,781.625,445.51197422,025.006,284.00197535,864.0013,862.00197621,422.009,055.00197720,904.0019789,997.00The primary issue for decision is whether petitioner is precluded from deducting net operating losses claimed with respect to his chartering of a canal barge on the ground that his boat chartering operation was not an activity engaged in for profit. We must also determine whether 245 petitioner's failure to timely file his income tax returns for the years 1970 through 1976 was due to reasonable cause. FINDINGS OF FACT The stipulation of facts and exhibits attached thereto are incorporated herein by reference. It is stipulated that petitioner was a resident of Nijmegen, The Netherlands, when he filed the petition in this case. Petitioner is unmarried. Petitioner was employed by Hyster Company in Peoria, Illinois, from 1949 through November 1952, at which time he was transferred to Nijmegen, The Netherlands. In Nijmegen, he was assistant managing director of Hyster B.V., a subsidiary of Hyster Company, and was involved in the organization and development of a manufacturing plant established by Hyster Company in Nijmegen. After this subsidiary was fully organized, Hyster Company proposed to transfer petitioner to Sao Paulo, Brazil, to organize another subsidiary in that country. Petitioner declined the transfer, and as of Janury 1, 1960, he ceased working for Hyster Company. In 1956 petitioner built a small boat, which he used as a place where he could go and relax. When he decided to remain in The Netherlands rather than accept the proposed transfer to Brazil, 246 he commenced with his plan for the construction of a large, luxurious canal barge, capable of cruising through the over 60,000 miles of navigable rivers and canals in Europe. The boat was designed so that petitioner could use it as his residence and also charter it to persons wanting to cruise the Western European inland waterways. Petitioner did most of the designing of the boat himself and personally supervised construction. The boat was completed in 1960 and christened the Alcuin. To assure that the Alcuin would be able to navigate virtually all the canals of Western Europe, petitioner took the utmost care to gather information about canal sizes and regulations. However, he did not undertake any comparable analysis to project whether the chartering of the boat would be a profitable business venture, and he had no prior experience with such an operation. At trial he could recall having sought business advice before the Alcuin was built from only two persons, both employees of the American Express Company, who did no more than discuss with him the general concept of whether an all-inclusive charter boat tour would appeal to American tourists. However, in 1960 when the Alcuin 247 was built, there were no operations in Western Europe offering canal boats for the type of charter contemplated by petitioner, that is, a luxury cruise, with all meals, beverages and other services included in a basic fee, although many operations offered boats for charter on a self-drive basis or with only a few services provided. The Alcuin is 75 feet in length and has two decks. The lower deck has six bedrooms, four bathrooms, crew's quarters and an engine room. The main deck has a galley, dining salon, sitting room, sun deck and bridge. The vessel is equipped with full living facilities, including such amenities as a refrigeratorfreezer, electric washing machine and dryer, stereo record player and color television set. Not only were charter passengers allowed full use of all facilities on the boat but they were also provided with all meals, wine and liquor included in a set price. A private car, with one of the crew serving as chauffeur, accompanied the boat on charter trips, so that passengers could take touring and shopping trips to places near the canals. The Alcuin has served as petitioner's primary residence since it was constructed, with petitioner living in one of 248 the double-berth cabins. The crew of the Alcuin also lived aboard the vessel, at least during the charter season. In addition to furnishing living quarters for the captain and crew, petitioner furnished them food and paid salaries and related taxes on an annual basis. From the commencement of operation in 1960 through approximately 1970, the Alcuin's crew consisted of a captain, chef, and four or five stewards. On charters during this period, petitioner served as charter director only. After his chef left in 1970, petitioner assumed the cooking responsibilities himself on the charters. During 1971 the crew size was also reduced by retaining only two stewards on a full-time, annual basis. The other stewards were replaced by casual labor hired only while the boat was chartered. Thus, from 1971 through 1975, the full-time crew of the Alcuin consisted of a captain, two stewards and petitioner, functioning on charters as chef and charter director. As charter director, petitioner planned the daily itinerary of the cruise, arranged sightseeing tours and excursions, and handled correspondence, accounting and other records. As chef, petitioner purchased food daily, drew up menus, and prepared 249 all the meals on the boat. He cooked not only for the passengers but also for the entire crew. However, he was assisted in cooking by other crew members, particularly in the more mundane tasks. During the entire period from 1960 through 1975, petitioner undertook only sporadic and minimal advertising of the boat charter operation, primarily in magazines aimed at American travelers, such as Yachting, The New Yorker, and the International Herald Tribune. Petitioner felt that advertising was not worth the expense; he obtained bookings primarily from word-of-mouth referrals and repeat travelers during the years in issue. Additionally, he made no direct effort to obtain charter participants from American travel agents, although he did use a Paris travel agency to provide some services to charter participants and this agency had some contact with American travel agents. The charter boat season in Western Europe is approximately 24 weeks--from early May through the end of October. However, it was not possible for petitioner to utilize this entire season for charter purposes because, as he testified, he generally needed 10 days' time between charter trips to provision and prepare the 250 boat for the next charter. Prospective bookings in 1970 were 15 weeks; in 1971, 10 weeks; in 1972, 20 weeks; in 1973, 18 weeks; in 1974, 18 weeks; and in 1975, eight weeks. However, because of significant cancellations in most of these years, the Alcuin was never chartered for more than 14 weeks in a season. In 1971, the Alcuin was actually chartered for 10 weeks; in 1972, 13 weeks; in 1973, 11 weeks; in 1974, 14 weeks; and in 1975, five weeks. The evidence is somewhat conflicting as to what amount was charged to persons chartering the Alcuin in the years in issue. Based primarily on petitioner's own testimony, we find the charge per week for a group of up to seven persons was $3,000 in 1970, 1971 and 1972; $3,500 in 1973; $4,000 in 1974; and $5,000 in 1975. If there were in excess of seven passengers, $50 per day per additional passenger was added to the basic charter fee. The maximum capacity of the Alcuin was nine passengers, although there is no evidence that it often carried this many. Since the end of the 1975 season, petitioner has not offered the boat for charter but has been trying to sell it for $150,000 net of sales cost, which would merely allow him to recoup his 251 initial $150,000 acquisition cost of the boat. Petitioner had substantial net operating losses from the operation of the Alcuin in every year since the boat was constructed. The following table shows gross receipts, expenses and net operating losses for the years 1962 through 1978: Net OperatingYearGross receiptsExpensesLoss1962$25,134.12196321,374.48196431,085.60196536,065.051966$35,163.50$59,415.6024,252.10196731,291.0059,021.8027,730.80196833,887.0070,276.9536,389.95196939,789.0070,114.0030,325.00197025,752.5082,646.6156,894.11197130,311.0077,745.4547,434.45197232,720.0094,510.9261,790.92197337,001.00108,007.6871,006.68197454,675.00117,992.0063,317.00197520,660.0070,318.0049,658.00197644,678.0044,678.00197727,925.0027,925.00197820,036.0020,036.00It has been stipulated that petitioner maintained complete and accurate records with respect to the operation of the Alcuin. Respondent also does not contest that petitioner did not deduct as business expenses the cost of food he consumed while on the charter trips. 2252 Since the construction of the Alcuin, petitioner has had no employment other than his work in chartering the boat. His continual losses from the charter boat operation have not meant, however, that he has received no income in these years. His losses from the boat operation were used to offset, completely or in large part, trust and dividend income received in these years. During the years 1966 through 1978, petitioner received trust and dividend income in the following amounts: Trust andYearDividend Income1966$47,286.11196749,791.04196849,842.00196954,451.00197056,897.53197157,696.80197258,151.88197356,853.74197460,807.001975106,634.00197678,304.531977106,790.001978119,925.00 For each of the taxable years in issue, petitioner filed a Federal individual income tax return. However, the returns for the years 1970 through 1976 were not filed timely. The following table lists the due dates and the dates the returns were filed: TaxableDate ReturnYearDue DateFiled19706/15/7110/ 1/7219716/15/725/30/7419726/15/735/ 3/7419736/15/749/29/7519744/15/753/22/7819754/15/763/22/7819764/15/773/22/78On 253 audit, respondent disallowed the net operating losses attributable to the operation of the Alcuin, which petitioner had deducted on his returns in the years at issue. The reason for disallowing these claimed deductions was respondent's determination that the operation of the boat was not an activity engaged in for profit. ULTIMATE FINDING OF FACT Petitioner's operation of the Alcuin was not an activity engaged in for profit during the years in issue. OPINION The question to be considered is whether petitioner had an actual and honest profit objective in owning the canal boat, Alcuin, and making it available for charters during the years in issue, so that he may deduct all the expenses and depreciation incurred in owning and operating the boat. Initially, we note that this case is dissimilar from many of the other cases relating to the existence of a profit motive because the type of activity undertaken by petitioner here would not normally be characterized as a hobby. Certainly, a charter boat operation, if carried on in a businesslike fashion, is the type of activity that may constitute a trade or business for which deductions are allowed under section 162. 3255 Here, the activity 254 had many of the characteristics of a true business. Petitioner kept adequate books and records and ran the charter trips in a professional but accommodating manner, which evidently impressed enough of his passengers so that many returned for subsequent trips or recommended the Alcuin to others. Furthermore, petitioner unquestionably worked hard on the charter trips, particularly after he assumed the duties of chef. There is simply nothing to support respondent's contention that, because he apparently enjoyed his work as chef, petitioner's activities during the charters were predominately pleasure rather than work. A taxpayer's enjoyment of the type of job commonly performed for pay cannot automatically transform it into a hobby. Jackson v. Commissioner,59 T.C. 312">59 T.C. 312, 317 (1972). However, the existence of characteristics of a business such as those discussed above does not conclusively establish whether petitioner had an objective to derive a profit from the activity. Carter v. Commissioner,645 F.2d 784">645 F.2d 784, 786 (9th Cir. 1981), affg. a Memorandum Opinion of this Court; Bolt v. Commissioner,50 T.C. 1007">50 T.C. 1007, 1013 (1968). The test to be applied is whether the taxpayer was engaged in the activity with the predominate purpose and objective of making a profit. Allen v. Commissioner,72 T.C. 28">72 T.C. 28 (1979); accord, Golanty v. Commissioner,72 T.C. 411">72 T.C. 411 (1979), affd. per order 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659 (1979). The taxpayer's expectation of profit need not be a reasonable one, but the taxpayer must enter into, or continue, the activity with the objective of making a profit. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 645 (1982), on appeal (D.C. Cir. June 1, 1982), Golanty v. Commissioner,supra at 425-426; Churchman v. Commissioner,68 T.C. 696">68 T.C. 696 (1977); section 1.183-2(a), Income Tax Regs.Here, petitioner had the burden of showing an objective to make a profit from his ownership and operation of the Alcuin during the years 1970 through 1978. Boyer v. Commissioner,69 T.C. 521">69 T.C. 521, 537 (1977); Benz v. Commissioner,63 T.C. 375">63 T.C. 375 (1974); Rule 142(a), Tax Court Rules of Practice and Procedure. Yet, he introduced no evidence that he ever projected receipts and expenses. 4 By 1970, the first 256 of the years in issue, petitioner had suffered net operating losses for 10 consecutive years, a fact that should have spurred any entrepreneur either to take drastic action to revamp his operation so that the possibility of such recurring losses would be reduced or to abandon the enterprise altogether. See Wittstruck v. Commissioner,T.C. Memo. 1980-62, affd. per curiam 645 F.2d 618">645 F.2d 618 (8th Cir. 1981). 5 In view of the operation's history of consistently large net operating losses, we must assume that petitioner recognized in 1970 that the operation had severe problems. We note, too, that petitioner had seven years' business experience with the Hyster Company organizing its Dutch subsidiary, which should have made him well aware of the need to evaluate his progress toward reducing the potential losses. Petitioner points to the fact that he significantly reduced crew size in 1971. This probably did reduce his overall expenses in 1971 but it was insignificant in relation to the 1971 net operating loss of over $47,000. The trend toward larger annual net operating losses commenced again in 257 1972. Furthermore, after 1971 petitioner evidently made no substantial operational changes, even though his expenses and net operating losses rose dramatically over the next few years. 6 When we look at the possible gross receipts petitioner could have anticipated receiving in any of the years in issue and compare these to expenses that he must have anticipated, it is obvious that there was never any possibility the operation could come anywhere close to making a profit. The record shows that the charter season was approximately 24 weeks, charters during the years in issue averaged two weeks in duration, and a minimum of one week was necessary for preparations between charters. Thus, the best that petitioner could have hoped for was that the boat would be chartered for 17 weeks per year. In 1970, he charged $3,000 per week for a party of seven, which would 258 have produced gross receipts of $51,000 had he succeeded in securing charters for all possible weeks. This amount would have been far less than what would have been needed to defray even the prior year's expenses of $70,114. Moreover, petitioner should have expected expenses to rise because of inflation and his failure to institute any substantial cost saving measures. Even if we assume that petitioner could have secured nine passengers for all these charters, his gross receipts would have been increased by only $11,900, leaving gross receipts still over $7,000 below expenses. Listed below are similar computations for the other years in issue during which charters were offered. They are also based on the assumptions, highly favorable to petitioner, that the Alcuin would be chartered for 17 weeks per year, that there would be nine passengers on each cruise, and that expenses would equal those of the prior year. Projected GrossProjectedProjected NetYearReceiptsExpensesOperating Loss1971$62,9007259 $64,647$1,747197262,90077,74514,845197371,40094,51123,111197479,900108,00828,108197596,900117,99221,092These objective computations, based on assumptions that would have been used only by an incorrigible optimist, are overwhelming evidence of the absence of a profit motive, and we believe they should be accorded far more weight than petitioner's own statements that his motivation was "to make a living" and that it was his opinion that he was operating a business. 8261 See Dreicer v. Commissioner,supra;Churchman v. Commissioner,supra at 701. Our determination that it was objectively impossible 260 to anticipate making a profit is in accord with what really occurred in this situation. We note that petitioner had a long history of unexplained losses in his operation of the Alcuin, a factor generally seen as persuasive evidence of the absence of profit motivation. Golanty v. Commissioner,supra at 427; Allen v. Commissioner,supra at 34. Nor can we overlook the fact that petitioner used the Alcuin as his personal residence for the entire year, not just when it was chartered. We note, too, that petitioner had an independent source of substantial income during the years in issue and that the deductions claimed with respect to the Alcuin were used to offset his income, a factor consistent with a finding that profit motive was lacking. See Golanty v. Commissioner,supra at 428-429. The early years, 1960 through 1969, are not before the Court and we make no determination as to petitioner's original intent. It is important, however, to realize that this early period was more than sufficient as a "start-up" period, 9 even under the circumstance that petitioner was in fact the initiator of a new type of business activity. The issue here is whether petitioner has shown that he continued his charter operation after 1969 with the requisite profit motive, in view of the 10-year history of losses. By 1970, petitioner knew that his then operational methods could not produce a profit. He must also have known that the rather minor reductions in cost achieved in 1970 and 1971 could not, even under the most favorable assumptions, convert the annual loss into a profit. Continuation of an activity under these circumstances creates at least a clear inference that profits were irrelevant, hence that no profit motive existed. 10 Petitioner has done nothing to rebut this inference. On this record 262 we must conclude that petitioner has failed to establish that his ownership and operation of the Alcuin was a profit-oriented trade or business for which expenses and depreciation may be deducted under sections 162 and 167. Therefore, we agree with respondent that only those deductions that are allowed by other I.R.C. provisions, including section 183, 11263 may be taken in the years in issue. Having disposed of the primary issue as to the existence of a profit motive, we turn now to an examination of whether respondent was justified in determining additions to the tax under section 6651(a). Petitioner claims that his failure to timely file his returns was due to his inability to get access at any one time to all his books and records, which were stored with various friends and acquaintances in Nijmegen and Paris. However, petitioner himself testified that he "simply didn't have the time" to file his returns, a totally meritless argument, particularly in view of the fact that he had no job other than his work on the Alcuin during the charter season. That his records may have been stored in different places, a situation entirely of his own making, provides him with no excuse for his failure to timely file his returns.Therefore, we find that petitioner is liable for all the additions to the tax set forth in the notices of deficiency with respect to the years 1970 through 1976. Decisions will 264 be entered for the respondent.Footnotes*. This case was tried before Judge Cynthia H. Hall, who has resigned from the Court. By order of the Chief Judge, the case was reassigned to Judge Meade Whitaker↩ for disposition.1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended.↩2. We assume that petitioner did not deduct his direct personal expenses, such as food, during the remainder of the year when the boat was not on charter. The record does not reflect the extent to which operation and maintenance expenses of the boat incurred in periods outside the charter season were deducted.3. Compare Jackson v. Commissioner,59 T.C. 312">59 T.C. 312 (1972), and McLarney v. Commissioner,T.C. Memo 1982-461">T.C. Memo. 1982-461; with Martin v. Commissioner,50 T.C. 341">50 T.C. 341 (1968), and Rand v. Commissioner,34 T.C. 1146">34 T.C. 1146↩ (1960).4. Compare McLarney v. Commissioner,supra.↩5. See also Worley v. Commissioner,T.C. Memo. 1981-51↩.6. Petitioner tried to characterize the losses in the years in issue as not anticipated but due to unforeseen fluctuations in currency exchange rates and political attitudes. In view of the track record of losses throughout the 1960's and our objective computations set forth below, we find this argument to be devoid of merit.↩7. Because, as we have previously discussed, petitioner reduced his crew size in 1971, we have allowed a reduction of $18,000 in anticipated expenses. The $18,000 figure was arrived at by taking expenses on the Schedule C for 1970 for crew salaries, taxes, food and other expenses, and by multiplying such crew expenses by three-sevenths, to reflect the reduction in the size of the crew from its maximum of seven persons on an annual basis to three on an annual basis and two hired during the charter season only. Because the Schedule C and other evidence in the record did not allocate food, liquor, wine and similar expenses between the crew, petitioner, and passengers, we reduced the overall food, liquor, etc. expenses of $15,659.40 by approximately $5,000 for purposes of this corporation.8. Petitioner's statement that he was motivated by a desire "to make a living" related to his motive in 1960 for having the Alcuin built and starting a charter operation. When he expressed his opinion that he was operating a business when he ran the Alcuin, he was not referring to any particular year. Thus, the slight weight to be given to these statements is even further reduced by the fact that they do not necessarily refer to the years in issue.9. See Worley v. Commissioner,supra.↩10. See Wittstruck v. Commissioner,T.C. Memo. 1980-62, affd. per curiam, 645 F.2d 618">645 F.2d 618↩ (8th Cir. 1981).11. 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).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619626/	JEWEL JOHN GUDENSCHWAGER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGudenschwager v. CommissionerDocket Nos. 1776-84; 35179-84.United States Tax CourtT.C. Memo 1988-546; 1988 Tax Ct. Memo LEXIS 575; 56 T.C.M. (CCH) 748; T.C.M. (RIA) 88546; November 29, 1988; As amended December 8, 1988; WITHDRAWN December 21, 1988 575 P did not file Federal income tax returns for 1974, 1975, or 1979 through 1982. P filed unsigned Forms 1040 for 1977 and 1978. P filed his 1976 Federal income tax return in 1982. Although the filing status indicated on the 1976 tax return was "married filing joint return," P's wife did not sign the return. P claimed two personal exemptions on his 1976 return and his unsigned Forms 1040 for 1977 and 1978. P claimed business deductions and a long-term capital loss for 1976. Held: P is not entitled to joint return status. Held further: P had unreported income for 1974, 1975, and 1977 through 1982. Held further: P is not entitled to a deduction for business expenses for 1976. Held further: P recognized a capital loss in 1976. Held further: P is liable for self-employment taxes. Held further: P is only entitled to one personal exemption. Held further: P is liable for additions to tax under sections 6651(a)(1), 6653(a), 6653(a)(1), 6653(a)(2), and 6654, I.R.C. 1954, as amended. Joseph W. Weigel, for the petitioner. Sheldon M. Kay, for the respondent. HAMBLENMEMORANDUM FINDINGS OF FACT AND OPINION HAMBLEN, Judge: Respondent determined deficiencies in and additions to petitioner's Federal income tax as follows: TaxableYearDeficiency1974$ 4,999.0019753,370.0019769,067.2919777,144.0019789,749.0019796,265.0019806,263.0019814,513.0019823,714.00578 TaxableAdditions to Tax Under Section 1Year6651(a)(1)6653(a)6653(a)(1)6653(a)(2)66541974$ 1,250.00$ 250.00----$ 160.001975843.00169.00----148.0019762,266.82453.36------19771,786.00357.00----253.0019782,437.00487.00----311.0019791,566.00313.00----262.0019801,566.00313.00----399.0019811,128.00--$ 226.00 * 347.001982929.00--186.00 ** 362.00The issues for decision are (1) whether petitioner received unreported income in taxable years 1974, 1975, 1977, 1978, 1979, 1980, 1981, and 1982; 579 (2) whether petitioner is entitled to deduct business expenses for taxable year 1976 under section 162; (3) whether petitioner recognized a capital gain or a capital loss from the sale of a residence under the installment method of accounting, and if so, the amount of the capital gain or capital loss; (4) whether petitioner is liable for self-employment taxes on the net earnings from his laundry business under section 1402; (5) whether petitioner's income tax liability should be computed using the rates for married persons filing separately or married persons filing a joint return; (6) whether petitioner should be allowed more than one personal exemption; (7) whether petitioner is liable for additions to tax under section 6651(a)(1) for taxable years 1974 through 1982, under section 6653(a) for taxable years 1974 through 1980, under section 6653(a)(1) for 1981 and 1982, under section 6653(a)(2) for taxable years 1981 and 1982, and under section 6654 for taxable years 1974, 1975, and 1977 through 1982. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. 580 Petitioner resided in West Allis, Wisconsin, when he filed his petitions in these cases. During the years in issue, petitioner was married and operated a small wholesale laundry business. Petitioner did not file Federal income tax returns for taxable years 1974, 1975, 1979, 1980, 1981, or 1982. Petitioner filed a Federal income tax return for taxable year 1976. In signing his return, petitioner indicated that he was filing "under duress." Respondent received petitioner's 1976 tax return in February of 1982. Although the filing status indicated on the 1976 tax return was "married filing joint return," petitioner's wife did not sign the return. Petitioner claimed business deductions on the Schedule C attached to his 1976 Federal income tax return. These claimed business deductions totalled $ 35,832.76. On his 1976 Federal income tax return, petitioner reported a long-term capital loss in the amount of $ 1,208 from the sale of a residence located in Germantown, Wisconsin. Petitioner had originally purchased the Germantown residence for $ 11,700. Petitioner made extensive improvements to the home including adding a living room, a dining room, and a garage with an upstairs, 581 building a shed, and putting in a driveway. The total cost of the improvements was $ 20,950. In 1974, petitioner sold the residence for $ 33,000 but did not receive payment until 1976. Petitioner paid a $ 1,558 commission on the sale. Petitioner submitted unsigned Forms 1040 for the taxable years 1977 and 1978. Respondent received petitioner's 1977 and 1978 Forms 1040 in February of 1982. Petitioner claimed two personal exemptions on his 1976 Federal income tax return and on his unsigned Forms 1040 for 1977 and 1978. Petitioner had no business records for the taxable years 1974, 1975, 1979, 1980, 1981, and 1982. Petitioner failed to introduce into evidence any records for taxable years 1976, 1977, or 1978. On October 27, 1983, respondent issued a notice of deficiency to petitioner. In this notice of deficiency, respondent determined petitioner's tax liability and additions to tax for taxable years 1974 through 1981. On August 14, 1984, respondent issued a notice of deficiency to petitioner. In the August 14, 1984, notice of deficiency, respondent determined petitioner's tax liability and additions to tax for taxable year 1982. For the taxable years 1974, 1975, 582 1979, 1980, 1981, and 1982, respondent determined petitioner's unreported income using Bureau of Labor statistics (sometimes hereinafter referred to as "Statistics"). Respondent's revenue agent used the table contained in the Statistics for a family of four and adjusted that figure to reflect the income for a family of two. Based on petitioner's statement that he had gross receipts of $ 60,000, respondent's revenue agent used the intermediate standard of living tables of the Statistics. Since petitioner lived in West Allis, Wisconsin, a suburb directly adjacent to Milwaukee, Wisconsin, respondent's revenue agent used the Statistics table for a metropolitan area. For taxable years 1977 and 1978, respondent determined petitioner's taxable income by using the information on the Schedule C attached to each of the unsigned Forms 1040 submitted by petitioner for these years. For taxable year 1976, respondent allowed the following deductions claimed by petitioner on his 1976 Schedule C for his laundry business: Taxes$ 102.16Interest Expense106.64Payroll Taxes1,174.74$ 1,383.54Respondent disallowed the remaining business deductions claimed by583 petitioner for taxable year 1976. Petitioner failed to cooperate with respondent in the ascertainment of his correct taxable income. OPINION The first issue for our consideration is whether petitioner received unreported income in taxable years 1974, 1975, and 1977 through 1982. Respondent determined that petitioner had unreported income for each of these years. Respondent's determinations are presumed correct, and petitioner bears the burden of proving that such determinations are erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a). Taxpayers are required to maintain records sufficient to show whether or not they are liable for any Federal tax. Sec. 6001. Where a taxpayer fails to maintain adequate records, respondent may use other means to determine the taxpayer's taxable income. Sec. 446(b). When a taxpayer files no returns and refuses to cooperate in the ascertainment of his income, respondent has great latitude in determining the taxpayer's tax liability. Giddio v. Commissioner,54 T.C. 1530">54 T.C. 1530, 1533 (1970). One method that this court has allowed respondent to use to reconstruct income is a method based on Bureau584 of Labor statistics. Giddio v. Commissioner, supra at 1533. In this case, petitioner produced no business records. He additionally testified that he had no records for the taxable years 1974, 1975, 1979, 1980, 1981, and 1982, and that the records for taxable years 1976, 1977, and 1978 were no longer available. Petitioner gave no credible explanation for his inability to produce records for 1976, 1977, and 1978. Petitioner filed no Federal income tax returns or any Forms 1040 for the taxable years 1974, 1975, 1979, 1980, 1981, and 1982. For these years, respondent determined petitioner's unreported income by using Bureau of Labor statistics. Petitioner submitted to respondent unsigned Forms 1040 for the taxable years 1977 and 1978. For these years, respondent determined petitioner's unreported income by using the information on the Schedule C attached to each of the unsigned Forms 1040 submitted by petitioner. Respondent's revenue agent, Melody Schrank, testified that, in ascertaining petitioner's unreported income, respondent used statistics tables for a family of four (adjusted for a family of two) with an intermediate standard of living in a metropolitan585 area. Petitioner objected at trial to this testimony on the grounds that Revenue Agent Schrank was not qualified as an expert to testify regarding the basis for any figures used by respondent. We overruled petitioner's objection because the witness was not testifying as an expert when she described the methodology used by respondent to ascertain petitioner's unreported income. The witness testified regarding what methodology was used, not the validity of that methodology. Since the witness was not providing scientific, technical, or other specialized knowledge to assist the court to understand the evidence in this case, rule 702 of the Federal Rules of Evidence2 is not applicable and the witness's testimony will not be treated as expert testimony. Petitioner also objected at trial to Revenue Agent Schrank's testimony because petitioner claimed respondent had violated this Court's pre-trial order by not listing Revenue Agent Schrank as an expert witness on the pre-trial memorandum and by not submitting an expert witness report. We overruled petitioner's objection because respondent was not required to file an expert witness report or list Revenue586 Agent Schrank as an expert witness since, as we discussed above, she did not testify as an expert witness. On brief, petitioner contends that respondent relied on an improper method when it used Bureau of Labor statistics to ascertain petitioner's taxable income. Petitioner argues that the figures used by respondent were arbitrary and that the burden of going forward with the evidence should, therefore, be shifted to respondent. We find petitioner's argument to be unpersuasive. Respondent is allowed to use Bureau of Labor statistics to ascertain a taxpayer's income when a taxpayer files no returns and refuses to cooperate with respondent. Giddio v. Commissioner,54 T.C. at 1533. Respondent has introduced credible testimony indicating that the Bureau of Labor statistics were not used in an arbitrary manner. Revenue Agent Schrank testified that the table for a metropolitan area was used because petitioner lived in West Allis, part of the Milwaukee metropolitan area. Revenue Agent Schrank also testified that figures for an intermediate standard of living587 were used based on petitioner's statement that he had received $ 60,000 in gross receipts. Revenue Agent Schrank further testified that an adjustment factor was used to adjust the figures in the table, which is based on a family of four, to give an accurate figure for a family of two. According to Revenue Agent Schrank, the adjustment factor for a family of two was used because petitioner had listed his wife on his income tax returns. On the basis of this testimony, we find that respondent's use of the Bureau of Labor statistics was not arbitrary. Therefore, the burden of going forward as well as the burden of proof remains on petitioner. Petitioner's evidence regarding the amount of income he derived from his laundry business rests solely on his own self-serving testimony. Petitioner's testimony is uncorroborated and not substantiated by any other evidence. We also note that petitioner's testimony was equivocal and evasive. We find that petitioner has not introduced evidence sufficient to prove that respondent's determinations are erroneous. Accordingly, we sustain respondent's determination that petitioner had unreported income for taxable years 1974, 1975, and 1977 through588 1982. Petitioner chose not to file returns, so his situation is of his own doing. His lack of records, we determine, also is of his own doing. Petitioner cannot bootstrap himself from this situation on patently questionable testimony of himself and his other witness which the Court found incredible. Petitioner not only failed to meet his burden of proof, he convinced the Court that he was determined to create the illusion of having business records. The second issue for our consideration is whether petitioner is entitled to deduct business expenses under section 162 for taxable year 1976. Respondent disallowed all but $ 1,383.54 of the $ 35,832.76 in business deductions claimed by petitioner. Respondent's determinations are presumed correct, and petitioner bears the burden of proving that such determinations are erroneous. Welch v. Helvering, supra; Rule 142(a). Petitioner introduced into evidence no books, records, or other documents to substantiate his claimed expenses. Petitioner's only support for his claimed expenses was his own self-serving testimony and the testimony of his former bookkeeper. Petitioner's testimony was vague and unconvincing. 589 A court is "not bound to accept testimony at its face value even when it is incontroverted, if it is improbable, unreasonable or questionable." Commissioner v. Smith,285 F.2d 91">285 F.2d 91, 96 (5th Cir. 1960). The bookkeeper's testimony was also unpersuasive and incredible. The bookkeeper testified that the figures on the return were "based on absolute fact" and based on bills, receipts, and other information. However, the bookkeeper did not testify with any specificity regarding the basis for any of the deductions claimed by petitioner. The bookkeeper's testimony was not corroborated by any documentary evidence. Simply put, we determine the bookkeeper's testimony not worthy of accreditation. Consequently, we find that petitioner has failed to adequately substantiate his claimed business expenses for taxable year 1976. We recognize that any laundry operation such as petitioner's would have a few operating expenses such as electricity and water, but petitioner chose to stonewall the revenue system by failing to report his income and expenses, if there were any expenses, and he has flagrantly refused to maintain and submit records of his business operation. Petitioner590 should not be rewarded for his refusal to maintain records and file tax returns. Cf. Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930); Sugar Creek Coal and Mining Co. v. Commissioner,30 B.T.A. 420">30 B.T.A. 420, 423 (1934). Accordingly, we sustain respondent's determination on this issue. The third issue for our consideration is whether petitioner recognized a capital gain or a capital loss from the sale of a residence under the installment method of accounting, and if so, the amount of such capital gain or loss. Respondent determined that petitioner recognized a capital gain on the sale of a residence and that the gain should have been reported on the installment method of accounting during the taxable years 1974, 1975, and 1976. Respondent determined that petitioner recognized capital gains of $ 4,760 in 1974, $ 161 in 1975, and $ 17,680 in 1976. Respondent's determinations are presumed correct, and petitioner bears the burden of proving that such determinations are erroneous. Welch v. Helvering, supra; Rule 142(a). Petitioner purchased the residence at issue for $ 11,700 and made substantial improvements to the property. The total591 cost of the improvements was $ 20,950. Petitioner sold the residence in 1974 but did not receive payment until 1976. Petitioner reduced the sales price of $ 33,000 by commissions paid of $ 1,558 to arrive at an amount realized of $ 31,442. Petitioner calculated his capital loss by subtracting from his amount realized his cost of the property and improvements, as follows: Amount realized$ 31,442 Cost of property and improvements-32,650 ($ 1,208)Section 453 provided that a sale of real property may be reported on the installment method if there is no payment in the taxable year of the sale or a payment of less than 30 percent of the selling price in the taxable year of the sale. 3 Petitioner's sale of his residence qualified as an installment sale because petitioner received the entire payment in a taxable year after the taxable year of the sale. We find that petitioner correctly recognized a long-term capital loss of $ 1,208 in 1976. 592 The fourth issue for our consideration is whether petitioner is liable for self-employment taxes on the net earnings from his laundry business under section 1402. Respondent determined that petitioner was liable for self-employment taxes under section 1402 for each year at issue. Respondent's determinations are presumed correct, and petitioner bears the burden of proving such determinations to be erroneous. Welch v. Helvering, supra; Rule 142(a). Petitioner's only evidence relating to liability for self-employment taxes is his own self-serving testimony regarding his income from the laundry business. Petitioner's testimony was not corroborated by any other evidence. Petitioner has not introduced sufficient evidence on this issue to carry his burden of proof. Accordingly, we sustain respondent's determination on this issue. The fifth issue for our consideration is whether petitioner's income tax liability should be computed using the rates for a married person filing separately or married persons filing a joint return. Respondent determined petitioner's tax liability for each year at issue using rates for married persons filing separately. Petitioner contends593 that the rates for married persons filing jointly should be used for each year at issue. Respondent's determinations are presumed correct, and petitioner bears the burden of proving that such determinations are erroneous. Welch v. Helvering, supra; Rule 142(a). For the taxable years 1974, 1975, and 1979 through 1982, petitioner failed to file Federal income tax returns or Forms 1040. The Forms 1040 submitted for 1977 and 1978 were not valid returns because they were not signed by petitioner. Vaira v. Commissioner,52 T.C. 986">52 T.C. 986, 1005 (1969), revd. and remanded on other grounds 444 F.2d 770">444 F.2d 770 (3d Cir. 1971). Therefore, petitioner failed to file valid Federal income tax returns for the taxable years 1974, 1975, or 1977 through 1982. Accordingly, petitioner may not now elect joint filing status. Thompson v. Commissioner,78 T.C. 558">78 T.C. 558 (1982); Phillips v. Commissioner,86 T.C. 433">86 T.C. 433, 441 n. 7, affd. and revd. on other issues 851 F.2d 1492">851 F.2d 1492 (D.C. Cir. 1988). Millsap v. Commissioner, 91 T.C. (1988), is inapplicable as in Millsap the taxpayer filed a valid joint return before the case594 was submitted for decision. This Court has no sympathy for a taxpayer who, without reasonable cause, fails to file a return. If a taxpayer has not filed a return by the time his case is submitted for decision, it is too late for the taxpayer to file a joint return and elect joint filing status. See Phillips v. Commissioner,86 T.C. at 441 n. 7. In this situation, no returns would be in the record, so this Court would have no basis for finding that the taxpayer had joint return status. If the issue of filing status is not pled, this Court does not have to consider the issue. Rule 34(b)(4). We hold that respondent correctly used the rates for married persons filing separately to calculate petitioner's tax liability for 1974, 1975, and 1977 through 1982. For taxable year 1976, petitioner filed a return and checked the box indicating that the return was a joint return. Section 1.6013-1(a)(2), Income Tax Regs., requires that joint returns be signed by both spouses. However, returns signed by only one spouse can qualify as valid joint returns if both spouses intended to file joint returns. Heim v. Commissioner,27 T.C. 270">27 T.C. 270 (1956), affd. 251 F.2d 44">251 F.2d 44 (8th Cir. 1958).595 Mrs. Gudenschwager did not sign the return filed by petitioner. Petitioner has offered no evidence to establish that Mrs. Gudenschwager intended to file a joint return with petitioner. Therefore, petitioner has failed to meet his burden of proving that Mrs. Gudenschwager intended to join petitioner in filing a joint return for the taxable year 1976. The sixth issue for our consideration is whether petitioner is allowed more than one personal exemption. Respondent determined that petitioner was allowed one personal exemption in each taxable year at issue. Respondent's determinations are presumed correct, and petitioner bears the burden of proving that such determinations are erroneous. Welch v. Helvering, supra; Rule 142(a). Petitioner is allowed one personal exemption for himself under section 151(b). To establish his right to a personal exemption for his spouse, petitioner would have to prove that he was married, that he did not file a joint return, that his wife had no income, and that his wife was not the dependent of another taxpayer. Sec. 151(b). We have found that petitioner was married and did not file joint returns for any of the years at issue. 596 However, petitioner failed to introduce any evidence that his wife had no gross income or was not the dependent of another taxpayer. Therefore, petitioner has failed to prove his entitlement to a personal exemption for his spouse under section 151(b). Petitioner introduced no evidence to establish his right to any other personal exemptions under section 151. Therefore, we find that petitioner has failed to meet his burden of proving his right to more than one exemption. The final issue for our consideration is whether respondent correctly determined additions to tax under section 6651(a)(1) for taxable years 1974 through 1982, under section 6653(a) for taxable years 1974 through 1980, under section 6653(a)(1) for 1981 and 1982, under section 6653(a)(2) for taxable years 1981 and 1982, and under section 6654 for taxable years 1974, 1975 and 1977 through 1982. The burden of proof is on petitioner to establish that he is not liable for these additions to tax. Baldwin v. Commissioner,84 T.C. 859">84 T.C. 859, 871 (1985); Neubecker v. Commissioner,65 T.C. 577">65 T.C. 577, 586 (1975); Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 802 (1972). Section 6651(a)(1) 597 imposes an addition to tax of 5 percent of the amount required to be shown as tax on a return for each month or fraction thereof for which a return is not filed, not to exceed 25 percent in the aggregate. The addition to tax does not apply if the taxpayer establishes that the failure to timely file was due to reasonable cause and not due to willful neglect. Petitioner failed to file returns for 1974, 1975, and 1977 through 1982. The Forms 1040 submitted for 1977 and 1978 did not constitute valid returns because they were not signed by petitioner. Vaira v. Commissioner,52 T.C. 986">52 T.C. 986, 1005 (1969), revd. and remanded on other grounds 444 F.2d 770">444 F.2d 770 (3d Cir. 1971). Respondent received petitioner's 1976 income tax return in February of 1982. Petitioner presented no evidence to meet his burden of proving that his failure to timely file was due to reasonable cause and not willful neglect. The addition to tax under 6651(a)(1) is sustained. Sections 6653(a) and 6653(a)(1) provide for additions to tax if any part of the underpayment is due to negligence or an intentional disregard of rules or regulations. Under sections 6653(a) and 6653(a)(1), negligence is598 a lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner,85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner testified that he had maintained books and records for taxable years 1976, 1977, and 1978, but that those records were no longer in existence. Petitioner testified that he had no records for taxable years 1974, 1975, 1979, 1980, 1981, and 1982. Section 6001 requires taxpayers to maintain records sufficient to show whether or not they are liable for Federal income taxes. Petitioner failed to adequately maintain any books or records for the taxable years at issue. Petitioner also failed to file income tax returns for taxable years 1974, 1975, and 1977 through 1982. Accordingly, we find that petitioner intentionally disregarded rules and regulations of the Internal Revenue Code and has been negligent. The additions to tax under sections 6653(a) and 6653(a)(1) are sustained. Section 6653(a)(2) provides for an additional amount to be added to the addition to tax under section 6653(a)(1) equal to 50 percent of the interest payable under section 6601 with respect to the portion of the payment599 due to negligence or intentional disregard of rules and regulations. This provision is applicable to taxes for which the last date prescribed for payment is after December 31, 1981. Petitioner failed to present evidence sufficient to show that the underpayments for 1981 and 1982 were not due to negligence or intentional disregard of rules or regulations. Thus, the addition to tax under section 6653(a)(2) is sustained. Respondent also determined an addition to tax under section 6654(a) for underpayment of estimated tax. Once a deficiency has been established, section 6654(a) is mandatory unless petitioner can bring himself within certain exceptions not here applicable. Grosshandler v. Commissioner,75 T.C. 1">75 T.C. 1, 20-21 (1980). Accordingly, the addition to tax under section 6654(a) is sustained. We have considered petitioner's other arguments and find them to be without merit. To reflect the foregoing, Decisions will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in question, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined that petitioner was liable for an addition to tax pursuant to section 6653(a)(2) of 50 percent of the interest due on $ 4,513.00. ** Respondent determined that petitioner was liable for an addition to tax pursuant to section 6653(a)(2) of 50 percent of the interest due on $ 3,714.00.↩2. Rule 143(a) requires this Court to conduct trials in accordance with the Federal Rules of Evidence.↩3. The applicable portions of section 453 are as follows: SEC. 453. INSTALLMENT METHOD. (a) Dealers in Personal Property. -- (1) In general. -- Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price. * * * (b) Sales of Realty and Casual Sales of Personality. -- (1) General rule. -- Income from -- (A) a sale or other disposition of real property, or * * * may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a). (2) Limitation. -- Paragraph (1) shall apply -- (A) In the case of a sale or other disposition during a taxable year beginning after December 31, 1953 (whether or not such taxable year ends after the date of enactment of this title), only if in the taxable year of the sale or other disposition -- (i) there are no payments, or (ii) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 per cent of the selling price. * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619627/	Leonard A. Farris and Katherine Farris, Petitioners, v. Commissioner of Internal Revenue, RespondentFarris v. CommissionerDocket No. 37691United States Tax Court22 T.C. 104; 1954 U.S. Tax Ct. LEXIS 236; April 23, 1954, Filed April 23, 1954, Filed 236 Decision will be entered under Rule 50. 1. Partnership Estate -- Deductions. -- Under State law, upon death of a partner the business was administered as "a partnership estate" in the Probate Court. Held, that certain expenses, including administrator's fees, attorneys' fees, court costs, etc., incurred in the administration and approved by the Probate Court, and being reasonable in amount, were deductible as ordinary and necessary expenses of the partnership. Section 162 and section 23 (a) (2), Internal Revenue Code.2. Partnership -- Capital Contribution -- Net Income. -- One of three partners made the original capital contribution for the formation of a partnership; upon liquidation of the partnership, part of the original capital was distributed to petitioner and the other noncontributing partner. Held, that the amount received or credited to petitioner was taxable income in the year of receipt or credit. Carl T. Smith, Esq., for the petitioners.Mark Townsend, Esq., for the respondent. Johnson, Judge. JOHNSON 105 OPINION.Respondent determined a deficiency of $ 3,705.22 in petitioners' income tax for 1948. The following issues are presented:(1) Did the Commissioner err in disallowing 237 $ 13,085.66 of the $ 13,678.40 claimed as ordinary and necessary expense of the partnership (Royer-Farris Drilling Company), and allocating the sum disallowed as an offset to the sale price of capital assets in determining the capital gains of the partnership?(2) Did petitioners receive $ 12,500 in taxable income in connection with the liquidation of the Royer-Farris Drilling Company?Petitioners alleged error in respondent's adjustment of the standard deduction, but on brief they withdrew their allegation of error.All of the facts were stipulated and are incorporated herein by this reference.Leonard A. Farris and Katherine Farris, husband and wife, are residents of Wichita, Kansas. They filed their joint return for the calendar year 1948 on a cash receipts and disbursements basis with the collector of internal revenue for the district of Kansas. Leonard A. Farris will hereinafter be referred to as petitioner.Petitioner, Roy H. Johnston, and H. H. Royer entered into a partnership agreement which, in part, is as follows:THIS AGREEMENT Made and entered into this, the 1st day of December, 1943, by and between ROY H. JOHNSTON, of 609-10 Equitable Building, Hollywood, California, hereinafter 238 for convenience designated as "JOHNSTON", Party of the First Part, and H. H. ROYER and L. A. FARRIS, both of Wichita, Kansas, Parties of the Second Part.* * * NOW, THEREFORE, In consideration of the premises and of the terms, conditions and provisions hereinafter contained, the parties to this agreement do contract to and with each other as follows:1. JOHNSTON shall furnish the sum of $ 50,000.00 to be used in the acquisition and development of oil and gas mining properties in the Mid-Continent field, under the sole and direct supervision of ROYER and FARRIS.$ 30,000.00 of said sum shall be made available immediately and $ 20,000.00 shall be made available on or before February 1, 1944.2. ROYER and FARRIS, for the duration of this contract, shall devote such of their time and attention as is necessary and advisable to the acquisition and 106 development of oil properties to be secured for the joint adventure, it being the sense of this agreement that the properties to be acquired shall be in the main drilling deals and farm-out deals for contemplated drilling.3. ROYER and FARRIS shall conduct the joint adventure under the name of ROYER-FARRIS DRILLING COMPANY, and all properties shall 239 be taken in that name, to be held for the benefit of the joint account. ROYER and FARRIS shall be the sole judges of what deals are taken for the account.4. This agreement shall continue in force and effect for a period of two (2) years from the date hereof, and may be renewed at the end of such period for such time or periods as the parties mutually agree.5. Second Parties shall keep an accurate set of records, showing all receipts and disbursements, together with a list of all properties acquired, which records at all times shall be open to inspection by First Party, or his agents. Such records shall be kept and maintained by Second Parties at their office in Wichita, Kansas.6. At the termination of the two-year period, the profits of the venture shall be divided on the basis of an undivided one-half (1/2) to JOHNSTON, an undivided one-fourth (1/4) to ROYER, and an undivided one-fourth (1/4) to FARRIS.Net profits shall be defined as the gross income remaining after deducting therefrom all operating expenses, all taxes, maintenance, insurance and other charges constituting operating expense, in accordance with accepted practices and principles of accounting, and including also 240 any necessary salaries paid.7. It is the specific understanding and agreement of the parties that ROYER and FARRIS have other interests and shall not be bound to give their entire time to this venture, but shall give it such time and attention as is necessary for the proper conduct of the same.8. Inasmuch as the covenants of this contract are personal insofar as ROYER and FARRIS are concerned, their respective interests shall not be assignable, except by written consent of First Party.This agreement was in force and effect on July 16, 1947.The partnership acquired 2 trucks, office equipment, an oil well drilling rig, and interest in oil properties. Operation of the partnership resulted in losses for the years 1944, 1945, and 1947, but there was a modest operating profit for the year 1946. In the partnership's Federal income tax returns for these years the profits and losses were divided according to the partnership agreement, and petitioner on his individual income tax return reported his share of these profits and losses.On July 16, 1947, Royer died. He was a resident of Kansas, and under State law petitioner, as surviving partner, was appointed administrator of the partnership 241 estate on September 3, 1947, by the Probate Court of Sedgwick County, Kansas. His petition requesting his appointment as such administrator alleged that the partnership was composed of Royer, Johnston, and himself and that Royer was the owner of an undivided one-fourth interest in all of the assets, properties, debts, and liabilities of the partnership. During the administration of the partnership estate all partnership assets were converted into cash, and all liabilities were discharged. At a hearing on 107 August 20, 1948, the Probate Court approved the final account of the administrator of the partnership estate. The Probate Court entered its order of distribution which is, in part, as follows:Said cause then proceeded on to be heard, the parties appearing as aforesaid, and testimony was duly introduced in connection with the services rendered the estate and the accounting of the Administrator.The Court being fully advised in the premises finds that the accounting of the Administrator attached as Exhibit A to his petition for discharge herein be and it is correct, settled and allowed and the Court approves said account as complete and accurate.The Court further finds that the partnership 242 owns no real estate and that the only persons entitled to the proceeds left in the Administrator's hands, after payment of costs, fees and compensation, are as follows, to-wit:L. A. Farris1/4thInez M. Royer, Executrix of the last will and testament ofH. H. Royer, also known as Horace Haldean Royer, deceased 1/4thRoy H. Johnston1/2The court then ordered that the proceeds remaining in the administrator's hands be distributed; the amount available for distribution was $ 24,190.14. From this distribution petitioner received $ 6,047.54 in cash in 1948. Other than the administrator's fee this $ 6,047.54 was the only cash received by the petitioner from the partnership in 1948.The Probate Court's order of August 20, 1948, also authorized and directed the administrator to pay certain administration expenses of the partnership estate. These expenses amounted to $ 13,000, and for this amount the court found:(1) That petitioner "rendered services as Administrator herein for which he shall be allowed a fee" of $ 3,000; (2) that the surviving partner Johnston "has rendered services herein of the reasonable value" of $ 1,000; (3) that an attorney "for the partnership estate, has rendered services 243 herein of the reasonable value" of $ 5,000; and (4) that attorneys for Johnston "have rendered services herein of the reasonable value" of $ 4,000.On November 16, 1948, petitioner was discharged as administrator of the partnership estate and the sureties on his bond were released from further liability.The only net worth account on the partnership books was denominated "Partners Capital." This account did not contain any debit or credit entries for the individual partners. It contained opening credit entries aggregating $ 50,000 without designating the origin of the money. Debit and credit entries were made during the years 1943 to 1947, but no entries were made for the individual partners. The following table shows a summary of respondent's reconstruction of the capital accounts: 108 CAPITAL ACCOUNTSTotalJohnstonDebitCreditDebitCreditOriginal capital$ 50,000.00$ 50,000.00Aggregate debits andcredits from Dec. 1, 1943 to Dec. 31, 1948 $ 68,417.2742,607.41$ 34,208.6521,303.71Totals $ 68,417.27$ 92,607.41$ 34,208.65$ 71,303.71Transfer of capitalfor services 25,000.00Cash settlement percourt order 24,190.1412,095.06$ 92,607.41$ 92,607.41$ 71,303.71$ 71,303.71CAPITAL ACCOUNTSPetitionerRoyerDebitCreditDebitCreditOriginal capitalAggregate debits andcredits from Dec. 1, 1943 to Dec. 31, 1948 $ 17,104.30$ 10,651.84$ 17,104.32$ 10,651.86Totals $ 17,104.30$ 10,651.84$ 17,104.32$ 10,651.86Transfer of capitalfor services 12,500.0012,500.00Cash settlement percourt order 6,047.546,047.54$ 23,151.84$ 23,151.84$ 23,151.86$ 23,151.86244 In computing petitioner's deficiency respondent analyzed the partnership books and determined that the capital account of petitioner should have reflected a debit balance of $ 6,452.46 and the capital account of Johnston should have reflected a credit balance of $ 37,095.06. This analysis was applicable to the account just prior to the cash settlement.By October 31, 1948, the partnership received from the sale of its capital assets the amount of $ 73,628.48 (real property $ 30,150; personal property $ 43,478.48), and ordinary income in the amount of $ 3,336.94. In the same period the partnership classified as "Partnership Estate Expense" the amount of $ 13,678.40; this included the $ 13,000 which was allowed in the order of the Probate Court. The amount of $ 13,678.40 was claimed as a deduction from ordinary income on the partnership return for the period ended October 31, 1948. That return reported ordinary losses of $ 23,907.25, and $ 15,104.27 as one-half of the net capital gains; respondent adjusted this return so that the resulting net losses were $ 10,853.21 and the capital gains $ 16,822.46.Petitioner reported on his individual return 25 per cent of the operating loss as 245 stated in the partnership return and 25 per cent of the capital gain. Two of respondent's adjustments to petitioner's 1948 income tax return are as follows:(2) It is held that $ 13,085.66 of the item shown on the return filed as partnership estate expense is properly chargeable to the expense of selling properties during the year. * * (4) It is held that the amount of $ 12,500.00 credited to your capital account and charged to another joint venturer in the settlement of the partnership estate is income taxable to you.The first issue is whether the Commissioner erred in disallowing $ 13,085.66 of the $ 13,678.40 claimed as ordinary and necessary expense of the partnership, and allocating the sum disallowed as an offset to 109 the sale price of capital assets in determining the capital gains of the partnership.Respondent on brief, in support of this disallowance and allocation, cites I. T. 2305, V-2 C. B. 108, to the effect that in the sale of real estate by persons not regularly engaged in that business "commissions paid, while they do not reduce or otherwise affect the amount of the selling price, may be offset against the selling price in determining the amount of gain or loss realized 246 from such sales, * ."He then cites Irma Jones Hunt, 47 B. T. A. 829, where it was held that a taxpayer not engaged in the real estate business could not deduct as an ordinary and necessary expense "commissions paid" to real estate broker for making sale of her interest, but that the amount of such commissions constituted an offset to the sale price of the property in computing petitioner's capital gain from the transaction.In the instant case there is no evidence that "commissions" in any amount were paid for sale of the partnership property, or any part thereof. The items comprising the claimed expenditures in the tax return were as follows:Additional clerical service$ 250.00Attorney fees1 9,250.00Estate fees (Administrator's fees)1 4,000.00Probate judge fees125.20Other court costs53.20$ 13,678.40In the absence of evidence that "commissions" were paid or that the expenses in question were directly connected with the sale of property, respondent on brief points out that a major portion of the partnership gross receipts in 1948 was from the sale of capital 247 assets and hence avers, "it would follow that the principal duties of the attorneys and administrators consisted of facilitating and consummating these sales."Upon this premise respondent argues that since the partnership estate was administered in the Probate Court primarily for the liquidation of the partnership, expenditures incurred therein, including fees paid the administrator for services rendered, attorneys' fees, etc., are "expenses incident to the sale of property" and hence are capital expenditures and are nondeductible. He cites no authority so holding, and we doubt if any court has so held.While liquidation is the ultimate goal of an administration, it is a matter of common knowledge that during its pendency the management, operation, and conservation of the business must be carried on, and compensations for such services are not expenses incident to the sale of property.110 The Commissioner's disallowance of the deduction was arbitrarily based upon the sources of the partnership gross income. For that percentage of the income received from the sale of oil, the deduction was allowed, but since the balance of the income was from the sale of capital assets, it was disallowed. 248 On brief he admits that in arriving at the amount of expenses disallowed, he "allocated the deduction between ordinary and necessary expenses and expenses incurred in the sale of capital assets in the same proportion as the reported gross receipts from oil sales in 1948 bear to the reported gross receipts from the sale of capital assets in such year." This is in conflict with respondent's regulations.We quote from Regulations 111, section 29.23 (a)-15:It is immaterial whether the expenses of fiduciaries are paid from the corpus of the estate or from income. Expenses derive their character not from the fund from which they are paid, but from the purposes for which they are incurred.Section 162 of the Internal Revenue Code provides that "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."As to individuals, section 23 (a) (2) of the Code allows a deduction, viz:(2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance 249 of property held for the production of income.Section 29.23 (a)-15 of Regulations 111 provides in part as follows:Reasonable amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including fiduciaries' fees and expenses of litigation, which are ordinary and necessary in connection with the performance of the duties of administration are deductible under this section, notwithstanding that the estate or trust is not engaged in a trade or business, * Respondent contends that the expenses in question were not "paid or incurred for the production or collection of income nor for the management, conservation or maintenance of property held for the production of income." He predicates this upon his averment that "expenses paid or incurred in the sale of capital assets" are not deductible. He refuses to recognize that these expenses were not incurred in the sale of assets, but in the administration of an estate, which the record here clearly shows. "Administration expenses, including fiduciary fees," etc., under the Commissioner's regulations last above cited are deductible.In Bingham's Trust v. Commissioner, 325 U.S. 365">325 U.S. 365, the Commissioner 250 sought to give a narrow and restrictive interpretation of the 111 terms, "for the production or collection of income, or for the management, conservation or maintenance of property held for the production of income," which the Supreme Court rejected after a thorough discussion of the question, and affirmed our allowance of these deductions in Mary Lily Bingham Trust, 2 T. C. 853, and which the Court of Appeals for the Second Circuit had reversed, 145 F. 2d 568. The expenses here in question were clearly incurred in the "management" of income producing property within the meaning of that term as defined and applied by the Supreme Court in the Bingham's Trust case, supra.Petitioners cite James H. Knox Trust, 4 T. C. 258, where we held that fees paid trustees out of the corpora of the trusts in accordance with New York law were deductible from the gross income of the trusts under section 23 (a) (2) of the Internal Revenue Code. Cf. Harry Civiletti, 3 T. C. 1274, affd. 152 F. 2d 332, certiorari denied 327 U.S. 864">327 U.S. 864.The expenses in question were paid by the administrator of the partnership estate pursuant to a decree of the Probate Court having jurisdiction thereof, 1 after the court had 251 heard evidence thereon and affirmatively found that the amounts were reasonable and that same were "for services rendered" therein.The Probate Court of Sedgwick County, Kansas, is a court of record and its records import absolute verity, and in the absence of evidence contrary to its findings, we must accept same as true. Goodwin's Estate v. Commissioner, (C. A. 6) 201 F.2d 576">201 F. 2d 576.We hold that the partnership expenses in question were deductible under section 23 (a) (2) of the Internal Revenue Code, and the Commissioner's disallowance of same is reversed.A brief review of the facts for the second issue will give a better understanding of respondent's basis for the deficiency determination. R. H. Johnston contributed the original capital to the partnership. Petitioner and H. H. Royer contributed knowledge, 252 experience, and services. Johnston was entitled to one-half of the profits or losses; the other partners one-fourth each. Only one capital account was kept on the partnership books; there was no separate account for any of the partners. However, respondent reconstructed the individual capital accounts for the partners and from the reconstruction determined, for 1948 prior to the liquidation settlement, that petitioner's account should have a debit balance of $ 6,452.46. Notwithstanding this debit balance, petitioner received on liquidation a cash settlement of 112 $ 6,047.54. Now respondent contends that the $ 6,047.54 cash settlement plus the elimination of the $ 6,452.46 debit balance amounted to $ 12,500 of taxable income to petitioner in 1948.Respondent used 3 theories to support his determination. First, he contends that petitioner received $ 12,500 in 1948 as a result of a transfer of that amount to petitioner's capital account from the capital account of the only partner who contributed initial capital to the partnership. Second, petitioner received taxable income as a result of the cancellation of his debit balances. Third, taxable income results to petitioner because he 253 benefited from loss deductions in prior years.Opposing respondent, petitioner contends that he did not actually or constructively receive $ 12,500 as income in 1948. Petitioner suggests that if he did receive $ 12,500, it was received in an earlier year, 1943 or 1944, when the original capital was contributed to the partnership; therefore, if he received anything in 1948 it was a return of capital and not taxable in that year.The contentions and allegations of the parties are often helpful in arriving at a solution to one of these problems. However, where the problem springs from a written agreement it is wise to first look to the agreement itself for the solution. An analysis of the partnership agreement shows that one of the partners was to contribute $ 50,000, but the agreement is silent as to the distribution of this $ 50,000 to the partners' capital accounts. Without any indication of a gift, sale, or transfer, it is only reasonable to conclude that the $ 50,000 originally remained in the account of the contributing partner. The mere fact that the agreement provided for a certain sharing of the profits and losses does not prove that the initial capital contribution was to be 254 shared in the same ratio as profits and losses.Next, if the $ 50,000 was not distributed when the partnership was formed, we must look at the record to see if it was ever distributed among the partners, and we see that it was. In 1948 petitioner received one-fourth of the aggregate balance remaining on the partnership capital account. He received $ 6,047.54 in cash, and in addition a personal debit balance of $ 6,452.46 was eliminated. The total of these 2 amounts is $ 12,500, or one-fourth of the original cash contribution. This sum of $ 12,500 was not a distribution of partnership income; income had already been distributed. It was, however, a distribution of Johnston's original capital contribution. Petitioner's gain was $ 12,500 in 1948, but now the question is whether that was taxable income.In Harry W. Lehman, 19 T. C. 659, a similar case, the question was put "whether petitioners realized taxable income by virtue of the $ 10,000 increase in their capital accounts by reason of transfers from their partners." It was held that they did. The facts in the Lehman113 case are not identical to these before us, but they are sufficiently similar so that the rule established there 255 must be considered here.In the Lehman case the transfer was only a bookkeeping entry, that is, no cash was transferred. In the present case a portion of the $ 12,500 was paid in cash. In both cases the funds were transferred from one partner's capital account to another's account. In the Lehman case the books disclosed the transfer, in the present case it was necessary for the respondent to reconstruct the accounts. While the basic facts are somewhat different, we believe that the rule established in the Lehman case is sound, and a like decision should be obtained here. Therefore, we find that the $ 12,500 was taxable income to petitioner in 1948.It should be pointed out that petitioner does not actually contest the receipt of $ 12,500, but rather maintains it was received in a year other than 1948. The evidence does not permit such a finding. Similarly, petitioner's argument that the $ 12,500 was a return of capital is without merit. There is no showing that petitioner contributed capital, or that he purchased, or was given, a share of Johnston's original contribution in any year other than 1948. It is unnecessary to discuss respondent's alternative arguments. On this second *256 issue respondent must be sustained.Decision will be entered under Rule 50. Footnotes1. A breakdown of the items comprising these amounts heretofore appears in our recital of the Probate Court's approval of same.↩1. The laws of Kansas (Kan. Gen. Stat. 1935, 1947 Supp., sec. 59-1005) relating to partnership estates provide that the administrator has "the same duty to account and to have his account adjudicated as in the case of ordinary administration." Also, section 59-1717 provides for compensation for services of administrator and his attorneys upon application and approval by the Probate Court.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619628/	L. S. Randolph v. Commissioner.Randolph v. CommissionerDocket No. 108629.United States Tax Court1942 Tax Ct. Memo LEXIS 22; 1 T.C.M. (CCH) 258; T.C.M. (RIA) 42666; 12/21/194222 Fenelon Boesche, Esq., Bradford J. Williams, Esq., Roscoe E. Harper, Esq., and Richard P. Ryan, Esq., for the petitioner. E. G. Sievers, Esq., and L. R. Vanburg, Esq., for the respondent. SMITH Memorandum Opinion SMITH, Judge: The respondent has determined deficiencies in petitioner's income tax for 1938 and 1939 in the respective amounts of $961.94 and $330.57. The only question in issue is whether certain oil and gas royalties which petitioner owned became worthless, giving rise to deductible losses, during the years involved. The essential facts pertaining to the acquisition, location and history of the oil and gas royalties involved have been stipulated. It has also been stipulated that certain portions of the evidence submitted in two prior cases, , promulgated November 18, 1942, and , promulgated December 9, 1942, shall be considered as evidence in this proceeding. [The Facts] Petitioner has his residence and principal office in Tulsa, Oklahoma. He is engaged in the business of acquiring nonproducing oil and gas royalties for investment purposes. He keeps23 his books and makes his income tax returns on the accrual basis. His returns for 1938 and 1939 were filed with the collector of internal revenue for the district of Oklahoma. During the year 1938 petitioner charged off in his books an amount of $12,303 representing the cost or adjusted basis of a total of 27 oil and gas royalties. He claimed a loss deduction of all but $170.50 of that amount in his return for 1938. During 1939 he charged off $5,257.54 representing the cost or adjusted basis of nine additional oil and gas royalties, all of which he claimed as a loss deduction in his return for that year. The parties have stipulated that eight of the royalties charged off in 1938, in the amount of $1,892.50, and one of those charged off in 1939, in the amount of $500, described in paragraphs (n), (t), (u), (v), (w), (x), (aa), (dd), and (ii) of the petition, did not become worthless in those years and that no deductions are allowable on account of such royalties. The remaining 27 royalties were located in Oklahoma, Illinois, and Kansas. They represented for the most part fractional royalty interests in tracts under lease to various operators. Petitioner usually acquired these royalties24 in areas where development was about to take place. When a dry hole was completed on or near his royalty and the operator abandoned the premises he considered that his royalty became worthless and charged it off as a loss. Maps were submitted in evidence as a part of the stipulation of facts showing the location of each of the royalties involved, the oil and gas development in the area of the royalty, and the dry holes, if any, which petitioner considered determinative of the worthlessness of his royalties. In addition to the stipulated facts several witnesses gave oral testimony as to the value of the royalties at the close of the years in which they are claimed as losses. From a careful study of the evidence of record we have determined, and we find as a fact, that all but four of the 27 royalties in dispute in this proceeding became worthless during the years when charged off by the petitioner. The 23 royalties which became worthless during the taxable years are described in the stipulation of facts as Nos. 243, 210, 196, 234, 153, 180, 181, 182, 231, 235, 236, 140, B.B. 187, C.C. 167, 208, 206, 18, 28, 266, 265, 251, 191, 218. We further determine, and find as a fact, that the25 following four described royalties did not become worthless during 1938 or 1939: Royalty No. 69 (Exhibit No. 7), having a cost of $225, was charged off by the petitioner in 1938 by reason of a dry hole drilled by the Gulf Oil Corporation at a distance from petitioner's royalty of more than two miles in a southwesterly direction in December, 1938. The map does not show any producing well or any other dry holes in that area at the close of 1938. In 1941, however, another dry hole was drilled directly on petitioner's royalty interest by "Sinclair-Gulf, et al." to the Wilcox formation, 7,630 feet. This royalty was on a tract leased by Gulf Oil Corporation in 1935 for a period of ten years. Rental under the lease was paid by Gulf Oil Corporation to June 25, 1942. Petitioner received a total of $45 rentals from his royalty. Because of the distance from petitioner's royalty of the dry hole upon which he relied for his determination that the royalty became worthless in 1938, and in view of the fact that reputable operators, including the Gulf Oil Corporation which had drilled this dry hole, considered that the royalty was suitable for further development and were willing to stand the cost26 of further drilling, we think that the royalty became worthless in 1941 and not in 1938 and that it was improperly charged off by the petitioner in 1938. Royalty No. 105 (Exhibit No. 9), having a cost of $265, was located in Sumner County, Kansas. It was charged off by the petitioner in 1938 on account of a dry hole drilled about half a mile directly north of the royalty in April of that year. The map shows, however, that a dry hole within a short distance of the royalty offsetting the southeast corner had been drilled in 1937. Petitioner testified that at the time he charged off the royalty in 1938 he had no knowledge of the nearer dry hole and that the royalty should have been charged off in 1937. The royalty became worthless, we think, in 1937. Royalty No. 142 (Exhibit No. 10), having a cost of $875, was located in Logan County, Oklahoma. It was acquired by the petitioner in 1934. It was charged off in 1938 on account of a dry hole drilled about a mile north of the royalty in June, 1938. The map shows, however, that in May, 1937, a dry hole was drilled only a short distance from this royalty in the next adjoining quarter section to the southwest. We think that the nearer dry 27 hole drilled in 1937 determined the worthlessness of the royalty in that year. Royalty No. 165 (Exhibit No. 16), having a cost of $275, located in Oklahoma County, Oklahoma was acquired by petitioner in April, 1935. In May, 1935, a dry hole was drilled to the Wilcox sand, to a depth of 6,456 feet, on the adjoining quarter section and less than one-half mile due west of the petitioner's property. In April, 1939, another dry hole was drilled about half a mile to the southeast. Petitioner charged off his royalty in 1939. He testified in this proceeding: * * * Evidently I purchased that royalty on the strength of this dry hole in Section 2 [the one drilled in May, 1935] being drilled but overlooked charging it off at the end of that year and I considered myself quite lucky to have another chance to charge it off by the dry hole in Section 12 [the one drilled in April, 1939]. [Opinion] Obviously petitioner has misconceived his rights under the loss provisions of the statute. Loss deductions on account of worthless property must be taken in the year when the property actually becomes worthless. It is apparent that the royalty actually became worthless when the first and nearer dry28 hole was completed in May, 1935. It is on the basis of such dry holes on or in the vicinity of the royalty that petitioner is claiming loss deductions on all but one of the royalties involved in this proceeding. It is stipulated that all of these dry holes, as well as the producing wells shown on the maps, were bottomed in sedimentary beds when drilling ceased. The only royalty that was charged off for reasons other than the drilling of a dry hole on or nearby was royalty No. 28 (Exhibit 15), having a cost of $884.94. It was located in section 35, township 11 north, range 6 east, Seminole County, Oklahoma. It embraced a 40-acre tract adjacent to the Keokuk pool. Most of the producing wells in this pool are operated by the Carter Oil Co. Rental was paid by the Carter Oil Co. to petitioner and others on account of their royalty interests in the tract. In lieu of drilling an offsetting well on the property Carter Oil Co. agreed to pay petitioner and others as an "offsetting royalty" a certain percentage of the production from one of the producing wells directly to the east. This offset royalty was paid from some time in 1937 until March 1, 1939. Because of the low production of the29 offsetting wells, the Carter Oil Co. was unwilling to continue payment of the offset royalties and in that year forfeited its lease on the tract on which petitioner's royalty was located. The evidence is that petitioner's royalty interest became worthless when the Carter Oil Co. ceased its offset royalty payments and abandoned its lease. We think that petitioner was justified in charging off the royalty in that year. With the four exceptions referred to above, we think that the evidence as a whole supports the petitioner's contentions that the royalty interests involved in this proceeding became worthless during the years when claimed. The cost or other adjusted basis of each of such royalties is deductible in petitioner's returns for those years. See , and Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619629/	Ted W. Mitchell and Jan Mitchell, Petitioners v. Commissioner of Internal Revenue, RespondentMitchell v. CommissionerDocket Nos. 7601-77, 11510-77United States Tax Court74 T.C. 578; 1980 U.S. Tax Ct. LEXIS 113; June 16, 1980, Filed 113 Decisions will be entered under Rule 155. Petitioner husband was employed by a State hospital, A, near the family residence. On June 15, 1972, he transferred his employment to another State hospital, B, because A closed down. B was 100 miles away from A (and the family residence). Petitioner husband worked at B until Nov. 30, 1977, when he retired; he lived in a rented trailer near B during the week and returned to the family residence on weekends. Held, petitioner husband's 1975 and 1976 expenses for food and lodging at B and transportation between the family residence and B are not deductible as expenses incurred while traveling "away from home." Lloyd Taylor, for the petitioners.Woodford G. Rowland, for the respondent. Chabot, Judge. CHABOT578 Respondent determined deficiencies in Federal individual income tax and an addition to tax under section 6653(a) 1 (negligence) against petitioners as follows:Addition to taxDocket No.YearDeficiencysec. 6653(a)7601-771975$ 1,149.47$ 57.4711510-7719761,275.920 The cases have been consolidated 114 for trial, briefs, and opinion. The issue remaining for decision is whether petitioners are entitled to deduct expenditures for transportation, food, and lodging under section 162(a)(2). 2579 FINDINGS OF FACTSome of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.When the petitions in these cases were filed, petitioners Ted W. Mitchell (hereinafter sometimes referred to as Ted) and Jan Mitchell (hereinafter sometimes referred to as Jan), husband and wife, resided in California.Between January 15, 1959, and June 14, 1972, Ted was employed as a psychiatric technician by the State of California at Mendocino State Hospital, at Ukiah, Calif. About 1971, Ted began to work in the Alcoholic Rehabilitation Section at Mendocino State Hospital. On June 15, 1972, Ted transferred his employment to the Napa State Hospital, at Imola, Calif., which is near Napa, Calif. The occasion of the transfer was the closing of Mendocino State Hospital and the transfer of Ted's program to Napa State Hospital. At all times during Ted's employment 115 at the two hospitals, he was classified as a full-time, permanent employee. Ted worked at Napa State Hospital until November 30, 1977, when he retired. If Ted had quit rather than accept the transfer to Napa State Hospital, his pension would have been less than what it was when he retired 5 1/2 years later.Ted moved to Ukiah in 1946, and Jan moved there in 1961; they were married in 1962. Jan had a series of jobs in Ukiah; she was employed there all during the years before the Court. During Ted's employment at Napa State Hospital, Jan maintained the family home at Ukiah. Ted's voter registration listed his address as the address of the family home in Ukiah. The Ukiah address also appeared on Ted's driver's license and automobile registration and on petitioners' income tax returns for 1975 and 1976. Ted had no intention of making Napa his permanent home.Ukiah (and Mendocino State Hospital) are approximately 100 miles from Napa State Hospital. During his employment at Napa State Hospital, Ted lived at Ukiah on weekends and traveled to Napa for the work week. At Napa, he lived in a rented trailer. During 1975 and 1976, Ted had the following living expenses at Napa and travel 116 expenses to and from Napa:19751976Trailer space rental$ 755.00Trailer rental145.00Food -- $ 85 per month1,020.00Telephone77.22Insurance on trailer37.00Subtotal2,034.221 $ 2,589.54Mileage -- 16,000 miles 2 at standard rate2,350.002,350.00Total4,384.224,939.54580 OPINIONPetitioners maintain that a taxpayer's "tax home" is the taxpayer's residence, at least while the period away from the residence is of temporary duration. Ted's residence was in Ukiah, and his stay at Napa State Hospital was temporary, petitioners assert, so Ted's "tax home" was in Ukiah. Respondent's position is that a taxpayer's "tax home" is the taxpayer's principal place of business, unless the employment 117 at a place away from the usual residence is temporary, rather than indefinite. Ted's principal place of business was at Napa State Hospital, and his job there was indefinite, respondent asserts, so Ted's "tax home" was at Napa State Hospital. 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)4118 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)):581 (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 do not appear to dispute that Ted's expenses were paid or were "traveling expenses." Because of our disposition of the "away from home" issue, we need not discuss whether the expenses were "incurred in pursuit of business," an issue to which the parties briefly address themselves.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 (4th Cir., 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). Since Ted's principal place of employment during the years in issue was at the Napa State Hospital, under the general rule, the vicinity of this hospital was his "tax home."Petitioners 119 rely on an exception to the general rule. Under this exception, a taxpayer's personal residence may be the "tax home" if the principal place of business is "temporary," rather than "indefinite." See Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59, 60 (1958). A place of business is a "temporary" place of business 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. 438 F.2d 1216">438 F.2d 1216 (6th Cir. 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 120 of proof ( Daly v. Commissioner, 72 T.C. at 197). At the beginning of the 2-year period before us, Ted had 582 worked at Napa State Hospital for 2 1/2 years, and by the close of this period, he had been there for 4 1/2 years. After the end of this period, Ted continued to work at Napa State Hospital for most of the next year, until his retirement. The record before us gives us no basis for concluding that Ted foresaw, or could reasonably have been expected to foresee, termination of his employment in the Napa area "within a short period" at any time during the years before the Court. We conclude that the Peurifoy "temporary" exception to the general "tax home" rule does not apply, and Ted's "tax home" for 1975 and 1976 was the general vicinity of the Napa State Hospital.The Court of Appeals for the Ninth Circuit approaches these questions somewhat differently, but we conclude that it would reach the same result in the instant cases.In Coombs v. Commissioner, 608 F.2d 1269">608 F.2d 1269 (9th Cir. 1979), affg. in part and revg. in part 67 T.C. 426">67 T.C. 426 (1976), the Court of Appeals took the opportunity to review its precedents on these questions. The Court of Appeals there stated its position that, "in 121 general, as between various possible 'abodes,' the abode or at least the locale of the abode which is located in the vicinity of the taxpayer's principal place of business or employment, or as close thereto as possible, will be considered the taxpayer's tax home for purposes of the travel expense deduction of section 162(a)(2)." 608 F.2d at 1275. In Wills v. Commissioner, 411 F.2d 537 (9th Cir. 1969), affg. 48 T.C. 308">48 T.C. 308 (1967), a professional baseball player maintained his family home in Spokane, Wash., while employed by the Los Angeles Dodgers. The Court of Appeals noted that Wills had spent only 138 days in Spokane during the first of the years there involved and only 96 days in Spokane during the other year. Despite the fact that Wills earned some portion of his income in Spokane, the Court of Appeals affirmed our holding that Spokane was not Wills' "tax home." 411 F.2d at 539-541. See Coombs v. Commissioner, 608 F.2d at 1275.On the basis of the stipulations, we conclude that petitioners have not shown that Ted spent more than 2 days out of every 7 at Ukiah. Indeed, Ted's testimony suggests that the ratio might be closer to 2 days out of every 8. The remainder of his time, perhaps 122 250 days or more each year, was spent by Ted at Napa. Ted's work was at Napa.Under the tests of Wills and Coombs, we conclude that Ted's 583 100 or so days a year in Ukiah are not sufficient to establish his abode there as his "tax home"; Ted's abode at Napa would be his "tax home" under the general rule of Wills and Coombs.The Court of Appeals for the Ninth Circuit has established its own approach to the Peurifoy "temporary" exception to its general "tax home" rule. In Harvey v. Commissioner, 283 F.2d 491">283 F.2d 491 (9th Cir. 1960), revg. 32 T.C. 1368">32 T.C. 1368 (1959), the Court of Appeals set forth its rule as follows:An employee might be said to change his tax home if there is a reasonable probability known to him that he may be employed for a long period of time at his new station. What constitutes "a long period of time" varies with circumstances surrounding each case. If such be the case, it is reasonable to expect him to move his permanent abode to his new station, and thus avoid the double burden that the Congress intended to mitigate. * * * [283 F.2d at 495; emphasis in original.]In Wills v. Commissioner, supra, the Court of Appeals summarized the foregoing Harvey rule; it then set forth its 123 analysis of the facts in Wills as follows: "At the beginning of the period here in question, Wills had completed three successful seasons with the Dodgers and could reasonably expect this employment to continue, as it in fact did for a total period of seven years." 411 F.2d at 541. The Wills court distinguished Harvey as a holding "that the particular taxpayer had not changed his tax home where employment at the new station normally lasted only a few months." Wills v. Commissioner, supra at 541. See Doyle v. Commissioner, 354 F.2d 480 (9th Cir. 1966), affg. a Memorandum Opinion of this Court, 5 in which the Court of Appeals indicated that a 28-month period was sufficiently long to satisfy the Harvey "long period of time" test (354 F.2d at 482) and suggested that 9 months might be an appropriate general dividing line (354 F.2d at 483 n. 3). See Stricker v. Commissioner, 54 T.C. at 362. See also Marth v. Commissioner, 342 F.2d 417">342 F.2d 417 (9th Cir. 1965), affg. per curiam a Memorandum Opinion of this Court. 6Petitioners, who have the burden of proof, introduced no evidence concerning Ted's expectations with respect to the duration of his employment 124 at Napa State Hospital. By the start 584 of 1975, Ted's employment had already lasted 30 months. Petitioners have not shown that, under the Harvey test (as described in Doyle and applied in Wills), Ted did not understand that is was reasonably probable that his employment at Napa State Hospital would be for a long period of time. Nothing in the record suggests that Ted had any reasonable expectations (see Marth v. Commissioner, supra) other than that it was reasonably probable that this employment would last a long time. We conclude that under the Harvey test, Ted's abode at Napa was his tax home, his decision to retain his home at Ukiah was a personal choice, and his travel expenses between Napa and Ukiah are not deductible.7125 The fact that Jan's Ukiah activities included earning income subject to tax does not affect the deductibility of Ted's expenses in dispute in the instant cases. Daly v. Commissioner, 72 T.C. at 196; Foote v. Commissioner, 67 T.C. at 6-7; Tucker v. Commissioner, 55 T.C. 783">55 T.C. 783, 788 (1971).On the one disputed issue, we hold for respondent.To take account of respondent's concessions,Decisions 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 years in issue.↩2. Respondent has conceded the addition to tax and all the other notice of deficiency adjustments.↩1. Details for 1976 are not available, but the parties have stipulated that the 1976 amounts are similar to those for 1975.↩2. The parties have stipulated as to the 100-mile distance between Ukiah and Napa State Hospital and as to the weekly round trips. Even if Ted took no vacations, this would appear to result in annual travel of about 10,000 miles. The record includes no explanation of the difference between this figure and the stipulated 16,000 miles of "travel to and from" Napa in each of the years before the Court.↩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. T.C. Memo. 1964-110↩.6. T.C. Memo. 1964-116↩.7. See Coombs v. Commissioner, 608 F.2d 1269">608 F.2d 1269, 1275-1276 (9th Cir. 1979), where the Court of Appeals set forth its analysis as follows:"In addition, when a taxpayer accepts employment either permanently or for an indefinite time away from the place of his usual abode, the taxpayer's tax home will shift to the new location -- the vicinity of the taxpayer's new principal place of business. * * In such circumstances, the decision to retain a former residence is a personal choice, and the expenses of traveling to and from that residence are non-deductible personal expenses. * * * [Citations omitted.]"	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619630/	ROBERT J. SMITH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Smith v. CommissionerDocket No. 8819-72.United States Tax CourtT.C. Memo 1975-314; 1975 Tax Ct. Memo LEXIS 58; 34 T.C.M. (CCH) 1367; T.C.M. (RIA) 750314; October 20, 1975, Filed R. Patrick Smith, for the petitioner. Karin T. Skeen, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined deficiencies in petitioner's Federal income tax for 1967 and 1968 in the amounts of $907.31 and $1,098.29, respectively. The only issue for decision is whether for Federal income tax purposes, petitioner was domiciled in a community property state during the years in issue. If so, he may exclude one-half of his salary from income as the income of his non-resident alien wife. FINDINGS OF FACT All of the facts have been stipulated by the parties, and are found accordingly. Petitioner filed a separate income tax return for 1967 with the Internal Revenue Western Service Center at Ogden, Utah, and a separate income tax return for 196859 with the Director of International Operations at Washington, D.C. He resided in Point Mugu, California, when he filed his petition. Petitioner was born in Minnesota on April 14, 1929. He resided there with his family until he entered the military service in 1946. While in the military service he served in the states of Florida and Texas as well as in Japan. He was sent to Fort Lawton, Washington, for his discharge in 1949. He spent one month visiting an aunt in Los Angeles, California, before returning to the family home in St. Paul, Minnesota in order to complete high school. In June 1950 petitioner worked for a short while in Kansas City. When the Korean war began, he reenlisted in the Air Force. During this period of service in the Air Force, his duty stations were in South Dakota and New Mexico. In 1953 petitioner was discharged from the service in New Mexico. He immediately returned to Minnesota and lived with his mother and sister in St. Paul, where he attended the University of Minnesota until 1955. In 1955 he took a job with RCA in New Mexico. After six months he resigned from RCA to take a position with Philco Corporation. He accepted employment with Philco in New Mexico60 with the understanding that he would receive one month's training in Philadelphia, Pennsylvania, and then be assigned to Japan. Pursuant to this agreement, petitioner was sent to Japan, where, except for a one-year assignment in Korea, petitioner resided from 1955 through 1971. In 1957 petitioner married a Japanese woman. They lived together as husband and wife until their divorce in 1971. During their marriage they had two children, both born in Japan. The children each speak both English and Japanese and attended day school in Japan. At all times during their marriage, petitioner's wife was a non-resident alien and citizen of Japan. In 1958 petitioner's mother and sister moved from Minnesota to San Francisco, California, and they have since resided in San Francisco. Until she moved to California, petitioner's mother had lived in Minnesota since before petitioner's birth. The address shown on the address label on petitioner's 1967 and 1968 income tax returns is that of petitioner's mother and sister in San Francisco. In 1966 Philco management, in conjunction with the United States Government, determined that petitioner's position should be a civil service position rather than61 a position held by a technician employed by private industry. Accordingly, petitioner left Philco to become a civil service employee of the United States Government, specifically, the Department of Defense. Petitioner was employed by the United States Government in Japan from 1966 through 1971. After becoming a civil service employee, petitioner had two temporary duty assignments in the United States. In 1966 he spent approximately six weeks in the United States. Of this time, a few days were spent working in Sacramento, California, and approximately four weeks were spent working in Rome, New York. During the remaining two weeks petitioner stayed with his mother and sister in San Francisco. In 1967 petitioner spent approximately one month in California, working in Sacramento during the week and spending the weekends in San Francisco with his mother and sister. While working in Sacramento, petitioner lived in a motel. Neither petitioner's wife nor children accompanied him on these temporary duty assignments. The civil service position held by petitioner limited overseas duty to a maximum period of five years. Upon termination of the five-year limitation period, civil service employees62 such as petitioner had no absolute right to return to a particular job location in the United States. An employee could, however, designate a "zone" of the United States in which he desired to work upon his return to the United States. The Department of Defense had divided the United States into four zones that could be listed in order of preference by an overseas employee required to return to the United States upon termination of the five-year period. Employees would be offered jobs in their highest priority zone where a vacancy existed. An employee could also designate a state and locality within a zone if he had previously designated the state and locality as his residence upon commencement of employment as a civil service employee. The petitioner listed his mother's address in California as his "home" with the civil service while he was working in Japan. As the end of petitioner's five-year limitation period overseas approached, he accepted a civil service position with the Air Force in Clovis, New Mexico. Before beginning work, however, he learned that the position was to be downgraded in pay. Therefore, he then revoked his acceptance and accepted a civil service position in63 Point Mugu, California. Petitioner's Federal income tax returns for years prior to 1967 were filed with the District Director in St. Paul, Minnesota. The only state income tax return filed by petitioner prior to his return to the United States in 1971 was a California income tax return for the year 1961. Petitioner never registered to vote in any state, either prior to or during the years in issue. After returning to the United States in 1971, he registered to vote in California. Petitioner maintained no bank accounts in California either prior to or during 1967 and 1968. He did, however, maintan a bank account in his own name at the Farmer's and Merchant's Bank in Las Cruces, New Mexico, from 1955 until 1973. His paychecks from Philco Corporation were deposited in the Las Cruces bank account. When he became a civil service employee in 1966, petitioner opened a joint checking account with his wife at the Chase Manhattan Bank, Tachikawa Air Force Base, Japan. All of his subsequent payroll checks were deposited in this account while he remained in Japan. Petitioner never possessed a California driver's license either prior to or during the taxable years in issue. He possessed64 a military driver's license for driving in Japan. For both 1967 and 1968, petitioner reported only one-half of his salary on his income tax returns. The other one-half of his salary was reported by his wife as her income on her non-resident alien income tax returns. ULTIMATE FINDING OF FACT During the years in issue Robert J. Smith was for Federal income tax purposes domiciled in Japan, and not in any community property state. OPINION Petitioner maintains that during the years in issue he was a bona fide domiciliary of either New Mexico or California. Respondent concedes that if petitioner were domiciled in either of those community property states, he is entitled to exclude one-half his salary from gross income, treating it as the income of his non-resident alien wife. Similarly, petitioner concedes that if he were not so domiciled, then his entire income is attributed to him. We have found as a fact that petitioner was domiciled in Japan during the years in issue. Although the terms "residence" and "domicile" are often used interchangeably, strictly speaking they have completely different meanings.1 "Residence" refers to where a person in fact is living, i.e., "any65 factual place of abode of some permanency, more than a mere temporary sojourn." Smith v. Smith,45 Cal. 2d 235">45 Cal. 2d 235, 239, 288 P. 2d 497, 499 (1955). "Domicile" "involves the concurrence of physical presence in a particular place with the intention to make that place one's home * . It embodies a disposition toward permanence, an attitude of attachment." In re Glassford's Estate,114 Cal. App. 2d 181">114 Cal. App. 2d 181, 186, 249 P.2d 908">249 P. 2d 908, 911 (1952). See also Dist. of Columbia v. Murphy,314 U.S. 441">314 U.S. 441 (1941). It is possible to have several residences; a domicile is unique. Chambers v. Hathaway,187 Cal. 104">187 Cal. 104, 200 P. 931">200 P. 931 (1921); Leff v. Leff,25 Cal. App. 3d 630">25 Cal. App. 3d 630, 102 Cal. Rptr. 195">102 Cal. Rptr. 195 (1972). Domicile has two components, one physical--actual residence, however66 fleeting--and one mental--the intent to live in that place indefinitely, the intent to make that place home. Texas v. Florida,306 U.S. 398">306 U.S. 398, 424 (1939). Both components must occur simultaneously; without such a union a new domicile cannot be acquired. George D. Hampton, Jr.,38 T.C. 131">38 T.C. 131 (1962); Aldabe v. Aldabe,209 Cal. App. 2d 453">209 Cal. App. 2d 453, 466, 26 Cal. Rptr. 208">26 Cal. Rptr. 208, 216 (1962). Once acquired, a domicile continues until a new domicile supplants it, regardless of whether one or more new residences are acquired, and regardless of the length of time one is physically away from the place of domicile. 1 Restatement of Conflicts of Laws 2d, sec. 19. Naturally, however, the length of time one is away from an alleged domicile has evidentiary value. See "Special Note on Evidence for Establishment of a Domicile of Choice", 1 Restatement of Conflicts of Laws 2d, sec. 20. There is no doubt that Japan was the sole residence of petitioner during the taxable years in issue. Domicile is the point of contention. The two cases which most closely resemble the situation67 currently before us are Memorandum Opinions of this Court. In Joseph F. Niki,T.C. Memo 1963-133">T.C. Memo. 1963-133, petitioner was born in Utah, resided in Utah, Idaho, and Japan, and was educated in California. From California he was inducted into the United States Army, serving during World War II in various locations. Upon the cessation of hostilities petitioner was assigned to Japan, subsequently becoming a civilian employee of the United States Army in Japan. From the time of his discharge in 1946 until June 1962, he lived in Japan, working in various jobs for the Federal government. In 1950 he married a non-resident alien who at all times was a citizen of Japan with a limited knowledge of the English language. From 1951 to 1962 petitioner maintained bank accounts at overseas branches of two American banks as well as savings and checking accounts in San Francisco. In denying petitioner's claim of being a California domiciliary for 1957 and 1958, this Court declared that "[petitioner's] retention and use of various residence addresses in this country seems to us merely opportunistic and do not tend to establish any definite intention to make California his home." Specifically68 rejected was reliance upon the Status of Forces Agreement between this country and Japan which provided, interalia, that members of the "civilian component" such as petitioner "shall not be considered as acquiring any right to permanent residence or domicile in the territories of Japan." We declared: Although petitioner, as an alien resident of Japan, may not under the agreement attain any right to a permanent residence and home in that country as against the desire of the Government thereof, he is certainly not prevented from establishing a residence therein and making it his home for as long as the agreement is in force which would be an indefinite period. We find he has done just that * * . In Robert W. Pashby,T.C. Memo. 1966-132, petitioner was born in California, lived temporarily in South Dakota, and returned to California, where he enlisted in the United States Navy. He maintained a California address while in the Navy, and lived in San Fernando, California from the date of his discharge in 1946 until he left for Japan to be married in 1953. The marriage was performed at the American Consulate in Yokohama, Japan, because petitioner and his69 bride "wanted to be married on American soil." The Vice Consul who performed the ceremony explained that the laws of California, in particular the community property laws, would govern, should a question arise. Subsequent to his marriage petitioner did nothing inconsistent with his being a California domiciliary. Petitioner did not file California income tax returns after 1953 only because the State of California formally informed petitioner none were required during those years he was not present in the United States. His children were educated only in English, the principal language of the family. Indeed, his children were registered with the American Consul shortly after their birth and were required to have an American passport and visa to remain in Japan. Moreover, unlike the fully stipulated situation now before us, petitioner therein testified in person. The Court was "impressed with his candor and truthfulness as a witness," and found for petitioner. Niki was distinguished on its facts; no mention was made of the Status of Forces Agreement. We have concluded that petitioner in this case was domiciled in Japan during the years in issue, and not in New Mexico or California. 70 While we have given due weight to petitioner's contentions, we find those contacts with New Mexico and California which petitioner presented as proof of domicile to be, in the words of the Court in Niki, "merely opportunistic." The evidence belies any claim of New Mexico being petitioner's domicile. Within six months of moving to New Mexico, he left voluntarily for employment in Japan. The opening and retention of a bank account in New Mexico does not by itself establish an intention to make that state his home, particularly since the account continued in existence subsequent to the time petitioner now claims California became his domicile. Petitioner's alternative claim that California was his place of domicile must also be rejected. Neither prior to nor during the years in issue did petitioner ever maintain a residence, much less a domicile, in California. Between 1955 and 1971, he visited the state only twice, and then only when sent there by his employer on temporary assignments. Petitioner's argument that the Status of Forces Agreement legally precluded Japan from becoming his domicile was, as noted above, specifically rejected by this Court in Niki. We agree with71 this conclusion of law, and note that nothing in the Pashby case is inconsistent with this view. Whether or not the country of Japan would recognize petitioner as a domiciliary for any purpose is irrelevant to the issue before us. We merely decide, as did the Court in Niki, that for Federal income tax purposes, petitioner was domiciled in Japan. It is not necessary to pinpoint the precise time at which petitioner became domiciled in Japan for Federal income tax purposes. It is sufficient merely to find that Japan was in fact petitioner's domicile before 1967 and that no change occurred through the end of 1968. Lincoln T. Taira,51 T.C. 662">51 T.C. 662 (1969). Decision will be entered for the respondent.Footnotes1. California statutes seldom use the term "domicile." See, e.g., Cal. Gov't. Code sec. 244 (West 1966), which gives the general rules for the determination of "residence", although it is obvious that "domicile" is the meaning intended. See Smith v. Smith,45 Cal. 2d 235">45 Cal. 2d 235, 239, 288 P. 2d 497, 499↩ (1955).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619631/	MARTHA L. TRANQUILLI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTranquilli v. CommissionerDocket No. 6863-76.United States Tax CourtT.C. Memo 1980-10; 1980 Tax Ct. Memo LEXIS 571; 39 T.C.M. (CCH) 874; T.C.M. (RIA) 80010; January 17, 1980, Filed Martha L. Tranquilli, pro se. Alan Summers, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined deficiencies in petitioner's income tax, plus additions to the tax under section 6653(b)1 for fraud, as follows: YearDeficiencySec. 6653(b)1970$1,052 $52619711,17858919721,39669819733920The issues for decision are: 1. Whether petitioner is entitled to deductions for charitable contributions for 1970, 1971 and 1972 in excess of the amounts allowed by respondent. 2. Whether petitioner is entitled to deductions for business574 expenses for 1970 and 1971 in excess of the amounts allowed by respondent. 3. Whether petitioner is entitled to dependency exemptions in 1970, 1971 and 1972 for certain individuals and organization. 4. Whether petitioner is entitled to deductions for legal expenses in 1972 and 1973. 5. Whether any part of petitioner's underpayment of tax during 1970, 1971 and 1972 was due to fraud. 6. Whether the statute of limitations bars the assessment of the deficiencies for 1970, 1971 or 1972. FINDINGS OF FACT Some of the facts have been stipulated by the parties and are found accordingly. At the time she filed her petition, petitioner was a resident of Sacramento, California. Petitioner filed timely returns in 1970, 1971, 1972 and 1973. She prepared these returns on the cash basis and in all of these years except 1973 she itemized her deductions. During the tax years in issue, petitioner was employed as a registered nurse in a community hospital in Mount Bayou, Mississippi. There she became actively involved in the affairs of the community, and joined a variety of organizations (including the National Council of Negro Women and the Jane Addams Peace Association). 575 Petitioner made cash contributions to various educational, civic and pacifist organizations in 1970, 1971 and 1972. These contributions amounted to $175 in 1970, $580 in 1971, and $185 in 1972. In addition, petitioner claimed charitable contributions of $120, $120 and $134 in 1970, 1971 and 1972, respectively, for automobile expenses incurred in transporting indigents to county welfare offices and to county health facilities. Petitioner provided this transportation service on her own initiative; it was not part of her job as a nurse nor was it performed in conjunction with the activities of a charitable organization. In 1972 petitioner also deducted $402 for transportation expenses incurred in traveling to meetings of the Jane Addams Peace Association of which organization she was a member of the advisory committee. Respondent determined that the expenses incurred in transporting indigents and in traveling to meetings of the Jane Addams Peace Association did not qualify as charitable contributions and disallowed these deductions. On her 1970 and 1971 returns petitioner deducted $168 as the cost of nurse's uniforms. In his statutory notice, respondent disallowed $103576 of the claimed amount for each year because of lack of substantiation. Petitioner claimed the following dependency exemptions for the years 1970, 1971 and 1972: 2Claimed Dependent197019711972HerselfclaimedclaimedclaimedAmerican Civil LibertiesclaimedClaimedclaimedUnionWomen's InternationalclaimedclaimedclaimedLeague for Peace andFreedomAmerican Friends Serviceclaimedclaimednot claimedCommitteeInternational League forclaimedclaimedclaimedthe Rights of manWar Resisters' LeagueclaimedclaimedclaimedWar Tax ResistersclaimedclaimedclaimedJuanitaclaimedclaimednot claimedDerricknot claimednot claimedclaimedEricnot claimednot claimedclaimedThese dependents were clearly listed by petitioner on her returns. In 1970 and 1971 petitioner provided a part-time home and paid tuition expenses for Juanita, an unrelated student at a local teacher's college. In 1972 petitioner provided food and clothing for Juanita's nephews, Derrick and Eric; these children did not live with petitioner nor were they related577 to petitioner. Petitioner claimed the various organizations as dependency exemptions as a means of voicing her opposition to the Vietnam conflict then in progress. 3During the taxable years in issue, petitioner knew that to claim someone as a dependency exemption that person must be a natural person and, if unrelated, must be a member of the taxpayer's household. In his statutory notice, respondent permitted petitioner only one exemption for herself and disallowed the other dependency exemptions claimed in 1970, 1971 and 1972. On March 21, 1973, a criminal indictment under section 7206(1) was filed against petitioner alleging that she had willfully subscribed, under578 penalties of perjury, her United States individual income tax return for the taxable years 1970 and 1971 which she did not believe to be true and correct as to every material matter in that said returns contained claims for the exemption of six false dependents for each of the years. The six dependents noted were the organizations that petitioner had listed on the 1970 and 1971 returns. petitioner's trial took place before a judge and jury in the United States District Court, Northern District of Mississippi. The jury found her guilty with respect to both years and judgment was entered on May 15, 1973. 4In calculating her adjusted gross income for 1972 and 1973 petitioner deducted $1,500 and $5,268.51, respectively, for legal expenses relating to the criminal fraud proceedings. The $1,500 represented her attorney's fee which she paid in 1972. The $5,268.51 (which represented her estimate579 of the wages she lost as a result of the trial) was deducted on her 1973 return under the heading "Cost of Court Trial." In his statutory notice, respondent disallowed these claimed amounts. OPINION 1. Charitable ContributionsPetitioner claimed deductions of $269.75 in 1970, $717.58 in 1971, and $207.00 in 1972 for cash contributions made to various educational, civic and pacifist organizations. Respondent disallowed a portion of these deductions due to lack of substantiation.5 The burden is on petitioner to substantiate by good and competent evidence her claimed deductions. Welch v. Helvering, 290 U.S. 111 (1933). Petitioner testified as to the nature of her cash contributions in each of the three years. She did not, however, provide any clear evidence of the amount thereof or any documentary support for these contributions. Although we found her testimony to be generally credible, she did not prove the precise amounts contributed. Accordingly, we are forced to make an approximation, bearing heavily580 against the taxpayer whose inexactitude is of her own making. Cohan v. Commissioner, 39 F. 2d 540 (2d Cir. 1930). Upon consideration of all the evidence, including her active participation in community affairs and her membership in some of the donee organizations, we conclude that petitioner is entitled to deduct $175 in 1970, $580 in 1971 and $185 in 1972. Petitioner also claimed deductions for expenses incurred (1) in transporting indigents to county welfare offices and to county health facilities and (2) in traveling to meetings of the June Addams Peace Association ("Association"). Respondent disallowed these deductions based on his determination (1) that petitioner's transportation services were "ad hoc" private charity which does not fall within the scope of section 170 and (2) that petitioner did not show the connection between her traveling expenses and the performance of services for the Association. We agree with respondent. In order to qualify as a charitable deduction, the contribution must be made to one of the organizations described in section 170(c), 581 see, e.g., Peace v. Commissioner, 43 T.C. 1 (1964); charitable contributions are not deductible if they are made to individuals rather than to qualified organizations. See Tilles v. Commissioner, 38 B.T.A. 545">38 B.T.A. 545, 549-551 (1938), affd. 113 F. 2d 907 (8th Cir. 1940), cert. denied 311 U.S. 703">311 U.S. 703 (1940). Unreimbursed transportation expenses are deductible if incurred in performing donated services for one of the organizations described in section 170(c). Sec. 1.170A-1(g), Income Tax Regs.Petitioner is not entitled to a charitable contribution deduction for the cost of transporting indigents to county offices. She provided this transportation service to individuals on her own initiative and not pursuant to the activities of any qualified organization. furthermore, petitioner is not entitled to deduct the cost of traveling to meetings of the Association because she failed to introduce any evidence of the relationship between these trips and the performance of donated services. Furthermore, petitioner presented no evidence to substantiate the amounts claimed. 2. Business Expenses582 Petitioner deducted $168 on her 1970 and 1971 returns as the cost of her nurse's uniforms. Respondent determined that petitioner was entitled to deduct only $65 in each year; respondent disallowed the remaining amounts claimed on the basis that petitioner did not substantiate that such amounts were paid. Section 162(a) permits a deduction for ordinary and necessary business expenses which includes nurses' uniform expenses. McGovern v. Commissioner, 42 T.C. 1148">42 T.C. 1148, 1150 (1964), affd. by order (6th Cir. Apr. 20, 1966). Petitioner, however, presented no evidence about the claimed deductions. Accordingly, petitioner has failed to carry her burden of proof, Rule 142(a), Tax Court Rules of Practice and Procedure, and her claimed deductions in excess of the amounts previously allowed by respondent are disallowed. 3. Dependency ExemptionsPetitioner contends that she is entitled to dependency exemptions in 1970, 1971 and 1972 for sundry organizations, for an unrelated woman named Juanita, and for Juanita's two nephews. Respondent asserts that these organizations and583 individuals do not qualify as petitioner's dependents under section 152(a) and, therefore, the dependency exemptions should be disallowed. We agree with respondent. Petitioner is entitled to a dependency exemption only for "dependents" as defined in section 152. Sec. 151(e). A dependent must be (1) an individual (2) over half of whose support was provided by petitioner and (3) if the individual is unrelated to petitioner, that individual must have petitioner's home as his principal place of abode. Sec. 152(a). The burden of proof with respect to each of these elements is on petitioner. Rule 142(a), Tax Court Rules of Practice and Procedure. None of the organizations claimed as dependents by petitioner qualify as "individuals" and, therefore, these exemptions are disallowed. Furthermore, Juanita's two nephews (who never lived with petitioner) did not use petitioner's home as their "principal place of abode." These exemptions are also disallowed. Finally, petitioner introduced no evidence as to either the amount of support she provided Juanita in 1970 and 1971 or the total amount584 of support Juanita received from all sources in 1970 and 1971. All we know is that Juanita was a student and a part-time resident of petitioner's household. This is insufficient evidence to carry petitioner's burden of proof and, accordingly, this exemption is also disallowed. See Stafford v. Commissioner, 46 T.C. 515">46 T.C. 515, 518 (1966). 4. Legal Expenses The next question is whether certain deductions petitioner claims are connected with her conviction for criminal fraud under section 7206(1) are deductible as legal expenses. Petitioner contends that $1,500 in attorney fees and $5,268.51 for estimated lost wages are deductible as legal expenses in 1972 and 1973, respectively. Respondent concedes that attorney's fees arising from criminal charges under section 7206(1) are deductible under section 212(3); 6 however, respondent disputes the deductibility of these fees in 1972. On the other hand, respondent asserts that estimated lost wages are not deductible as legal expenses. 585 For cash basis taxpayers like petitioner, legal expenses are deductible in the year of payment. See Estate of Gordon v. Commissioner, 47 T.C. 462">47 T.C. 462, 466 (1967); sec. 1.461-1(a)(1), Income Tax Regs. Petitioner bears the burden of proving the amount paid and the year in which it was paid. Welch v. Helvering, 290 U.S. 111 (1933). Petitioner asserted that she paid her attorney $1,500 in 1972. She did not provide any documentary support for this assertion. Nonetheless, we found petitioner's testimony to be forthright and credible and, accordingly, are satisfied that the $1,500 payment occurred in 1972. Petitioner, however, is not entitled to the $5,268.51 deduction claimed in 1973. This amount merely represents income foregone as a result of the trial and does not constitute expenditures made on behalf of her defense. Only the latter are deductible as legal expenses. 5. Fraud IssueRespondent has determined that petitioner is liable for additions to tax for fraud (section 6653(b)) 7 for 1970, 1971 and 1972 because she claimed dependency exemptions for various organizations in those years. 586 The existence of fraud is a question of fact to be determined upon consideration of the entire record. Stratton v. Commissioner, 54 T.C. 255">54 T.C. 255, 284 (1970). For fraud to be present, we must find that petitioner acted with the specific intent to evade a tax believed to be owing. Mitchell v. Commissioner, 118 F. 2d 308, 310 (5th Cir. 1941). Respondent has the burden of proving by clear and convincing evidence that petitioner is liable for additions to tax for fraud. Sec. 7454(a); Rue 142(b), Tax Court Rules of Practice and Procedure. Respondent must establish fraud for each individual year in issue. Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 220 (1971). This burden may be met with circumstantial evidence, Powell v. Granquist, 252 F. 2d 56, 61 (9th Cir. 1958), but fraud is never presumed or imputed. Switzer v. Commissioner, 20 T.C. 759">20 T.C. 759, 765 (1953). With respect to the years 1970 and 1971, respondent contends that petitioner's conviction under section 7206(1) for willfully filing a false and fraudulent return conclusively satisfies respondent's burden of proof as to petitioner's fraudulent intent587 under section 6653(b); therefore, respondent asserts that he need only demonstrate that petitioner's fraudulent representations resulted in an underpayment of tax. Respondent relies on Considine v. Commissioner, 68 T.C. 52 (1977), to support his position that petitioner's conviction under section 7206(1) collaterally estops her from denying that she intended to evade taxes by claiming dependency exemptions for various organizations. For the reasons stated below, we agree with respondent's application of collateral estoppel to the years 1970 and 1971. In Considine v. Commissioner, supra, the taxpayer's conviction under section 7206(1) resulted from his failure to report a specific item of capital gain. The only allegation of error in the taxpayer's return in the criminal case was this omission. Based on these facts, we held that the taxpayer was estopped from denying that he omitted income from his return or that he intended to evade taxes by this omission. We have recently had the opportunity to reconsider this view of collateral estoppel in Goodwin v. Commissioner , 73 T.C. (Oct. 31, 1979) (Court reviewed). In Goodwin588 the taxpayer pleaded guilty to an indictment under section 7206(1) for willfully subscribing to returns known or believed to be incorrect in that income was omitted. The omission of income was the only allegation on which the indictment was based. We followed Considine, supra, in holding that the taxpayer in Goodwin was collaterally estopped from denying that he omitted income from his returns or that such omissions were made with the intent to evade taxes. In both Considine and Goodwin the taxpayers' convictions under section 7206(1) estopped them from denying the existence of two of the three elements required to be proved under section 6653(b), i.e., an intentional wrongdoing and the requisite intent. As a result, respondent's burden of proof in those cases was reduced to demonstrating that the omitted items of income resulted in an underpayment of tax. The only allegation of willful misrepresentation mentioned in petitioner's indictment for violating section 7206(1) is that she claimed dependency exemptions for various organizations in 1970 and 1971. Based on her conviction on these charges and the application of Considine and Goodwin, we hold589 that petitioner wrongfully claimed dependency exemptions for certain organizations on her 1970 and 1971 returns and that she did so with the intent to evade taxes. Respondent must still prove, however, that the wrongfully claimed dependency exemptions resulted in an underpayment of petitioner's taxes in 1970 and 1971. Petitioner does not contend that she is entitled to any deductions or exemptions other than those which appear on her 1970 and 1971 returns contained in the record; nor have we determined that any deductions or exemptions not shown on the returns are allowable. Furthermore, petitioner does not contend that the gross income reported on her returns was overstated. It is therefore obvious from the record as a whole that petitioner's claiming these organizations as dependency exemptions created an underpayment of her taxes in 1970 and 1971 and, accordingly, we sustain respondent's assessment of the fraud penalty for those years. Respondent contends that the fraud penalty under section 6653(b) should also be assessed for 1972 because petitioner claimed five organizations as dependents. 8 Respondent, however, may not rely upon collateral estoppel with respect to590 1972 because petitioner was neither charged nor convicted of violating section 7206(1) in that year. Nonetheless, respondent argues that he has presented clear and convincing evidence of each requirement of section 6653(b). For the reasons stated below, we do not agree. Respondent points to two facts in support of his assessment of the fraud penalty for 1972. These are (1) petitioner's awareness of the requirements for claiming dependency exemptions at the time she prepared her 1972 return, and (2) petitioner's awareness prior to preparing her 1972 return that a criminal indictment had been filed against her for claiming certain organizations as dependents in 1970 and 1971. While we agree that these facts clearly indicate the intentional and willful nature of petitioner's error in claiming these exemptions, these facts do not provide clear and convincing proof that petitioner's intent in claiming these exemptions was to evade taxes. Rather, the facts in this591 case demonstrate that petitioner's intent was not to evade taxes. Petitioner's testimony indicates that her sole motivation in claiming the exemptions for these organizations was to protest the Government's activities in Vietnam. Petitioner's situation here is analogous to that presented in Muste v. Commissioner, 35 T.C. 913">35 T.C. 913 (1961). In Muste, the taxpayer wrote letters to the Internal Revenue Service notifying the Service that he did not intend to file income tax returns. These letters were written each year and were always mailed prior to the filing date for the taxpayer's none-existent return. The letters expressed the taxpayer's aversion to the use of federal funds for war and preparation for war. In holding that the taxpayer in Muste was not liable for additions to tax on account of fraud under the predecessor of section 6653(b), we stated: Here the evidence shows that the petitioner did not attempt to conceal from the respondent the fact that he had earnings; rather, he advised the respondent at the time for filing of the returns for each of the years in question that he did not intend to file returns and stated his reasons. His failure to file592 returns and thus advise the respondent of the amount of his income was due entirely to his sincere belief that he should not file returns and pay taxes, since he was averse to the use of Federal funds for war and preparation for war. At the time for filing returns he advised the respondent's representatives that he was willing to talk with them and he thereafter cooperated fully with them in their investigation. We are completely satisfied that there was not on the part of the petitioner any bad faith, intentional wrongdoing, sinister motive, or intent to mislead or deceive the respondent. Under these circumstances it is our conclusion, and we have found as a fact, that no part of the deficiency in tax for any year in question was due to fraud with intent to evade tax. 35 T.C. at 921. There are several similarities between petitioner's situation and that of the taxpayer in Muste. First, petitioner listed the initials of the organizations she claimed as dependents on the face of her return. Although the letters were not set off by periods, it is clear that the initials WILF, WTR, WRL, ILRM and ACLU represent the names of organizations. 9 The openness with593 which petitioner claimed these erroneous exemptions is tantamount to directly notifying respondent of her actions. The success of this communication is evident from respondent's audit of petitioner's return. Second, petitioner testified that she "claimed the organizations as dependents in protest against the war, and the Federal Government taking [her] money without [her] consent for war purposes and for the Pentagon." We found petitioner to be sincere in her beliefs and respondent does contend otherwise. Third, respondent offered no evidence that petitioner did not fully cooperate with him in the course of the audit. In the absence of such evidence we assume that petitioner fully cooperated. Under these circumstances, we find Muste controlling and conclude that respondent has not provided clear and convincing proof that petitioner acted with the intent to evade taxes. 10 Although the tax system should not be used as a means of political protest, we may not presume the intent necessary to assess the penalty prescribed under section 6653(b). See Iley v. Commissioner, 19 T.C. 631">19 T.C. 631, 635 (1952). 594 Our holding is not meant to imply that a protest action such as petitioner's is not ever evidence of fraud. Cf. Powell v.Granquist, 252 F. 2d 56 (9th Cir. 1958), in which the taxpayer failed to file tax returns for nine consecutive years. The taxpayer in Powell purportedly did not file these returns because "he did not approve of the manner in which the money was spent by the government, that he considered the government wasteful." Id. at 58. These feelings were expressed only after respondent had begun investigating the absence of the returns. Moreover, the taxpayer had been uncooperative with the Internal Revenue agents during their investigation. On these facts respondent's assessment of the fraud penalty under the predecessor of section 6653(b) was upheld. 5. Statute of LimitationsPetitioner contends that respondent is barred by the statute of limitations from assessing and collecting the 1970, 1971 and 1972 deficiencies. The three-year statute of limitations under section 6501 does not apply to a false or fraudulent return filed with the intent to evade tax. Sec. 6501(c)(1). Petitioner filed fraudulent returns in595 1970 and 1971 with the intent to evade tax and, consequently, the statute of limitations present no barrier to the assessment and collection of the deficiencies relating to those years. Generally, the three-year statute of limitations under section 6501 begins to run on the latter of the actual filing date of the taxpayer's return or the due date of the return. Sec. 6501(a) and (b). The mailing of a statutory notice of deficiency suspends the running of the statute of limitations as of the date it is mailed, even if it is not received by the taxpayer until after the three-year deadline. Sec. 6503(a)(1); sec. 301.6503(a)-1(a), Proced. & Admin. Regs.; Whirlpool Corporation v. Commissioner, 61 T.C. 182 (1973). The burden of providing the expiration of the statutory period is on the taxpayer. Refiners Production Co. v. Commissioner, 43 B.T.A. 481">43 B.T.A. 481, 492 (1941). Petitioner filed a timely return for 1972; therefore, she must prove that respondent did not mail his statutory notice on or before April 16, 1976. 11 The statutory notice received by petitioner596 bore the date of April 15, 1976. Petitioner introduced no evidence at trial indicating that the mailing of the statutory notice did not occur on this date and, accordingly, we find that the statutory notice suspended the running of the statute of limitations. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue.↩2. Petitioner claimed one dependency exemption in 1969 and 1973.↩3. Petitioner's explanation of her actions was as follows: I claimed organizations as dependents in protest against the war, and the Federal Government taking my money without my consent for war purposes and for the Pentagon. And I felt that these organizations--they are not hidden by any means. A.C.L.U., W.I.L.P.F., the American "Friends" Service Committee. These are all familiar organizations of a peace nature. I prefer to support this kind of thing rather than Pentagon or the Pentagon activities.↩4. United States v. Tranquilli was an unreported decision, criminal docket number CRD7330-K. Petitioner appealed the conviction; the Fifth Circuit affirmed, 488 F. 2d 1406 (5th Cir. 1974). The Spreme Court denied certiorari on June 17, 1974. 417 U.S. 971">417 U.S. 971↩.5. The amounts allowed by respondent were $94.00 in 1970, $257.00 in 1971, and $147.00 in 1972. Respondent does not contend that the organizations listed by petitioner are not qualified donees.↩6. Respondent cites Rev. Rul. 68-662, 2 C.B. 69">1968-2 C.B. 69↩, as the basis for this concession.7. Section 6653(b) provides: (b) FRAUD.--If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * *↩8. Respondent does not argue any basis for asseting the fraud penalty other than petitioner's claim to dependency exemptions for the five organizations. Accordingly, this is the only ground for fraud we address.↩9. These initials represent the following organizations: Women's International League for Peace and Freedom, War Tax Resisters, War Resisters' League, International League for the Rights of Man and the American Civil Liberties Union. ↩10. We note that respondent did not alternatively assess the five percent penalty for intentional disregard of rules and regulations under section 6653(a)↩.11. The due date for 1972 individual tax returns was April 15, 1973. This date, however, fell on a Sunday and, accordingly, the due date automatically became April 16, 1973. Sec. 7503.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619632/	ROBERT M. HUNTER and LINDA M. HUNTER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHunter v. CommissionerDocket Nos. 12185-83, 29654-83.United States Tax CourtT.C. Memo 1985-271; 1985 Tax Ct. Memo LEXIS 362; 50 T.C.M. (CCH) 67; T.C.M. (RIA) 85271; June 5, 1985. E. J. Ball,Kenneth R. Mourton, and Stephen E. Adams, for the petitioners. Leroy D. Boyer, for the respondent. GOFFE MEMORANDUM OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income taxes as follows: Docket No.Taxable YearDeficiency29654-831977$4,85929654-83197818,40712185-8319794,26212185-83198047,77512185-8319818,920 After concessions by the parties, the issue for decision is whether petitioners, as noncorporate lessors, are entitled to the investment tax credit with respect to certain section 38 1 machinery and equipment leased or subleased by them to their wholly owned corporation. All of the facts have been stipulated and this case was submitted to this Court without trial pursuant to Rule 122. The stipulation of facts and accompanying exhibits are so found364 and incorporated herein by reference. Robert M. and Linda M. Hunter (Mr. or Mrs. Hunter, individually, or petitioners, collectively), husband and wife, were residents of Tulsa, Oklahoma, at the time the petition in this case was filed. For the taxable years at issue, petitioners timely filed joint Federal income tax returns with the Internal Revenue Service Center in Oklahoma City, Oklahoma. Mr. Hunter operated a machine shop as an individual proprietor under the name of American Manufacturing Company until May 31, 1978, on which date business was incorporated as American Manufacturing of Oklahoma, Inc. (the corporation). Petitioners are the sole shareholders of the corporation. Petitioners and the corporation are related parties within the meaning of section 178(b)(2). Mr. Hunter, individually, purchased land and improvements on March 14, 1978. The land, building, and such machine shop equipment as was deemed necessary or desirable by mutual consent of lessor and lessee, were leased by Mr. Hunter to the corporation for one year by oral agreement on or about June 1, 1978. A Lease Agreement, dated June 1, 1978, was prepared by the parties, but was never executed. 365 The term of the unexecuted lease was to expire upon May 31, 1994. During the taxable years 1979, 1980, and 1981, Mr. Hunter, individually, leased or purchased additional machine shop equipment in the amounts of $201,174, $561,502, and $64,100, respectively. All of the newly acquired equipment was leased or subleased by Mr. Hunter to the corporation. The useful life of the newly acquired property, all of which is section 38 property, leased or subleased by petitioners to the corporation, was seven years or more. A written lease agreement, dated June 1, 1979, provided for the lease or sublease of Mr. Hunter's land, building, and equipment to the corporation for one year. Payments under the lease were to be made over 12 months beginning June 1, 1979, and ending May 31, 1980, in the total amount of $256,000. The lease contained no provisions for renewal of the lease or options to renew. The lease required petitioners to provide "at least three support personnel" in addition to the leased building, land, and equipment. On or about May 15, 1980, the items listed in the written agreement dated June 1, 1979, and other equipment acquired by Mr. Hunter prior to May 15, 1980, were366 leased by oral agreement from his to the corporation for one year for total lease payments in the amount of $287,640. On or about May 15, 1981, the items listed in the writted agreement dated June 1, 1979, and other equipment acquired by Mr. Hunter prior to May 15, 1981, were leased by oral agreement from him to the corporation for one year for total lease payments in the amount of $290,000. In summary form, the annual lease dates and payments are: Date of LeaseTotal Lease PaymentsJune 1, 1978 (oral)Not in recordJune 1, 1979 (written)$256,000May 15, 1980 (oral)$287,640May 15, 1981 (oral)$290,000Petitioners received total rental income under the lease of assets to the corporation for the taxable years 1979, 1980, and 1981 in the amounts of was $182,025, $287,640, and $254,400, respectively. No allocation was made between amounts paid for rent of the land, building, equipment and the provision of support personnel. From the sums received, petitioners paid compensation to four persons employed by petitioners, and provided by petitioners to the corporation as support personnel under the terms of the leases. Two of the employees were floor supervisors, 367 one was a maintenance and repair person, and one was a programmer. None of these individuals was related to petitioners. The corporation did not reimburse petitioners for any of the administrative expenses incurred in paying the compensation. The compensation, if allowed as a deduction with respect to the leased property solely by reason of section 162, exceeds 15 percent of the rental income for the section 38 property. On its returns for the taxable years before this Court, the corporation claimed no deductions for depreciation, amortization, or investment tax credit for any of the properties or equipment. Petitioners claimed investment tax credit for the leased or purchased equipment on their Federal income tax returns for the taxable years 1979, 1980, and 1981. On March 4, 1983, the Commissioner issued a statutory notice of deficiency to petitioners for the taxable years 1979, 1980, and 1981. The Commissioner determined that the investment tax credit claimed by petitioners was excessive and reduced the credit to $1,231 for the taxable year 1979, and disallowed the credit in full for the taxable years 1980 and 1981. The adjustments are as follows: Investment Tax CreditInvestment Tax CreditTaxable YearClaimed by PetitionersAllowed by Commissioner1979$5,745$1,231198049,29119816,410368 On July 21, 1983, the Commissioner issued a statutory notice of deficiency to petitioners for the taxable years 1977 and 1978. In such notice, the claimed carrybacks of investment tax credit from the taxable years 1979 and 1980 against the tax liability of petitioners for the taxable years 1977 and 1978 were disallowed by the Commissioner. The deficiencies determined by the Commissioner for the taxable years 1977 and 1978 represent the refunds made to petitioners pursuant to Form 1045, Application for Tentative Refund, filed by petitioners for those years. The Commissioner's determination in his statutory notices of deficiency to disallow the investment tax credit is presumptively correct, and petitioners have the burden of disproving each individual adjustment. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Section 38 allows a credit against income tax for investment in "section 38 property" which is defined under section 48(a)(1) to include generally depreciable, tangible personal property having a useful life of at least 3 years. Section 108 of the Revenue Act of 1971, Pub. L. 92-178, 85 Stat. 497, 507, imposed limitations on the availability369 of the investment tax credit to certain noncorporate lessors by adding section 46(e)(3) to the Code. The clear intent of Congress was to deny the benefits of the investment credit to noncorporate lessors who have engaged in mere passive investment or financing risks as opposed to having assumed the risks and obligations usually associated with an active business. Carlson v. Commissioner,79 T.C. 215">79 T.C. 215, 221 (1982), affd. 712 F.2d 1314">712 F.2d 1314 (9th Cir. 1983); H. Rept. 92-533, 1 C.B. 498">1972-1 C.B. 498, 513; S. Rept. 92-437, 1 C.B. 559">1972-1 C.B. 559, 583.Noncorporate lessors are, therefore, entitled to the investment tax credit only if the equipment is subject to a short-term lease, under the conditions set forth in section 46(e)(3), which provides: (3) NONCORPORATE LESSORS.--A credit shall be allowed by section 38 to a person which is not a corporation with respect to property of which such person is the lessor only if-- (A) the property subject to the lease has been manufactured or produced by the lessor, or (B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for370 the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property. Neither party contends that petitioners manufactured or produced the equipment leased to the corporation. The necessary prerequisites for petitioners' entitlement to the investment tax credit, as noncorporate lessors, are, therefore: (1) a lease term of less than 50 percent of the useful life of the property, and (2) section 162 expenses, with respect to the property, in excess of 15 percent of the rental income from the property for the first 12 months after the property is transferred to the lessee. For petitioners to prevail, they must first show that the terms of the leases were less than 50 percent of the useful life of the section 38 property. The only written, executed lease was for a term of one year, without a provision for renewal or option to renew. The oral leases were also for one year terms, 371 without provisions for renewal or options to renew. Nominally, the leases in this case were neither for an indefinite term, nor were they open-ended in term. Either of these situations would result in a lease for a term of more than 50 percent of the useful life of the section 38 property, and consequent failure to qualify for the investment tax credit. Ridder v. Commissioner,76 T.C. 867">76 T.C. 867 (1981); Hokanson v. Commissioner,730 F.2d 1245">730 F.2d 1245 (9th Cir. 1984), affg. a Memorandum Opinion of this Court. Similarly, petitioners are not in the position of arguing that the terms of section 46(e)(3)(B) are met solely because of an early termination due to cancellation or destruction of the property. Cf., Ridder v. Commissioner,supra at 872-873; Bloomberg v. Commissioner,74 T.C. 1368">74 T.C. 1368 (1980). Rather, these leases, viewed as independent instruments, are individually for terms of substantially less than 50 percent of the stipulated useful lives of the section 38 property. Respondent contends, however, that the leases are not to be viewed in isolation, but that the test for calculating the length of the actual lease term372 is the "realistic contemplation" of the parties, and that the circumstances in this case indicate an established practice which either makes the leases of indefinite duration or requires that the leases be aggregated. 2 Respondent also argues that the prior, unexecuted lease indicates that the parties anticipated that the equipment would be leased for so long as it was useful. Petitioners contend that they have met the statutory requirements for allowance of the investment tax credit in that not one of the leases is for more than 50 percent of the useful life of the property leased. Petitioners assert that the fact that the long-term lease was not executed is a strong indication that the parties did not intend to enter into a long-term lease. Petitioners also contend that the leases, by their terms, were separately negotiated, for individual one-year periods, and for items that were not "the same or substantially similar" and that the leases, therefore, should not be aggregated. We are unable to agree with respondent that the unexecuted lease is determinative of the parties' intention to lease the373 equipment at issue for a period of longer than 50 percent of its useful life. Further, we respect the fact that each lease was for a finite, rather than an indefinite term, and that the duration of each lease is for a period of less than 50 percent of the equipment's useful life. We find, however, that the durations all four leases must be aggregated to determine the duration of the equipment lease under the terms of section 1.46-4(d)(4), Income Tax Regs., which provides: (4) * * * If a noncorporate lessor enters into two or more successive leases with respect to the same or substantially similar items of section 38 property, the terms of such leases shall be aggregated and such leases shall be considered one lease for the purpose of determining whether the term of such leases is less than 50 percent of the estimated useful life of the property subject to such leases. Thus, for example, if an individual owns on airplane with an estimated useful life of 7 years and enters into three successive 3-year leases of such airplane, such leases will be considered to be one lease for a term of nine years for the purpose of determining whether term of the lease is less than 3-1/2 years374 (50 percent of the 7-year estimated useful life). This regulation was promulgated with explicit Congressional authority pursuant to section 38(b), and is entitled to the customary deference accorded legislative regulations. Commissioner v. Portland Cement Co. of Utah,450 U.S. 156">450 U.S. 156, 169 (1981). Further, this regulation is a reasonable and consistent interpretation of the statute. Thor Power Tool Co. v. Commissioner,439 U.S 522 (1979). Although the parties have stipulated to substantial amounts of newly leased or purchased equipment in each of the taxable years at issue, petitioners have failed to prove that the equipment was not the same or substantially similar from one year to the next. Rule 142(a). We find, therefore, that the leases at issue should be aggregated under the provisions of this regulation, as there are two or more successive leases dealing with the same or substantially similar property. The four leases before this Court, once aggregated under section 1.46-4(d)(4), Income Tax Regs., have an aggregated term in excess of 50 percent of the stipulated useful lives of the section 38 property at issue. Further, although the executed375 and oral leases between the parties cover periods of only one year each, it is obvious that the realistic contemplation of the parties in this instance was that the overall length of the lease arrangement would be for an indefinite period or at least for the useful life of the property leased. Hokanson v. Commissioner,supra at 1249. A minimum duration specified in a lease is not the controlling factor in determining the length of the term of the lease for section 38 purposes. Hokanson v. Commissioner,supra at 1248 n. 2. All of the facts and circumstances surrounding the leases must be examined. Highland Hills Swimming Club, Inc. v. Wiseman,272 F.2d 176">272 F.2d 176, 179 (10th Cir. 1959); Buddy Schoellkopf Products, Inc. v. Commissioner,65 T.C. 640">65 T.C. 640, 656 (1975). Despite the assertion by petitioners that the leases are separate and distinct, rather than being mere continuations of an ongoing arrangement, the variances in terms of the leases from year to year were so slight that the parties failed to even execute new leases, relying on the written lease for all terms but the actual equipment to be leased, and376 the total amount of the payments for the particular year. Petitioners have failed to show that the leases were not interrelated and that they were independently negotiated. A final factor that supports our finding that petitioners are not entitled to the investment tax credit for the section 38 property in this case is the close relationship of the activities of the lessor and lessee.The regular purchases and leases of equipment by Mr. Hunter over a period of at least four taxable years, followed by the immediate leasing of these items to petitioners' wholly owned corporation, bespeaks a substantial, coordinated and long-term undertaking by both parties. Hokanson v. Commissioner,supra at 1249. A practical construction of the facts and circumstances of the leasing transactions is that the parties anticipated an ongoing leasing arrangement for an indefinite period in excess of 50 percent of the useful lives of the section 38 property. See G.W. Van Keppel Co. v. Commissioner,295 F.2d 767">295 F.2d 767 (8th Cir. 1961), affg. a Memorandum Opinion of this Court; Highland Hills Swimming Club, Inc. v. Wiseman,supra.As the first377 prong of the test for the use of the investment tax credit by a noncorporate lessor under section 46(e)(3) has not been met, it is unnecessary to resolve whether the expense of compensating the individuals hired by petitioners as support personnel constitutes an expense with respect to the equipment, deductible under section 162, within the purview of section 46(e)(3)(B). Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the relevant years, and all Rule references are to the Rules of Practice and Procedure of this Court.↩2. Peterson v. Commissioner,T.C. Memo. 1982-442↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619634/	NANCY LYNN TRAVERS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTravers v. CommissionerDocket No. 10505-81.United States Tax CourtT.C. Memo 1982-88; 1982 Tax Ct. Memo LEXIS 655; 43 T.C.M. (CCH) 603; T.C.M. (RIA) 82088; February 22, 1982. Nancy Lynn Travers, pro se. Karen Nicholson Sommers and Thomas H. Meyerer, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Francis J. Cantrel for the purpose of conducting the hearing and ruling656 on respondent's motion for summary judgment filed herein. After a review of the record, we agree with and adopt his opinion which is set forth below. 1OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: This case is presently before the Court on respondent's motion for summary judgment filed on December 30, 1981, pursuant to Rule 121, Tax Court657 Rules of Practice and Procedure.2Respondent, in his joint notice of deficiency issued to petitioner and Paul Travers on February 18, 1981, determined a deficiency in their Federal income tax (self-employment tax) for the taxable calendar year 1978 in the amount of $ 484.54. 3The issue here is one of law, i.e., whether petitioner is liable for the self-employment tax with respect to self-employment income of her then husband for 1978. Petitioner resided at 6430 Oakridge Road, San Diego, California, on the date she filed her petition. During the year 1978 she was married to Paul with whom she timely filed a joint 1978 Federal income tax return with the Internal Revenue Service Center at Fresno, California. On that return petitioner and Paul reported income from wages she received from the Donald N. Sharp Memorial Community Hospital in the amount of $ 3,694. During 1978 Paul was a real estate broker trading under the name of Paul Travers and Associates. Attached658 to the 1978 return is a Schedule C, "Profit or (Loss) From Business or Profession", which reports that Paul received a net profit from his business of $ 5,982, which said amount was carried over to line 13 of page 1 of the joint return, whereat business income is reported. No liability for self-employment tax was reported on the 1978 return. Respondent determined that petitioner and Paul were liable for a self-employment tax of $ 484.54 on said $ 5,982, computed at a rate of.081.4The petition herein was filed on May 18, 1981, and respondent filed his answer on July 7, 1981. Thus, the pleadings are closed. Rules 34, 36, 38, and 121. As we view this record, petitioner concedes that income from the self-employment of Paul was reported on the 1978 joint return and that self-employment tax is due thereon. However, she argues that she should not be liable for the self-employment tax on that income since such tax "is ex-spouse's assessed contribution to the Social Security system on his own behalf." She further contends she is not liable for such tax on the ground that she exercised no management or control over Paul's real estate659 brokerage business; the gross income and deductions upon which the self-employment tax deficiency were assessed were earned and deducted solely by Paul. Unfortunately for petitioner, her reliance on the foregoing arguments is misplaced. It is undisputed that petitioner and Paul received self-employment income in 1978 in excess of $ 400. Indeed, they reported that income on their joint return. Such income is subject to self-employment tax. Section 1401 5 imposes a tax on self-employment income. Section 1402(b) provides that the term "self-employment income" means the net earnings from self-employment income derived by an individual in excess of $ 400 a year. Section 6013, which permits joint returns of income tax by husband and wife, provides in pertinent part: (a) Joint Returns.--A husband and wife may make a single return jointly660 of income taxes under subtitle A, * * (d) Special Rules.--For purposes of this section-- (3) if a joint return is made, the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several. The self-employment tax is imposed by section 1401(a) in chapter 2 of subtitle A and is thus within the express language of section 6013. 6Here, petitioner and Paul filed a joint 1978 Federal income tax return whereon they reported self-employment income but no self-employment tax due thereon. Respondent has correctly determined the precise amount to that tax. Under the clear statutory mandates, self-employment tax owed by either spouse, together with the income tax on the aggregate income of both spouses, is to be reported on a joint return filed by the spouses. Liability for all taxes reportable on a joint return is joint and several as to each spouse. 7*661 The record is clear that there is no genuine issue as to any material fact. In such circumstance, Rule 121(b) permits this Court to render decision as a matter of law. Since respondent has demonstrated that he is entitled to prevail as a matter of law, his motion for summary judgment, filed on December 30, 1981, will be granted. An appropriate order and decision will be entered.Footnotes1. Since this is a pretrial motion and there is no genuine issue of material fact, the Court has concluded that the post-trial procedures of Rule 182, Tax Court Rules of Practice and Procedure↩, are not applicable in these particular circumstances. This conclusion is based on the authority of the "otherwise provided" language of that rule. The parties were afforded a full opportunity to present their views on the law at the hearing at Washington, D.C., on February 10, 1982. Petitioner did not appear nor did she file any response to respondent's motion herein under consideration, albeit a copy thereof together with a copy of respondent's Memorandum of Points and Authorities in support thereof and the Court's notice setting respondent's motion for hearing were served on petitioner by the Court on January 7, 1982.2. All rule references are to the Tax Court Rules of Practice and Procedure.↩3. Petitioner and Paul Travers (hereinafter referred to as Paul) are new divorced and the latter is not a party to this case.↩4. See section 1.1401-1, Income Tax Regs.↩5. All section references are to the Internal Revenue Code of 1954, as amended and in effect in 1978. There is nothing in this record establishing that Paul is exempt from self-employment tax. See Travers v. Commissioner,T.C. Memo. 1981-469↩, where we denied Paul's claim for exemption from self-employment tax for 1977.6. The only exception to joint and several liability is found in section 6013(e), which is inapplicable here since no↩ omission of gross income has been determined by respondent.7. See Buckles v. Commissioner,T.C. Memo. 1968-105↩, where we held a wife who filed a joint return with her husband was jointly and severally liable for self-employment tax.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619635/	APPEAL OF WASHINGTON PIECE DYEING & FINISHING CO.Washington Piece Dyeing & Finishing Co. v. CommissionerDocket No. 4619.United States Board of Tax Appeals4 B.T.A. 987; 1926 BTA LEXIS 2111; September 24, 1926, Decided 2111 On the facts stated, held, that expenditures for copper rolls should be capitalized and not charged to expense. Depreciation rate on said rolls determined. Wm. Surosky, Esq., for the petitioner. F. O. Graves, Esq., for the Commissioner. MORRIS987 This appeal is from the determination of a deficiency of $3,025.94 in income and profits tax for 1921, arising from the disallowance of $6,135.97 as depreciation on copper rolls and $9,425.05 charged to expense as the result of purchases of copper rolls. 988 FINDINGS OF FACT. The petitioner is a New Jersey corporation with its principal office in Paterson. In 1920 it went into the silk printing business. Copper rolls were used in connection with engraving designs according to specifications selected by the trade. About the middle of 1920 the petitioner purchased some of these rolls. Additional purchases were made from time to time during 1920, 1921, and 1922. The rolls purchased in 1920 and part of 1921 amounting to $10,983.12 were capitalized, but early in 1921 and for the balance of that year the purchases, amounting to $9,425.05, were charged to expense. Purchases2112 in 1922 were again capitalized. During 1920 and 1921, 250 rolls were purchased. By the end of 1921, 50 of these were discarded as worn out. In 1922, 100 additional rolls were purchased. The petitioner was not experienced in handling copper rolls and was handicapped during 1920 and 1921 by lack of funds. This lack of funds prevented it from carrying copper rolls above bare requirements for operations. The rolls on hand were engraved, used to print the design, and then scraped and a new design engraved thereon. At the date of purchase the copper rolls were 16 inches in circumference. When they had been scraped down to 13 inches in circumference they became useless. The ordinary useful life of these rolls is about five years. The Commissioner capitalized the purchases of rolls made in 1921, which the petitioner had charged to expense, and allowed depreciation at the rate of 10 per cent on all rolls. OPINION. MORRIS: The petitioner capitalized part of its purchases of rolls and took depreciation thereon, and charged other purchases of rolls to expense. The Commissioner contends that the cost of all rolls should be capitalized. On the evidence presented we are of the*2113 opinion that the copper rolls were capital items and that the cost thereof should therefore not be charged to expense. The facts show that the petitioner was not experienced in handling copper rolls, and further that it was handicapped by a lack of finances. The lack of available funds made it necessary constantly to scrape the rolls on hand for the purpose of engraving new designs thereon. As a result the rolls depreciated very rapidly so that about fifty were worn out in 1921. We are satisfied that the useful life of these rolls did not exceed five years, and that a depreciation rate of 20 per cent should be allowed on the cost thereof for the taxable year in question. Order of redetermination will be entered on 10 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619637/	McBride Building Trust, First Mortgage Bond Company, Inc., Trustee v. Commissioner.Building Trust v. CommissionerDocket No. 22836.United States Tax Court1951 Tax Ct. Memo LEXIS 364; 10 T.C.M. (CCH) 13; T.C.M. (RIA) 51004; January 9, 1951364 John M. Hudson, Esq., 1170 Penobscot Bldg., Detroit 26, Mich., for the petitioner. Cyrus A. Neuman, Esq., for the respondent. LEMIRE Memorandum Opinion LEMIRE, Judge: This proceeding involves a deficiency in income tax for the fiscal year ended July 31, 1945, in the amount of $807.77. Petitioner claims that there is an overpayment of $138. The sole issue presented is the amount of depreciation which the petitioner as trustee is entitled to deduct in computing the taxable net income of the trust for the taxable year. This case was submitted without a hearing upon a written stipulation of facts under Rule 30 of the Rules of Practice of this Court. The stipulated facts are so found and we adopt the written stipulation as our findings. The material facts are as follows: [The Facts] The petitioner is a Virginia corporation with its principal place of business in Detroit, Michigan. Its income tax return for the fiscal year ended July 31, 1945, was made on a cash basis of accounting and was filed with the collector of internal revenue for the district of Michigan, at Detroit. By trust mortgage dated December 1, 1926, certain improved real estate in Detroit, known365 as the McBride Building, was conveyed by James F. and Cora McBride to the petitioner as trustee to secure bonds in the face amount of $123,500 issued by the McBrides. The bonds later were in default as to both principal and interest and proceedings for the foreclosure of the mortgage were instituted. The petitioner as trustee bid in the property at the foreclosure sale and acquired absolute title to it on behalf of the bondholders when the period of exemption expired on February 7, 1932. Under the terms of the trust mortgage the petitioner was authorized to acquire and handle the property as directed and approved by the holders of 51 per cent in interest of all the bonds. The terms and conditions upon which the trust property should be handled, managed, controlled, and disposed of for the benefit of all the bondholders were determined by agreement entered into as of December 31, 1931, between more than 51 per cent in interest of the bondholders and the petitioner. The agreement provided in pertinent part as follows: "WHEREAS it is not practicable at the present time to sell said property without great sacrifice and it is desirable that the premises be properly furnished and put366 into condition so that the same may be rented and income derived therefrom for the benefit of bondholders until such time as advantageous sale can be made, and it is necessary to raise funds for such purpose and to pay taxes and the cost, charges and expenses of the Trustee in connection with the property. * "WHEREAS, the Trustees have deemed it beneficial to bondholders that the title to the premises be acquired, and that the property be maintained and handled, on behalf of bondholders until such time as an advantageous sale can be made; and it is deemed necessary that a plan be adopted and followed for the proper and effectual handling and ultimate disposal of said property for the benefit of bondholders in the anticipated event that said premises are not redeemed and title becomes absolute in said Trustee on behalf of bondholders; * "1. This agreement and determination shall be effective and binding upon all bondholders and upon the Trustee if and when the holders of 51% in interest of all the holders of bonds secured by said mortgage now outstanding shall join herein by the execution of this agreement or the execution of separate concurrent instruments in367 writing signifying their participation herein and depositing their bonds as hereinafter provided. "2. The Trustee shall issue trust certificates evidencing beneficial ownership in the premises pro rata to all holders of bonds on the basis of one unit for each $10.00 so represented. "3. The Trustee shall have full power to hold, handle, manage, control, rent, lease, furnish, equip, improve, preserve and protect said property and collect the rents, issues and profits thereof in accordance with its best judgment and discretion; also to mortgage or sell said premises subject to the conditions hereinafter mentioned. "4. It is the intent that the property should be put and maintained in good condition, and furnished and equipped so far as needed, and the largest possible revenues derived therefrom pending liquidation by sale thereof, at a time when conditions are more favorable than at present. It is agreed that five (5) years' time shall be allowed to liquidate, and that sale shall not be made earlier without the written consent of fifty-one per cent (51%) in interest of all certificate holders. "5. The Trustee shall have power to borrow moneys at any time or times, for the purpose368 of paying any part of the purchase price on foreclosure that was applicable to the payment of taxes, Trustee's advances or other items having priority over the bonds, of paying the reasonable expense and compensation of Trustee incident to this reorganization, of paying taxes and assessments due or to become due, of paying for any furniture or equipment deemed necessary and any expense necessary to place in first class condition or for preserving and protecting the property held in trust; and for the purpose of securing any such loans the Trustee may mortgage said premises, any such mortgage to be a first lien thereon having priority to all other rights and interests. "6. On any sale of said property the net proceeds shall be distributed pro rata to all holders of certificates then outstanding. After paying the costs and expenses of operation, taxes, maintenance, protection and improvement of said property, including the reasonable compensation of the Trustee, any net revenues, in the judgment of the Trustee not required to meet payments on any mortgage or otherwise in connection with the property, shall be distributed to certificate holders pro rata; provided that should income369 available for distribution in any one year exceed five per cent (5%) upon the outstanding certificates the excess may be used by the Trustee to purchase or retire outstanding certificates at a price not exceeding $10.00 per unit, purchases to be made at lowest prices offered, and retirement by lot. All certificates so purchased or retired shall be cancelled by the Trustee. "7. The Trustee shall be entitled to reimbursement for all advances made by it and for all necessary expenses and attorney fees, and to reasonable compensation for its services in connection with this reorganization and its operations hereunder. The Trustee shall have a lien on the premises and upon any funds or property in its hands superior to all interests except such mortgage as the Trustee may place on the premises pursuant hereto. * * "11. This agreement shall be construed liberally to carry out its purposes. The Trustee shall be protected in acting upon any notice, request, consent, certificate, declaration or other paper or document or signature believed by the Trustee to be genuine and to have been signed by the proper party or parties, and in any action deemed by the Trustee authorized and proper370 hereunder and shall not be liable for errors or mistakes nor for anything in good faith done or omitted nor at all except for its own bad faith. The Trustee shall not have any personal liability to third persons arising out of any debts contracted by it or otherwise, any such liability to be confined solely to the property and funds in its hands." Pursuant to the terms of the trust mortgage and the agreement of December 31, 1931, the petitioner managed, controlled, and operated the trust property on behalf of the bondholders until February 1, 1946, when the property was sold. The petitioner administered the trust under the jurisdiction of and in accordance with the order of the Circuit Court of Wayne County, Michigan, during the entire term of the trust. The bondholders deposited their bonds with the petitioner and received trustee's depository receipts and certificates of beneficial interest in the property. The petitioner registered the bonds deposited and the certificates issued in the names of the bondholders as evidence of their rights and beneficial interests in the trust property. During the term of the trust periodical financial statements were made to the holders of certificates371 of beneficial interest in the trust property and to the clerk in the circuit court. At the date the petitioner acquired the trust property for the bondholders the face amount of bonds outstanding was $123,500, and past due and unpaid property taxes amounted to $19,781.26, exclusive of interest and penalties. Beginning with its fiscal year 1933 the petitioner filed income tax returns for the trust, claiming in each return a deduction for depreciation sustained on the property. Various adjustments to the cost basis of the property and to the deductions for depreciation claimed were made by the respondent and accepted by the petitioner on several of the returns, but a deduction was allowed to the petitioner for depreciation in each year except the taxable year ended July 31, 1945. In the return filed for that year the petitioner claimed a deduction for depreciation of $3,683.44, computed on the basis and at the rate previously allowed by the respondent. Respondent determined that no depreciation on the property was allowable to petitioner for that year. The following table shows the results of the operation of the property by the trustee during the fiscal years 1933 through 1945: Net IncomeDepre-Balance ofFiscalGrossOperatingBefore De-ciationof NetYearIncomeExpensepreciationAllowedIncome1933$ 6,915.26$ 6,643.18$ 272.08$ 5,222.00($4,949.92)19347,520.635,672.141,848.495,259.24( 3,410.75)193511,705.606,954.424,751.185,296.56( 545.38)193613,957.017,857.316,099.705,302.76796.94193715,992.448,108.047,884.405,302.772,581.63193818,806.018,215.5410,590.474,748.345,842.13193916,993.679,947.457,046.224,752.772,293.452-1 to 7-31, 19397,932.455,216.092,716.362,376.81339.55194016,727.6510,927.105,800.553,655.022,145.53194119,937.089,747.248,189.843,708.084,481.76194220,126.4510,965.209,161.253,712.485,448.77194319,281.069,926.319,354.753,676.625,678.13194419,305.6210,984.748,320.883,682.024,638.86194519,756.3711,824.407,931.97 3,683.444,248.53$212,957.30$122,989.16$89,968.14$60,378.91$29,589.23372 FiscalAmountAmountYearDistributedwithheld1933($4,949.92)1934( 3,410.75)1935( 545.38)496.94 2,581.63 19385,842.13 $ 627.501,665.95 2-1 to 7-31, 1939627.50( 287.95)19401,864.20281.33 19412,324.902,156.86 19422,090.403,358.37 19431,966.403,711.73 19441,895.402,743.46 19452,255/5-1,993.03 $13,651.80$15,937.43 On February 1, 1946, the petitioner sold the trust property for $79,133.75. A net gain on the sale of $12,749.72 was reported in the petitioner's return for the period August 1, 1945, to February 1, 1946, computed in accordance with the adjustments made by the respondent to the depreciable property on the returns for prior years, except that the depreciation claimed by the petitioner for the fiscal year 1945 was taken into account, although the respondent disallowed the deduction of depreciation for that year. In 1946 the petitioner distributed to the holders of certificates of beneficial interest $90,012.60, representing the net proceeds of sale of the property, 373 the net income for the current year's operation, and the accumulations from operations in prior years. The reconcilation of the final distribution to holders of certificates of beneficial interest in the trust is as follows: Total distribution 1946$90,012.60Net income after depreciation 1946$ 3,422.841946 depreciation1,842.441946 net income before depreciation$ 5,265.28Net proceeds of sale79,133.7584,399.03Prior accumulations distributed$ 5,613.57Prior years accumulated depreciation$60,378.91Net undistributed income15,937.4376,316.34Past due property taxes$35,347.52Income taxes2,255.14Furniture, fixtures and equipment3,939.46Reorganization expense8,181.72Certificates bought20,990.0070,713.84$ 5,602.50Add withholding tax adjustment11.07Prior accumulations$ 5,613.57[Opinion] Section 23(1), Internal Revenue Code, provides that in computing net income there shall be allowed as a deduction a reasonable allowance for depreciation of property used in the trade or busines or held for the production of income. It further provides that: 374 " * * In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each." The petitioner contends that the trust instrument, by conferring upon the trustee the power to manage the trust property and to improve, preserve, and protect it, with all the powers of an absolute owner, authorized the trustee to set aside as reasonable the full amount of depreciation sustained on the property each year. In the alternative, the petitioner contends that the trustee is, in any event, entitled to a deduction for depreciation proportionate to the undistributed income. Although in determining the deficiency herein the respondent disallowed any deduction for depreciation, he now concedes that the petitioner is entitled to a deduction of $5,676.47 of the depreciation of $3,683.44 sustained on the trust property during the taxable year, since the petitioner had discretion to withhold, and did withhold, $5,676.47 of the trust income of $7,931.97 in that year. 375 In the absence of any specific provision in the trust agreement for a deduction for depreciation, we must examine the pertinent provisions of the instrument to find a basis for an allocation in accordance with section 23(1). The purpose of the trust was to operate and preserve the property until such time as it could be sold advantageously. The trustee was given broad powers in the management of the property. It had power to withhold almost any amount of the current income to cover the cost of operating and maintaining the property. The bondholders held the beneficial interests as well as the remainder interests in the trust property. There was no trust purpose to be served either by increasing their current income at the expense of their capital or by preserving their capital at the expense of their current income. Under the broad powers conferred upon it the trustee could, and did, distribute annually all of the income not required for operating and maintaining the property. The broad discretion of petitioner, as trustee, either to withhold or to distribute trust income constituted a power to allocate the income. The word "allocable" in section 23(1) means "distributable". Fleming v. Commissioner, 121 Fed. (2d) 7,376 affirming 43 B.T.A. 229">43 B.T.A. 229; Newbury v. United States, 57 Fed. Supp. 168, certiorari denied, 323 U.S. 802">323 U.S. 802. We conclude that the allowance for depreciation in the taxable year must be divided between the trustee and the bondholders on the basis of the amount of trust income distributed and the amount withheld, as now conceded by respondent. The fact that respondent allowed the depreciation deductions claimed by the trustee for previous years, except for certain adjustments which the trustee accepted, is immaterial. Respondent had a right, and a duty, to change his position whenever, in his judgment, the law required him to do so. Reynard Corporation, 30 B.T.A. 451">30 B.T.A. 451; Shield Co., Inc., 2 T.C. 763">2 T.C. 763. Decision will be entered under Rule 50. Footnotes*. This amount claimed and reported by petitioner but not allowed by respondent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619640/	ANNA J. COTTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cotton v. CommissionerDocket Nos. 45005, 51393.United States Board of Tax Appeals25 B.T.A. 1158; 1932 BTA LEXIS 1416; April 15, 1932, Promulgated 1416 1. Held, that the evidence fails to support a claim for accelerated depreciation of hotel property owned by petitioner in the taxable years. 2. In the circumstances herein a mineral lease abandoned in 1926 resulted in loss, if any, in that year. M. A. Matlock, Esq., for the petitioner. Nathan Gammon, Esq., for the respondent. LANSDON 1158 Income tax deficiencies for 1927 and 1928 in the respective amounts of $210.65 and $4,219.66 are at issue in these consolidated appeals. In each case the proper rate of depreciation and obsolescence allowable to petitioner upon hotel property is an issue; also, the further question of whether or not a net business loss was sustained in 1927 which could be carried over as a deduction from income in 1928. 1159 FINDINGS OF FACT. The petitioner is the widow of Almon Cotton, who died March 5, 1922, leaving certain property and interests to which she succeeded. Included in such property was a mining lease in the State of Arkansas, which decedent acquired in 1919, and was engaged in developing at the time of his death. She continued such work until the fall of 1926, at which time, being1417 convinced that the project was too expensive for profit, she abandoned it. From its acquisition in 1919 to September, 1926, when the petitioner abandoned it, she and the decedent together expended $139,675.38 in development work on this lease. For those years petitioner and her husband each claimed and were allowed deductions for such expenditures from their Federal income-tax returns as business expenses. Other expenditures, amounting to $19,619.40, made in the building of a flotation plant, mill and foreman's cottage, were capitalized and exhausted through deductions claimed and allowed as depreciation at the rate of 20 per cent per annum, the final deduction on such account being for 1927, following abandonment of the lease. Involved in our inquiry is certain community property which the petitioner and her husband owned at the time of his death. Included therein was a ten-story concrete and brick hotel, located in the heart of the business district of Houston, Texas, which was leased upon a profit-sharing basis. This hotel was built by Almon Cotton in 1913 and was then modern in every respect. Two years later the Rice Hotel, was built three blocks away; and more recently1418 the Texas State Hotel of 10 or 12 stories has been erected just across the street. Within a radius of three blocks including petitioner's hotel are located a number of modern skyscraper office buildings, including the Second National Bank and the Gulf and the Eperson buildings, the latter two being respectively twenty-five and twenty-eight stories in height. The yearly rentals derived from the Cotton Hotel, based upon its earnings, from 1920 to 1928, inclusive, were as follows: 1920$52,280.70192144,448.21192246,329.54192344,715.08192443,639.931925$37,941.21192634,993.03192731,006.50192820,762.37Based upon a cost of $302,992, the petitioner and her husband before her have claimed and been allowed as deductions from gross income in each year prior to 1927 an amount equal to 2 per cent of such valuation representing depreciation and obsolescence of the hotel building. For the years in question the petitioner claims the right to increase such deductions to 3 per cent on account of accelerated 1160 obsolescence of such property brought about by business changes affecting its economic usefulness. This claim has been disallowed1419 by the respondent. OPINION. LANSDON: The petitioner contends that changed conditions have accelerated obsolescence and shortened the useful life of her hotel property by one-third. She therefore claims the right to depreciated deductions on such account from net income in each of the taxable years at the rate of 3 per cent on the cost thereof. No evidence has been introduced to show that conditions have permanently changed for the worse in respect to the petitioner's property since it was opened up as a hotel in 1913. That it has not greatly suffered from destructive competition is indicated by the fact that its greatest earnings were in 1920, five years after the building of the Rice Hotel. The evidence also shows that the operation of the Texas State Hotel across the street helped rather than injured its business. The falling off of revenues, of course, is no evidence, per se, of a shortening of the property's economic life. The witness, E. C. Cotton, who was petitioner's business manager, testified that in his opinion the hotel business was overdone in Houston. Even if this is true, it would not establish obsolescence or accelerated depreciation of petitioner's1420 properties. In the absence of proof to show that the true economic life of this property is shorter than determined by the respondent, we affirm the respondent's determination on this issue. ; ; ; . The petitioner contends that she sustained a business loss in 1927 in the amount of $139,675.38 as a result of expenditures made by her deceased husband and herself in developing a mine which was abandoned in September, 1926. Although the abandonment was in 1926, she contends that, because of a provision in the lease which allowed a six-month suspension of work before subjecting her interests in it to forfeiture, the loss did not occur until after the lapse of that period, which ended in 1927. In this contention she has overlooked the fact that her interests in that property were not terminated by forfeiture, but that she voluntarily abandoned it on September 8, 1926. Her son, who was her manager and in full charge of the work at the mine, when asked the question: "Was it your intention*1421 to go back and resume operations later?" answered: "No, I did not go back for it cost too much money to get the equipment." This voluntary abandonment, with the intent indicated, terminated the petitioner's interests in the lease, as and from that date without awaiting further lapse of time or invoking involuntary forfeitures. ; ; ; ; ; ; ; ; ; ; ; ; . Inasmuch as the petitioner has failed to establish the loss contended for in 1927, it follows that there was no resulting net loss which she was entitled to carry forward in reduction of her taxes in 1928. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619641/	AUTO SPECIALTIES MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Auto Specialties Mfg. Co. v. CommissionerDocket Nos. 10449, 15928.United States Board of Tax Appeals9 B.T.A. 455; 1927 BTA LEXIS 2586; December 1, 1927, Promulgated 2586 PATENT VALUES. - The March 1, 1913, value of certain patents acquired for stock determined for the purpose of deductions for exhaustion. Paul F. Myers, Esq., and John R. Yates, Esq., for the petitioner. Granville S. Borden, Esq., for the respondent. TRUSSELL 455 In this proceeding the petitioner seeks a redetermination of income and profits taxes for the years 1918 and 1919. For the year 1918 the Commissioner assessed a total tax of $10,733.67 and thereafter allowed an abatement of $1,772.41, leaving a proposed tax liability of $8,961.26. Of this amount petitioner seeks a reduction to the extent of $4,474.55, representing an original deficiency of $6,246.96 less the abatement of $1,772.41. For the year 1919 the Commissioner found a deficiency of $3,107.01. FINDINGS OF FACT. The petitioner is a corporation organized March 25, 1909, under the laws of the State of California, with an authorized capital stock of the par value of $49,990, consisting of 4,999 shares of common stock of the par value of $10 a share. Petitioner was organized by E. F. O'Brien, S. A. Crook, and C. L. Bair. One thousand shares of capital stock were issued2587 to each of the three individuals and there was turned in to the corporation by Bair certain patents issued in his name. Most of the remaining stock was sold for cash to J. W. Tiscornia during 1909 and 1910. On March 1, 1913, petitioner was the owner of the following patents: Patent No.Date of applicationDate of issuePatentee866,416July 2, 1906Sept. 17, 1907C. L. Bair967,305Apr. 3, 1907Aug. 16, 1910Do.1,010,110May 26, 1910Nov. 28, 1911Do.456 These patents were issued on what was known as a vehicle-top bow-holder. This device was attached to the motor cars with folding tops and had as its object a means of permitting the bows of the top to drop back into the holder and be held separate from each other so firmly as to prevent chafing or rattling. This object was accomplished by having a fixed vertical arm rigidly attached to the side of the vehicle and to which was attached a movable arm by a hinge at the bottom, on which movable arm were a series of sockets to separately embrace and support the bows of the vehicle top. The movable arm when closed was attached to the top of the fixed arm by a locking lever. Prior2588 to March 1, 1913, there were at least 40 patents issued on vehicle-top bow-holders, some of which dated as far back as the year 1892. Some of these patents contained specifications disclosing devices which performed functions very similar to those performed by the patentee's inventions. However, the petitioner owned the basic patent on bow-holders of the type where the bow separators were attached to the movable arm. As at March 1, 1913, the automobile manufacturing business was at a stage of very rapid development, as indicated by the following schedule of motor vehicle production. Schedule of motor vehicle productionYearCommercialPassengerFord19005,00019017,00019029,000190311,235708190441122,4191,000190545024,5501,695190650033,5001,599190770043,3008,42319081,50063,5005,98619093,255127,73112,29219106,000181,00019,293191110,655199,31940,402191222,000356,00078,611191323,500461,500182,809191425,375543,679260,720191574,000818,618355,276191692,1301,525,578577,0361917128,1571,740,792802,7711918227,250926,388402,9081919316,3641,657,652777,6941920322,0391,883,1582589 By 1913 the petitioner had induced some 55 automobile manufacturing concerns to use the Bair Bow-holder as a part of the standard factory equipment. The operations of the petitioner from date of organization to March 1, 1913, are shown as follows: Schedule of earnings for 1909-1912, and January and February, 1913YearNumber of setsGross salesCost of sales and other expensesNet profitProfit per set1909858$2,612.46$7,080.93($4,468.47)($5.21) red19104,6839,650.6918,623.66(8,972.97)(1.91) red191121,52632,387.1933,172.45(785.26)(.03) red191251,544-9,502.3852,977.5316,524.85.321913 (Jan. and Feb.)12,31012,453.2510,238.262,214.99.18457 Operations for 1913 and subsequent years are shown as follows: YearGross sales top holdersTop holder sets soldProfit as adjusted by Commissioner1913$84,240.4256,388$13,289.95191492,030.9774,87824,643.401915216,384.69252,92086,367.801916323,535.43509,47599,269.481917440,660.21566,67842,771.031918271,227.34306,84238,914.701919891,823.80881,605154,096.0619201,103,214.92854,078237,028.862590 These schedules show that petitioner supplied bow-holders to 13.55 per cent in 1911, and 18.58 per cent in 1912, of all the passenger cars manufactured during those years. At March 1, 1913, the net tangible assets of the petitioner were approximately $38,000. The value of petitioner's patents at March 1, 1913, was $160,000, and the petitioner is entitled to a deduction of one-fifteenth of that amount for each of the years in question. OPINION. TRUSSELL: The sole question to be determined in this appeal is the value of the patents owned by the petitioner on March 1, 1913. In support of petitioner's claim for value it introduced various witnesses who testified as to the superiority of the device manufactured under the petitioner's patents as compared with other devices then in existence. Two of these witnesses placed a value of some $500,000 on these patents. The first witness, Borgun, determined his value from estimated annual earnings of $149,344. The other witness, Milnor, presented a long series of curves and estimates of future probability from the year 1913 to the year 1927, inclusive, in which he estimated the probable increase of sales of open cars, the probable2591 increase in the inhabitants of the United States, the probable increase 458 in sale of bow-holders, and the probable profits to be realized from the sale. We have examined with great care the computations and estimates of future probability thus presented, but do not believe that the witnesses placed sufficient weight in the probability that the patents might become obsolete before they expired, due to the rapid improvements in the automobile industry, nor did they give sufficient weight to the competition which might arise from the sale of devices which would perform similar functions to those manufactured by the petitioner. This would result in smaller profits than those estimated by the witnesses. The record of the petitioner has shown that these estimated profits have not been realized. From the data submitted it appears that the approximate profits made by the petitioner for the years 1913 to 1920 were as follows: 191323 cents per set191432 cents per set191534 cents per set191620 cents per set191708 cents per set191813 cents per set191919 cents per set192028 cents per setSubsequent events have also shown that the device*2592 during the last few years has been placed upon comparatively few vehicles, due to the large increase in the production of closed cars and various improvements or changes in open-car construction which made such a device unnecessary. We believe, also, that all of the profits realized from the manufacture and sale of this article are not entirely attributable to the patents themselves. Had the petitioner manufactured these devices without patents in competition with other concerns, it is very probable that it could have realized substantial profits therefrom. This fact was indicated in the testimony of Milnor, who stated that the profits he estimated per set were only slightly in excess of what could have been obtained with the keenest kind of competition against other patented devices. Accordingly, we are of the opinion that the value of the petitioner's patents at March 1, 1913, was $160,000, and that such value is exhaustible over a period of 15 years from March 1, 1913. Judgment will be entered on 15 days' notice, under Rule 50.Considered by SMITH, LOVE, and LITTLETON.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619642/	STEVEN F. WELSCH, a.k.a. STEPHEN F. WELSCH, a.k.a. STEVE WELSCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWelsch v. CommissionerDocket No. 26250-91United States Tax CourtT.C. Memo 1993-544; 1993 Tax Ct. Memo LEXIS 562; 66 T.C.M. (CCH) 1385; November 22, 1993, Filed 562 Decision will be entered for respondent. For respondent: William B. McCarthy. JACOBSJACOBSMEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to tax as follows: Additions to TaxYearDeficiencySec. 6653(b)(1)Sec. 6653(b)(1)(A)Sec. 66541984$ 21,213$ 10,607$ 1,237198528,07114,0361,018198650,122$ 37,5912,199198750,13037,5982,030All section references are to the Internal Revenue Code in effect for years in issue. Petitioner failed to appear at trial. Several days prior to the scheduled trial date, he sent a letter to the Court in which he stated that he did not wish to prosecute his case. Because respondent has the burden of proof with respect to the fraud additions to tax under section 6653(b)(1) and section 6653(b)(1)(A), the case proceeded to trial without petitioner's being present. At trial, respondent's counsel recited numerous instances in which petitioner failed to comply with the Court's standing pre-trial order that the parties meet in order to discuss settlement and/or prepare a stipulation of facts. Counsel thereafter563 moved to dismiss this case for failure to properly prosecute as to those items for which petitioner bears the burden of proof, namely the deficiencies, and the additions to tax under section 6654, for 1984, 1985, 1986, and 1987. Respondent's motion was granted. Thus, the sole issue for decision is whether petitioner is liable for the additions to tax for fraud. FINDINGS OF FACT Petitioner was a resident of Hollywood, Florida, on the date the petition was filed. During the course of an investigation of petitioner's failure to pay over the trust fund portion of employment taxes (as a responsible officer of Doughboy's, Inc.), a representative of the IRS' Collection Division in St. Louis, Missouri, discovered that petitioner failed to file individual income tax returns (Forms 1040) for 1984 and 1985. Because petitioner refused to comply with the Collection Division's request to file, the matter was referred to the IRS' St. Louis Examination Division, which initiated an audit of petitioner for these years. Within a relatively short time, the Examination Division determined that the matter was a potential criminal fraud case, and the matter was referred to the IRS' St. Louis Criminal564 Investigation Division. The St. Louis Criminal Investigation Division initiated an investigation of petitioner for 1984 and 1985. This investigation culminated in a criminal indictment for tax evasion under section 7201 for both years. Petitioner pled guilty to one count of tax evasion (for the year 1985). As a result of his criminal plea, petitioner was sentenced to 3 months' imprisonment and 3 years' probation. Subsequent to the completion of the criminal investigation, petitioner's case was returned to the St. Louis Examination Division for resolution of the civil issues remaining for years 1984 and 1985. The audit was expanded to include years 1986 and 1987 when it was discovered that petitioner had failed to file income tax returns for those years as well. In the notice of deficiency, respondent determined that petitioner failed to report the following amounts of wage income from Adwork, Inc. (Adwork), an advertising agency of which petitioner was president: YearWage1984$ 66,623198581,312198612,100After being contacted by the Collection Division in 1986, petitioner no longer drew a salary from Adwork. Rather, he received amounts from Adwork designated565 as "loans". The amounts of the "loan" proceeds received by petitioner were $ 95,659 for 1986 and $ 55,407 for 1987. The IRS reclassified these purported loans as wages and increased petitioner's taxable income accordingly. As of January 1986, petitioner owned a house located at the Lake of the Ozarks, Missouri. The house was appraised in November 1985 in the amount of $ 165,000. Subsequent to his being contacted by the Collection Division, petitioner purportedly transferred his ownership in the house to Larry Geirer in exchange for an 80-percent stock ownership interest in Doughboy's, Inc., which operated a deli/restaurant. No corporation income tax returns were ever filed by Doughboy's, Inc. Notwithstanding the purported transfer of the Lake of the Ozarks house to Mr. Geirer, petitioner continued to list the house as an asset on his financial statements. In 1986 and 1987, petitioner drove a luxury automobile which was leased by Adwork for his personal use. Until February 1986, the lease payments on the automobile were deducted from petitioner's salary. When petitioner began receiving "loans" from Adwork, as opposed to a salary, petitioner stopped making the automobile lease566 payments. Instead, the lease payments were made by the Company without reimbursement from petitioner. Respondent determined the fair rental value of the automobile to be $ 10,250 per year. In 1986, Adwork made 87-1/2 percent of the total annual lease payments; in 1987, Adwork made all the lease payments. Respondent determined that petitioner used the leased automobile exclusively for personal purposes. Consequently, respondent determined that petitioner's taxable income should be increased by $ 8,969 (87-1/2% x $ 10,250) for 1986 and $ 10,250 for 1987. For each of the years at issue, petitioner received interest income which he failed to report. For 1985, 1986, and 1987, petitioner had capital gains income which he failed to report. As previously noted, respondent determined that petitioner is liable for the addition to tax for fraud for 1984, 1985, 1986, and 1987. Oral testimony to support the tax fraud determination revealed: 1. Petitioner failed to file income tax returns for each of the 4 years involved, notwithstanding that he had substantial amounts of income for each year; 2. petitioner made numerous misleading and false statements to the revenue officer and agents567 involved in these matters regarding the filing of his returns, his income, his employment status, and his ownership of various assets; 3. in 1986 and 1987, petitioner attempted to circumvent the collection process of the IRS by directing his company (Adwork) to reclassify his wages as loans; and 4. petitioner attempted to prevent the collection of taxes known to be owing by transferring his house to Larry Geirer for less than adequate consideration. In addition, for 1985, respondent argues that because petitioner pled guilty to a violation of section 7201 for that year, the doctrine of collateral estoppel applies. OPINION For years 1984 and 1985, section 6653(b)(1) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. As to 1986 and 1987, section 6653(b)(1)(A) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to the sum of 75 percent of the portion of the underpayment attributable to fraud. Fraud is defined as an intentional wrongdoing designed568 to evade tax believed to be owing. ; , revg. ; . The Commissioner bears the burden of proving that a taxpayer is liable for the additions to tax for fraud by clear and convincing evidence. Sec. 7454(a). This burden is met by showing there is an underpayment of tax and that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. 1, affg. ; ; ; . 569 Here, for each of the 4 years at issue, there was an underpayment of tax; thus, the only question is whether such underpayments were due to fraud. The existence of fraud is a factual question to be decided upon a consideration of the entire record. ; . Fraud is never presumed but must be established by affirmative evidence. . Because direct proof of a taxpayer's intent is rarely available, fraud may be proven by circumstantial evidence. ; , affd. without published opinion . The taxpayer's entire course of conduct may establish the requisite fraudulent intent. ; ; .570 Courts have relied on a number of indicia (or badges) of fraud in deciding civil tax fraud cases. Although no single factor is necessarily sufficient to establish fraud, the existence of several badges is persuasive evidence. Consistent and substantial understatements of large amounts of taxable income over a period of years have been held to be strong evidence of fraud. , affg. ; , affg. ; . However, the mere failure to report income is not sufficient to establish fraud. ; . Respondent has herein shown the existence of several indicia of fraud. Petitioner failed to file tax returns for 4 years; consequently, he failed to report substantial amounts of wages received from Adwork, as well as 571 interest income and capital gains income. Further, petitioner made false statements to the revenue officer and agents handling his case with respect to his filing of tax returns for years 1984-87, with respect to his income and employment status for these years, and with respect to his ownership of assets. These actions are indicative of an attempt by petitioner to evade the payment of income taxes known to be due and owing. . Viewing the record as a whole, we conclude respondent by clear and convincing evidence has proved that petitioner is liable for the additions to tax for fraud. It is apparent that behind petitioner's conduct lay a deliberate plan (for each of the 4 years involved) to both conceal the amount of his income and evade the payment of taxes known to be owing. Moreover, with respect to 1985, petitioner is collaterally estopped by his criminal conviction under section 7201 from denying that he willfully attempted to evade the tax for that year. See , affg. .*572 Accordingly, we sustain respondent's determination that petitioner is liable for the additions to tax for fraud under section 6653(b)(1) for 1984 and 1985 and under section 6653(b)(1)(A) for 1986 and 1987. To reflect the foregoing and the granting of respondent's motion to dismiss with respect to the deficiencies and additions to tax under section 6654, Decision will be entered for respondent. Footnotes1. An underpayment for purposes of sec. 6653(b) equals the amount of tax imposed if a return is not filed on or before the last day prescribed for filing. Sec. 6653(c); sec. 301.6653-1(c)(1)(ii), Proced. & Admin. Regs.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619643/	Estate of William L. Belknap, deceased, William L. Belknap, 3rd, and Anna Berggren Anderson, executors et al. 1 v. Commissioner. Estate of William L. Belknap v. CommissionerDocket Nos. 23842, 23843, 23844, 23845.United States Tax Court1951 Tax Ct. Memo LEXIS 134; 10 T.C.M. (CCH) 769; T.C.M. (RIA) 51243; August 20, 1951Stanley Worth, Esq., 404 Transportation Bldg., Washington 6, D.C., for the petitioners. Paul Lipton, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined an estate tax deficiency against the Estate of William L. Belknap, and transferee liability against three successors to said estate as follows: DocketNo.PetitionerDetermination23842Estate of William L. Bel-knap$82,738.7823843William L. Belknap, 3rd,Transferee33,992.9323844Clara Estelle Treat, Trans-feree38,849.0623845Barbara B. Grimes, Trans-feree33,992.93The primary questions presented are: (1) Whether transfers by decedent of stock of The Belknap Manufacturing135 Company and his contribution to the capital of that Company of two notes said Company owed him, all occurring in April 1938, are includible in his gross estate under section 811(c) of the Internal Revenue Code; and (2) if so, whether a 25 per cent addition to the tax applies for delinquent filing of the estate tax return. A subsidiary issue is whether testimony of one of respondent's witnesses, subject to incomplete cross-examination by reason of illness of the witness, should be stricken. It is agreed that transferee liability exists if respondent's determination of deficiency is sustained in any amount. Findings of Fact The stipulated facts are hereby found. Decedent, William L. Belknap, Sr., died testate June 7, 1944, at the age of 79, a resident of Stratford, Connecticut. His will was admitted to probate by the Probate Court of Stratford, Connecticut, on July 10, 1944. William L. Belknap, 3rd, and Anna Anderson qualified as executors thereunder on July 20, 1944. The estate tax return was filed with the collector for the district of Connecticut. Decedent was survived by one son, George J. Belknap, a daughter, Clara Estelle Treat, and the following136 grandchildren: Russell L. Treat and Shirley R. Treat, children of Clara Estelle Treat; William L. Belknap, 3rd, and Barbara B. Grimes, children of a deceased son, W. L. Belknap, Jr.; and Robert L. Belknap and Martha B. Belknap, children of George J. Belknap. The children and grandchildren listed above are descendants of the decedent and his first wife, Clara M. Belknap. The latter were divorced in November 1924. Clara died October 7, 1936. Decedent remarried December 19, 1924. His second wife, Eva B. Belknap, survived him and is still alive. Decedent's son, William L. Belknap, Jr., died in November 1927, survived by his wife, Pauline, who is still living. Decedent often stated that he had made a serious mistake when he divorced his first wife, Clara, and married his second wife, Eva. It was generally known that he and Eva were not happily married. Affected employees at the Company had been instructed that they never should disclose or discuss any of the Company's affairs with Eva, nor make any mention of decedent's personal matters, including financial, to Eva. His banking address was in care of the Company. Decedent was reared in a spiritualist family and personally embraced137 Christian Science teachings some years before his death. He became particularly interested in these tenets after a trip to the West Coast in 1914 which he had taken for considerations of health. On returning he mentioned the subject to his grandniece, Marcia Heidenreich, with whom later he often discussed Science teachings. Decedent was imperious and jovial. He was given to talkativeness and enjoyed the approbation of others. He was fond of expensive clothing and jewelry. Though bothered with frequent attacks of indigestion, from which he suffered beginning some ten years before his death, decedent was an enthusiastic eater. He customarily took hot water, lemon juice, and bicarbonate of soda to alleviate this condition. As early as 1938 decedent was aware also of an ailment of his gall bladder. In addition, decedent had for many years an epigastric hernia which would bulge, when strained, to a lump about the size of two clenched fists. Decedent often spoke of death and frequently stated that he was getting his house in order to meet his Maker. In September 1935 decedent suffered a bad fall through a hole in the floor of his summer place. Bruises, abrasions, and a strained lower138 back resulted, following which he developed erysipelas. At the time of the erysipelas he was feverish and there were periods of delirium. He was in bed under his doctor's care for about two weeks and confined to home some time thereafter. Decedent became associated with The Belknap Manufacturing Company, sometimes herein referred to as the Company, prior to 1906. This company, organized under the laws of Connecticut in 1875, has for many years been engaged in Bridgeport, Connecticut, in the manufacture and sale of bronze valves, globes, angles, check valves, and bronze specialties to customers' specifications. Both sons were also associated with the Company. William, Jr., from 1914 until his death in 1927, and George, from an early age until an illness in 1938. Decedent's interests in the Company and his talents were directed toward factory work. William Belknap, Jr., sometimes hereafter called Junior, for some years prior to his death had served as general manager and in that capacity handled the sales and finances of the business. Decedent leaned heavily on Junior's talents. His sudden death in 1927 at the age of 44 was a shock from which decedent never fully recovered. He139 and Junior had been very close; with only 18 years' difference in their ages, they were more like brothers. Decedent's second son, George, was a good mechanic whose specialty was the manufacturing end of the business. Decedent had a very affectionate feeling toward him. In 1932, after completing his education, William Belknap, 3rd, joined the employ of the Company. At that time decedent was president of the Company, George was vice-president in charge of manufacturing, and Clifford Mason was secretary and treasurer. Mason, a brother-in-law of William, Jr.'s, widow, was relied on for management of the business. As of March 27, 1928, decedent owned or had at his disposal 1,200 shares of Company stock. By successive instruments beginning on that date and concluded by an agreement dated September 22, 1937, decedent created and then revoked three separate trusts embracing such stock. In each he had reserved the right to vote the stock and to receive the income therefrom during his life. The remainder interests in each instance were granted to either or both his surviving children, to Pauline Belknap, and to their respective heirs. On October 29, 1933, and February 5, 1934, decedent140 created revocable trusts, each of which covered a note in the respective principal amounts of $50,000 and $22,500. These notes had been executed previously by The Belknap Manufacturing Company payable to decedent. In either trust decedent reserved the right to all payments of interest or principal for his life. On his death the trustee of the $50,000 note was directed to demand of the Company $2,500 per year and pay the same in monthly instalments to decedent's first wife, Clara Belknap, for her life. Upon her death the note was to be delivered to the Company and discharged. The trust instrument covering the $22,500 note provided that upon his death the note "be cancelled and delivered up" to the Company and "form no part of the estate of William L. Belknap." Decedent's first wife died in October 1936. Thereafter, on November 19, 1936, decedent directed his attorney, Lorin W. Willis, to revoke the trust dated October 29, 1933, covering the $50,000 note as the purpose for which it was created had ceased. Willis was then directed to draw a new agreement, incorporating the $50,000 note, to be worded like the trust instrument dated February 5, 1934, covering the $22,500 note. On November 24, 1936, the141 trusts embracing the $50,000 and the $22,500 notes were revoked, and on the same day a new trust agreement covering the $50,000 note was executed. Less than a year later, on September 22, 1937, (the same date noted above on which the last trust covering the 1,800 shares of Company stock was terminated), the November 24, 1936, trust agreement incorporating the $50,000 note was likewise revoked. In the summer of 1937 an attorney, George A. Saden, was retained by decedent for advice in connection with certain proposed personal and Company activity. Decedent discussed with Saden his family affairs and proposals for transferring his major interest in the Company to his children and grandchildren and for transferring to the Company the two notes it owed him totaling $72,500. It was contemplated that as a consequence of his nearly complete divestment of Company interest decedent would be employed by the Company in an advisory capacity at a fair salary. At the conclusion of the discussions which had covered several months, and according to decedent's wishes, Saden outlined sometime prior to the end of 1937 a detailed plan for the chronological execution, beginning January 3, 1938, and142 continuing through January 8, 1938, of eight proposed documents. In February 1938, however, prior to execution of any of these proposed documents a certified public accountant who specialized in tax matters was consulted for an opinion as to the effect of the proposed transfers with relation to tax liability. The plan submitted to the specialist embraced gifts of stock to only three donees, decedent's two children and Pauline Belknap. After learning that decedent intended that these shares should eventually go to his descendants, it was suggested that the grandchildren be included in order to take advantage of the added gift tax exclusions available for each additional donee. In addition, the plan initially contemplated provided that decedent was to exchange the two notes the Company owed him, totaling $72,500, plus some other items owed to him by the Company approximating $11,000, for an agreement by which the Company would pay decedent an annuity of $12,000 per year for life. The specialist suggested that this proposal be dropped, reasoning that the annuity payments were not an allowable income tax deduction, and suggested instead that decedent contribute the notes to the capital143 of the Company in exchange for its agreement to pay him a salary, the payments of which would be deductible by the Company for income tax purposes. Further reason for the suggestion of this latter alternative was that the notes had been willed to the Company and decedent did not expect to collect them. However, the contribution to capital was in furtherance of decedent's plan to divest himself of his interest in the Company. By this means the specialist predicted an eventual inheritance tax saving of about $9,500. On April 1, 1938, the Company's outstanding stock, all common, consisted of 1,800 shares of $100 par value each, owned as follows: Decedent1,199W. L. Belknap, 3rd1George J. Belknap1Pauline W. Belknap479Clifford L. Mason120In execution of the amended plan decedent on April 4, 1938, by an appropriate instrument, contributed the two notes for $50,000 and $22,500, respectively, to the capital of the Company. On April 9, 1938, all Company stockholders and the Company by mutual agreement and in consideration of the payment of one dollar, executed a "Monthly Stipend Agreement," obligating the Company to pay Eva Belknap $100 per month for144 life, providing that Pauline Belknap, or if she should predecease Eva, William Belknap, 3rd, should see fit in their discretion to deposit a written statement with the Company setting the date when payment should commence. On April 14, 1938, a previously executed stock transfer covenant was amended by a special waiver agreement in order to allow unimpeded execution of decedent's plan. On April 15, 1938, decedent made direct transfers of his Company stock as follows: Pauline W. Belknap49 sharesW. L. Belknap, 3rd175 sharesBarbara B. Grimes175 sharesSix days later, on April 21, 1938, an employment agreement was executed by decedent, the other stockholders, and the Company. It provided, inter alia: "1. That the Corporation does hereby employ the First Party [decedent] as a general advisor and consultant in its business for a term of one (1) year from the 15th day of May, 1938, to and including the 15th day of May, 1939, at a salary of Ten Thousand ($10,000) Dollars per annum payable at the rate of Four Hundred Sixteen Dollars and Sixty-six Cents ($416.66) semi-monthly on the 15th and last day of each month. "2. That the First Party shall render the following145 services to the Corporation: whenever any question or questions of business, engineering, or mechanical policy are presented to him by the Corporation, he shall offer to the Corporation within a reasonable period of time his best opinion and advice with relation thereto. "3. That the employment contracted for under this agreement shall not require the First Party to report to or be present at the place of business of the Corporation during any specific days of the week nor during any particular hours of the day. The First Party shall, however, always be reasonably available to the Corporation through the various means of communication customarily employed by the business world today, e.g., among others, telephone, mail, telegraph, wireless, cable, etc. The First Party may, however, if he so desires, report to and be present at the place of business of the Corporation at such time or times as he chooses. "4. That the First Party shall have the option to renew this contract of employment with the Corporation for a period of one (1) year provided he shall notify the Corporation in writing not later than eleven (11) months from the date of this contract. Such renewal contract shall146 in turn be subject to further renewal for one year at the option of the First Party provided he shall notify the Corporation in writing not later than eleven (11) months from the renewal date of said renewal contract; and thereafter each renewal contract, including said further renewal contract shall be subject to successive renewals each year at the option of the First Party in like manner, mutatis mutandis, as provided for the renewal of the instant contract." The contract was renewed at decedent's option each successive year and was in effect at his death. Subsequently, on April 29, 1938, by an agreement of guarantee the employment contract which had previously bound only the Company was made a joint and several obligation of the individual parties. On April 27, 1938, decedent executed five irrevocable trust agreements covering a total of 599 shares of his Company stock, and on that same date transferred an additional 200 shares directly to Clara Treat. Incorporated in each trust instrument was the following language: "WHEREAS the Settlor desires to relieve himself of some of the responsibilities of corporate management; and "WHEREAS the Settlor is and has been for many147 years interested in the betterment of the beneficiaries subsequently named under this trust agreement; and "WHEREAS there are other urgent and equally important reasons involving the peace of his family which make the creation of this trust desirable to the Settlor. * "Anna B. Anderson was named trustee in three of the trust agreements, two covering 100 shares each and the third 199 shares. George J. Belknap, was the beneficiary for life of all three trusts. On his death the remainder interests devolved to his two children, his wife, and on certain contingencies to the donor's four other grandchildren. Clara Treat was designated trustee of the other two trusts, each of which covered 100 shares. Hers was the income for life with the remainder interest over on her death to her two children, and if they predeceased her, then to the donor's remaining grandchildren. During the year 1929, the Company, in round figures, made a profit of $13,000. For the next six years it sustained an average loss of about $32,000 per year. In 1936 and 1937 profits of $5,161.93 and $2,632.51, respectively, were earned. A loss of $38,416.01 was sustained in 1938. A $3,000 aggregate dividend148 was paid by the Company during this ten-year period, on September 15, 1936. Decedent's salary as president averaged $7,229.17 that decade, the top figure paid being $10,000.01 in 1937. The Belknap Manufacturing Company never gave out credit statements and never furnished financial statements to Dun & Bradstreet. Throughout 1937, and as late as February 26, 1938, the Bridgeport City Trust Company, which was the company's bank, advised the National Credit Office that the Company maintained very substantial balances, that it requested no loans, and that it was sure that the Company was in good financial position. The first knowledge that the bank had of the cancellation of the notes of the Company held by decedent was obtained by the bank on May 11, 1938. Decedent filed a gift tax return for the calendar year 1938 in which he reported gifts of 1,198 shares of Company stock, valued at $132.68 per share for a total valuation of $158,950.64. Nine exclusions of $5,000 each were claimed, plus the specific exemption of $40,000 leaving total net gifts for the year of $73,950.64, and disclosing a tax liability of $4,464.82 which was paid. On the bottom of a schedule attached to the gift149 tax return, which schedule listed the gift and donee's name, was this language: "Motive for all gifts - Betterment of beneficiary - Peace in family - Entering speculative business." Prior to the summer of 1938 decedent placed envelopes containing cash in a special, secret compartment of the Company safe. He informed Anna B. Anderson, the Company bookkeeper, of his action and specifically charged William Belknap, 3rd, with the responsibility of giving the money to the people whose names were listed on the several envelopes. Decedent often made promises of gifts to relatives and employees in inconsequential amounts and, although well meant, he did not always live up to them. On several occasions he remarked that he intended at his death to care for his older sister, Kate. On a few of her birthdays and once at Christmas he gave her cash gifts ranging from $25 to $100. Several times he bought coal for her and one one occasion gave her a hearing aid. After William, Jr.'s, death decedent saw to it that William's son, William, 3rd, had an education. Another grandchild was given similar assistance. He made a gift, the value of which is not shown, to a church that he attended during150 his occasional trips to Florida. In addition, he built his first wife a garage and bought her an automobile some time after their divorce. Decedent and an employee, Edwin Meyer, had jointly engaged, over a period of time prior to 1938, in the invention and development of a new type of electrical sign. Decedent was serious and enthusiastic about promoting the development of this sign and envisaged significant profits from its exploitation. On January 8, 1938, decedent and Meyer executed a partnership agreement drafted by Saden, providing for cooperation in the development of the sign and agreeing to share the profits equally. Meyer left the employ of the Company in 1941; interest in the sign waned, and there were no further developments. George Belknap suffered a heart attack in late 1938 and left the employ of the Company never to return. On February 2, 1939, George became indebted to decedent on a mortgage note for $8,000. The note bears endorsements of payments of interest and principal as follows: InterestPrincipalDecember 22, 1941$1,390.67$2,109.33December 22, 1942353.44400.00Beginning in December, 1940, decedent was afflicted with a151 series of ailments. At that time he had a sudden onslaught of a strangulation of the epigastric or umbilical hernia which necessitated an operation. While in the hospital he developed a slight jaundice, indicating gall bladder trouble. On August 7, 1941, decedent resigned as president of the Company due to advancing years. William Belknap, 3rd, succeeded him in that job and decedent was elevated to chairman of the board of directors. At various times from 1941 to March, 1944, decedent consulted and submitted to treatment by his physician for various distresses caused by gall bladder disturbances and hernia. On March 31, 1944, he consulted his physician, complaining of abnormal distress, and after consultation was advised to have his gall bladder removed. The operation was considered advisable because his general health otherwise was so good that there would be an advantage derived from having his major complaint cured. The operation was performed April 6, and appeared to be successful. Decedent was discharged from the hospital April 29, 1944. Subsequently, however, he became violently ill and was readmitted to the hospital on June 5, 1944. Two days later he died. The cause of152 death was given as suppurative cholangitis and hepatitis, resulting when a stone obstructed the common duct, thereby causing multiple liver abscesses. But for that condition decedent had prospects, considering his age, for indefinitely continued good health. As early as February, 1934, decedent had executed a will. Late in 1939 he executed another will, which had been drafted for him by Saden, his legal adviser, on the 1938 transfers of stock. Decedent's last will and testament was executed December 22, 1941. Pauline Belknap was bequeathed his one remaining share of Company stock. To his wife, Eva, he devised life use of his home and made her the life income beneficiary of a trust embodying one-third of his residuary estate. The will was drafted to leave Eva the least dower interest required by Connecticut law. On Eva's death the trust was to terminate and the corpus divided equally between Pauline Belknap and Clara Treat. The remaining two-thirds of the residuary estate was devised and bequeathed absolutely to the last-mentioned beneficiaries. Lorin W. Willis, then a busy practicing attorney in Bridgeport, Connecticut, as well as State's Attorney for Fairfield County, Connecticut, 153 was engaged as attorney for decedent's estate. Willis was not an expert on tax matters. Shortly after decedent's death Willis offered his will for probate. George Belknap, through his attorney, contested the will on the grounds that decedent was of unsound mind and unduly influenced. Appeal was taken immediately to the Superior Court where it remained until September 20, 1945, at which time it was assigned for special hearing, and the contest was withdrawn. William Belknap, 3rd relied on Willis to handle the legal affairs of the estate, including filing of an estate tax return. He told Willis about the stock transfers in 1938 and gave him information relating to the size of the gross estate. Willis relied on William, 3rd for such information and was led to believe that the estate totaled about $40,000. On October 26, 1944, William, 3rd told Willis about the gifts of cash decedent had left in a secret compartment of the Company safe. Investigation of the compartment revealed $12,000 in currency contained in eight envelopes on which was written in decedent's handwriting the names of the donees. During the latter part of 1944 or within the first month or so of 1945 Willis was advised154 by the executors that decedent left at his death some bank accounts with survivorship provisions. The tax return when filed revealed five accounts totaling $14,527.60. On April 17, 1945, Willis was requested by the Inheritance Tax Division of the State of Connecticut to file in the Probate Court all joint bank accounts in which decedent had an interest. This letter was followed by letters on May 17 and June 20, 1945, the latter also asking Willis to file the appropriate form reporting all anti-mortem transfers decedent made. On June 21, 1945, Willis answered that the form covering joint accounts had been filed with the Probate Court and enclosed the duplicate of the form filed; no reference to ante-mortem transfers was made. On June 26, 1945, the department reminded Willis that he had not filed the form reporting ante-mortem transfers by decedent. Willis replied June 30 that the form would be submitted along with the State succession tax return within a short time. Thereafter, on five occasions between July 12, 1945, and November 27, 1945, the department wrote Willis admonishing him to file the succession tax return. On November 27, 1945, Willis answered that appeal from probate155 of decedent's will had been settled and that he hoped to file the State succession tax return within the next two weeks. Additional letters requesting filing of the succession tax return were sent on June 13 and July 22, 1946. Neither letter was acknowledged by Willis. By letter dated August 12, 1946, Willis filed the Connecticut succession tax return for the estate. He did not file the return sooner because of the pressure of other matters which required his presence in Court at all times. Prior to the time of filing that return he did not see all the figures together representing the gross estate and did not appreciate the fact that the estate was within the provisions of the Federal estate tax. An estate tax return was filed by the executors with the collector for the district of Connecticut on August 14, 1946. The return, prepared by Willis, disclosed a gross estate of $77,210.98, deductions, other than specific exemption, totaling $13,352.78, and a total estate tax due of $115.75. In his notice of deficiency respondent determined that the transfers by decedent in April, 1938, of 1,198 shares of Company stock were includible in decedent's gross estate as transfers under 156 section 811 (c) of the Internal Revenue Code, and that the fair market value of the stock at the date of death was $194.2353 per share. The gross estate was increased by $232,693.89 on account of the said 1,198 shares. This valuation is not contested. Respondent further determined that the transfer by decedent of $72,500 in notes payable to him by the Company, to the capital surplus account of the Company, was a transfer under section 811 (c) of the Code and includible in the gross estate in the proportion that 602 shares, the shares attributed to owners other than decedent, bears to 1,800 shares, the total outstanding stock of the Company. The gross estate was increased by $24,247.22 in respect of this item. Respondent also determined a 25 per cent addition to the tax because of failure to file the return on time. This addition, amounting to $16,570.91, is included in the $82,738.78 deficiency. George Belknap was called and duly sworn as a witness for and on behalf of respondent at 11:00 A.M., May 9, 1950. At 12:30 P.M. the hearing was recessed to reconvene at 2:00 P.M. Direct examination, resumed at 2:00 P.M., was continued until about 3:05 P.M., when hearing157 was recessed for ten minutes. Beginning at 3:15 P.M., direct examination was again resumed, lasting this time until shortly before 5:00 P.M., when George was excused for the day at the suggestion of respondent. George again resumed the stand at 10:00 A.M., May 10, and direct examination continued, with the exception of a ten-minute recess in midmorning, until 12:03 P.M. After about 15 minutes of the afternoon session beginning at 2:00 P.M., direct examination was completed. Frequently during direct examination there were interruptions relating to the relevancy and materiality of the testimony. George was cross-examined for about an hour beginning about 2:15 P.M. Testimony was then suspended for about 20 to 30 minutes, during which time there was a discussion between the Court and counsel and a ten-minute recess. George resumed the stand thereafter and cross-examination was continued, with time out for another ten-minute recess, until shortly before 5:00 P.M. The next morning, May 11, 1950, George's heart condition was such that he was unable to resume the stand. Thereupon petitioner moved to strike all of his testimony. Respondent countered with a motion that the case be continued158 to some future date for the purpose of completing examination of the witness. On May 12, in response to this latter motion and by agreement of counsel, the Court ruled that the case be continued to August 14, 1950, at Bridgeport, Connecticut, George's home city. George's condition was not improved when the Court subsequently convened in Bridgeport. He was still unable to testify and his condition was such that according to medical evidence further cross-examination would have seriously endangered his life. In view of these facts the Court rejected a motion made by respondent for a further continuance, and reserved judgment on petitioner's reiterated motion to strike George's testimony and evidence relating thereto. Ultimate Finding Decedent's transfers of Company stock and his contribution to the capital of the Company of the two notes said Company owed him were not made in contemplation of death. Opinion Our ultimate finding that decedent's transfer of Belknap Manufacturing Company stock six years before his death was not made in contemplation of that event is based upon what appears, from a scrutiny of the entire record, to have been his primary motive. We are entirely159 satisfied that before the transactions were ultimately consummated decedent did envisage that tax liability would be affected, and it may even be that he recognized the connection between his proposed action and the condition of his estate. See Allen v. Trust Co. of Georgia, 326 U.S. 630">326 U.S. 630, 635. But the program was worked out in meticulous detail before the services of a tax consultant were obtained; and only after decedent's plans were thoroughly considered with the attorney by whom the documents were drafted was tax advice resorted to. This seems to us to demonstrate preponderantly that decedent's decision to make the transfers must have originated in the other motives described, and hence that the effect upon his estate - his contemplation of death - could not have been the generating concern. Cf. First Trust & Deposit Co. v. Shaughnessy (C.A. 2), 134 Fed. (2d) 940, certiorari denied, 320 U.S. 744">320 U.S. 744. It is, of course, that primary motive which we are admonished to ascertain. United States v. Wells, 283 U.S. 102">283 U.S. 102. The only significant change 2 suggested by the tax adviser affects not the Belknap Company stock but the indebtedness160 due decedent by that Company and which he forgave or contributed to the Company's capital at that time. In this respect the plan was altered, for avowed estate tax purposes, so that the indebtedness was to be forgiven immediately instead of at decedent's death as originally planned. In order to benefit the income tax situation of the Company, an annuity to be paid by it was eliminated and a salary agreement executed. Here again, however, the basic plan was one of long standing. The contribution to capital could have been, and was in fact, made immediately instead of being postponed. But in a sense that amounted to no more than decedent's decision not to make the contribution in a manner which might, except for his consultant's advice, have amounted to a transfer to take effect at death. In sum, the contribution to capital was hardly a donation to the inanimate impersonality of the Company. And if viewed as a gift to the other stockholders it was a present transfer with no different basic motives, as respondent himself insists, than the transfer of the stock itself. The dispositive161 finding has been made accordingly. This brings us to a consideration of respondent's alternative determination - that the transferred property was includible under 811 (c) because decedent, by means of the salary agreement, retained the income from the property. Although we recognize the force of respondent's point that it is the earlier conclusion in Estate of Pamelia D. Holland, 47 B.T.A. 807">47 B.T.A. 807, rather than the supplemental opinion, 1 T.C. 564">1 T.C. 564, which is here applicable since the transfers presently in controversy were later than 1931, we have nevertheless concluded that it is Estate of William F. Hofford, 4 T.C. 790">4 T.C. 790, which governs the present facts. This decedent was required to perform services; he continued to work for the Company as Chairman of the Board; the salary provided was not apparently unreasonable; and the stock itself was subject to no such rigid control by decedent as appeared in the Holland case. We conclude that none of the transfers were includible under any provision of 811 (c). A word needs to be said as to petitioners' motion to strike the testimony of respondent's witness, George Belknap. The question involved is intriguing, 162 and is entitled to more extended consideration than these facts warrant. The motion to strike is being denied, not because the requirement that cross-examination be completed is more rigid at law than under classic equity concepts, though that may be true, see e.g., Davies v. Otty, 35 Beav. (Eng.) 208, nor because the rules of evidence in equity cases in the District of Columbia, by which the Tax Court is bound, Internal Revenue Code, section 1111, may have embraced the early British equity doctrine that admission of testimony not tested by completed cross-examination is properly a subject for exercise of the Chancellor's discretion, see Scott v. McCann, 76 Md. 47">76 Md. 47, 24 A. 536">24 A. 536, though that also may be true. See Gass v. Stinson ( C.A. 1), 3 Sumn. 98">3 Sumn. 98. But see D.C. Code, section 14-103; U.S. Supreme Court Equity Rules No. 46. Denial of the motion is due to our conclusion that certain parts of the testimony should be accepted as a basis for our findings since they were either well corroborated or covered by so much of the cross-examination as could be completed before the witness was taken ill, but that even as to this material, *163 the factual result in petitioners' favor will not be disturbed. Granting of the motion in its entirety would hence be virtually dictum. On the other hand, even the equity rule does not and could not require that all of the evidence be adopted without qualification, and, indeed, respondent scarcely advances so broad a contention. See 5 Wigmore "Evidence" (3rd ed.), 1390. It follows that denial of the motion is required without passing upon the interesting legal question which a sharper evidentiary conflict might otherwise have required. Finally, the penalty question appears to be eliminated by our conclusions on the substantive issues. The statement to that effect in petitioners' brief is not challenged by respondent. By reason of a claimed overpayment, Decision will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: William L. Belknap, 3rd, (As alleged transferee of the Estate of William L. Belknap, deceased); Clara Estelle Treat (As alleged transferee of the Estate of William L. Belknap, deceased); Barbara B. Grimes (As alleged transferee of the Estate of William L. Belknap, deceased).↩2. The number of donees of the stock was also increased to enlarge the exclusions from gift tax.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619644/	Beatrice B. Briggs, Petitioner, v. Commissioner of Internal Revenue, RespondentBriggs v. CommissionerDocket No. 73242United States Tax Court34 T.C. 1132; 1960 U.S. Tax Ct. LEXIS 63; September 29, 1960, Filed 63 Decision will be entered for the petitioner. Held, gifts of stock to infant donees under guardianship, were gifts of present interests in property. Walter L. Nossaman, Esq., and Joseph L. Wyatt, Jr., Esq., for the petitioner.L. Justin Goldner, Esq., for the respondent. Tietjens, 64 Judge. TIETJENS1132 OPINION.The petitioner contests a deficiency of $ 5,255.81 in gift tax for 1954, based on a determination by the Commissioner that gifts of stock made by petitioner to nine minor donees under guardianship were gifts of future interests in property rather than present interests.All of the facts are stipulated and the stipulation of facts together with the pertinent exhibits are incorporated herein by reference.Petitioner permanently resides in Naples, Florida, where she resided during the taxable year 1954. Her gift tax return for that year was filed with the director of internal revenue at Jacksonville, Florida.The gifts in question consisted of shares of corporate stock of the Outboard Marine & Manufacturing Company and were made by the petitioner and her husband by deed of gift to already-appointed guardians of the minor donees. During 1954 the minor donees resided in California and Illinois with their respective parents.Each gift made to the children in California was made "subject to terms and conditions of the order of the Superior Court for Los Angeles County in the matter of your guardianship" made by the court authorizing the donee's guardian65 to accept the gifts. The gift made to the minor donee residing in Illinois was made subject to the same conditions, specified in the deed of gift itself. The conditions attached to each gift were stated as follows:1. That each gift is made subject to all gift taxes thereon. The Donee shall pay all such taxes imposed upon the Donor (Stephen F. Briggs or Beatrice B. 1133 Briggs, as the case may be) by reason of such gift, or shall reimburse the Donor therefor, without interest. Such payment or reimbursement shall be made only out of the corpus of the donated property, or out of other property of the Donee, and in no case out of income from the donated property.2. That your Guardian shall be authorized but not required to use or expend any part of the donated property or of the income therefrom, or both, for your support, maintenance and education; any income not used for the purposes mentioned to be invested for your benefit.3. That your Guardian shall in no case be required to convert the donated shares of stock into any other form of holding, but is authorized to retain such shares as long as in your Guardian's judgment retention is in the best interests of yourself, 66 as Donee.The parents of each beneficiary were at the time of the gift and thereafter fully willing and able to provide adequately for the maintenance, education, and support of each of the beneficiaries. Petitioner was aware of this fact and expected that state of affairs to continue, but she recognized the possibility that future needs or misfortunes might arise which could alter that state of affairs.At the time of the gifts in question and thereafter during the minority of the minor donees, the respective fathers of each of the donees served as their respective guardians, duly appointed by an appropriate court, and accounts and reports of each of the guardianship estates have been filed and approved by these courts without any appeal from any of these accounts.These accounts and reports indicate that dividends from the donated stock were received by the guardians and that disbursements were made from each of the guardianship estates, including cash distributions to the minors themselves (sometimes referred to as "allowances"), payments of the minors' income and gift taxes, and various types of insurance premiums, and in some cases, payments of private school tuition and expenses, 67 dental expenses, airplane fare and bus fare, clothing and other wearing apparel, summer camp, court costs, automobiles, purchase of investments, bank charges, and miscellaneous expenses not otherwise identified in the accounts.When any of the minors reached age 21, his or her guardianship was terminated and the estate was delivered to him or her, including the gift property here involved.The gifts were made in 1954 at a time when section 1003(b)(3) of the Internal Revenue Code of 1939 was applicable. If the gifts were of future rather than present interests in property, the petitioner is not entitled to the annual $ 3,000 gift tax exclusion for each of the gifts in 1954.The Commissioner's argument is summarized as follows: The California law, as well as that of Illinois, prevents parents of minors (who in this case are also legal guardians) from using the estates of their minor children or the income therefrom for the support, maintenance, and education of their children, unless the estates of the parents are 1134 insufficient to support the children in accordance with their station in life. In other words, the Commissioner argues, the minor donees did not at the time of68 the gifts "receive the unqualified and immediate right then to the use and enjoyment * * of the donated property and the income therefrom."We think the Commissioner's argument cuts too deep. The so-called condition, set forth as paragraph 2 above, to which our attention is directed, is not, in our opinion, a restriction on the use of the gifts themselves or their income which transforms what otherwise would be a gift of a present interest in the property into a future interest. The purpose of the condition was just what the petitioner contends it was; i.e., to remove the restriction imposed by State law, which permits the use of a minor's estate for the minor's support, maintenance, and education only if the parents are unable themselves to provide for such needs from their own estates. See Cal. Prob. Code secs. 1502, 1503, 1504, and Ill. Ann. Stat. ch. 68, sec. 52(a) (Smith-Hurd). 1 It was a provision designed to free the guardians from these limitations of State law and not a restriction on the present use of the gift property imposed by the donor. As a matter of fact, the provision had the effect of removing a limitation and not of imposing one on the immediate69 use of the property for the minors' benefit.70 That the guardians so interpreted the "condition" of the gifts is shown by the character of the expenditures made and reports filed with and approved by the appropriate courts. They ranged from 1135 allowances, to automobiles, clothing, airplane and bus fare, and tuition. And this without any showing that these were items "more expensive than his father can reasonably afford" which would justify dipping into the minor's estate under California Probate Code section 1504.Some of the difficulty in this case arises from the fact that the donees are infants represented by guardians. This, however, does not necessarily convert the gift of a present interest into a future interest. As indicated in the Commissioner's brief: It was stated in Fondren v. Commissioner, 324 U.S. 499">324 U.S. 499 (1944), that "The statute in this respect purports to make no distinction between gifts to minors and gifts to adults. If there is deferment in either case the exemption is denied." In Revenue Ruling 54-400, 2 C.B. 319">1954-2 C.B. 319, it was stated that:An unqualified and unrestricted gift to a minor, with or without the appointment of71 a legal guardian, is a gift of a present interest; and disabilities placed upon minors by State statutes should not be considered decisive in determining whether such donees have the immediate enjoyment of the property or the income therefrom within the purport of the Federal gift tax law. * * * In the case of an outright and unrestricted gift to a minor, the mere existence or nonexistence of a legal guardianship does not of itself raise the question whether the gift is of a future interest. * * * It is only where delivery of the property to the guardian of a minor is accompanied by limitations upon the present use and enjoyment of the property by the donee, by way of a trust or otherwise, that the question of a future interest arises. * * * [Emphasis supplied.]As we have indicated above the donor in this case imposed no restrictions or limitations on the present use and enjoyment of the property by the donees. The only limitations on the use of the property were those imposed by State law and it has been recognized, both in Revenue Ruling 54-400, supra, and case law, that such limitations are not decisive and do not make a gift to a72 minor under guardianship a future interest.In United States v. Baker, 236 F. 2d 317, 320 (C.A. 4, 1956) it was stated:The trust agreements with which we are concerned here created no barriers to the present enjoyment by the infants of the trust fund beyond those which are established by the laws of North Carolina. Indeed, the agreements actually remove certain of these barriers, since if a guardian were to be appointed his use of the trust funds for the benefit of the infant must be subject to approval by the court having jurisdiction of the subject matter; whereas, by the express provisions of these trust agreements, the trustee, although empowered to deal with the funds as if he were guardian of the infants, is not required to secure approval of his acts by any court. As was said by the Supreme Court in the case of Fondren v. Commissioner, infra, [324 U.S. 18">324 U.S. 18, (1945)], "the crucial thing" in determining whether a gift is one of a future interest in property "is postponement of enjoyment." Here the right of the beneficiaries to present enjoyment of both the corpus and the income is not different from what it would73 1136 be if the gifts had been made directly to each of them, or to a guardian for their benefit. There is no magic in mere words. These gifts to a trustee, since they conferred on the beneficiaries the same right to present enjoyment which they would have had if the gifts had been made to a guardian for them, must be judged by the same standard as that applied to gifts made to a guardian.And in Kieckhefer v. Commissioner, 189 F. 2d 118 (C.A. 7, 1951) reversing 15 T.C. 111">15 T.C. 111 (1950), the court said:As heretofore shown, the fallaciousness of the Commissioner's contention is the failure to distinguish between restrictions and contingencies imposed by the donor (in this case the trust instrument), and such restrictions and contingencies as are due to disabilities always incident to and associated with minors and other incompetents. As to the former, it is authoritatively settled that a gift upon which the donor imposes such conditions or restrictions is of a future interest. In the latter, such restrictions as exist are imposed by law due to the fact that the beneficiary is incapable of acting on his own. It is74 our view, and we so hold, that such restrictions do not transform what otherwise would be a gift of present interest to one of future interest. [Emphasis supplied.]See also Commissioner v. Sharp, 153 F. 2d 163 (C.A. 9), affirming 3 T.C. 1062">3 T.C. 1062.It is to be noted that the gifts here were made directly to minors under guardianship. No trust or other person or entity was interposed between the donor and the guardian who stood in the shoes of the minor donee. This was not the case in Stifel v. Commissioner, 107">197 F. 2d 107 (C.A. 2), affirming 17 T.C. 647">17 T.C. 647 and Abraham M. Katz, 27 T.C. 783">27 T.C. 783, where a result different from the result here was reached. However, in both of those cases the court indicated that had a guardian been appointed to exercise the children's rights or, "Had outright gifts been made directly to the beneficiaries or to guardians acting for them there would be no question that the transfers were of present interests." Abraham Katz, supra at 785. That, as we see it, is the case here.The Commissioner75 further argues that the gifts were of future interests because the right of the donees to receive the stock or the income therefrom depended upon the exercise of discretion by the guardian. There is no merit in this contention. The only discretion lodged in the guardian was that provided for by State law -- and the donor here had attempted to broaden that discretion. Whatever restrictions there were were those imposed by State law on all guardians. They were not imposed by the donor. If this argument of the Commissioner were carried through it appears that it would be impossible to make a gift of a present interest to a minor under guardianship, and that is not the law as we understand it.The Commissioner further contends that petitioner intended these gifts to be of future interests and points to the fact that in making similar gifts of stock in other years no such "conditions" were attached 1137 We conclude from the record, however, that the so-called conditions were inserted from an abundance of caution for the purpose of removing State law restrictions and making it unnecessary for the guardians to obtain prior court approval before making the expenditures which76 were made from the donated funds. We see no intent to give future interests rather than present.We hold that the gifts here involved were gifts of present interests in property.Decision will be entered for the petitioner. Footnotes1. Cal. Prob. Code, sec. 1502:Every guardian of an estate must manage it frugally and without waste, and apply the income, as far as may be necessary, to the comfortable and suitable support, maintenance and education of the ward and his family, if any; * * [Emphasis supplied.]Cal. Prob. Code, sec. 1503:Whenever a guardian fails, neglects or refuses to furnish suitable support, maintenance or education for his ward, the court may order him to do so, and enforce such order by proper process * * * [Emphasis supplied.]Cal. Prob. Code, sec. 1504:Support of ward having father living: [Use of income of minor's estate: Allowance on accounting]. If a minor having a father living has property, the income of which is sufficient for his support, maintenance and education in a manner more expensive than his father can reasonably afford, regard being had to the situation of the father's family and all the circumstances of the case, the expenses of the support, maintenance and education of such minor may be defrayed out of the income of his own property, in whole or in part, as judged reasonable, and as directed by the court; and the charges therefor may be allowed accordingly in the settlement of the accounts of his guardian. [Emphasis supplied.]Cal. Prob. Code, sec. 1516:In all cases where no other or no different procedure is provided by statute, the court on petition of the guardian, creditor or other interested party may from time to time instruct the guardian as to the administration of the ward's estate and the disposition, management, care, protection or preservation of the estate or any property thereof. Notice of the hearing of such petition shall be given for the period and in the manner required by section 1200 of this code * * * [Emphasis supplied.]Ill. Ann. Stat. ch. 68, sec. 52(a) (Smith-Hurd):For the purposes of this Act:(a) A husband is liable for the support of his wife, and a wife for the support of her husband if he is in need of such support and likely to become a public charge. Both husband and wife are severally liable for the support of any child or children under 18 years of age↩, or 18 years of age or over whenever such child is unable to maintain himself and is likely to become a public charge. * * * [Emphasis supplied.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619647/	Estate of Albert E. Nettleton, The Syracuse Trust Company, Executor v. Commissioner.Estate of Albert E. Nettleton v. CommissionerDocket No. 4371.United States Tax Court1946 Tax Ct. Memo LEXIS 268; 5 T.C.M. (CCH) 127; T.C.M. (RIA) 46033; February 7, 1946268 HARRON Decision HARRON, Judge: Pursuant to the determination of the Court, as set forth in its Findings of Fact and Opinion, promulgated March 19, 1945, the parties have filed separate recomputations of the deficiency under Rule 50. Upon consideration of the respective recomputations, it is concluded that decision should be entered in accordance with the recomputation filed by the respondent and it is ORDERED and DECIDED: That there is a deficiency in estate tax in the amount of $113,229.83. Memorandum Sur Decision HARRON, Judge: In approving respondent's recomputation of the estate tax deficiency, the following has been taken into consideration with respect to the 1932 trust, the only one which gives rise to any differences between the respective recomputations of the parties: Under the 1932 trust, Alice N. Edwards was to receive the income of the undivided corpus of the trust until she reached forty-five years of age. If she attains forty-five years of age, then the trustees are to divide the corpus existing at that time and distribute one-half to her. But if she died before forty-five years of age, her estate was not to receive any one-half of corpus, under provisions269 which provide for the continuance of the trust for the benefit of her children and grandchildren. Therefore her interest in one-half of the corpus of the trust clearly falls within the definition of a future interest. See , June 4, 1945. At the date of the decedent's death, the interest of Alice N. Edwards was still a future interest with respect to one-half of the corpus of the trust, and it cannot be included in computing the value of her lifeestate to be excluded from the decedent's gross estate. See also , (January 2, 1946). The respondent's recomputation excludes from the gross estate of the decedent the value of the right of Alice N. Edwards to receive income from the undivided corpus of the trust until she attains the age of forty-five years, plus the value of the right to receive income from one-half of the corpus for the duration of her life. Respondent's computation of the value of the life interest of Alice N. Edwards in the 1932 trust for the purpose of making an exclusion from the gross estate of the decedent is based upon the opinion of the Court*270 in this case, and gives effect to what was the intendment of the holding which has been made.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619648/	JERZY D. GRZEGORZEWSKI AND JENNIFER S. GRZEGORZEWSKI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGrzegorzewski v. CommissionerDocket No. 21303-93United States Tax CourtT.C. Memo 1995-49; 1995 Tax Ct. Memo LEXIS 42; 69 T.C.M. (CCH) 1788; January 31, 1995, Filed 42 Decision will be entered for respondent. Held: P understated his 1989 income from his sole-proprietor business by $ 24,825. Held, further, Ps are liable for an addition to tax under sec. 6651(a)(1), I.R.C., for failure to file timely a 1989 tax return. Held, further, Ps are liable for penalty under sec. 6662(a), I.R.C. for negligence. For petitioners: William Curtis Elliott, Jr.For respondent: David Delduco. LAROLAROMEMORANDUM FINDINGS OF FACT AND OPINION LARO, Judge: Jerzy D. Grzegorzewski and Jennifer S. Grzegorzewski (petitioners) petitioned the Court to redetermine respondent's determination of a deficiency in their 1989 Federal income tax and additions thereto under sections 6651(a)(1) and 6662(a). 1 Respondent determined a $ 7,753 deficiency, a $ 1,448 addition under section 6651(a)(1), and a $ 1,551 accuracy-related penalty under section 6662(a). Respondent reflected her determinations in a notice of deficiency issued to petitioners on August 9, 1993. 43 The issues for decision are: 1. Whether the 1989 income of the sole-proprietor business of Mr. Grzegorzewski (petitioner) 2 was understated by $ 24,825. We hold that it was. 32. Whether petitioners are liable for an addition to tax for failure to file timely under section 6651(a)(1). We hold that they are. 3. Whether petitioners are liable for an accuracy-related penalty for negligence under section 6662(a). We hold that they are. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations and attached exhibits are incorporated herein by this reference. Petitioners resided in Charlotte, North Carolina, when they filed their petition. During the year in issue, petitioner was a self-employed mover, and his wife was a tax administrator. 44 Petitioner is a native of Poland. He came to the United States on March 22, 1985. After learning of an opportunity to enter the moving business for himself, petitioner became affiliated with the Mayflower Co. (Mayflower) in 1987. Petitioner subsequently purchased a truck from Mayflower. During 1989, petitioner drove this truck for Mayflower in his capacity as a self-employed individual. On March 25, 1991, petitioners filed a 1989 Form 1040, U.S. Individual Income Tax Return, using the filing status of "Married filing joint return". Petitioners' return includes a Schedule C, Profit or Loss From Business, for petitioner's moving service business. The Schedule C shows that petitioner received $ 74,199 in gross income and incurred $ 73,580 in total expenses in connection with that business. Petitioner paid a self-employment tax of $ 125 on this business' net income of $ 961. This was the only income of petitioner that was subject to self-employment or Social Security taxes for 1989. OPINION The case at bar involves mainly a factual determination: Was $ 24,825 of unreported income determined by respondent actually a loan to petitioner from his brother. Respondent determined45 that this amount was income from petitioner's sole-proprietor business. Petitioners disagree. Petitioners contend that this amount was not income because it was a loan from petitioner's brother. Petitioners contend that petitioner's brother, who lives in Poland, loaned him $ 30,000 to help him start his life. According to petitioners, petitioner's brother transferred to him three cash payments of $ 3,000 in 1988 and seven cash payments of $ 3,000 in 1989. The $ 3,000 payments were purportedly hand carried to petitioner, each in an envelope containing 30 $ 100 bills, by friends who were visiting their relatives in various cities throughout the United States. Petitioners further contend that these friends received the envelopes from petitioner's brother in Poland and handed the envelopes to petitioner in the various cities, not knowing the envelope's contents. Petitioners bear the burden of proving respondent's determination incorrect.4 Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); see also Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 658-659 (1990); Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 75-76 (1986).46 Petitioners attempt to meet their burden by relying primarily on petitioner's testimony that the funds were loaned from his brother. Self-serving statements, without other collaborating documentation, are generally not reliable indicia of the creation of a loan. Turner v. Commissioner, 812 F.2d 650">812 F.2d 650, 654 (11th Cir. 1987), affg. T.C. Memo. 1985-159. 47 We do not find petitioner believable. He has failed to persuade us that his story is true. His explanation of the funds as a purported loan from his brother fails to convince us that he actually did receive such a loan. Indeed, the record belies his claim. Petitioner testified that he had no promissory note or other documentation of a debtor/creditor relationship. See In re Indian Lake Estates, Inc., 448 F.2d 574">448 F.2d 574, 578-579 (5th Cir. 1971). Petitioner also testified that the "loan" did not have a maturity date or repayment schedule, and that no interest accrued on the outstanding balance. Petitioner further testified that the "loan" was never repaid, except for two claimed payments totaling $ 2,000, one of which purportedly was a $ 1,500 cash payment handed to his mother in 1993 to deliver it to his brother. We find that petitioner failed to establish that he intended to repay the funds or that his brother intended to enforce repayment, which are necessary elements of a debtor/creditor relationship. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 91 (1970); Fisher v. Commissioner, 54 T.C. 905">54 T.C. 905, 909-912 (1970).48 Respondent determined that petitioner received $ 24,825 in unreported income from his sole-proprietor business, and petitioners have failed to disprove her determination. Accordingly, we must sustain respondent's determination with respect to this issue. 5Respondent also determined an addition to tax under section 6651(a)(1) asserting that petitioners failed to file timely a 1989 Federal income tax return, and that they had not shown that their failure was due to reasonable cause. In order to avoid this addition to tax, petitioners must prove that their failure to file was: (1) Due to reasonable cause and (2) not due to willful neglect. Sec. 6651(a)(1); Rule 142(a); United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245 (1985);49 In re Stanford979 F.2d 1511">979 F.2d 1511, 1512 (11th Cir. 1992); Stovall v. Commissioner, 762 F.2d 891">762 F.2d 891, 895 (11th Cir. 1985), affg. T.C. Memo. 1983-450. A failure to file timely a Federal income tax return is due to reasonable cause if the taxpayer exercised ordinary business care and prudence, and, nevertheless, was unable to file the return within the prescribed time. In re Stanford, supra, at 1514; sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a conscious, intentional failure or reckless indifference. United States v. Boyle, supra at 245. We hold that petitioners have failed to prove that their failure to file was due to reasonable cause and not due to willful neglect. Petitioners filed their 1989 tax return on March 25, 1991, 11 months after it was due, and have not provided an explanation for their failure to file timely. Because the record does not establish that their failure to file the return on time was reasonable, we must sustain respondent's determination under section 6651(a)(1). Respondent further determined that petitioners' 50 underpayment of Federal income tax for 1989 was due to negligence, and, accordingly, that they were liable for the penalty under section 6662(a). Section 6662(a) imposes an accuracy-related penalty equal to 20 percent of the portion of an underpayment that is attributable to negligence. See also sec. 6662(b)(1). Petitioners have the burden of establishing the incorrectness of respondent's determination that they are liable for an accuracy-related penalty under section 6662(a). Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); see also Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). Petitioners must prove that they were not negligent, i.e., that they made a reasonable attempt to comply with the provisions of the Code, and that they were not careless, reckless, or in intentional disregard of rules or regulations.6Sec. 6662(c). Based on our careful review of the record at bar, we conclude that it does not establish that petitioners made a reasonable attempt to comply with the provisions of the Code. We sustain respondent's determination with respect to this penalty. 51 We have considered all arguments made by petitioners, and, to the extent not addressed above, find them to be without merit. To reflect the foregoing, Decision will be entered for respondent. Footnotes1. Section references are to the Internal Revenue Code for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure.↩2. For simplicity and ease, we use the term "petitioner" to refer solely to Mr. Grzegorzewski.↩3. Our holding with respect to this issue also sustains respondent's $ 823 computational adjustment to petitioners' medical expense deduction.↩4. Petitioners allege in their brief that the burden of proof should be on respondent because her determination was arbitrary. Petitioners' first mention of this contention was in their brief. If petitioners had wanted this allegation to be at issue, they should have so provided in their petition. Rule 34(b)(4) and (5) (petition shall contain clear and concise assignments of each and every error claimed to have been made by respondent in respondent's determination, and clear and concise statements of the facts on which petitioners base the assignments of error); see also Rollert Residuary Trust v. Commissioner, 80 T.C. 619">80 T.C. 619, 636 (1983), affd. 752 F.2d 1128">752 F.2d 1128 (6th Cir. 1985); Jarvis v. Commissioner, 78 T.C. 646">78 T.C. 646, 658 (1982); Messer v. Commissioner, 52 T.C. 440">52 T.C. 440, 455 (1969), affd. 438 F.2d 774">438 F.2d 774 (3d Cir. 1971). By failing to raise this contention as an issue in the assignment of errors in their petition, petitioners are deemed to have conceded this issue. Rule 34(b)(4); Jarvis v. Commissioner, supra at 658 n.19; see also Merlino v. Commissioner, T.C. Memo. 1993-200↩. We note, in any event, that the record does not support petitioners' contention that respondent's determination was arbitrary.5. Given that this income was from petitioner's sole-proprietor business, we also sustain respondent's $ 3,313 adjustment to petitioner's self-employment tax. The Code imposes a "self-employment tax" on net earnings of $ 400 or more from self-employment income. Sec. 1401.↩6. Negligence has also been defined as a lack of due care or a failure to do what a reasonable and prudent person would do under similar circumstances. Allen v. Commissioner, 925 F.2d 348">925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1">92 T.C. 1↩ (1989).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619653/	HARRY E. MACCONAUGHEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOEL W. KAUFMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MILDRED B. KAUFMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MacConaughey v. CommissionerDocket Nos. 92052, 95082, 95083.United States Board of Tax Appeals41 B.T.A. 408; 1940 BTA LEXIS 1191; February 16, 1940, Promulgated 1191 Held, on the facts, that petitioners were not participants in an association taxable as a corporation, and the distribution upon termination of the organization was not in liquidation of such an association, and petitioners' base upon sale of stock distributed was the net investment in the organization. Walter C. Fox, Jr., Esq., and Robert B. Gaylord, Esq., for the petitioner in Docket No. 92052. Walter C. Fox, Jr., Esq., Monte A. Dernham, Esq., and Donald M. Scott, Esq., for the petitioners in Docket Nos. 95082 and 95083. Arthur L. Murray, Esq., and Harry R. Horrow, Esq., for the respondent. DISNEY408 OPINION. DISNEY: These proceedings, duly consolidated, involve deficiencies in income tax as follows: Docket No.YearAmountHarry E. MacConaughey920521934$498.59Joel W. Kaufmann950821936295.20Mildred B. Kaufmann950831936380.59All facts have been stipulated, by a general stipulation covering facts common to all cases and a supplemental stipulation in each proceeding as to facts not common to all. The facts so stipulated are found as facts by us, and will be set forth1192 herein only so far as is necessary for disposition of the issue presented. The only issue left for our consideration is whether the "Coos Bay Lumber Company Syndicate" was an association taxable as a corporation. The facts involved may be epitomized as follows: The Coos Bay Lumber Co. (hereinafter called the company) was for many years prior to 1928, and has ever since been, a corporation engaged in the lumber business. In addition to operating properties, such as lumber mills, it owned nonoperating timber lands. Through a reorganization which had taken place in 1927, the holders of the company's bonds exchanged them for 63,757 shares of first preferred stock and 63,757 shares of no par value common stock, this being all of the common 409 stock and all of the first preferred stock, and all was placed in a voting trust with power in the trustees to sell the same for the benefit of the beneficiaries, the former bondholders. The general creditors as a part of the reorganization received 10,000 shares of second preferred stock. On July 10, 1928, the company made a contract to sell for $2,000,000 a part of its nonoperating timber lands. The proceeds of that sale were received1193 prior to April 12, 1929. In 1928 an investment banking house, after investigating the financial standing, business, and operations of the company, decided that with the proceeds of sale of all or a substantial part of the remaining nonoperating timber lands the second preferred stock and a substantial portion of the first preferred stock could be retired, that the company's earnings would pay 7 percent on the remaining first preferred stock, and that any preferred remaining, and the common, could be sold to sawmill operators in the southern states or otherwise disposed of. The investment bankers believed that, because of depletion of timber in the southern states, such sawmill operators desired to commence operations in the West. On October 5, 1928, the investment banking house, on its own behalf, made a contract to buy, and on November 1, 1928, did buy, from the voting trustees all of the first preferred and all of the common stock of the company, for $6,375,700 cash. On October 22, 1928, the investment banking house formed a syndicate to purchase from itself all of the first preferred and three-fourths of the common stock for an aggregate price of $6,375,700, retaining one-fourth1194 of the common stock as compensation for services as syndicate manager. All of the stock was to be deposited with the Bank of California, National Association, as depositary. The syndicate was to be divided into 63,757 units, each unit to be sold for $100, plus interest of 7 percent per annum from October 1, 1928, until payment. All units were disposed of and each member signed and delivered to the syndicate manager a counterpart of the agreement forming the syndicate. The manager also signed a copy thereof. The purchase price of the units, $6,375,700, plus interest was paid to the investment banking house by itself as syndicate manager. There were 894 original members of the syndicate. Settlement for all units was made in cash by payment to the depositary, the Bank of California, National Association, for the account of the investment banking house as syndicate manager. The bank issued deposit certificates to each member acknowledging receipt of such payment. The syndicate agreement provides, so far as material, that the syndicate manager, Peirce, Fair & Co., is forming a syndicate of which it will be manager and in which it will participate to purchase the first preferred1195 and common stock of the company; that interests in the syndicate will be in $100 units; that "The purpose of this Syndicate 410 is to acquire the stock above mentioned and to market or otherwise dispose of all or a part thereof"; that in material part the terms of the syndicate are: That no interest shall be transferable at any time except with the express written consent of the manager, which may be given or withheld at the manager's option in each case, provided that the manager hereby consents to pledge by any member of his interest for the purpose of borrowing money on the security thereof for his own use; that the manager reserves the right in its absolute discretion to determine who shall become members and the number of units to which anyone shall be permitted to subscribe; upon making payment, each member shall be entitled to a receipt; but nothing in the agreement or otherwise shall constitute the members partners with, or agents for, the manager; that except as otherwise expressly provided, the agreement shall bind and inure to the benefit of the several members, their heirs, executors, administrators and assigns; that the syndicate shall expire November 1, 1932, provided1196 that the manager may, in its discretion, extend the term not to exceed four years, and may terminate the same at any time upon ten days' written notice to the members; that within thirty days after the termination of the syndicate, the manager shall make final distribution of the net assets and profits of the syndicate to the members pro rata; and that the manager's apportionment and determination of profits, losses and expenses of the syndicate and its written statement of the results of the syndicate shall be conclusive upon the members. The syndicate agreement further provides: The Manager shall have the sole direction and management in all respects of transactions and business of the Syndicate. The members irrevocably grant to the Manager full power and authority, for account of the Syndicate, to do any and all acts and enter into and execute any and all agreements or other instruments necessary, proper or expedient, in the judgment of the Manager, to carry out and perform this agreement, including the right to sell at public or private sale from time to time, in the discretion of the Manager, any and all of the securities owned by the Syndicate, or to exchange any of such1197 securities for other securities, and generally, as such Manager, to transact the business of the Syndicate in such manner as in its discretion if may deem for the best interests of the Syndicate. * * * The Manager shall have the right, in its own name or otherwise, but for the account of the Syndicate, to do all such things and take all such action as may be necessary in its discretion to sell, merge or consolidate the properties of the Coos Bay Lumber Company with those of any other person, firm or corporation or to reorganize, recapitalize or refinance said corporation, and for such purpose the Manager shall have the right to exchange any or all securities owned by the Syndicate for securities of any other corporation into which it may be merged or consolidated or to which its properties or any thereof may be sold, or for the securities of a reorganized or recapitalized corporation. * * * If it shall become impossible to meet such expenses out of the income or profits of the Syndicate, the members agree to pay the same pro rata upon 411 call of the Manager, provided that the total amount of all such calls by the Manager upon any one member shall not exceed 10% of the1198 amount of his subscription hereunder. * * * * * * It is also understood that in case the Manager participates in any underwriting or selling syndicate in connection with the marketing of the securities to be acquired by the Syndicate, or any thereof, it shall be entitled to receive a brokerage or commission on all securities marketed or sold by it, not exceeding 5% of the price at which such securities may be sold. The instrument further provided that it should be accepted by executing one counterpart and delivering such executed counterpart to the manager, and that the other counterpart might be retained by the person thereby becoming a member; further that all of the counterparts executed by members and taken together should constitute the syndicate agreement as fully as though all parties had executed one agreement. The deposit certificate received by a member from the Bank of California, National Association, in return for the money subscribed to the syndicate recited that it was nonnegotiable, but on the back thereof there is a printed from for assignment or transfer, together with a printed form for consent by the manager to the transfer. The Coos Bay Lumber Co.1199 paid from surplus a dividend for the quarter ended December 31, 1928, of $1.75 per share on all first preferred stock. Payment was made to the syndicate and on February 23, 1929, the manager enclosed to the members checks for their proportion thereof together with a balance sheet of the company under date of December 31, 1928. The Coos Bay Lumber Co. paid from surplus a dividend for the quarter ended March 31, 1929, of $1.75 per share on first preferred stock. This was received by the syndicate and distributed by the manager. The Coos Bay Lumber Co. purchased from the syndicate 15,939 1/4 shares of the first preferred stock, paying $100 and accrued dividend per share. The accrued dividend was applied by the manager against syndicate expenses and the principal sum received, amounting to 25 percent of the principal investment of the syndicate, was distributed by the manager on April 12, 1929, together with a financial statement of the company as of March 31, 1929. On July 15, 1929, the manager distributed a dividend of $1.75 per share paid by the company for the quarter ended June 30, 1929, on the outstanding preferred stock. Accompanying this distribution was a letter from1200 the president of the company giving results of the company for the first six months of 1929, its estimate of probable earnings for the year, and a balance sheet as of June 30, 1929. 412 On October 25, 1929, the manager distributed a dividend of $1.75 per share received from the company on the outstanding preferred stock, together with a balance sheet as of September 30, 1929. On February 14, 1930, a dividend from the company of $1.75 per share on the preferred stock was distributed by the manager of the syndicate, together with a letter from the president of the company, similar to the one distributed on July 15, 1929. Again on April 15, 1930, a dividend received from the company of $1.75 per share on preferred stock was distributed by the manager. On July 19, 1930, the manager distributed a letter with a copy of a letter from the president of the company, explaining why no dividend was being paid at that time. The balance sheet of the company as of June 30, 1930, was enclosed. On February 11, 1931, the manager distributed a letter from the president of the company, together with a balance sheet and a comment upon the situation of the company, showing a net loss from1201 the operations of the year 1930, and suggesting that some method must be found to provide the company with additional working capital. On August 6, 1931, a report was made by the manager, stating that the total amount of subscriptions and underwritings received for the proposed issue of notes and common stock of Coos Bay Lumber Co. was $728,690 on August 1, that $1,000,000 was the minimum amount the management would have felt justified in accepting, and, therefore, all subscriptions and underwritings received under the proposed financing were released. On August 6, 1932, the manager distributed a notice that under the terms of the syndicate agreement the syndicate was to be terminated as of August 20, 1932. There was enclosed a complete statement of the company's affairs, together with a copy of the balance sheet of the company as of June 30, 1932. Attention was called to the depression and its effect in decreasing the company's working capital and prospective further diminution thereof. It was stated that the purposes of the syndicate had been defeated by the depression; that it was felt that members should be placed in the possession of their stock, in immediate relationship1202 to the board of directors; that the management would, before dissolving the syndicate, donate to the syndicate the 15,939 1/4 shares of common stock of the company owned by it and retained by it at the time the syndicate was formed; that the manager would surrender to the company for cancellation the remaining outstanding shares of preferred stock, in simplification of the capital structure of the company; that this surrender would not decrease the proportionate participation of each member in the company, and that on or before August 20, 1932, there would be deposited with the Bank of California, National Association, as depositary for the syndicate, a certificate issued in the name of each 413 member for his number of shares of common stock in the company, delivery of which certificate would be made upon delivery by the member of the deposit certificate held by him, together with his copy of the syndicate agreement dated October 22, 1928, and upon payment by him of 20 cents per unit, representing syndicate expenses uncurred. The petitioners herein received their proportionate share of the distributions made by the syndicate manager both in cash and in stock. Upon the1203 termination of the syndicate they received one share of common stock of the Coos Bay Lumber Co. for each share held by them. Petitioner Harry E. MacConaughey received upon termination of the syndicate 90 shares of the common stock of the company, and on December 28, 1934, sold same for $217.40. Petitioners Joel W. Kaufmann and Mildred B. Kaufmann received 100 shares of said common stock and sold the same in 1936 for $1,096. The petitioners in filing their income tax returns deducted as a capital loss the difference between the sale price received and the adjusted cost basis of the units. In arriving at each deficiency, the respondent determined that the syndicate was an association taxable as a corporation, that the shares of the Coos Bay .lumber Co. stock sold were received in exchange for the units, upon which exchange gain or loss was realized, and that the cost basis of the stock sold was its fair market value on August 20, 1932, the date of distribution by the syndicate, which value respondent determined to be $3 per share. The respondent therefore as to petitioner Harry E. MacConaughey determined a loss of $52.60, with 60 percent thereof, or $31.56, recognizable. Petitioner1204 MacConaughey had in his income tax return claimed a realized loss of $6,532.60, the difference between the sale price of $217.40 and an adjusted cost basis of $6,750. He therefore claimed a recognizable loss of 40 percent, or $2,613.04, and therefore claimed a capital loss of $2,000. As to the other petitioners, Joel W. and Mildred B. Kaufmann, his wife, respondent disallowed deduction of loss claimed and determined a realized gain of $796, of which 60 percent was determined to be taxable, one-half to each of the two petitioners. Petitioners Kaufmann and wife had claimed a realized loss of $6,424, the difference between the sale price of $1,096 and adjusted cost basis of $7,520, and claimed a deductible loss of 40 percent thereof, or $2,569.60, or $1,284,80 as to each. The fair market value of common stock of the Coos Bay Lumber Co. on August 20, 1932, was $3 per share. The only question requiring our determination is whether an organization was an association taxable as a corporation, as respondent contends, or a mere joint venture, pool or syndicate, as petitioners 414 argue. The question is not an easy one, for the organization possessed characteristics tending1205 both to prove, and to deny, the existence of an association of the nature taxable as a corporation. No single test can be applied, as appears from the stress laid sometimes upon one feature, sometimes upon another, in the various cases. We should certainly give weight to the purpose for which the organization was formed, as set forth in the agreement under which it is set up, and to purpose and actual operation rather than form. . The purpose here is plain. The corporate stock involved had previously been placed in a voting trust, with power in the voting trustees to sell the stock for the benefit of the beneficiaries (formerly holders of bonds of the company). The company already, at the time of formation of the "syndicate", had a contract to sell some of its nonoperating timber lands for $2,000,000, and received the purchase price thereof several months after the "syndicate" was organized. In this situation an investment banking house, after investigating the financial standing, business, and operations of the lumber company, conceived the idea that the remaining nonoperating timber lands1206 could be sold, all second preferred stock and a substantial part of the first preferred stock could be retired, and 7 percent dividends paid on the remaining preferred, and that any unredeemed preferred stock, and the common stock, could be sold to sawmill operators in the southern states or otherwise disposed of. The investment bankers had a theory that such sawmill operators desired to commence operations in the West, because of depletion of timber in the South. Thus it appears that an initial idea, first of the voting trust and then of the investment bankers, was the sale to others of the stock of the lumber company. The investment bankers then contracted with the voting trust to purchase, and did purchase, for cash, all first preferred and common stock and immediately organized on October 22, 1928, what they called a "syndicate." Looking to the agreement entered into between the investment bankers and those who participated with them, we find again the idea of sale of stock predominating, for the agreement states its purpose: * * The purpose of this Syndicate is to acquire the stock above mentioned and to market or otherwise dispose of all or a part thereof. * * * Respondent1207 suggests that the words "or a part" allowed retention of all or a part by the "syndicate" manager. Viewing the expression in the light of the earlier history of the matter and intent of the investment bankers, we think that such expression does not militate against the prevailing idea of sale of stock. Obviously it might be necessary to sell only a part, at any one time, as it might not be possible to sell all the stock. There is no suggestion of power to purchase stock, though cases have held organizations both to buy and sell stock not to 415 be associations taxable as corporations. Later in the agreement exchange of securities is permitted, but this seems limited to exchange for securities of any other corporation with which there may be merger. We conclude that the object of the organization was not to do business generally, not trade generally even in the stock of the lumber company, but to dispose of such stock. Turning from purpose to activities, we see that in fact the activities of the organization consisted merely of receiving and distributing dividends upon the stock, selling to the lumber company a part of its first preferred stock, transmitting to the participants1208 reports made by the company as to its operation and condition, and finally, when financial conditions changed, terminating the "syndicate" and distributing the stock. The respondent urges that the business of the lumber company was the business of the "syndicate." We can not so disregard the corporate entities. The organization took no integral part in the operation or conduct of the lumber company. Of course the "syndicate" was organized for profit, but we think it was not engaged in business within the intent of the cases suggesting conduct of business as a test. Considering now the form of the organization, we of course note that there is centralized management in a broad sense, for there was a manager. . Yet there was no board of directors, no power of control by participants, no officers, no meetings of participants. There were no certificates of participation, a counterpart of the agreement and a deposit certificate, stating that it is nonnegotiable, being the only evidence of a participant's rights. There was no free assignability of rights. Though subject to hypothecation by a participant in borrowing money1209 for his own use, any other transfer of a participant's interest was subject to the express written consent of the manager. It is true that the agreement bound and inured, except as otherwise provided, to the benefit of the members, "their heirs, executors and assigns", but as above seen, power to assign was specifically limited. The same expression in effect appeared in the syndicate agreement in , wherein we held a syndicate not to be taxable as a corporation. Liability of the participants was not limited as in a corporation. Liability for expenses was limited to 10 percent, but general liability was not so limited. Continuity of enterprise was limited by the power of the manager to terminate at any time, upon 10 day's notice, and by the fact that no provision was made for selection of a successor to the manager. Dissolution of Peirce, Fair & Co., the manager, would have terminated the syndicate so far as the terms of the agreement are concerned. The term of the agreement is of course much linger than those considered by us in 1210 , and , where 416 we held there was no association taxable as a corporation, but otherwise there is considerable similarity. Title to the stock did not rest in the "syndicate" as such, though the manager could by express provision of the agreement hold it in its own name or in the name of others. The organization agreement provided no name for the group. It had no office, no books, no stationery, and no bylaws. The manager, Peirce, Fair & Co., kept records upon its own books as to the affairs of the syndicate, but designated no part of its office for syndicate transactions. Reviewing all of the attributes of the organization here presented, it seems to us to partake of agency rather than of an association taxable as a corporation. The powers of the manager are expressly and irrevocably granted by the agreement: "The members irrevocably grant to the Manager full power and authority, for the account of the Syndicate, to do any and all acts", etc. The manager was given power to decide in its absolute discretion who should become members of the "syndicate." It determination1211 and apportionment of losses, profits, and expenses were conclusive. Such an agreement seems to us not to present the similarity to a corporate set-up which the cases require. To review and distinguish decisions would render little aid, for they, of course, vary in the facts presented. Deputy v. du . We think that we have before us here an organization merely to dispose of certain stock, no even to buy or deal in it; or if not to dispose of all, merely to hold the remainder for the members, and distribute dividends or other distribution by the corporation, in a manner more similar to such cases as ;; affd., ; ; and , involving holding of stock, rather than cases such as , and , where real property was owaned and operated for long periods of time, or 1212 , involving drilling of an oil well. After analysis of the original intent of the organizers, the powers conferred by the agreement, and the activities conducted herein, we conclude and hold that petitioners did not own interests in an association taxable as a corporation, and therefore the distribution to petitioners upon termination thereof was not liquidation of such an association, and the basis for determination of gain or loss to them was the net investment made in the organization. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619654/	LEONA LEVINE AND SAMUEL M. LEVINE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLevine v. CommissionerDocket No. 6521-84.United States Tax CourtT.C. Memo 1987-413; 1987 Tax Ct. Memo LEXIS 410; 54 T.C.M. (CCH) 209; T.C.M. (RIA) 87413; August 24, 1987. Samuel M. Levine, pro se. Jody Tancer, for the respondent. WRIGHTMEMORANDUM FINDING OF FACT AND OPINION WRIGHT, Judge: Respondent determined a deficiency in petitioners' 1981 Federal income tax in the amount of $ 4,669. The issues presented for consideration are: (1) whether a charitable contribution deduction of $ 7,000 is available for the value of petitioners' services to Health Advocates, Inc., Plus Group Homes, Inc., and the New York State Council of Organizations for the Handicapped or, alternatively, whether petitioners are entitled to deduct said amount as a non-business bad debt or an expense incurred in an activity not engaged in for profit; (2) whether petitioners are entitled to a deduction for travel expense for trips to Israel and Tampa, Florida;; (3) 412 whether petitioners are entitled to deduct automobile expenses of $ 1,021; and (4) whether petitioners are entitled to deduct office supplies and expenses in the amount of $ 2,965. FINDING OF FACTS Some of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference. Petitioners Samuel M. Levine and Leona Levine resides in Oceanside, New York, at the time the petition in this case was filed. They timely filed a joint Federal income tax return for the 1981 taxable year. During the year in issue petitioner Samuel M. Levine (hereinafter petitioner) was employed full-time by the County of Nassau, New York (Nassau County), as the Superintendent of Real Estate. His office was located in Mineola, New York. He also conducted a part-time law practice concentrating on the rights of the handicapped, disabled and the elderly. Petitioner Leona Levine was a full-time homemaker. Petitioner received wages from Nassau County totaling $ 36,069.93 during 1981. On Schedule C of the joint tax return, petitioner also reported gross receipts of $ 3,130 and deductions of $ 8,186 with respect413 to his part-time law practice. During 1981, petitioner performed services for Health Advocates, Inc., Plus Group Homes, Inc., and the New York State Council of Organizations for the Handicapped,agencies concerned with the rights of the handicapped, disabled and the elderly. Petitioner valued these services at $ 7,000 and claimed a charitable deduction for that amount. The value of these services was not reported by petitioner as income in 1981. Petitioner traveled to Israel from October 15, 1981 through November 2, 1981. The trip was arranged through Intercontinental Tours and its itinerary included numerous tourist and sightseeing activities. On October 29, 1981 and November 1, 1981, petitioner met with members of Israeli organizations concerned with the rights of the elderly, handicapped, and disabled. Petitioner deducted $ 1,799, which was the entire amount of his travel expenses to Israel. Petitioner, a practicing attorney in New York since 1953, also traveled to Tampa, Florida in order take the Florida Bar examination. Petitioner arrived in Tampa a few days prior to the examination to attend a bar review seminar. Petitioner deducted the costs of the trip to Florida, 414 the bar review seminar fee and the bar examination fee. Petitioner listed automobile expenses on Schedule C of the joint return. These expenses were partially incurred in connection with petitioner's employment as an attorney with Nassau County and partially in his work in connection with various charitable organizations. A portion of these expenses were incurred in his travel between his residence and his office. A deduction of $ 2,965 for office supplies and expenses was taken by petitioner. Respondent issued a notice of deficiency disallowing charitable contributions of $ 7,000, travel expenses of $ 2,971, automobile expenses of $ 1,021 and office expenses of $ 1,618. OPINION Respondent's determinations are presumptively correct. Deductions are a matter of legislative grace and petitioner bears the burden of proving his entitlement to them. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Charitable ContributionThere shall be allowed as a deduction415 any charitable contribution, payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary. Section 170(a). 1 The term charitable contribution means a contribution or gift to or for the use of qualified charitable organizations. Sec. 170(c)(2)(B). The parties have stipulated that petitioner provided legal services, with a fair market value of $ 7,000, to three qualified organizations. Respondent disallowed petitioner's deduction, however, on the basis that no deduction is allowable under section 170 for a contribution of services to a charitable organization. Sec. 1.170A-1(g), Income Tax Regs. Petitioner contends, however, that this regulation is invalid. A long standing regulation which applies to a subsequently reenacted statute is treated416 as having congressional approval and has the force and effect of law. Grant v. Commissioner,84 T.C. 809">84 T.C. 809 (1985), affd. without published opinion 800 F.2d 260">800 F.2d 260 (4th Cir. 1986). The Supreme Court has often stated that regulations must be sustained unless they are unreasonable and plainly inconsistent with the statute. Lykes v. United States,343 U.S. 118">343 U.S. 118 (1952); Commissioner v. South Texas Lumber Co.,333 U.S. 496">333 U.S. 496 (1948). Since 1958, it has been the Commissioner's position that the value of services rendered to a charitable organization is not deductible. This position has been upheld by the Court. Grant v. Commissioner, supra.Congress has made several amendments to the Internal Revenue Code, including the recent and most sweeping, the Tax Reform Act of 1986, without revising the administrative interpretation of section 170. Due to its longevity and its withstanding of subsequent amendments the regulation is treated as having the force and effect of law. Furthermore, petitioner has not brought forth any evidence concerning the regulation's unreasonable application or its inconsistency with the417 statute. Therefore, petitioner is not entitled to deduct the value of services rendered to charitable organizations as a charitable contribution. Petitioner argues in the alternative that the deduction is allowable as a bad debt under section 166 or as an expense incurred in an activity not engaged in for profit under section 183. Turning to petitioner's first contention, we note that section 166 allows a deduction for any debt which becomes worthless within the taxable year. The question of whether a debt becomes worthless during a taxable year is to be determined on the basis of the surrounding facts and circumstances, the burden of proof being on petitioner. Mueller v. Commissioner,60 T.C. 36">60 T.C. 36, 41 (1973), affd. on this issue 496 F.2d 899">496 F.2d 899 (5th Cir. 1974). A bad debt is deductible under section 166 if it is a bona fide bad debt. A bona fide bad debt is a debt which arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay418 a fixed or determinable sum of money. Sec. 1.166-1(c), Income Tax Regs. Petitioner's alleged debt clearly does not fall within this criterion. In the instant case, a debtor-creditor relationship between petitioner and the various charitable organizations did not exist because petitioner never intended to collect the amounts at issue. Although petitioner provided a statement to the qualified organizations at the end of the taxable year setting forth the value of his contribution, he indicated that he intended to use the value of the services as a charitable contribution deduction. Petitioner never billed the organizations for his time nor has he shown any attempt to collect the amounts that he alleges are due. We conclude that the value of services rendered by petitioners does not constitute a bad debt and, therefore, is not deductible under section 166. Petitioner contends, alternatively, that the value of his services should be deductible as an activity not engaged in for profit pursuant to section 183. Section 183 provides in pertinent part: (a) General419 Rule. -- In the case of an activity engaged in by an individual * * , 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) Deduction Allowable. -- In case of an activity not engaged in for profit * , there shall be allowed -- (1) the deduction which would be allowable * * 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). With respect to the instant facts, petitioner's reliance on this section of the code is misplaced. While considering but not expressly deciding the issue under section 183, we note that section allows an additional deduction only in those instances where the income generated by the not for profit activity420 exceeds the deductions from this activity. As discussed previously, petitioner did not bill for these services nor did he make attempts to collect fees which would generate income. Therefore, because petitioner has no income which exceeds expenses from his not for profit activities, a deduction is not allowable under section 183. Automobile ExpensesPetitioner argues that a deduction should be allowed for his automobile expenses. Petitioner testified that the expenses were incurred partially in connection with his employment with Nassau County and partially for his work with various charitable organizations. With respect to the expenses relating to his Nassau County employment, petitioner testified that he traveled between his residence in Oceanside, New York, and his office on a daily basis. Petitioner claimed that he maintained a law practice and represented Nassau County as a client. Petitioner's testimony, as well as the evidence of record, establishes that he was actually employed by Nassau County as the Superintendent of Real Estate. Therefore, the travel expenses relating to his employment are 421 commuting expenses, which are personal in nature and are not deductible. Sec. 262(b)(5). Fausner v. Commissioner,413 U.S. 838">413 U.S. 838 (1973); Commissioner v. Flowers,326 U.S. 465">326 U.S. 465 (1946). Respondent's disallowance of these expenses is sustained. Secondly, while a portion of expenses relating to petitioner's law practice may be deductible as ordinary and necessary business expenses or as out-of-pocket transportation expenses associated with providing services to qualified charitable organizations, petitioner has not provided any documentation at trial relating these expenses to specific charitable organizations. Sec. 162; sec. 1.170A-1(f)(1), Income Tax Regs. No travel logs, receipts, bills, cancelled checks, or other records were presented at trial. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Petitioner has not met his burden of proof with regard to the claimed deduction. Therefore, respondent's disallowance of the deduction is also sustained. Business Related Travel and Educational ExpensesPetitioner argues that the expenses incurred on his trip to Israel are deductible as business expenses under422 section 162. Section 162 allows as a deduction all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including travel expenses while away from home in the pursuit of trade or business. Reed v. Commissioner,35 T.C. 199">35 T.C. 199 (1960). When the taxpayer's travel has both a personal and a business purpose, travel expenses are deductible only if the trip is related primarily to the taxpayer's trade or business. The fact that the taxpayer engaged in business during a portion of the trip is not sufficient to entitle him to deduct travel expenses absent a showing that business was the primary motive for the trip. Reed v. Commissioner, supra;sec. 1.162-2(b)(1), Income Tax Regs. In the instant case, petitioner's trip to Israel lasted over two weeks, and the itinerary indicates numerous social and sight-seeing activities. Although petitioner presented a memorandum indicating that he spent423 part of two days meeting with Israeli officials in order to develop his legal practice with respect to rights of the handicapped and disabled, he spent the remaining 13 days as a tourist. Because the overwhelming majority of time spent in Israel was of a personal rather than a business nature, the expenses of the trip were primarily personal. Therefore, petitioner's expenses incurred in traveling to and from his destination are not deductible. Despite petitioner's inability to deduct transportation to and from Israel, expenses incurred while at his destination, which are properly allocable to his trade or business, are deductible. Sec. 1.162-2(b)(1), Income Tax Regs. Petitioner testified that his discussions with Israeli officials helped in generating future legal fees. Thus, the expenses associated with these meetings are deductible. Although the evidence is not entirely satisfactory we find $ 125 of the costs associated with the Israel trip to be deductible by petitioner. 2Petitioner next argues424 that the costs of travel to Florida, the bar review fees, the examination fees, and lodging expenses while in Florida should be fully deductible under section 162 as ordinary and necessary business expenses. Respondent disallowed these deductions on the basis that these costs are personal in nature and are therefore not deductible. We agree with respondent. As stated above, section 162 allows a deduction for ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business. The amount paid by petitioner for a bar review course was an expenditure "made by an individual for education." Sec. 1.162-5(a), Income Tax Regs. Educational expenses incurred to meet the minimum educational requirements for qualification in a taxpayer's trade or business or which qualify him for a new trade or business are personal expenditures. Sharon v. Commissioner,66 T.C. 515">66 T.C. 515 (1976), affd. 591 F.2d 1273">591 F.2d 1273 (9th Cir. 1978), cert. denied 442 U.S. 941">442 U.S. 941 (1979). Petitioner was engaged in the425 business of practicing law in New York, but the expenses will not be deductible if we find that the expenses were incurred in qualifying him for a new trade or business. Prior to taking the bar review course and sitting for the Florida bar petitioner could not engage in the practice of law in the State of Florida. The bar review course assisted in preparing him for the examination, which in turn qualified him to engage in the practice of law in Florida, which is a new trade or business as compared to the practice of law in New York. Sharon v. Commissioner, supra at 529-530; Glenn v. Commissioner,62 T.C. 270">62 T.C. 270 (1974); Avery v. United States,419 F. Sup. 105 (N.D. Iowa 1976). The cost of the bar review course and related travel expenses are not deductible under section 162 as ordinary and necessary business expenses because they are personal in nature, qualifying the petitioner for entry into a new trade or business. Petitioner argues that a deduction should be allowed for bar examination fees of $ 525. The payment of fees enabled petitioner to take the Florida Bar Examination, enabling him to obtain a license to practice law426 in Florida. This fee is for the privilege of practicing law and is a nondeductible capital expense because it has value beyond the year in issue. Sharon v. Commissioner, supra.3Petitioner has also deducted expenses for local travel. At trial, petitioner did not set forth the amount of this travel, nor did he provide details of the charitable purpose or business destination of such travel. No travel logs, bills, receipts, or invoices were presented at trial to enable petitioner to meet his burden of proof on this issue. Welch v. Helvering, supra.Respondent's disallowance of the deduction for local travel is therefore sustained. Office Supplies and ExpensesPetitioner claimed a deduction on his Schedule C for office supplies and expenses in the amount of $ 2,965. Respondent allowed $ 1,347 of this deduction and disallowed427 the remainder which consisted of amounts for bar review expenses, bar examination fees and checks made payable to cash or petitioner Samuel Levine. The deductibility of the bar review course expenses has been discussed previously and respondent's disallowance has been sustained. Petitioner argues that a deduction should be allowed in the amount of $ 468 for checks which were made payable to Samuel Levine or to cash, which he claims were for the expenses of his part-time law practice. While section 162 allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, the taxpayer has the burden of proving the claimed deduction. Welch v. Helvering, supra;Rule 142(a). Petitioner submitted copies of canceled checks from a joint bank account which are marked "office expenses," except for check No. 7295 which indicates a $ 6.45 filing fee for "H.A." (Health Associates). Petitioner provided no other substantiation for these expenses. Accordingly, petitioner has not met his burden of proof*428 on this issue. Welch v. Helvering, supra.Respondent's determination therefore will be sustained. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references herein are to the Internal Revenue Code of 1954,m as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. No contention was raised concerning section 274. ↩3. See also Walker v. Commissioner,T.C. Memo. 1987-409↩ (lawyer licensed in New Jersey and Pennsylvania sought to deduct airfare, lodging, bar review course, and fees for California bar examination).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619655/	ERVIN J. KLAPHAKE AND VIRGINIA M. KLAPHAKE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Klaphake v. CommissionerDocket No. 20536-88United States Tax CourtT.C. Memo 1990-375; 1990 Tax Ct. Memo LEXIS 389; 60 T.C.M. (CCH) 195; T.C.M. (RIA) 90375; July 23, 1990, Filed 389 Decision will be entered under Rule 155. John R. Koch, for the petitioners. Gail K. Gibson and Mary E. Pierce, for the respondent CLAPP, Judge. CLAPPMEMORANDUM OPINION Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows: Additions to taxYearDeficiencysec. 6653(b)sec. 66541978$ 74,195$ 37,098--197950,32325,162$ 913198048,00224,001937After concessions by petitioners, the issues are (1) whether petitioner Ervin J. Klaphake (Mr. Klaphake) is liable for additions to tax for fraud under section 6653(b) 390 for 1978 through 1980; and (2) whether the deficiency for 1978 is barred by the statute of limitations. All section references are to the Internal Revenue Code for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts are stipulated and are so found. Petitioners resided in Melrose, Minnesota when they filed their petition. Mr. Klaphake was raised on a farm. He had a difficult time with school, failed the second grade, and attended only through the eighth grade. Thereafter, Mr. Klaphake worked on the farm as a general laborer. He married Virginia M. Klaphake (Mrs. Klaphake) in 1949. Mr. Klaphake continued to be a farmer after his marriage. Mrs. Klaphake also had only an elementary school education. During their marriage, the Klaphakes had seven children. Mrs. Klaphake stayed at home, raised the children, and took care of the farm records. At income tax time, she made a summary of farm income and expenses and would take this information to a tax return preparer. From 1949 to 1978, petitioners filed joint Federal income tax returns. Petitioners heard about seminars on the tax benefits of391 trusts through Norbert Stelten (Stelten), an agricultural teacher and former mayor of Albany, Minnesota. He was the local representative of Lowell Anderson (Anderson), the mastermind behind the trust scheme. Petitioners attended one of the seminars. Three or four people, including Anderson, explained how trusts could be used to minimize taxes. Mr. Klaphake did not understand how the trusts worked but asked Stelten several times if they were legal. Stelten assured Mr. Klaphake that they were. Petitioners paid $ 10,000 to have the trusts set up for them. After trusts were created in October 1978, Anderson gave Mrs. Klaphake instructions on how records were to be kept in order to report farm income to the trusts. He sent a form to Mrs. Klaphake, she filled it out with the farm income and expenses, and sent it back. Later, Anderson sent petitioners blank tax forms which they signed and returned with the understanding that Anderson's accountants would fill them out and file them. From the creation of the trusts, petitioners stopped reporting their income and filing Federal income tax returns. Mr. Klaphake signed papers pertaining to the trusts without really knowing what they392 were. He never intended to avoid the payment of an income tax, but he believed that the trusts were a legal way to save taxes. Mr. Klaphake pled guilty to willfully failing to file income tax returns for the years 1979 and 1980. The Internal Revenue Service conducted a criminal investigation of petitioners. They did not cooperate with the investigation. OPINION The issues are (1) whether Mr. Klaphake is liable for additions to tax for fraud under section 6653(b) for 1978 through 1980 (respondent has not determined the fraud addition with respect to Mrs. Klaphake); and (2) whether the deficiency for 1978 is barred by the statute of limitations. Our first inquiry is whether Mr. Klaphake is liable for 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). To meet this burden, respondent must show that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. ; see also .393 The existence of fraud is a question of fact to be resolved upon consideration of the entire record. , affd. without published opinion . Fraud may be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. ; . An intent to conceal or mislead may be inferred from a pattern of underreporting income. ; . Other badges of fraud include the making of false and inconsistent statements to agents of the Internal Revenue Service, ; inadequate records, and the failure to file tax returns. , affg. a Memorandum Opinion of this Court. The mere failure to file a return, standing alone, is not sufficient to constitute civil tax fraud. .394 Respondent determined that Mr. Klaphake is liable for additions to tax for fraud. We disagree. The Klaphakes were unsophisticated and not well educated. They were good turkey farmers but had little knowledge of business, accounting, or taxation. They were good citizens of their community but were simple folk and easily led down the garden path. In every year from 1949 to 1978, petitioners faithfully reported their income and filed joint Federal income tax returns. For 1978, 1979, and 1980, years after the trusts were created, petitioners did not report their income. However, petitioners believed the trust promoters' assurances that the trusts were a legal way to shift income. This belief may have been naive, but it was less than the intent necessary for fraud. ; ; ; Vodantis v. Commissioner, a Memorandum Opinion of this Court dated January 22, 1954. Petitioners did not make false or inconsistent statements to agents of the Internal Revenue Service. They did not cooperate with respondent's*395 investigation, but Mr. Klaphake testified, and we believe, that this noncooperation was due to fear. Mrs. Klaphake maintained adequate records and provided information to the trust promoters but was mistaken as to what was being done with the information from such records. Although Mr. Klaphake pled guilty to willful failure to file income tax returns for 1979 and 1980, respondent has not established other facts and circumstances which are necessary to support an addition to tax for civil tax fraud. Respondent has failed to establish by clear and convincing evidence that Mr. Klaphake intended to evade taxes known to be owing. The second issue is whether the unlimited statute of limitations under section 6501(c) for civil fraud is applicable for 1978. As no fraud is present in this case, section 6501(c) does not apply. Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619656/	Ryanco Sales Company, Inc. v. Commissioner.Ryanco Sales Co. v. CommissionerDocket No. 72187.United States Tax CourtT.C. Memo 1961-327; 1961 Tax Ct. Memo LEXIS 25; 20 T.C.M. (CCH) 1689; T.C.M. (RIA) 61327; December 1, 1961William G. O'Neill, Esq., for the petitioner. Albert Squire, Esq., for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioner's income tax for the taxable years ended June 30, 1955, and 1956, in the amounts of $9,127.36 and $9,706.76, respectively. Petitioner claims an overpayment for the year ended June 30, 1956, based on the carryback of a net operating loss from the year ended June 30, 1959. Each party has conceded certain issues, leaving for decision the following: 1. Whether petitioner is entitled to a deduction in excess of $9,300 for the year ended June 30, 1955, and $10,500 for the year ended June 30, 1956, as a reasonable allowance for salaries for services26 rendered by Ethel Ryan. 2. Whether petitioner is entitled to a deduction in computing its net operating loss for the year ended June 30, 1959, to be carried back to the year ended June 30, 1956, of an amount in excess of $7,500 as a reasonable allowance for salary for services rendered by Charles A. Ryan. Findings of Fact Petitioner is a corporation organized on July 1, 1953, under the laws of Pennsylvania, having its office and place of business in Philadelphia. Its books are maintained and its income tax returns filed on an accrual basis for fiscal years ended June 30. The returns for each of the years here involved were filed with the district director of internal revenue at Philadelphia, Pennsylvania. Petitioner was in the business of rack jobbing, and its major operations during the taxable years 1955 and 1956 consisted of selling nonfood items such as plastic and metal housewares and toys which it bought from manufacturers to American Stores Company, hereinafter referred to as American, for resale through American's stores in the Philadelphia area, south and central New Jersey, and portions of Delaware and southeastern Pennsylvania. American operates a chain of retail27 food markets throughout the middle Atlantic States, its markets being known as Acme Markets. Its main office is located in Philadelphia, Pennsylvania. Petitioner's sales to American were made under a contract, requiring it to take back at full credit items which could not be sold in the food markets. Deliveries to American's various stores were made by petitioner's driver-salesmen. These driver-salesmen visited each store weekly, placed new merchandise on the racks, noted what items had been sold since their last visit, took back unsalable items, and straightened out the racks. The number of American stores which petitioner serviced as a rack jobber varied, but the maximum number of stores serviced at any one time was about 180. Prior to petitioner's incorporation, the business which is conducted had been carried on by a partnership composed of Charles A. Ryan, hereinafter referred to as Charles, and Ethel Ryan, hereinafter referred to as Ethel, husband and wife. The partnership between Charles and Ethel was formed on October 1, 1952, and continued until organization of petitioner on July 1, 1953. From January 1, to September 30, 1952, Charles had operated the business as an28 individual proprietorship and in 1951 had operated it in partnership with his 25-year old son. Of the 100 shares of stock originally issued by petitioner, Charles owned 48, Ethel, 51, and one share was owned by Reta Girard. Sometime after petitioner's incorporation, the one share of its stock held by Reta Girard was transferred to Charles. Other than this transfer, there has been no change in the shareholders of the petitioner since its incorporation. On July 1, 1953, Charles, Ethel, and Reta Girard were elected to be petitioner's directors, and there have been no changes in its directors since that date. In July 1953 Charles was elected as petitioner's president, Ethel as its treasurer, and Reta Girard as its secretary, and Ethel was appointed to act as assistant secretary. There have been no changes in petitioner's officers since July 1953. Charles began his career in merchandising about 1924 as a buyer and merchandiser for a Buffalo, New York, department store, which had at that time a volume of sales of about $10,000,000. Charles' duties were to plan and set up the food division of this store including its grocery and candy sales department and its restaurant operations. Charles29 remained in this position until 1933 at which time he took a similar position with Abraham and Strauss Company, a large department store in Brooklyn, New York. In his position with Abraham and Strauss Company he was authorized to purchase the needs of the food department and to allocate the space in the department on the basis of his decision as to the salability of the various items. He was responsible for the expenditure of as much as several million dollars a year. During this time Charles was doing research work involving supermarket operations. In the middle 1930's be became employed as a merchandising consultant in the supermarket field. He was retained by Reynolds Wholesale Grocery Company to set up for them a pilot supermarket operation in New York City. This entailed supervising the layout of the architectural work for floor space, purchasing equipment for various departments, arranging advertisement plans, and purchasing merchandise to stock the stores. This project took a period of approximately 9 months. Thereafter, he was retained as a consultant by Interstate Department Stores to set up food departments in their stores, and later by Twentieth Century Markets in Madison, 30 Wisconsin to revamp a market which was operating at a loss. Around 1939 or 1940 Charles was retained by Kroger Company which operated a chain of food stores. Charles was employed to work with the vice president in charge of operations in the converting of smaller stores to supermarkets. Kroger Company gave him the title of Assistant to the Vice President in charge of operations. Charles continued working for Kroger Company until 1942 when he entered the military service as a captain in the United States Army. He was assigned to the Special Services Division, responsible for the operation of Post Exchanges. He was in charge of the food department of the Post Exchanges of the Seventh Service Command. His headquarters was in Omaha, Nebraska, and his work consisted of going to the various Post Exchanges and setting up their food departments. He continued to serve in the United States Army until late 1945 or early 1946 at which time he had the rank of major. After leaving the military service, Charles spent further time in research in connection with supermarket operations. During the course of this research, he developed the thought that nonfood items would increase the gross profit31 of supermarkets, and he compiled a 750-page study containing information of the results of his studies of shopping habits, stamp plans, premium shopping, and similar considerations. In 1948 or 1949 Charles rented a store in Buffalo, New York, which he operated for the purpose of experimenting with his idea of the profitability of sale of nonfood items in food markets. Ethel assisted him in the operation of this store. Charles continued his study of shoppers' habits while operating this store, determining what nonfood items appealed to customers and the various price ranges which seemed to move best. Around 1950 Charles ceased operating this store, and he and Ethel came to Philadelphia. Charles presented his plan to executives of American and in 1950 or 1951 he sold some cutlery to American on a test basis. The test was successful and the business with American grew and continued to grow during the years ended June 30, 1955 and 1956. During the period from 1950 to 1956 the number of stores operated by American in the area which petitioner serviced increased and a part of petitioner's increase in sales was due to the larger number of stores operated by American. Ethel, for approximately32 7 1/2 years prior to 1934, was an assistant buyer in the food section of a department store in Buffalo, New York. Her salary was $35 a week and her duties consisted of taking part in some of the buying for this department of the store and being in charge of about 40 employees in the department. She set up the work schedules of these employees and the manner of carrying out the work. When Charles and Ethel came to Philadelphia, Ethel continued to assist in the business operated by Charles and his son and by Charles as a sole proprietorship in somewhat the same way she had assisted in the operation of the experimental store in Buffalo. She was not compensated for her work but she did spend substantial time in the office at the warehouse which the business operated. Beginning in October 1952 when the partnership between Charles and Ethel was formed, Ethel spent full time working in the warehouse office. After formation of petitioner, Ethel began to spend long hours at petitioner's warehouse office, and during petitioner's fiscal years 1955 and 1956 generally worked around 70 hours a week including working on Saturdays and Sundays and some weeks worked as much as 90 hours. She took33 full charge of the items returned from the stores, separating out the returned items which could be salvaged. She went through the warehouse and checked the inventory for merchandise that needed to be purchased and wrote up the orders for merchandise and interviewed salesmen who came to petitioner's office. Generally, Ethel and Charles dealt with the salesmen who came into the office together, but when Charles was not in the office, Ethel dealt with them alone. Charles made most of the decisions regarding petitioner's purchases although he often consulted Ethel before making a final decision, and Ethel had authority to, and did occasionally, make purchases of new items without consulting Charles, but she usually consulted him before making any such purchases. Ethel had complete responsibility for establishing routes of the drivers which she did by use of lines and pins on a map. She also had complete charge of checking incoming shipments against invoices and freight bills and filing claims if necessary for shortages although at times Charles helped her in filing such claims. It was necessary for Ethel to work late very often because of the late hours at which the drivers came back34 to the warehouse and she was required to stay at the warehouse in order to check the items taken out and returned by the drivers. Ethel made up the invoices for billing to American, and Charles and Ethel both would work on Sundays on the sales invoices. On Sundays Charles would type the sales invoices which Ethel prepared in draft form. Ethel, on a number of occasions, advised Charles with respect to the salability of certain types and colors of merchandise. A manufacturer's agent is a sales agent who represents various manufacturers and carries the different manufacturers' line of goods, making sales to retail merchants or jobbers for a commission. Manufacturers' representatives who came to petitioner's office always found Ethel present when the office was open, and two such representatives were impressed by the fact that Ethel was the only person doing administrative or office work at petitioner's office when they came to call, where other concerns with which they dealt would have several people in the office. Ethel did not make any entries in petitioner's payroll book or other books of account. The entries therein were made by a public accountant who visited the office once35 or twice a week for this purpose. Petitioner's warehouse employees whom Ethel supervised were young people who each earned about a dollar an hour, their combined wages in the fiscal year 1955 amounting to $3,600 and in the fiscal year 1956, to $4,700. Ethel's duties as petitioner's treasurer and assistant secretary did not require more than incidental services. The most difficult part of petitioner's business was educating the general merchandise men, the division and district managers and store managers of American, to the higher profits obtainable from sales of petitioner's nonfood merchandise as compared to profits from food sales. The employees of American knew nothing about selling petitioner's nonfood items. In its fiscal years 1955 and 1956 Charles took complete charge of the educational program of petitioner. Ethel did not work outside the office. Charles initiated and developed petitioner's contacts with the executives of American and with the store managers. On August 31, 1953, petitioner's board of directors, comprised of Charles and Ethel, passed a resolution that: CHARLES A. RYAN and ETHEL RYAN, as Officers, Directors, and Manager and Assistant Manager of the RYANCO36 SALES COMPANY, INC., are hereby authorized salary not to exceed ten (10%) per cent of the gross sales of the business per fiscal year, said salaries to be payable weekly by a salary of $400.00 for CHARLES A. RYAN and $300.00 for ETHEL RYAN, with the right of the Officers to adjust the amount of the salary or waive the salary to be paid within the ten (10%) per cent limitation set. The minutes of January 4, 1954, show that the board of directors resolved that Charles and Ethel will draw their authorized salaries of $400 per week for Charles and $300 per week for Ethel to commence in January 1954 and that any additional accrual up to the 10 percent limitation on salaries was being waived. On June 10, 1955, a board of directors' meeting was held at which the only directors present were Charles and Ethel. The minutes of this meeting state in part: A motion was made and seconded to draw a check in the amount of $4,500.00, payable to ETHEL RYAN, and a check in the amount of $4,500.00 payable to CHARLES A. RYAN, to cover the balance of salaries due to end fiscal year because of increased sales. Included in the deduction taken by petitioner for salary to Ethel of $11,800 in its fiscal37 year 1955 is the $4,500 accrued on petitioner's books on June 30, 1955, in accordance with the above minutes. This amount was not paid to Ethel until September 1955. Petitioner, for its fiscal year 1956, deducted salary to Ethel of $15,000 which was paid as follows: From July 1, 1955 to August 1955, at the rate of $300 per week; from August 1955 to January 4, 1956, at a weekly rate not shown; from January 4, 1956 to June 30, 1956, at the rate of $300 per week. On June 1, 1956, a board of directors' meeting was held at which the only directors present were Charles and Ethel. The minutes of this meeting state in part: A motion was made and seconded to authorize the payment of additional salaries due in the amount of $4,500.00 to ETHEL RYAN and $4,500.00 to CHARLES A. RYAN because of increased sales. Included in the deduction taken by petitioner on its income tax return for salary to Ethel in the amount of $15,000 for its fiscal year 1956 is the $4,500 accrued on petitioner's books on June 30, 1956. This amount was not paid to Ethel until September 1956. Petitioner has never paid a dividend. At least one meeting of petitioner's board of directors was held in each fiscal year, but38 the minutes of these meetings contain no mention of the subject of dividends. Prior to 1953 the partnership had no written contract with American but dealt on an informal basis. On May 25, 1953, a contract between American and the partnership was entered into which provided that the partnership would supply American with merchandise and that the price to be paid by American was list price less 25 percent with a 1 percent discount for payment within 10 days. The contract was terminable at the will of either party. Petitioner acquired this contract upon its incorporation. Although the contract required no notice of termination, American had a policy of giving 30 days' notice. Upon notice by American of the termination of the contract, petitioner would have had 30 days within which to close out its departments in each of American's stores. Petitioner would have been required by the contract to repay to American the amounts which American had paid to it upon delivery of merchandise to the extent of the inventory remaining unsold at the end of the 30-day period from notice of termination of the contract. In managing petitioner's affairs, it was necessary for the officers and directors39 to consider the possibility of a potential liability for repaying American some amount after 30 days' notice of termination of its contract. Early in 1957 Charles became aware that petitioner's relationship with American was becoming strained. After discussion between Charles and executives of American, American proposed that it buy petitioner and bring Charles into American as an employee. Charles did not accept this proposal and late in 1957 American terminated its contract with petitioner. After the contract with American was terminated, petitioner's business dropped off and during its fiscal year 1959 it had very little business, its total sales in this year amounting to $17,701.82, its gross profits from these sales, to $2,485.93, and total salaries and wages of employees other than Charles and Ethel, to $2,496.75. The gross sales of petitioner as shown on its income tax returns for the taxable years ended June 30, 1954, 1955, 1956, 1957, and 1958 were $290,292, $383,153, $559,577, $931,691, and $564,582, respectively. By February or March of 1958, petitioner had no driver-salesmen and very little business. Charles and Ethel both continued to go to the office every day, 40 and Ethel generally spent the major portion of the day at the office. During the fiscal year 1959 Charles' main activities consisted of visits to stores of large food market chains noting the time customers spent in the nonfood departments, what items they bought, and the amount of space the nonfood departments occupied. He was preparing a plan to present to a large chain store. At some time prior to March 1961, Charles did present his plan to one large chain store and was near to entering into a contract with them when his negotiations proved unsuccessful. Charles has since been engaged in attempting to sell the plan to another large chain and had not concluded such negotiations at the time of the trial of this case in March 1961. At a meeting of petitioner's board of directors, it was decided to reduce Charles' salary to $300 per week and Ethel's to $100 per week effective July 11, 1958, until such time as new contracts could be negotiated with the food chains. Petitioner, on its income tax return for its fiscal year 1954, deducted salary to Charles of $15,500 and to Ethel of $6,950, and such deductions have not been questioned by respondent. Petitioner, on its income tax return41 for its fiscal year 1955, deducted $33,800 as compensationofo officers consisting of salary to Charles of $22,000 and salary to Ethel of $11,800. For its fiscal year 1956 petitioner, on its income tax return, deducted $33,500 as compensation of officers consisting of salary to Charles of $18,500 and salary to Ethel of $15,000. Respondent disallowed a portion of the salary to Charles in each of these years but has conceded on brief error in this regard. He disallowed as excessive compensation to Ethel $2,500 in petitioner's fiscal years 1955 and $4,500 in its fiscal year 1956. Petitioner, on its income tax return for its fiscal year 1959, reported a net loss of $33,081.38. In computing this loss it deducted salaries to Charles and Ethel in the amount of $21,100, composed of salary to Charles of $15,800 and salary to Ethel of $5,300. Respondent has conceded on brief that petitioner is entitled to a deduction of the salary paid to Ethel in its fiscal year 1959 in the amount of $5,300 and that petitioner is entitled to a deduction to the extent of $7,500 for salary paid to Charles in its fiscal year 1959, but contends that any amount in excess of $7,500 is not reasonable compensation42 for the services rendered by Charles during its fiscal year 1959. Ultimate Findings of Fact Reasonable compensation for the services rendered by Ethel to petitioner in each of its fiscal years 1955 and 1956 is $11,000. Reasonable compensation for services rendered by Charles to petitioner in its fiscal year 1959 is $7,500. Opinion Section 162(a) of the Internal Revenue Code of 1954 provides for a deduction to a taxpayer of all 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 rendered. The amount of reasonable compensation for personal services rendered is a question of fact governed by the circumstances present in each case. California Vegetable Concentrates, Inc., 10 T.C. 1158">10 T.C. 1158 (1948). The burden is upon petitioner to prove by evidence the services rendered and their value. Where the payments are to shareholders and relatives, the proof must clearly establish that the payments were not made because of family considerations and were not disguised distributions of profits. L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419, 429 (1932).43 We have set forth in some detail the facts with respect to the services rendered to petitioner by Ethel in its fiscal years 1955 and 1956 and the resolutions of the board of directors with respect to the compensation to be paid to Charles and Ethel. Ethel worked long hours and rendered valuable services to petitioner. In our ultimate finding, determining the amount of reasonable compensation for her services, we have taken these facts into account. We have also considered the fact that many of Ethel's duties were clerical in nature and that insofar as the record shows she was not employed in any business activity from 1934, when she left an assistant buyer's position in which she was paid $35 a week, until she began to assist Charles in his business in 1948 or 1949. We have considered the facts that Ethel owned 51 percent of petitioner's stock, that petitioner has paid no dividends since its organization, and petitioner's need for a cash reserve in the event its contract with American was terminated. Upon consideration of all the facts of record in this case, we have found, and we hold, that reasonable compensation for the services rendered by Ethel to petitioner in each of its fiscal44 years 1955 and 1956 is $11,000. While the record is replete with evidence of Charles' experience in the merchandising field and his services to petitioner during the years prior to its fiscal year 1959, the evidence with respect to the services Charles rendered to petitioner during its fiscal year 1959 is most unsatisfactory. The record shows that he was making further studies with the hope of negotiating another contract for petitioner. There is no showing of how these further studies were intended to be of financial benefit to petitioner in the fiscal year 1959 or thereafter or why petitioner had need of these studies. Exactly when Charles expended efforts in attempting to negotiate another contract for petitioner or the time he spent in this undertaking is not shown. He had not at the date of the trial of this case in March 1961, been successful in obtaining another contract for petitioner and was still working toward that end. The record does show that both Ethel and Charles went to petitioner's office during the fiscal year 1959 on a regular basis. Respondent has conceded that the $5,300 paid by petitioner to Ethel in its fiscal year 1959 was reasonable compensation for her45 services. Charles is entitled to some compensation for his services to petitioner in its fiscal year 1959 but the evidence is insufficient to show that reasonable compensation for the services rendered by Charles to petitioner in that year was in excess of the $7,500 conceded by respondent to be deductible in computing petitioner's net operating loss. Upon consideration of all the evidence of record, we hold that $7,500 constituted reasonable compensation for the services rendered by Charles to petitioner during its fiscal year 1959. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619657/	Florists' Transworld Delivery Association, Petitioner v. Commissioner of Internal Revenue, RespondentFlorists' Transworld Delivery Ass'n v. CommissionerDocket No. 1996-74United States Tax Court67 T.C. 333; 1976 U.S. Tax Ct. LEXIS 16; November 30, 1976, Filed 16 Decision will be entered under Rule 155. Petitioner, a membership organization composed of retail florists, received advances from its members which it was obligated to apply to the cost of clearing their intercity exchanges of flower orders. Petitioner also received advances from members which it was obligated to use for national advertising (marketing). To the extent that the respective advance accounts exceeded clearing house or marketing expenses in any year, the excess remained the property of the individual members which petitioner was obligated to refund. Held, the clearing house and marketing advances were not gross income to petitioner. Held, further, certain other receipts of petitioner's clearing house and marketing operations which were not burdened with restrictions as to disposition in petitioner's hands did constitute gross income from which allocable expenses were deductible. Held, further, the amount of deductible expenses allocable to these other receipts determined.In 1968, petitioner paid $ 150,000 in settlement of an antitrust suit and deducted the entire settlement expense against its gross income. Held, petitioner was not required 17 to allocate any part of such expense to its clearing house or marketing operations funded by members' advances. N. Barr Miller and Walter D. Haynes, for the petitioner.Chauncey W. Tuttle, Jr., for the respondent. Tannenwald, Judge. TANNENWALD334 Respondent determined the following deficiencies in petitioner's Federal income tax:TYE June 30 --Deficiency1967$ 84,283.951969167,976.831970178,187.93197111,796.46The deficiency asserted for the taxable year ended June 30, 1971, has been paid by petitioner and a refund claim therefor is now pending. 1 The parties have reached an agreement concerning certain of the issues underlying the deficiencies for the other 3 years. Remaining for our consideration are the following questions:(1) 19 Whether any receipts of petitioner's Clearing House and Marketing Divisions were income to petitioner.(2) Whether petitioner's payment in settlement of a private antitrust action was allocable in part to each of the petitioner's divisions or was solely an expense of its Membership Fulfillment Division.FINDINGS OF FACTThe stipulation of facts and accompanying exhibits are incorporated herein by this reference.Petitioner Florists' Transworld Delivery Association (hereinafter sometimes FTD), organized as a nonprofit corporation under the laws of the State of Michigan, 2 maintained its principal place of business in Detroit, Mich., at the time it filed its petition herein. FTD timely filed its Federal income tax returns on the accrual basis for each of the years in question.20 Petitioner is a membership organization composed of individuals, partnerships, firms, and corporations engaged in 335 the retail florist business. In order to become and remain a member of FTD, florists must observe certain standards in respect of their shops, equipment, bookkeeping, and floral stock and must maintain a reputation for honest and ethical business conduct. Memberships are not transferable.FTD's activities are principally divided among four divisions: Publications Division, Membership Fulfillment Division, the administration of a Clearing House Fund (hereinafter Clearing House Division), and the administration of a Marketing Fund (hereinafter Marketing Division). The Publications Division publishes the FTD News, the FTD News Letter, and the trade magazine Florist; it derives its revenues from member and nonmember advertising, member and nonmember subscriptions, and book sales. The Membership Fulfillment Division investigates applicants, processes membership applications, enforces membership rules, guarantees the payment of accounts contracted between members, and sponsors trade fairs and an annual convention. This division derives revenue from application21 fees, membership fees and dues, trade fair and convention receipts, membership fines, and interest from members' credit deposits. The revenues, less expenses, of these two divisions are added to (or, in the case of losses, deducted from) FTD's general fund and were reported on petitioner's returns for the years in issue as taxable income or loss.Petitioner's Clearing House Division enables members to accept customer orders for delivery to distant areas by telephoning such orders to a member florist in the city of delivery who then fills the order. The delivering florist bills the Clearing House Division, which pays for the order and bills the sending florist. To cover the cost of its operations, advances from members are collected. 3 Petitioner's Marketing Division, which conducts national advertising, is similarly funded by members' advances. 4 The advances to both divisions are made pursuant to the following bylaws:336 BYLAW IIIAdvancesSection 1.Each Member shall advance monthly the following sums:(a) 1% on the gross amount of all incoming orders to be used for Clearing House Operations.(b) 2% on the gross amount of incoming orders and 2% on the gross amount22 of outgoing orders to be used for national advertising, publicity, public relations and service to Members. [Marketing Division.]BYLAW VAccounting * Section 3.Advances received pursuant to Bylaw III hereof shall be held in one or more reserve accounts.Section 4.An individual account shall be set up for each Member on the books of the Association for each classification of advances specified in Bylaws III * * and these accounts shall be credited for all related advances made by such Member. Charges shall be made from time to time on a pro rata basis to each Member's appropriate individual reserve account based on the actual cost of the particular operation or the losses to be deducted from the Credit Deposit Fund. Any balances in such individual Member's account shall remain the property of such Member.Each Member shall receive an annual statement showing for the fiscal year all credits, charges, deductions and balances in his own reserve accounts insofar as they relate to advances made pursuant to Bylaw III.When a membership is terminated for any reason whatsoever, all credit balances in the reserve accounts of the Member consisting of advances made pursuant23 to Bylaw III and which remain in the reserve accounts at the end of 120 days after his membership is terminated, shall be returned to such Member. * Credit balances in Members' Reserve Accounts shall be returned to Members who created the same when the operation for which the particular advance was made has been terminated. Such advances shall be so returned in whole or in part when no longer required. Any such return shall be made upon the recommendation of the Finance Committee and the approval of the Board of Directors.[Emphasis added.]Assuming a California florist receives a $ 15 order for delivery in New York and transmits such order to a New York member florist, the California florist would be entitled to a commission, $ 3 in this case, on the order. The New York florist would fill the order and bill the Clearing House for $ 12. The Clearing House would pay the24 New York florist $ 12 less 337 $ 0.15 (or 1 percent of the gross sale) as that member's clearing house advance and less $ 0.30 (or 2 percent of the gross sale) as that member's marketing advance. The Clearing House would then bill the California florist for $ 12 plus $ 0.30 (or 2 percent of the gross sale) as that member's marketing advance. The petitioner's bookkeeping entries for these transactions would be represented as follows:CALIFORNIA (SENDING) FLORISTClearing House Account$ 15.00Order sent$ 3.00Retainedcommission.30Marketing12.30CheckadvancereceivedNEW YORK (DELIVERING) FLORISTClearing House Account$ 3.00Commission$ 15.00Order filledpaid.30Marketingadvance.15ClearingHouseadvance11.55Check sentFurther assuming that each florist transacted no other business through FTD that year, that each florist's share of marketing expenses was $ 0.28, and that the delivering florist's share of clearing house expenses was $ 0.14, representative bookkeeping entries would be as follows:CALIFORNIA (SENDING) FLORISTClearing House Account$ 0.00Operating$ 0.00Advanceexpenses0.00To reserveaccountClearing House Reserve Account$ 0.00FromadvanceaccountMarketing Advance Account$ 0.28Expenses 5$ 0.30Advance0.02To reserveMarketing Reserve Account$ 0.02Fromadvanceaccount25 NEW YORK (DELIVERING) FLORISTClearing House Advance Account$ 0.14Operating$ 0.15Advanceexpenses0.01To reserveaccountClearing House Reserve Account$ 0.01FromadvanceaccountMarketing Advance Account$ 0.28Expenses 5$ 0.30Advance0.02To reserveMarketing Reserve Account$ 0.02Fromadvanceaccount338 Moneys advanced by members for the Clearing26 House Division could only be applied by petitioner to clearing house expenses and members were advised to list the yearend excess of their advances over their prorata share of such expenses as their own assets. Moneys advanced by members to the Marketing Division could only be applied by petitioner for advertising expenses and members were similarly advised to list the yearend excess of their advances over their prorata share of such expenses as their own assets. Such advances to both divisions were "placed in a single bank checking account." 6Refund of a member's credit balance was required to be made upon termination of membership; 7 refunds could be, 339 and, in fact, occasionally were, made upon board of directors' approval. See p. 336, supra.27 For the years in question, petitioner reported on its tax returns receipt of the following amounts as advances, but did not include any net income or loss from the operations of either division in its calculations of taxable income:ClearingTYE June 30 --HouseMarketing1967$ 1,018,534.90$ 4,086,700.2919691,230,938.594,936,005.8819701,308,125.285,250,383.99On or before the 15th of each month, petitioner mails statements to its members covering Clearing House transactions for the prior month. Members with debit balances are required to remit payment to the Clearing House on or before the 25th of the same month in which the statement is received. If a member's check to petitioner is returned by the bank for insufficient funds, that member must pay a service charge of $ 10 to the Clearing House. Failure to submit payment by the appointed date results in a delinquency. Any member who is delinquent twice in any 12-month period is required to pay a $ 50 fine for each additional delinquency in that 12-month period.The service charges and fines collected by the Clearing House are used to pay that portion of clearing house expenses attributable to processing28 returned checks and delinquent accounts. These expenses include manual processing, long-distance telephone calls, correspondence, miscellaneous paperwork, computer time, interest expenses, 8 and a portion of the clearing house general overhead expenses.29 340 Petitioner received the following amounts for the taxable years ending June 30, 1967, June 30, 1968, June 30, 1969, and June 30, 1970, as such service charges and fines from members: 9TYE June 30 --Amount1967$ 32,241.38196838,590.001969$ 44,520.00197041,613.51Petitioner's total clearing house expenses, less expenses attributable to its international operations (see n. 9 below) were as follows:TYE June 30 --Amount1967$ 964,908.301968925,331.731969949,812.211970865,914.94In addition to members' advances, the Marketing Division derives revenue from the following activities: printing or acquisition of promotional material for members (such as calendars, signs, and stuffers) and office supplies for members (such30 as order pads or forms); the processing or arranging for the processing of its members' billings to their customers, i.e., charge accounts; the conducting of education and research for members on the retail florist industry, including seminars and classes; and arranging for members to purchase gifts from suppliers when the member's customer desires to wire gifts other than flowers to friends in other cities. 10In 1961, petitioner was sued in Federal District Court by Florists' Nationwide Telephone Delivery Network -- America's Phone-Order Florists, Inc. (FNTDN), for antitrust violations. FNTDN was organized several years prior to the commencement of suit and was composed of certain FTD members who paid FNTDN an annual franchise fee. FNTDN franchises were limited to one "select" FTD florist per city for the purpose of trading in intercity flower orders exclusively among themselves while31 using FTD's Clearing House to effect 341 such orders. FNTDN's operations worked a boycott of FTD members who were not FNTDN franchisees.In response to FNTDN's activities, petitioner had adopted two new membership rules in 1961 precluding its members from establishing exclusive exchanges of orders and from holding themselves out as "select" or exclusive wire-service florists where other FTD members are present in the area.These rules formed the basis of FNTDN's claim that FTD violated the antitrust laws. After a jury trial, FNTDN was awarded $ 450,000 as treble damages but was denied injunctive relief. Both parties appealed and the Court of Appeals for the Seventh Circuit reversed both the damage award and the denial of injunctive relief and remanded the case for a new trial. ( Florists' Nationwide Tel. Del. Net. v. Florists' Tel. Del. Assn., 371 F.2d 263">371 F.2d 263 (7th Cir. 1967)). In petitioner's 1968 fiscal year, the case was settled; petitioner paid FNTDN $ 150,000 without admitting any liability.In computing its tax liability for the years in question, petitioner reported no income 11 and claimed no expenses 12 in respect of its Clearing House32 and Marketing Divisions. Also, for 1968, petitioner claimed the $ 150,000 payment in settlement of the antitrust action as an expense fully deductible against its reported gross income.Respondent determined that all receipts of the Clearing House and Marketing Divisions constituted gross income to petitioner from which all division expenses were deductible. 13 Alternatively, respondent determined that, if members' advances were not income to petitioner, then (1) at least the receipts of the Clearing House and Marketing Divisions not derived from33 members' advances were gross income to petitioner and (2) the payment in settlement of the FNTDN antitrust suit was an expense allocable in part to petitioner's Clearing House and Marketing Divisions as well as to its 342 other divisions, with the result that a portion of the deduction for such payment would be lost.Petitioner has collected clearing house and marketing advances in substantially the same manner since March 1944. It has consistently excluded from its taxable income any increases or decreases in the balances in the accounts of those divisions. Upon audit of petitioner's tax return for the taxable year ended June 30, 1944, respondent's agent issued a report on May 25, 1945, which stated in part as follows:As of March 1, 1944, the by-laws of the Association were amended whereby from that time on the 2% clearing house fees were collected from the members as advance fees against which all expenses34 are ratably charged to each member. The excess of fees collected from each member over expenses chargeable to him are returnable to the member upon his withdrawal from the Association or earlier if working capital permits.* * Clearing house fees collected in advance after March 1, 1944, are held not to be income to the Association. 1435 After issuance of the foregoing agent's report, petitioner's treatment of the annual increases or decreases in the clearing house and marketing accounts as resulting neither in taxable income nor loss to petitioner was not changed by the respondent upon audit of petitioner's returns through the taxable year ending June 30, 1962. Following audit of petitioner's tax returns for the taxable years ending June 30, 1963, through June 30, 1966, a revenue agent's report dated November 27, 1967, characterized such clearing house account increases as taxable income. 15 Petitioner protested this report with the District Director, who then issued a report reversing the agent's adjustments and excluding such amounts from taxable income.On October 17, 1969, petitioner filed with respondent a request for a ruling to the effect that, upon amendment of its bylaws effective July 1, 1970, it would operate on a cooperative basis and be entitled to deduct patronage 343 dividends. On January 23, 1970, respondent acted favorably on the request. The letter ruling provided, inter alia:FTD proposes to amend its bylaws so that it will be "operating on a cooperative basis" as that phrase is used in section 1381(a)(2) of the Internal Revenue Code of 1954. More specifically, bylaw V section 3, as amended, will provide that the net income derived from business done with or for members shall belong to and be held for them. The net income of each year derived from business done with or for members shall be distributed to them on the basis of the quantity or value of business36 done with or for each member. The bylaws also provide that, by obtaining or retaining membership in FTD, its members consent to take into account the stated dollar amount of any distributions made to them in written notices of allocation out of income from their patronage. The effective date of the bylaws is July 1, 1970.Also, taxpayer anticipates that it will amend its bylaws at its next annual meeting to clarify the fact that, in the event of its liquidation, it will liquidate on a cooperative basis. More specifically, in the event of liquidation, taxpayer will: (1) pay all liabilities, (2) return to the members their membership fees, (3) return to the members the face amount of outstanding patronage equities and (4) distribute the remaining assets to the members on the basis of their past patronage.Based on the facts presented as enumerated above, we have concluded: (1) that upon the effective date of its new bylaws, FTD will be "operating on a cooperative basis" within the meaning of section 1381(a)(2) of the Internal Revenue Code of 1954 provided it amends its bylaws to provide for liquidation on a cooperative basis and provided that it does in fact operate within the framework37 of its amended bylaws, (2) that, if taxpayer gives the proper notice to each of its present and future members of the consent bylaw contained in its new bylaws, in accordance with section 1388(c)(2)(B) of the Code and section 1.1388-1(c)(3)(ii) of the Income Tax Regulations, distributions with respect to patronage occurring after the adoption and notice of these bylaws will be deductible by FTD as patronage dividends if they otherwise meet the requirements of sections 1382 and 1388 of the Code as to form and timing.Notwithstanding the provision in the immediately preceding paragraph concerning amendment of the bylaws with respect to liquidation on a cooperative basis, FTD will be treated as a cooperative as of July 1, 1970, if the amendment pertaining to liquidation is adopted at its next annual stockholder's meeting taking place after the date of this ruling letter and before the last day of its fiscal year ending June 30, 1971.OPINIONThe primary issue before us is whether members' advances to the Clearing House and Marketing Divisions, respectively, constituted gross income to petitioner. The consequence of 344 finding that such advances were includable in gross income38 would be the taxation of the annual increase (advances less expenses) or the deduction of the annual decrease in each of these division accounts. Although the clearing house accounts did increase during each of the years in issue, the marketing accounts sustained aggregate losses in some years. Petitioner reported no income and took no deduction in respect of the foregoing.Because of the similarity in the basic funding of the two divisions, our determination as to the includability or excludability of the advances will apply to both divisions.Petitioner's position that the increases in the advance accounts were not taxable is principally grounded on two alternative theories: (1) That it held the advances in trust for the benefit of its members and realized no gross income therefrom and, alternatively, (2) that if such advances were income, then, under the accrual method of accounting, any yearend excess in the clearing house or marketing accounts was offset by the accrual of petitioner's liability to refund to each member the unexpended balance on such member's account.In support of the trust fund theory, petitioner relies on a series of cases in which it has been held that where39 a taxpayer reserves funds "which he is obligated to expend in entirety for a specified purpose and no profit, gain, or other benefit is to be received by him in so doing, the funds are not includable in gross income" and are merely held in trust for others. Ford Dealers Advertising Fund, Inc., 55 T.C. 761">55 T.C. 761, 771 (1971) (nonacq. 2 C.B. 5">1974-2 C.B. 5), affd. per curiam 456 F.2d 255">456 F.2d 255 (5th Cir. 1972). See also New York State Association of Real Estate Boards Group Insurance Fund, 54 T.C. 1325">54 T.C. 1325 (1970) (nonacq. 2 C.B. 5">1974-2 C.B. 5); Dri-Powr Distributors Association Trust, 54 T.C. 460 (1970) (nonacq. 2 C.B. 5">1974-2 C.B. 5); Angelus Funeral Home, 47 T.C. 391">47 T.C. 391 (1967) (acq. 1 C.B. 20">1969-1 C.B. 20), affd. 407 F.2d 210">407 F.2d 210 (9th Cir. 1969); Broadcast Measurement Bureau, Inc., 16 T.C. 988 (1951) (nonacq. 2 C.B. 4">1974-2 C.B. 4); Seven-Up Co., 14 T.C. 965 (1950) (acq. in 40 result 2 C.B. 4">1974-2 C.B. 4). See further Rev. Rul. 74-319, 2 C.B. 15">1974-2 C.B. 15.Petitioner contends that it had an obligation to expend advances to the Clearing House and Marketing Divisions only in accord with Bylaw III and that it had a further obligation 345 to refund unexpended amounts to each member, since, under Bylaw V, such amounts remained the members' property. Respondent does not deny that there were some restrictions on petitioner's use of moneys so collected but takes the position that such restrictions were not narrow enough to impose any meaningful controls on petitioner's disposition thereof. Moreover, respondent seizes upon the infrequency with which actual refunds were paid out (as opposed to credited to members' accounts), other than upon termination of membership, to buttress his assertion that the advances were part of gross income.Respondent veers away from the fact that petitioner could not apply such advances however it saw fit. Instead, he seems to argue that, because petitioner was not limited to the expenditure of the advances for a single, well-defined purpose, they should be included in41 gross income. Respondent would have us conclude that, because of the various administrative functions performed by the Clearing House 16 and the Marketing 17 Divisions, petitioner derived some benefit in apportioning the amounts advanced among permissible uses.We think respondent takes too narrow a view.Granted that the scope of the uses to which the advances in question could be put is somewhat broader than those which obtained in the cases upon which petitioner relies, we think they were sufficiently restricted to warrant the conclusion that the principles upon which those cases were decided should be applied herein. In our opinion, the scope of the functions performed by the Clearing House and Marketing Divisions did not vitiate the obligations which petitioner had with respect to its members' advances. Nor was there such benefit to petitioner, 42 by reason of the number of permissible uses to which it could apply those advances to trigger income. Cf. Valley Waste Disposal Co., 38 B.T.A. 452 (1938). In Ford Dealers Advertising Fund, Inc., 55 T.C. at 772-773, a case involving advances to the taxpayer from automobile dealers for "advertising," we said that, while the evidence indicated that no restrictions were placed on the type and timing of 346 advertising expenditures permitted, the fact was that the funds could only be spent for advertising. The taxpayer's discretion in determining how and when it made advertising expenditures did not convert what were essentially trust funds into income. Moreover, the characterization of such funds as trust funds did not require any specific or express words of trust. See also Broadcast Measurement Bureau, Inc., supra.Compare Krim-Ko Corp., 16 T.C. 31">16 T.C. 31, 39-40 (1951). We think petitioner's bylaws and its intent in dealing with its members in respect of the Clearing House and Marketing Divisions established with reasonable certainty the uses to which advances43 had to be put and sufficed to create a trust.Petitioner did not realize any gain or profit by reason of its "intermediary" role. 18 See Ford Dealers Advertising Fund, Inc., 55 T.C. at 773-774. Petitioner could not transfer the funds represented by the advances nor any portion thereof to any of its other operations or to its general corporate coffers. Compare Burley Tobacco Growers Cooperative Association, Inc. v. United States, an unreported case ( E.D. Ky. 1968, 22 AFTR 2d 5146, 68-2 USTC par. 9458). The commingling of advances with each other or with general revenues in a single bank account did not dissolve the trust with which they were impressed. See Seven-Up Co., 14 T.C. at 978. Nor did the fact that yearend excesses in the clearing house and marketing accounts were more often credited to members' accounts, rather than refunded forthwith, dilute petitioner's responsibilities in respect thereof. See Broadcast Measurement Bureau, Inc., 16 T.C. at 997. Whatever "benefit" petitioner may have obtained in virtue of the allocation of a portion44 of general administrative and overhead expenses to the Clearing House and Marketing Divisions (see n. 5 supra) was "incidental and secondary" (cf. Angelus Funeral Home, 47 T.C. at 395); such allocation simply represented reimbursement of the costs of operating those divisions and did not constitute 347 "compensation" to petitioner. See Ford Dealers Advertising Fund, Inc., 55 T.C. at 772.45 We conclude that the members' advances to the Clearing House and Marketing Divisions were not includable in petitioner's gross income during the taxable years in issue. In view of this conclusion, we need not reach petitioner's alternative argument concerning the offsetting of annual net increases with equal accrued liabilities. 19 We note, however, that the accrued liability theory may be simply the shadow of the trust fund theory. 20 Cf. Seven-Up Co., 14 T.C. at 977. See also Broadcast Measurement Bureau, Inc., 16 T.C. at 1002-1003 (Turner, J., concurring).46 Notwithstanding the excludability of the clearing house and marketing advances under the rationale of Seven-Up Co., and its progeny, respondent, relying on Park Place, Inc., 57 T.C. 767 (1972), belatedly argues that petitioner was a cooperative corporation during the years at issue 2147 and, therefore, was subject to the provisions of subchapter T of the Internal Revenue Code. 22 Under section 1382 of subchapter T, petitioner's gross income could be adjusted to reflect yearend account increases to the extent that such increases qualified thereunder as patronage dividends paid.348 We think it clear that respondent's position alleging petitioner's cooperative status constitutes a new matter as to which the respondent bears the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure. See also Estate of Floyd Falese, 58 T.C. 895">58 T.C. 895, 899 (1972). That burden herein involves proof as to both petitioner's cooperative status and nonqualification of account increases as patronage dividends which could have been taken into account in computing taxable income, issues which are factual in nature. Cf. Puget Sound Plywood, Inc., 44 T.C. 305">44 T.C. 305 (1965). Unlike the situation which obtained in Park Place, Inc., supra, the record herein is insufficient to permit a determination of these issues. Respondent's bald assertions on brief do not satisfy his burden. 2348 We now turn to respondent's alternative argument, namely, that if such advances were not income to petitioner, then miscellaneous receipts of the Clearing House 24 and Marketing 25 Divisions did constitute income to petitioner. We agree. Unlike members' advances, these moneys were not burdened with restrictions as to disposition. Petitioner's argument that some of these receipts, e.g., clearing house service charges and fines, were only intended to cover the costs relating thereto is of no moment. The fact is petitioner was free to use such receipts as it saw fit.The real bone of contention between the parties in respect of this issue, however, is the amount of deductible expenses incurred in connection with these receipts. Since the parties have stipulated the amount of miscellaneous receipts and expenses attributable thereto for the Marketing Division and the amount of miscellaneous receipts of the Clearing House, their dispute concerns the49 amount of total clearing house expenses attributable to that division's miscellaneous receipts consisting of service charges and fines collected in respect of returned checks and delinquent accounts.349 In presenting the taxability of miscellaneous receipts as an alternative determination in the notice of deficiency, respondent made no allowance for the deductibility of expenses related thereto. 26 On brief, respondent contends that deductible expenses are that fraction of total clearing house expenses that miscellaneous receipts are of total clearing house receipts.During the years in question, petitioner made no separate allocation of clearing house expenses relating to the processing of returned checks and delinquent accounts. Petitioner alleges, however, that such expenses definitely exceeded miscellaneous receipts. At trial, petitioner introduced testimony of its controller during the years50 at issue, who was also a certified public accountant, concerning the amount of total expenses allocable to the processing of the returned checks and delinquent accounts. Based upon his knowledge of petitioner's operations and with the assistance of petitioner's independent auditor, he testified that he looked at each expense of the Clearing House for 1970 and estimated what portion thereof, if any, was spent in such processing. He further testified that he then totaled the amount of expenses he deemed attributable to the miscellaneous receipts and determined that $ 48,926.45 was the cost thereof for that year. Because petitioner had first adopted a more detailed cost accounting system for 1970, its records did not permit the same sort of allocation for prior years. 27 Therefore, the controller, based upon his knowledge that the Clearing House was operated in a similar fashion throughout all of the years in question, determined that the allocable costs for each of the prior years were the same percentage of total clearing house costs (exclusive of those pertaining to petitioner's International Division, see n. 9 supra) for such year as the $ 48,926.45 was of petitioner's 197051 clearing house costs (exclusive of those pertaining to the International Division), or 5.65 percent.In our judgment, neither petitioner's nor respondent's methodology is reflective of actual allocable costs. Respondent's 350 method of apportionment is insensitive to the additional time and resources expended in the collection process. Petitioner's reconstruction of expenses is a very rough estimate, at best, calculated with the benefit of 20-20 hindsight. Yet, we know some costs were so allocable and we have sufficient evidence to make a determination of the allowable amount therefor. See Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). While we might be inclined, on the basis of the whole record, to find that deductible expenses slightly exceeded fees and fines collected, we simply could not say by how much. Using our best judgment, we determine that the amount of52 costs allocable to the miscellaneous receipts for each year at issue was the amount taken in as miscellaneous receipts for each such year. In this way, petitioner has realized neither net taxable gain nor deductible loss from its clearing house operation. 28One issue remains for our consideration, namely, whether the amount paid by petitioner in settlement of the FNTDN antitrust action was fully deductible against petitioner's gross income for 1968. Both parties argue their positions within the framework of the "origin-of-the-claim" test of deductibility of litigation expenses as such test is articulated in United States v. Gilmore, 372 U.S. 39">372 U.S. 39 (1963), and Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572 (1970).53 Petitioner takes the position that, since the lawsuit was generated by the promulgation and enforcement of its membership rules, the settlement expense was properly an expense of its Membership Fulfillment Division. Respondent, on the other hand, argues that the membership rules giving rise to the lawsuit were actually adopted by petitioner's directors in order to protect all of its operations from the impact of FNTDN's members exclusive flower order exchanges 29 and the $ 150,000 is, therefore, allocable to all of petitioner's divisions so that a portion thereof would be attributed to the Clearing House and 351 Marketing Divisions funded by members' advances and, consequently, not deductible.54 In Gilmore and Woodward, the issue was whether the taxpayer's litigation expenses were personal (Gilmore) or capital-related (Woodward) as opposed to ordinary and necessary business expenses, so as to be subject to an express statutory disallowance. 30 The real question at hand is not what kind of expense was incurred; rather, the question is to which of petitioner's operations the conceded ordinary and necessary expense represented by the settlement payment should be related. Consequently, we think disposition of the disputed issue herein is governed neither by Gilmore nor Woodward.We have already found that petitioner held the Clearing House and Marketing Division advances in a trustee capacity. It could only expend the advances to specified ends. 55 The advances were beneficially owned by the members. Petitioner's trustee role in respect of these operations stood apart from its general corporate identity. Cf. Dri-Powr Distributors Association Trust, supra.The antitrust action was instituted against petitioner for actions taken in its own behalf as a corporate entity in its own right and not as a trustee. The individual members were not defendants. Expenses incurred in connection with such litigation were paid with general corporate funds.We think the settlement payment was properly taken as an ordinary and necessary business expense of petitioner's general operations. The only authorized expenditures of the clearing house and marketing advances were those necessary for the actual administration of the Clearing House and those necessary for national advertising. Petitioner, as trustee, could not have and, in fact, did not expend such funds in satisfaction of its own general liabilities. Moreover, the issue in the antitrust action did not relate to the operations of the Clearing House and Marketing Divisions but to the eligibility to participate in those operations.We are not unmindful56 of the fact that the advances were applied against a portion of some of petitioner's general 352 administrative expenses (e.g., directors' and officers' salaries). These expenses, however, were of the type incurred in part in the actual operation of the Clearing House and Marketing Divisions. The same cannot be said of the settlement expense.Decision will be entered under Rule 155. Footnotes1. The record contains no indication as to the situation with respect to the 1968 taxable year.↩2. Petitioner was incorporated in 1924 as Florists' Telegraph Delivery Association. In 1965, petitioner changed its name to Florists' Transworld Delivery Association.↩3. Other clearing house receipts are discussed at pp. 339-340, infra↩.4. Other marketing receipts are discussed at p. 340, infra↩.5. Expenses are prorated on the basis of each member's advances in relation to all advances made. A portion of petitioner's general administrative and overhead expenses is allocated to the Clearing House and Marketing Divisions. Respondent has not raised any question herein as to the propriety of the amounts so allocated except in respect of the allocation to the service charges and fines attributable to clearing house operations (see pp. 339-340, infra); the amounts allocated to the miscellaneous receipts of the Marketing Division have been stipulated. See n. 10, p. 340, infra↩.6. The quoted words are from the stipulation of the parties. It is not clear in the record whether this account also included other receipts of petitioner, although the inference to be drawn from the record herein is that it did.↩7. When a membership is terminated prior to the end of the fiscal year, the balance refundable to the member is the balance as of the end of the previous fiscal year. The member's share of operating expenses for the year of termination is deemed to be the amount credited to his advance account for that year.↩8. Petitioner's Clearing House issues checks monthly to members in payment for orders filled. The Clearing House often does not have sufficient cash with which to meet expenses and these obligations and, therefore, relies heavily on monthly bank borrowings. To the extent that returned checks and delinquent accounts result in a smaller cash supply, further borrowings are necessary.Occasionally, there is a positive cash balance in the Clearing House between the 25th of one month and the 15th of the following month. Petitioner is not authorized to invest such balance. Once during the years in issue, however, petitioner did earn interest on the clearing house positive cash balance. In July 1969, it earned $ 2,463.11 which it credited to its general revenue and reported as income.↩9. In addition to advances, service charges, and fines, the Clearing House had receipts from its International Division and incurred expenses related thereto; the tax treatment of such receipts and expenses does not appear to be an issue herein.↩10. The parties have stipulated the amount of marketing receipts derived from these activities and the expenses related thereto.↩11. With the exception, however, noted in n. 8 supra↩.12. With the exception, however, of a deduction inadvertently claimed for 1967 relating to a portion of a loss resulting from the Marketing Division's complete billing service; petitioner tendered an amended 1967 return (deleting this deduction) to the revenue agent auditing this year upon commencement of the audit. The amended return was rejected, but an adjustment therefor was made in the deficiency notice.↩13. In effect, respondent would tax the annual increase in each division's fund. See also n. 5 supra↩.14. The parties submitted only the above-quoted portion of the 1945 report, with the result that we are unable to determine from the record whether the report dealt with the Marketing Division advances.↩15. As is the case with the 1945 report (see n. 14 above), the stipulation deals only with the treatment of the Clearing House accounts insofar as the 1967 report is concerned, and the record is otherwise silent as to the treatment accorded the Marketing Division accounts.↩16. E.g., clearing of members' order, handling returned checks, handling deficiency accounts.↩17. E.g., advertising, office supplies, promotional materials, etc.↩18. The single instance in which petitioner earned unauthorized interest on its clearing house account balance (see n. 8 supra), applied such interest to its general revenues, and paid income tax thereon, does not, in our opinion, destroy the character of the advances. Cf. Ford Dealers Advertising Fund, Inc., 55 T.C. 761">55 T.C. 761, 770 n. 1 (1971); New York State Association of Real Estate Boards Group Insurance Fund, 54 T.C. 1325">54 T.C. 1325, 1335-1336 (1970); Angelus Funeral Home, 47 T.C. 391">47 T.C. 391, 395, 397 n. 4 (1967), affd. 407 F.2d 210">407 F.2d 210↩ (9th Cir. 1969).19. Nor need we reach the question of the significance of respondent's prior acceptance of petitioner's consistent method of accounting for such increases as excludable from gross income insofar as it bears on the propriety of petitioner's accounting, a question subsumed in this argument. See Fort Howard Paper Co., 49 T.C. 275">49 T.C. 275, 286-287↩ (1967).20. The two concepts are not necessarily two sides of the same coin, however, e.g., in the case of a cash basis taxpayer. For this reason, where the elements of trust are present, the trust concept would appear to be the preferable interpretative tool.↩21. The first appearance of respondent's cooperative argument is in his trial memorandum. The notice of deficiency simply contained the following statement of respondent's position in respect of the taxability of the clearing house and marketing advances:"It has been determined that the annual increase in members' funds is includable in the gross income derived from your trade or business as provided in Section 61(a)(2) * ** * *"In the event it is held that Clearing House and the Marketing funds are nontaxable advances from members held in trust↩, then it is determined that so much of those funds, as detailed below [relating to clearing house and marketing receipts from sources other than advances], are not such advances and are, therefore, includable in gross income. [Emphasis added.]"22. All Code and section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.↩23. This conclusion is reached independently of the fact that when petitioner applied to respondent for a ruling deeming it a cooperative for years subsequent to those in issue, respondent conditioned such ruling upon petitioner's amendment of the very bylaw (Bylaw V) now in issue. See p. 343, supra↩.24. See pp. 339-340, supra↩.25. See pp. 340-341, supra↩.26. This is because respondent initially deemed all division receipts gross income and all expenses deductible.↩27. Records for prior years did not include as detailed a breakdown of types of Clearing House expenditures.↩28. In view of the stipulation of the parties (see n. 5 supra↩), the situation may well be different in respect of the allocation of expenses to the miscellaneous receipts of the Marketing Division. This matter can be dealt with in the Rule 155 computation.29. In fact, neither the clearing house nor marketing operations apparently suffered by reason of these exclusive exchanges which were passed through petitioner's Clearing House. These divisions only depended upon order quantity for revenue. Basically, the same number of orders would have been exchanged, albeit among a fewer number of florists.↩30. Sec. 265, which disallows any deduction for expenses allocable to tax-exempt income, would not come into play here. Members' advances to the Clearing House and Marketing Divisions were not income to petitioner, exempt or otherwise.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619658/	Ruby M. Williams and Charles R. Coy, Assignee of Ruby M. Williams for the Benefit of Creditors, Petitioners, v. Commissioner of Internal Revenue, RespondentWilliams v. CommissionerDocket No. 3880-62United States Tax Court44 T.C. 673; 1965 U.S. Tax Ct. LEXIS 44; July 30, 1965, Filed 44 An order of dismissal will be entered. Jurisdiction -- Sec. 6871. -- Petitioner made an assignment for the benefit of her creditors. The assignee in 1961 brought an action in a State court in Kentucky to settle the estate and liquidated the assets under supervision of that court. In 1962 respondent determined deficiencies and made a jeopardy assessment. Petitioner filed a petition with the Tax Court. Held, the assignment and proceedings pursuant thereto were the equivalent of the appointment of a receiver in a receivership proceeding in a State court and the filing thereafter of the petition with the Tax Court is prohibited by section 6871(b). Michael J. Clare, for petitioner Ruby M. Williams.James E. Thompson, for petitioner Charles R. Coy.Ferd J. Lotz III, for the respondent. Bruce, Judge. BRUCE 673 OPINIONThis proceeding involves deficiencies in income tax for the calendar years 1960 and 1961 in the respective amounts of $ 29,955.75 and $ 14,203.44, and an addition to tax for 1960 under section 6651(a), I.R.C. 1954, in the amount of $ 7,488.94 for failure timely to file a return.The taxpayer in this case is Ruby M. Williams, a resident of Richmond, Ky. She filed individual income tax returns for the calendar years 1960 and 1961 with the district director of internal revenue at Louisville, Ky.Although none of the parties to this proceeding has questioned the jurisdiction of this Court, it is fundamental46 that a court must consider that question if it is suggested by the facts and applicable law. Psaty & Fuhrman, Inc. v. Stimson, 11 T.C. 638 (1948); Louisville Property Co., 41 B.T.A. 1249 (1940). We have concluded that the filing of the petition herein is prohibited by section 6871(b) of the Code and therefore we are without jurisdiction to determine the issues raised in the petition.Ruby M. Williams, on March 20, 1961, made a voluntary assignment to Charles R. Coy for the benefit of her creditors. Coy, as assignee, on June 26, 1961, filed a complaint in the Circuit Court for Madison County, Ky., naming as defendants Ruby M. Williams and her husband and all the known creditors of Ruby M. Williams, including the United States of America. Paragraph 13 of this complaint alleged:13. Plaintiff believes, and, therefore, alleges on information and belief that the United States of America may, under and by virtue of the 1954 Internal Revenue 674 Code, Title 26 U.S.C.A., have some interest in this action and in the estate of the defendant, Ruby M. Williams; and the United States of America is now called upon to plead47 herein and to show what interest, if any, it has in this action and in the estate of the defendant, Ruby M. Williams, under said Internal Revenue Code.Notice of the assignment was given by Coy to all known creditors and notice by publication was given according to law. Coy filed bond as required by statute. Coy liquidated the assets transferred to him by the assignment under orders of the Circuit Court. He rendered to that court an accounting as of May 5, 1962, of the performance of his trust and made a further report and accounting to the court on December 31, 1964, showing the assets on hand for settlement of claims. The district director of internal revenue filed a claim in that proceeding.Ruby M. Williams filed her income tax returns for 1960 and 1961 on or about March 18, 1962. Respondent mailed a notice of deficiency to Ruby M. Williams on June 28, 1962, determining the deficiencies herein and informing her that assessment had been made of the deficiencies and addition to tax under the provisions of the internal revenue laws relating to jeopardy assessments.The petition herein was filed September 24, 1962, naming as petitioners both Ruby M. Williams and Charles R. Coy, 48 assignee of Ruby M. Williams for the benefit of creditors.Section 6871 of the Internal Revenue Code of 19541 deals with claims for income, estate, and gift taxes in bankruptcy and receivership proceedings. Subsection (a) provides for immediate assessment of any deficiency upon adjudication of bankruptcy or upon "the appointment of a receiver for any taxpayer in any receivership proceeding before any court of * * * any State." Subsection (b) 675 provides for presenting claims for such deficiencies to the court before which the bankruptcy or receivership is pending, "despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Tax Court;" and further provides "but no petition for any such redetermination shall be filed with the Tax Court after * * the appointment of the receiver."49 The provisions of section 6871(b) are to the effect that if a petition has been filed with the Tax Court prior to the adjudication of bankruptcy or the appointment of a receiver for the taxpayer in a receivership proceeding in a State or Federal court, the Tax Court is not deprived of jurisdiction to redetermine the deficiency, Comas, Inc., 23 T.C. 8">23 T.C. 8 (1954), but that after the appointment of such a receiver the Tax Court is without jurisdiction to receive a petition and the determination of the tax claim is solely within the jurisdiction of the court which appointed the receiver. Leon I. Ross, 38 T.C. 309">38 T.C. 309 (1962).Upon consideration of the statutes of Kentucky and the decisions of the Court of Appeals of Kentucky interpreting those statutes, we are impelled to the conclusion that the assignment in this case and the proceedings pursuant thereto were in all essential respects the equivalent of the appointment of a receiver in a receivership proceeding in a State court within the meaning of section 6871, and that the filing of the petition herein, long after the assignment was made and the assignee had filed a bond and had50 commenced an action in the State court to settle the estate, is prohibited by section 6871(b).Chapter 379 of the Kentucky Revised Statutes deals with voluntary assignments. Section 379.020 requires the deed of assignment to be recorded in the county clerk's office of the county where the assignor resides and in each county where a tract of land or the greater part thereof conveyed is situated. Section 379.030 requires the assignee to file a bond approved by the county judge and recorded in the county clerk's office. Section 379.170 permits the assignee to bring an action to settle the estate in the circuit court instead of the county court, in which case the circuit court, in addition to its powers as a chancery court, may exercise any power conferred on the county court in administering and settling the assigned estate. Section 379.050 provides that the assignee shall be subject to the orders and supervision of the court and may be required to file any report ordered. Section 379.090 provides for sales of the property conveyed and requires a report of the sale, subject to confirmation by the court. Sections 379.100, 379.110, and 379.120 provide for the filing of claims and51 allowance or rejection or compromise of claims, all within the supervision of the court and subject to confirmation by the court. Section 379.130 provides for distributions upon the claims, subject to confirmation by the court.Under the foregoing provisions of the statutes of Kentucky, the assignee, in proceeding to liquidate and distribute the estate conveyed 676 by the assignor, is at all times subject to the orders of a court of competent jurisdiction to pass upon the claims of the creditors, including the United States.The Court of Appeals of Kentucky has regarded the State laws and procedure relating to assignments for the benefit of creditors as comparable with receiverships in receivership proceedings in the State courts. In Deposit Bank v. Kirby, 175 Ky. 700">175 Ky. 700, 194 S.W. 929">194 S.W. 929 (1917), that court commented:it has been held that the appointment of a receiver for the mortgaged property is a matter within the sound discretion of the trial court, and should be made or refused on the circumstances of each particular case, and the appointment of a receiver in such a state of case, at the instance of the mortgagee, is a necessary52 thing upon which to base the mortgagee's right in equity to have appropriated to his debt the rents and profits; but in the case of an assigned estate the property is already in the hands of the assignee, who, while a trustee for all the creditors, as well as the assignor, occupies the position of an officer of the court, and the good faith of his actions is secured by a bond, and where there is no valid objection to the assignee's performance of the duties of preserving, having charge of, and renting the property, a receiver should not be appointed, because the only duties to be performed by the receiver are just such duties as are incumbent upon the assignee, and the appointment of a receiver would be a useless waste of money, as well as to add confusion to a method for preserving and settling such an estate which is perfectly simple and direct. The provisions of chapter 7, Ky. Statutes, clearly show that in actions for the settlement of assigned estates, that it was intended that the assignee should have possession of the property and hold it for the benefit of all the creditors, and where the assignee lets the property to rent under order of the court, the rents in his hands53 may be appropriated to the debts of such mortgage creditors as are equitably entitled to have such done, the same as if the rents were in the hands of a receiver of the court. Hence the court was not in error in overruling appellant's motion for the appointment of a receiver and ordering the assignee to let the property to rent, and to collect and preserve the rents, subject to the further order of the court.Also, in BancoKentucky Co.'s Receiver v. National Bank, etc., 281 Ky. 784">281 Ky. 784, 137 S.W. 2d 357, 376, 377, 378 (1939), in connection with a receivership of BancoKentucky, the Court of Appeals said:there can be no doubt that the filing of the receivership proceedings by the executive committee of the board of directors, consented to by Banco, was equivalent, in effect, to a voluntary assignment for the benefit of creditors. To hold otherwise would be to ignore all the realities of the situation and trade substance for shadow. The mere fact that the court was to select the person by whom the trust was to be executed and that this person would be denominated "receiver" instead of "assignee" did not change the character of the liquidation54 or affect the substance of the transaction. * ** * * There is slight, if any, difference in the powers of the receiver, the rights of the creditors, the intent of the parties and the ultimate results to be obtained from those which would have been secured by a general assignment for the benefit of creditors. It is true that certain statutory procedure is applicable to assignments 677 and not necessarily so to receivership proceedings, but such procedure is not essential to substantive rights.* * * the receivership proceeding here was in substance and effect a voluntary assignment for the benefit of creditors. * The U.S. Court of Appeals for the Sixth Circuit has taken this view in In Re American Fuel & Power Co., 151 F. 2d 470, 481 (1945), saying:Insofar as title and substantive rights are affected, no material difference appears between the position of an assignee under a deed of assignment for the benefit of creditors and an equity receiver of the property and assets of a corporation. * citing the BancoKentucky Co.'s Receiver case.It is not essential in the applicability of section 6871(b) that the fiduciary be denominated55 a "receiver" or that he be appointed by the court. In French & Co., 10 B.T.A. 665">10 B.T.A. 665, 667 (1928), in interpreting section 282(a), Revenue Act of 1926, a predecessor of section 6871, I.R.C. 1954, we said:The statute does not require that the receiver shall be appointed by the court. It does specify that there shall be a receiver in a receivership proceeding before a court. In those instances where statutes provide that certain officials shall take over the duties of a receiver or liquidating agent, and at the same time grant to a court the authority to supervise and control such receiver, so that the property may be said to be in the custody of the court and the receiver may be said to be its officer, the mere fact that the court does not appoint the receiver seems unimportant. In such a case there has been a receiver appointed in a receivership proceeding before a court. Such a case differs from the ordinary case of receivership only in the manner of the appointment of the receiver.We have held that where the superintendent of insurance of the State of New York took possession of the assets of an insurance company as liquidator pursuant to State 56 law and an order of a State court, the proceeding was in effect a receivership proceeding before a State court and the superintendent was the receiver therein. Louis H. Pink, Supt. of Insurance of New York, 38 B.T.A. 182">38 B.T.A. 182 (1938). Similarly, we have held that the superintendent of banks of the State of New York, in taking possession of the assets of a bank under authority of State law, was acting in a receivership proceeding in a State court for the purposes of a predecessor of section 6871. Banco Di Napoli Agency in New York, 1 T.C. 8 (1942). In each of these cases a petition filed after the State officer took possession was dismissed.The assignee in this proceeding is an officer of the circuit court which has, through him, taken the property of the assignor into its possession. This is equivalent to a receivership proceeding in a State court and the appointment of a receiver therein. The petition was 678 filed thereafter and is prohibited under section 6871(b). The Tax Court is without jurisdiction.An order of dismissal will be entered. Footnotes1. SEC. 6871. CLAIMS FOR INCOME, ESTATE, AND GIFT TAXES IN BRANKRUPTCY AND RECEIVERSHIP PROCEEDINGS.(a) Immediate Assessment. -- Upon the adjudication of bankruptcy of any taxpayer in any liquidating proceeding, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided by law) determined by the Secretary or his delegate in respect of a tax imposed by subtitle A or B upon such taxpayer shall, despite the restrictions imposed by section 6213(a) upon assessments, be immediately assessed if such deficiency has not theretofore been assessed in accordance with law.(b) Claim Filed Despite Pendency of Tax Court Proceedings -- In the case of a tax imposed by subtitle A or B claims for the deficiency and such interest, additional amounts, and additions to the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Tax Court; but no petition for any such redetermination shall be filed with the Tax Court after the adjudication of bankruptcy, the filing or (where approval is required by the Bankruptcy Act) the approval of a petition of, or the approval of a petition against, any taxpayer in any other bankruptcy proceeding, or the appointment of the receiver.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619659/	ESTATE OF GEORGIA T. O'KEEFFE, DECEASED, RAYMOND R. KRUEGER, PERSONAL REPRESENTATIVE, JUAN HAMILTON, PERSONAL REPRESENTATIVE, AND JUNE O'KEEFFE SEBRING, PERSONAL REPRESENTATIVE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of O'Keeffe v. CommissionerDocket No. 18344-90United States Tax CourtT.C. Memo 1992-210; 1992 Tax Ct. Memo LEXIS 228; 63 T.C.M. (CCH) 2699; April 8, 1992, Filed 228 Decision will be entered under Rule 155. Joseph E. Earnest, R. Donald Turlington, Robert P. Worcester, Eileen Caulfield Schwab, E. Michael Bradley, and Judith Welcom, for petitioner. Deborah A. Butler, George E. Gasper, and James E. Archie, for respondent. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge. Respondent determined a deficiency of $ 6,014,493 in the estate tax of the estate of Georgia T. O'Keeffe, deceased (O'Keeffe). After concessions, the issue for decision is the fair market value after application of the appropriate blockage discount of O'Keeffe's works left in her estate at the date of death. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at the date of death, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT O'Keeffe died on March 6, 1986, at the age of 98. At the time of her death, there remained in her estate approximately 400 works or groups of works of art that she had created. The total of the individual fair market values of each of O'Keeffe's works in the estate as of the date of death exceeded $ 72,759,000. 229 If, however, all or a substantial portion of those works had been simultaneously offered for sale on the date of death, the availability of such a large block of O'Keeffe's works would have depressed the price to be paid for each of the individual works. The fair market value of the aggregate of the works in the estate, therefore, as of the date of death, was substantially less than the total of the fair market values of each individual work. The amount of the discount (the blockage discount) to be anticipated with respect to each work of art in the collection, however, would depend on the market for that work or works of the type represented by that work. In order to determine the appropriate discount for particular segments of the aggregate, therefore, it is necessary to examine the history of the market for O'Keeffe's works, the prospects for the market for O'Keeffe's works as of the date of death, the types of works to be valued, and the art market in the United States. O'Keeffe in RetrospectO'Keeffe began painting in 1914. Her work was first exhibited in 1915 at the 26th Annual Exhibition -- New York Watercolor Club. Subsequent to that show, her works were exhibited230 at numerous galleries, museums, and shows on a regular basis. O'Keeffe rose to prominence in the 1920s, initially through the efforts of Alfred Stieglitz (Stieglitz), her husband. Critical acclaim for O'Keeffe's work was high in the 1920s and 1930s, the period during which she produced her popular signature large flower paintings. Until 1946, when Stieglitz died, he controlled distribution of O'Keeffe's works into the marketplace. O'Keeffe became one of the best known American artists of the period between the two World Wars. Although she lived well past the post-War period and became a celebrity, the bulk of her work, as well as her reputation among art dealers and critics, was based on her connection with early Modernist painting in America. After the death of Stieglitz, O'Keeffe selected certain dealers to sell her works on her behalf. Whether she sold through an agent or directly, O'Keeffe imposed strict conditions and guidelines regarding the hanging and framing of her works, how often they were to be lent and to whom, and their subsequent dispositions. She frequently required that paintings either be resold to her or given to a museum. In 1970, a major exhibition of231 O'Keeffe's works was held at the Whitney Museum of American Art in New York, then traveled to Chicago, Illinois, and San Francisco, California. Five of O'Keeffe's works were offered for sale at Sotheby Parke Bernet Inc. or its predecessors (Sotheby's) in 1970, and four of her works were offered for sale at Sotheby's in 1972. One of the dealers used by O'Keeffe was Edith G. Halpert (Halpert) of the Downtown Gallery. In March 1973, an auction of works from the estate of Halpert was conducted by Sotheby's. That auction included 12 works by O'Keeffe that had been painted throughout 41 years of her career, 1914 to 1955, that represented all of her media -- charcoal, pastel, watercolor, and oil -- and that presented the range of her canvas size. The works sold at the auction brought strong prices, including $ 120,000 for an oil painting entitled Poppies, which had been painted in 1950. One hundred twenty thousand dollars was a large and unexpected price for an O'Keeffe painting in 1973. In the summer of 1973, O'Keeffe met Juan Hamilton (Hamilton), a sculptor who was working as a handyman in the area of O'Keeffe's home in New Mexico. Thereafter and until the time of her death, Hamilton232 assisted and advised O'Keeffe in the promotion of her art. In 1976, O'Keeffe had published a luxurious book that included photographs of her best works. The book increased the marketability of her best works. In 1977, a major television documentary film featuring O'Keeffe and characterizing her as a living legend was made. In about 1978 or 1979, a book and exhibit of Stieglitz portraits of O'Keeffe stimulated interest in her and her art. Sales of O'Keeffe's works in the late 1970s and early 1980s increased, partly as a result of a generalized boom in the art market and partly because of a more aggressive personal sales approach taken by O'Keeffe. In 1979, the average price of a work sold by O'Keeffe jumped from tens of thousands of dollars to $ 121,000. The average price of paintings O'Keeffe sold personally rose to a high of $ 631,250 in 1983. At the date of O'Keeffe's death, she and Hamilton were working on a major exhibition of her art to be held at the National Gallery of Art in Washington, D.C. In connection with that exhibition, a catalogue of her work was published in 1987. At the date of her death, O'Keeffe had produced between 1,100 and 1,200 substantial works. 233 The market for her works was essentially limited to the United States. The total dollar values of sales reported by the major auction houses, Sotheby's and Christie's of New York, for works by O'Keeffe, for the period 1979 to 1991, were: 1979$ 196,50019801,100,0001981152,5001982400,0001983420,00019841,005,00019851,200,0001986410,00019878,260,0001988715,00019894,405,00019902,905,0001991575,000O'Keeffe's works were also sold through galleries, although exact data concerning such sales is difficult to obtain or to verify. From 1979 through 1986, one gallery sold 16 of O'Keeffe's works on canvas, 24 works on paper, 1 work on wood panel, and 4 sculptures. The prices received for the works on canvas ranged from $ 60,000 to $ 1,000,000. The prices received for the works on paper ranged from $ 6,000 to $ 120,000. From 1978 to 1991, another gallery sold in excess of 100 of O'Keeffe's works. Approximately 25 works were sold for prices of $ 500,000 and above, and 5 works were sold for prices over $ 1,000,000. Approximately 28 works were sold at prices between $ 200,000 and $ 499,999. O'Keeffe was able to transcend her traditional market, 234 collectors of American Modernism, and appeal to a far broader range of buyers. The buyers to whom her works appealed included art collectors and persons who enjoyed the beauty of her pictures, the fascination of her myth, and the subject of her pictures. O'Keeffe's diverse range of subject matters, such as flowers, trees and leaves, landscapes (New Mexico and New York), and abstractions (early and late), and her various "periods" appealed to different segments of the public. The market for O'Keeffe's works included small and large museums that bought the works or sought donors for the works, private collectors, and the general public. Her works appealed to those who collected American "modern" art as well as those who simply liked what she painted. Works in the EstateThe works of significant value in the estate at the date of O'Keeffe's death ranged from early works on paper through works on canvas done in the 1970s. The estate included many major paintings of flowers, abstracts, and landscape subjects from the 1920s and 1930s and many large and important works from later periods, including western landscapes and abstractions from the 1940s, 1950s, and 1960s. The estate235 included paintings in series, including the Jack-in-the-Pulpit series, Abstraction series, White Rose series, Charcoal Drawing series, From a Day with Juan series, In the Patio series, It was Yellow and Pink series, Nude series, Series I series, Shell and Old Shingle series, Special series (drawings), and Yellow Horizon and Clouds series. Certain series by O'Keeffe, for example, the Jack-in-the-Pulpit, the Clouds, and the In the Patio series, are sought after by collectors and are highly esteemed in the marketplace. Three works in the Jack-in-the-Pulpit series had individual fair market values of $ 1,500,000, and one had an individual fair market value of $ 1,800,000 at the date of O'Keeffe's death. The paintings that are part of a particular series show the differences in O'Keeffe's technique in the treatment of medium, light, form, and perspective of one theme and show O'Keeffe's progression as an artist. The paintings that are part of a series are an essential part of her lifetime output and will often have a value greater than the value each would have if it were not part of a series. O'Keeffe's will, executed in 1979, a codicil, executed in 1983, and a settlement agreement, 236 entered into in 1987 resolving litigation over the estate, provided for the distribution of 42 of O'Keeffe's works to 8 museums. The works distributed to the museums had individual values ranging from $ 40,000 to $ 1,800,000 and a total value of $ 22,575,000. As a result of the settlement agreement, five additional works were transferred to the Museum of New Mexico and the University of New Mexico. The Art Market in the United StatesFrom 1979 to 1986, with the exception of the 1982 recession, the art market in the United States experienced a boom period, with the values of individual works of art rising dramatically over those years. Increased market activity and competition drove up the prices of works of art. The relatively low prices for American art, and specifically for early American Modernism, caught the attention of the general art market. Consequently, between 1979 and 1986, prices for American art generally increased severalfold. In 1986, the art market in the United States was strong. The Sotheby's auction in 1987 occurred at the peak of the art market boom. By 1986, it had become apparent to knowledgeable dealers and collectors that the art market, particularly237 the highly inflated market for American art, had grown so fast that it was becoming unstable and unreliable. A dealer could still make a profit on the quick turnover of individual works, particularly on outstanding examples of an individual artist's work. Knowledgeable dealers and collectors, however, would have approached with caution the purchase of a large block of works of mixed quality identified with early American Modernism, such as those in the estate. Appraising, buying, or selling a large group of works by a single artist is considerably different from appraising, buying, or selling a single work. This difference is a result of the nature of the art market. The market for works of art that sell at the relatively high values of the works in the O'Keeffe estate is limited. Popularity among persons seeking to decorate with art is not necessarily a reliable index of market strength or breadth. Potential purchasers of large groups of works are dealers, collectors, and institutions with interest and substantial funds to disburse. The art market, however, is different from, and less secure than, financial markets. A work of art usually does not have intrinsic financial238 value beyond its desirability as art and lacks external indicia of return prior to resale, such as earnings or dividends. Individuals and institutions interested in purchasing art, therefore, tend to rely on the principal dealers or collectors in a particular market for advice and on the perceived security of purchasing the type of art that is most in demand, or is most fashionable, at the time. Particular key dealers and collectors become identified with different specific markets within the general art market. When considering a purchase or sale of a large number of works by an individual artist, a purchaser for investment would consider the potential involvement of those dealers and collectors. Without both the involvement of those key dealers or collectors and a current broad appeal among art patrons capable of investing at the level required, it is exceedingly difficult to sell a large group of works. Particular individual works may appropriately be valued at high levels. When considering the works of a specific artist, a dealer must look within the general art market to the specific markets that support the value of the artist's work. With regard to the O'Keeffe market, 239 the dealer distinguishes not only between the markets for European and American artists but also between the markets for pre-World War II and post-World War II American art. The market for European artists is substantial and worldwide. The market for post-War American art by the outstanding American artists of the latter half of the 20th century -- artists such as Pollock, Rothko, de Kooning, and Johns -- is also substantial, although not as large as the market for European artists such as Picasso, Miro, and Chagall. The post-War market is populated by numerous dealers and collectors who support and facilitate that market. By contrast, the market for early American Modernism, into which dealers classify O'Keeffe's works, is narrower with fewer key dealers and collectors to support it. According to records maintained by the Art Sales Index and ArtQuest, the number of sales of artwork at auction at a price in excess of $ 500,000 for 1986 through 1990 was as follows: 19861571987351198852619891,0861990856Art Expert OpinionsThe estate employed Eugene Victor Thaw (Thaw) to appraise O'Keeffe's works in the estate for the Federal estate tax return and240 for trial of this case. Thaw had been involved in all aspects of the art market since 1950. He was well qualified to appraise the works of O'Keeffe. Thaw had testified as a witness on the blockage discount appropriate in the Tax Court case of , affd. . The Smith case was the first litigated case to apply a blockage discount to works of art. In Thaw's opinion, however, there was no similarity between the content of the Smith estate and the content of the O'Keeffe estate except that the two cases were tried in the Tax Court. The individual values of all of O'Keeffe's works in the estate were determined by agreement between Thaw, on behalf of petitioner, and the Internal Revenue Service (IRS). It was Thaw's opinion that the appropriate blockage discount that should be allowed for O'Keeffe's works in the estate on the date of death is 75 percent. Thaw's opinion was based on the understanding and assumption that all of the works in the estate would be sold to a single buyer as a bulk purchase, which would require a syndicate of investors. The hypothetical buyer241 would have to hold the works for many years and, in determining the price to be paid, would take into account interest, selling costs, promotion, maintenance costs, and carrying charges. Thaw also based his opinion on the assumption that a buyer would consider "fluctuations from the very high market plateau for O'Keeffes in 1986", although he would have advised a potential buyer that prices of works by O'Keeffe, on average, were unlikely to go down. Thaw would not, however, have advised a hypothetical seller of the works in the estate to sell the total of those works at a 75-percent discount. Thaw was under the impression that determination of blockage discount required him to assume a hypothetical buyer on the date of death who would have been required to purchase all of the works of the estate in bulk on that date. Although Thaw's written report categorized the works in the estate by medium and price, he did not differentiate among the works in determining the discount to be applied. Barbara Rose (Rose), an art historian who had assisted O'Keeffe in relation to the publication of the 1976 book, also prepared a written report on behalf of petitioner. Rose identified traditional242 factors establishing value in the art market as rarity, quality, size, subject matter, medium, and condition. With reference to O'Keeffe's works, she identified lack of scholarly reviews or a catalogue raisonne, the "mystical and religious content of her art", and prejudices of sex, age, and provincialism as negative factors. Rose concluded that a bulk sale of O'Keeffe's works on the date of death would have resulted in a two-thirds to three-fourths loss in value. Rose, however, would not have advised a seller to sell O'Keeffe's works in bulk on the date of death at the discounted value. Rose's opinion was based in part on her view that many of O'Keeffe's works in the estate were in poor condition. Warren Adelson (Adelson), a dealer in American art, prepared a written report on behalf of respondent. Adelson divided the art into two categories, "Bequested Art" and "Remaining Art". Adelson assumed and understood that: Blockage discounts have been applied to recognize the impact of a huge number of works of art coming on the market at the same time, thereby disrupting the normal economics of supply and demand. Clearly blockage is applicable to works of art that are for sale, 243 works that impact the marketplace. It is not applicable to works which are unavailable for sale, in this case, bequested works.The total value of the 80 pieces of "Bequested Art" for which Adelson did not determine a blockage discount was $ 32,228,000. With respect to the "Remaining Art", Adelson noted that the 72 most valuable items totaled $ 30,975,000. He opined that these pieces could be sold "within a few years"; he determined "only a nominal discount" of 10 percent for those 72 items. In his opinion, a blockage discount of 37 percent would be "fair and reasonable" for the other 177 pieces that would "take years, perhaps a decade, to dispose of." OPINION The expert reports and the testimony at trial comprise hundreds of pages, containing much repetition, inconsistency, and interesting, but immaterial, information. We do not set forth such details here. We have considered all of the testimony and the exhibits, and the facts set forth above are those necessary to understand our conclusions. Property includable in a decedent's gross estate is generally included at its fair market value on the date of the decedent's death. Sec. 2031(a). Fair market value is the 244 price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. ; sec. 20.2031-1(b), Estate Tax Regs. The parties in this case agree that the total of the individual fair market values of each of O'Keeffe's works in the estate exceeded $ 72,759,000 on March 6, 1986. They disagree, however, as to the appropriate blockage discount to be applied to the total. In our view, the disagreement is in large part the result of erroneous instructions to the experts with respect to the concept of blockage. As we said in : If the parties fail to provide the experts with complete information concerning material facts or reasonable assumptions to be made, they undermine the reliability of their experts and their opinions. In any case, we are not bound by the opinion of any expert witness. We may accept an expert's opinion or we may reject testimony that is contrary to our own judgment, especially where the witness' 245 opinion of value is so exaggerated that the testimony is incredible. .In this case, the opinions of petitioner's experts that O'Keeffe's works in the estate, individually valued in excess of $ 72 million, could have been sold on the date of her death for $ 18 million, defies common sense. Our conclusion is based in substantial part on the particular content of the works. The individual values of 44 pieces totaled almost one-half of the agreed value of the whole group! Respondent's expert's opinion is erroneous as a matter of law. There is no justification for his exclusion of the bequeathed art from the total subject to discount. Determination of fair market value assumes that works are in the market and precludes consideration that works are "unavailable for sale." He was not entitled to consider the actual disposition of the works of art of the estate any more than fair market value may be determined by assuming that particular purchasers will purchase works of art from the estate. See ; ;246 . Thaw, Rose, and Adelson each testified at trial in support of their respective opinions of fair market value and in rebuttal of the adverse experts' testimony. In addition, petitioner called James H. Maroney, Jr. (Maroney), a dealer in 19th century and early 20th century American art, and Anthony M. Lamport (Lamport), a financial analyst and advisor to venture capital funds, in support of Thaw's opinion. Lamport prepared a pro forma income statement, making various assumptions about the financial return to a bulk purchaser investing in O'Keeffe's works on the date of death. The hypothetical purchaser assumed by Lamport would have sold O'Keeffe's works from a newly opened gallery in New York City. Lamport's analysis made no allowance for inflation in the prices of O'Keeffe's works but used rates of 10 percent to 32 percent to discount projected cash flow after expenses. According to petitioner, Lamport's analysis was intended only to explain expenses that a hypothetical buyer would consider in determining a fair purchase price. Although each of the experts was qualified to express an opinion 247 on the subject matter on which he or she was called to testify, each of them suffered from the same tendency to ignore relevant facts inconsistent with the position of the party employing the expert and to exaggerate facts consistent with the view espoused. Thus, each conclusion as to the appropriate blockage discount suffers from substantial defects and is patently unreliable. Thaw, for example, in effect assumed a forced sale in bulk of all of the works of the estate to a single buyer. Petitioner tries to justify that assumption by arguing that ascertainment of fair market value requires that property "must change hands" on the date of death. That argument is unsupported by authority or reason and ignores the concepts of willing buyers and willing sellers acting without compulsion -- the defining actors in a fair market value transaction. Petitioner also ignores the statement in its own trial memorandum that: the court has rejected expert analyses and proposed transactions that are unlikely or without foundation in the real marketplace or contrary to the interests of a hypothetical buyer. [;248 Newhouse, 94 T.C. at 232-33 [. Expert testimony based on a flawed legal basis or presumption is irrelevant. .The Court also rejects proposed transactions that are contrary to the interests of a hypothetical seller. Rose's opinion relied on her concern with the condition of certain of the works of art in the estate, although the individual condition of each work presumably would have been taken into account by Thaw in reaching the individual appraisals of the work. Thaw never indicated otherwise. Both Thaw and Rose conceded that they would not have recommended to a seller that the works in the estate be sold for the $ 18 million that they opined was the blocked value of the estate on the date of death. The discounts that Adelson applied to what he categorized as "Remaining Art" were inadequate. They were not consistent with IRS material recognizing blockage discount and explaining it as follows: The concept of blockage is essentially one of timing. A discount may be allowed where a large quantity of any one type of art is offered249 on the market at one time and would substantially depress its value. The amount of the discount would be determined, in part, on a reasonable estimate of the time it would take to sell the entire quantity in smaller lots. Some of the factors to be considered in determining whether a blockage discount is available are the opportunity cost of holding the inventory, the carrying costs of the inventory, and the expected period of time it will take to dispose of the inventory. * * * The extent of the collection may also be a significant factor. [The IRS Valuation Guide for Income, Estate and Gift Taxes, CCH Fed. Est. & Gift Rep. No. 115 (Oct. 14, 1985) at 30 (the Guide).]On cross-examination, Adelson stated that he was aware of the factors mentioned in the quoted material. Adelson's opinion as to the minimal discount, however, was inconsistent with his testimony as to the time required to sell works in the estate and apparently did not consider any "opportunity" or carrying costs. In support of the approach used by respondent's expert, respondent argues that: Unlike shares of stock which are fungible, individual works of art are both distinctive and unique in both medium, 250 size, composition, quality and saleability. The application of an across-the-board discount to works of art, which by its very nature ignores the uniqueness of works of art, would not be appropriate. Acknowledging that works of art, unlike stocks, are not fungible, and incorporating factors enunciated by the Court in Estate of Smith and Calder, respondent has developed a tiered approach to assess the appropriateness of blockage discounts in determining the fair market value of works of art.Respondent's tiered approach was based solely on individual dollar values, i.e., no discount was applied to works valued at or more than $ 500,000, and 20-percent and 50-percent discounts were applied to categories of $ 200,000 to $ 499,999 and under $ 200,000, respectively. Respondent's approach of considering the specific segments of the estate and the uniqueness of pieces within the estate makes sense and is supported by the evidence, although the specific percentages used by Adelson do not and are not. At the Court's urging, respondent included a revised three-tiered proposed discount in her brief, but the percentages suggested would still be applied solely on the basis of251 individual values. We are persuaded from Thaw's testimony and other evidence that the most valuable works would not necessarily be sold first and that some works of all types and values would be fed into the marketplace at a controlled pace. The most reliable consensus of the experts is that the better works could be sold within 7 years, and sale of the bulk of the estate would take more than 10 years. The record does not support any specific percentages at the levels proposed by respondent. While the parties each purportedly rely on , affd. , each takes parts of the opinion in that case out of context. In that case, the Court was required to determine the fair market value of 425 pieces of nonrepresentational metal sculptures created by David Smith. Respondent claimed that no discount should be applied to the total and that the fair market value of each item should simply be determined by the price at which the item could be sold separately in the retail art market on a "one-at-a-time" basis. The estate applied a 75-percent discount to the total. The Court stated: 252 We find it unnecessary, in this unusual case, to make any hard-and-fast choice between the two approaches urged by the parties. On the one hand, we think that the initial 75-percent discount, which petitioner has applied to the "one-at-a-time" value in order to determine the price which a purchaser would pay for all the sculptures, is too high. On the other hand, we think that respondent should have given considerable weight to the fact that each item of sculpture would not be offered in isolation. We think that, at the very least, each willing buyer in the retail art market would take into account, in determining the price he would be willing to pay for any given item, the fact that 424 other items were being offered for sale at the same time. The impact of such simultaneous availability of an extremely large number of items of the same general category is a significant circumstance which should be taken into account. In this connection, the so-called blockage rule utilized in connection with the sale of a large number of securities furnishes a useful analogy. See (C.A. 10, 1951), affirming a Memorandum Opinion253 of this Court; (C.A. 8, 1942), affirming a Memorandum Opinion of this Court; (C.A. 4, 1938), affirming ; . We think that a museum or individual collector of art objects would not completely ignore the resale value of a given item, although it obviously has far less significance than in the case of a dealer. Moreover, the "retail market" claimed by respondent may well encompass the use of an auction method of disposal (to be distinguished from the usual forced-sale concept) for at least a part of the art objects; in such a situation the presence of a large number of pieces on the market at one time would be a most material factor. Under the foregoing circumstances, we think that, in this case, the amount which an en bloc purchaser for resale would pay and the aggregate of the separate "one-at-a-time" values to be obtained by a variety of dispositions in the "retail market" would be the same. [;254 fn. refs. omitted.]The Court took into account other elements involved in the valuation process as they existed at the time of death and rejected the estate's claim that future commissions on sales of the work should be considered. The Court concluded that the fair market value of the 425 sculptures at the moment of Smith's death was $ 2,700,000. Because the total of the individual values of the sculptures was $ 4,284,000, the parties in this case translate the Court's conclusion to a 37-percent discount. Nothing in the opinion, however, explains the conclusion of value by application of a particular percentage to the total. In , the Smith analogy to large groups of securities was extended, and a blockage discount was applied in valuing gifts of art. The Court noted that each of the parties in Calder had considered the length of time necessary to liquidate the artwork as a primary factor in coming up with the blockage discount. The Court then recalculated the blockage discount with reference to the average annual sales figure for the art in question, reducing the stream of income to its present value. 255 Although the record here contains some information about subsequent sales of the works in the estate, only a small percentage of the value has actually been liquidated in that manner. Neither party has urged application of the Calder approach here. Respondent argues in this case that petitioner's approach improperly takes into account future expenses to be incurred in selling O'Keeffe's works in the estate. According to respondent, this approach violates section 2053, which delineates and limits expenses deductible by an estate. Petitioner disputes this contention, asserting that the expenses to be taken into account by a hypothetical buyer are not affected by section 2053. Petitioner further argues that, even if expenses were ignored, projecting sales of O'Keeffe's works at $ 5 million a year and reducing that amount to the present value would require a discount in excess of 60 percent. Petitioner would ignore any inflation in the prices of the works over the period of sales -- an assumption we are not persuaded to accept. Because we do not include assumptions about specific expenses or rates of return in our analysis, we do not resolve this dispute. We do, however, 256 consider that the works could not be sold simultaneously on the date of death and that carrying costs would be incurred. Petitioner's experts acknowledge that there is a vast difference in quality among the pieces in the estate, although Thaw disagreed with Adelson's assumption that it would be appropriate to dispose of the most valuable pieces first. Although they mentioned, and purportedly relied on, their experience with estates of other artists, Thaw and Rose provided insufficient information for us to make a judgment on the comparability of those situations. The attempted comparisons to the estate of David Smith showed lack of meaningful "comparability". Unlike the situation in , affd. , the evidence in this case shows that the amount that would be paid for individual purchases of O'Keeffe's works and the amount that would be paid by a hypothetical en bloc purchaser would not be the same. There is too much variation among the different O'Keeffe works by type, quality, period, price, and other factors affecting the probable market for each work. Overall, petitioner's257 experts' testimony was limited to the perceptions of dealers and art critics and ignored less sophisticated elements of the art market. From the evidence, it is apparent to us that different works in the estate would be of interest to different segments of the art market. The parties have not reasonably quantified assumptions about the specific markets in which segments of the works in the estate would be salable. Petitioner has erroneously assumed that all of the art would initially be sold to a bulk purchaser, who would purchase for resale. Petitioner thus ignores the market of collectors who, while taking into account resale value, are not primarily interested in the rate of return on the investment. Petitioner strenuously objects to evidence that, in fact, a substantial number of the most valuable works in the estate have been or will be distributed to museums. We are not persuaded that the market for O'Keeffe's works did not include museums, and petitioner's assertions on this point are disingenuous. Petitioner's experts stated, without supporting data, that museums were not in the market for O'Keeffe's works. This testimony, however, does not consider whether museums258 were not in the market for O'Keeffe's works only because they anticipated distributions of 42 major works from the estate to 8 major art museums. The evidence of actual distributions and subsequent sales to museums refutes petitioner's experts' opinions about the interest of museums in O'Keeffe and thus cannot be ignored. Petitioner and its experts also argue that the market for O'Keeffe's works depended on her personality and personal sales efforts, but the objective evidence of sales of her works after her death belies that contention. Those sales may be considered for that purpose. It is equally plausible and more consistent with the objective evidence to infer that the methods of sale and the postsale constraints that O'Keeffe imposed limited the market for her works, so that the market opened up after her death. We conclude that the respective experts in this case each failed to consider the relevant market for particular works of O'Keeffe or groups of works in the estate. See sec. 20.2031-1(a), Estate Tax Regs. The failure to consider the relevant market undermined the respective positions of the parties in an analogous situation in ,259 affd. . There the Court was charged with the task of valuing gemstones contributed to the Smithsonian Institution. The Court found that the low valuations made by respondent's experts in that case were unacceptable because they were based on the erroneous assumption that the gems had to be valued on a bulk sale basis. The taxpayers' experts had reached high valuations by erroneously focusing on the prices at which items of jewelry were sold to customers of jewelry stores. The Court stated: What we have in this case are two sets of valuations, each of which is based upon a substantially incorrect view of how the property at issue should be valued. In some cases in which experts' valuations are based on incorrect assumptions, it may be possible for the Court to construct reliable estimates of fair market value by adjusting for the discredited assumptions. However, this is not such a case. [.]On that record, the Court decided the issue against each party to the extent that that party had the burden of proof. We cannot rely on the burden of proof in this case. There is evidence from which260 we can determine a value, although we are frustrated and imposed upon by the lack of reliable expert opinion supporting the discounts claimed by the opposing parties. We are persuaded that O'Keeffe's works in the estate on the date of her death should be segmented, not necessarily by value but by quality, uniqueness, and salability. There should be at least two categories, i.e., works that are salable within a relatively short period of time at approximately their individual values and works that can only be marketed over a long period of years with substantial effort. We believe that petitioner's experts' opinion is valid only as applied to the second category of works. Respondent's argument is meritorious with regard to the first category. For want of a more reliable breakdown, we conclude that one-half of the value of O'Keeffe's works in the estate would be appropriately subjected to petitioner's experts' analysis and should be discounted 75 percent. Using our best judgment on the entire record, we conclude that the other half of the total value of O'Keeffe's works should be discounted 25 percent. After considering the entire record, we conclude that the fair market value261 of O'Keeffe's works in the estate at the date of death was $ 36,400,000. To reflect the agreement of the parties and our conclusion, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619667/	Victor A. Pietrowski v. Commissioner.Pietrowski v. CommissionerDocket No. 37801.United States Tax Court1953 Tax Ct. Memo LEXIS 282; 12 T.C.M. (CCH) 442; T.C.M. (RIA) 53138; April 23, 1953282 Harold Gibson, Esq., for the petitioner. Melvin A. Bruck, Esq., for the respondent. JOHNSONMemorandum Opinion JOHNSON, Judge: The respondent disallowed exemptions claimed by petitioner for alleged dependent children and, as a result, determined a deficiency of $487 in income tax for 1947. The proceeding was submitted on a stipulation of facts, which is incorporated herein by reference as our findings of fact. Petitioner, a resident of Oshkosh, Wisconsin, filed his return for 1947 with the collector of internal revenue for the district of Wisconsin, in which he claimed exemptions for five daughters as dependents. Pursuant to an order of the Winnebago County Circuit Court of Wisconsin, in connection with a decree of divorce granted prior to 1947 in which petitioner's wife was granted custody of five daughters of petitioner, in 1947 petitioner paid into the court the sum of $920, of which $230 represented alimony and $690 was for support of the children. Section 25 (b) (1) (D) of the Internal Revenue Code, applicable to the year 1947, allows: "An exemption of $600 for each dependent whose gross income for the calendar year in which the283 taxable year of the taxpayer begins is less than $500, * * ." Subsection (b) (1) (3) of the same section defines a dependent as one of certain specified individuals, including a daughter of the taxpayer "over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer." The respondent's action in denying the exemptions is presumed to be correct and petitioner's burden was to establish by proof that his claims were within the requirements of the statute. There was no appearance for petitioner at the hearing and no briefs were filed by either party. Petitioner alleged in his amended petition that he paid $60 a month during 1947 for the support of his alleged dependents, and that the contributions were more than one-half of the cost of their support. The allegations of fact were denied in the answer of respondent to the pleading. The agreed facts, which constitute the only evidence before us, establish total contributions in 1947 of $690 for the support of the five children. Such meager proof does not satisfy the requirements of the statute. Proof is lacking on whether the contributions of petitioner were more284 than half of the actual cost of support, and whether the gross income of each of the alleged dependents was less than $500. The failure of petitioner to prove these requirements of the statute leaves us with no alternative but to sustain the respondent's action because of lack of proof of error. Accordingly, Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619668/	American Metal Climax, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentAmerican Metal Climax, Inc. v. CommissionerDocket No. 58218United States Tax Court41 T.C. 292; 1963 U.S. Tax Ct. LEXIS 11; November 26, 1963, Filed 11 Decision will be entered under Rule 50. Petitioner, a company involved in the mining and sale of molybdenum, engaged in a program of exploration and development. Held, a portion of the petitioner's 1942 income arising from the sale of molybdenum constitutes net abnormal income resulting from such exploration and development within the meaning of sections 721(a)(2)(C) and 721(a)(3), I.R.C. 1939, and is allocable to those years prior to 1942, during which the exploration and development work was done, pursuant to section 721(b), I.R.C. 1939. John P. Lipscomb, Jr., for the petitioner.Arthur N. Mindling and S. A. Winborne, for the respondent. Forrester, Judge. FORRESTER292 The issue in this case is excess profits taxes under section 721 12 of the Internal Revenue Code of 1939, as amended, 1 for the calendar year 1942. The principal questions are the existence of "net abnormal income" in such year, and the portion thereof attributable to other taxable years under section 721(b).On November 21, 1961, we filed our Findings of Fact and Opinion herein, 37 T.C. No. 30. We decided in such report that petitioner had realized "Abnormal Income" within the meaning of section 721(a)(2)(C); 293 assumed the existence of "Net Abnormal Income" under section 721(a)(3) for such year; but concluded that none of it could be attributed to any other year under section 721(b) and section 35.721-3, Regs. 112, because we had been afforded no reliable or acceptable basis or method for screening out World War II induced increased demand for petitioner's product.On further consideration we concluded that the substantial sums which had been expended by petitioner13 in exploration and development work in prior years had resulted (in and of themselves, and apart from war-induced increased demand and improvement in business conditions) in increased abnormal income for petitioner in 1942, and that the method we now employ would effectively eliminate that portion of such abnormal income which is attributable to war-induced increased demand; consequently we withdrew the said report of November 21, 1961, and have by appropriate orders admitted further evidence into the record and received further briefs from the parties.FINDINGS OF FACTSome of the facts are stipulated and are so found.At all times material, Climax Molybdenum Co., hereinafter called Climax, was a Delaware corporation. From about 1933, its principal office was located in New York, N.Y. Its corporate existence continued until December 30, 1957.Petitioner is a New York corporation organized on June 17, 1887, with its principal office in New York, N.Y. Prior to December 30, 1957, petitioner's name was The American Metal Co. (Ltd.). As of such date, petitioner and Climax were consolidated and merged, with the petitioner continuing as the surviving corporation. Thereupon, petitioner14 changed its name to American Metal Climax, Inc.By order, dated February 13, 1959, petitioner was substituted for Climax, which filed the original petition herein.Climax was organized on January 17, 1918, to acquire certain mining claims held by E. C. Heckendorf and others on the molybdenite property located on Bartlett Mountain near Climax, Colo.At all times material, Climax employed an accrual method of accounting and filed its tax returns thereunder and on a calendar year basis. Its tax returns were filed with the collector of internal revenue for the third district of New York.Climax filed its excess profits tax return for 1942 on March 15, 1943. The total net assessment of excess profits tax against Climax for 1942 was $ 4,409,066.94. The entire amount of such net assessment was discharged prior to February 6, 1946, by payment or by credit of other amounts due Climax.294 On February 6, 1946, Climax filed a claim for refund of excess profits tax (Form 843) with respect to the calendar year 1942 in which it claimed the benefit of section 721 of the 1939 Code and asserted that the net amount of tax to be refunded was $ 2,391,636.93. Thereafter, Climax filed two supplemental15 documents in support of its claim for refund. The first document, designated a protest, was filed on May 19, 1950. The second document, filed on September 14, 1954, took the form of a letter purporting to amend the original claim for refund in certain respects, including the submission of revised and additional data. Climax's claim was disallowed in full on March 8, 1955.Climax's mine is located on Bartlett Mountain approximately 100 miles west of Denver, Colo., and is about 1 mile east of the Continental Divide. Outcroppings of molybdenite, the ore mineral of molybdenum, occurred on the southwestern slope of the mountain. The existence of these outcroppings had been known for some time before Climax was organized. Climax, after taking over the claims in 1918, operated the mine until 1919, at which time the mine was shut down because of the lack of demand for molybdenum. Operations were resumed in August of 1924 and have continued to the date of trial.Molybdenum is an alloying metal and is element No. 42 of the Chemical Periodic Table. There are two major types of molybdenum deposits in the world. In the first, molybdenum occurs as the main product, while in the second 16 molybdenum occurs as a recoverable byproduct from copper operations. The Climax mine is of the first type and is the world's largest single primary source of molybdenum.In the Climax mine, numerous siliceous veinlets impregnated with molybdenite had penetrated the granite rock. This molybdenite, a compound of molybdenum and sulfur, contained approximately 60 percent molybdenum. The ore that outcropped on the surface also extended a considerable depth below the surface. In the upper 700 feet, the ore body was quite symmetrical and surrounded a dome-shaped cone of high silica rock that gradually enlarged below the surface. At deeper levels, the symmetry of the ore body was destroyed by another intrusion of mineralization. The ore body was low in its content of molybdenite varying from zero to slightly more than 1 percent. The overburden or waste that covered the ore body was of two types, glacial debris and low-grade material of uneconomic mineralization. Climax recovered about 18 pounds of molybdenite from a ton of ore assaying 1 percent. This amounted to about 11 pounds of molybdenum.The first mining by Climax occurred on the Leal Level at an altitude of 12,145 feet on Bartlett17 Mountain. In 1927, the last tonnage was hauled from Leal Level as the higher grade ores had been extracted. Operations were then shifted to the White Level which was 295 205 feet below the Leal Level and more productive. In 1929, Climax began development work at the Phillipson Level of its mine which was about 470 feet below the White Level. The first production from the Phillipson Level, other than that produced during the course of development work, referred to as "development tonnage," was during May 1933. Production from the White Level ceased in September of 1937. From the latter date through 1942, production was from the Phillipson Level, except for small stipulated amounts of development tonnage in 1941 and 1942 from levels below the Phillipson. Through the year 1942, Climax carried on no other mining operations and the only metal recovered from its mine was molybdenum.The grade of the ore body that Climax considered economical to mine varied over the years. In the late 1920's and the early 1930's the grade limit was ore containing six-tenths of 1 percent molybdenite. In the middle 1930's, the cutoff grade was reduced to 0.45 percent. Later in the 1930's, it18 was further reduced to 0.4 percent, where it remained substantially throughout the 1940's.Climax employed two types of mining. On the Leal Level and to a lesser extent on the White Level, it used a gloryhole type of mining, and it also used shrinkage stopes and open-room and pillar methods. As its mining progressed to deeper levels, Climax needed a more economical method of mining that would permit the extraction of low-grade ores in large volume. Accordingly, it adopted the block or progressive caving method of mining, which was the most economical method of mining this particular ore body. The progressive caving method utilized gravity to break up the ore as contrasted with drilling and blasting. Numerous joints and fractures in the rock assisted in breaking up the mass when it subsided. Essentially, the progressive caving method contemplated driving in from the surface beneath the ore body to be mined, removing the supports from underneath the column of ore to be recovered by an intricate system of undercutting on a level that would cause subsidence, and thereafter extracting the ore from underneath. The ore was removed from the mine in ore trains through haulage drifts. 19 The overburden or waste followed the ore down after caving diluting it from 10 to 20 percent.Climax employed two methods of caving, the "grizzly" system and the "slusher" system. The grizzly system was used on the White Level and on the Phillipson Level prior to November 1936. Thereafter, a combination of the grizzly and slusher systems was used on the Phillipson Level. On levels below the Phillipson Level, the slusher system was used. The slusher system had several advantages over the grizzly system, including safety, better ventilation, cheaper development costs, and greater productivity. The main hazards of both systems 296 were dust and falls. Also there were hangups at points which required blasting.In the grizzly system of progressive caving, a vertical chute for control of the ore was raised from the haulage level. Branch raises led off from this chute to a sublevel, known as the "grizzly level," which was about 60 feet above the haulage level, and on which rooms were located called "grizzly chambers." From the grizzly chambers, finger raises at a 45 o angle were driven upward about 50 feet into the undercutting level where the undercuts were connected together20 in such a way as to leave pillars supporting the ore above. The intervening pillars were then longholed and blasted with the result that the ore passed down the finger raises to the grizzly level where its flow into the branch raises and the chute could be controlled.In the slusher system a slusher drift was driven above and at right angles to the haulage drift. From the slusher drifts, about 100 feet long in each direction, finger raises were driven up into the undercutting level in a similar manner to the grizzly system. Again, the undercuts were joined together in a way which formed the pillars. When the supporting pillars were blasted, the ore subsided into the finger raises and then down to the slusher drift. Scrapers were employed at this drift to scrape the ore into the ore cars on the haulage level below. The distance between the haulage level and the undercutting level in the slusher system was about half that of the grizzly system.The rock containing the ore was removed from the Phillipson Level by ore trains and transported to Climax's mill located approximately one-half mile from the mouth of the level. The low grade of the ore prohibited hauling the rock any 21 great distance. The rock had no salable value at the mine portal.At the mill, Climax concentrated or upgraded the mineral in the rock to make it salable. No other change was made in the mineral as the result of the milling process. The rock reached the mill in all shapes and sizes. The first step in the milling process was to crush the rock with primary and secondary crushers until it passed through vibrating screens with 1/4-inch openings. After crushing, the material went to cylindrical drum-type mills, half full of steel balls, where it was ground to a fineness that would pass through a 100-mesh screen (10,000 openings per square inch). The material was then mixed with water and certain chemical reagents and passed through a rough flotation circuit wherein the mineral floated off from the rock. At this stage in the milling process, the mineral content had been upgraded from about one-half of 1 percent to 10 percent molybdenite. The tailings or waste, which contained small amounts of molybdenite, were discharged from the mill through pipes to the tailings ponds. 297 The amount of molybdenite remaining in the tailings depended upon the fineness of the grind in separating22 the molybdenite from the rock.Subsequent milling steps were all designed to upgrade the 10-percent concentrate until a salable product was reached. These consisted of progressively finer crushing or grinding and flotation through three or four stages until a concentrate consisting of 90 to 92 percent molybdenite was reached, the remainder being small quantities of iron, copper, tungsten, and rock material of quartz and feldspar. This was essentially the milling procedure followed by Climax during the years 1938 through 1942. The slight variations in grade of ore during these years did not materially affect the cost of milling.In 1918, when Climax acquired the mining claims, little was known of the extent or depth of the ore body. Over the years, Climax conducted exploration of the mine mainly by diamond drilling for the purpose of determining the size, shape, location, and grade of the ore bodies and zones. Exploration of what later became the Phillipson Level began in August of 1926 and was completed in January of 1930. Climax maintained records of its diamond drillings which showed the location of each hole, the core removed therefrom, and the results of assays made of such23 core. An analysis of these drilling records from 1926 through 1942 indicates that holes drilled during the period 1926 through January 1930 were for exploration purposes, that holes drilled to levels below the Phillipson Level through 1942 were also exploratory, but that holes drilled after January 1930 on the Phillipson Level were for development purposes. Development drilling was aimed at defining the tonnage and the grade of the ore over individual work places or draw points.Development work generally followed exploration. It consisted of all the work necessary to prepare the ore body for production beginning with the driving of an adit or tunnel into the mountain below the ore body and included the drifting, raising, and the undercutting necessary to remove the support of the ore above it. Upon the blasting of the support pillars, the development work of the area in question was completed and the draw point was turned over to the production crews.In 1929, development of the Phillipson Level was begun by starting an adit or tunnel from the surface to the mineralized zone on that level and by starting an inclined shaft from the surface to such level. Various drifts, raises, 24 chutes, chambers, ore passes, undercutting, and other work necessary for production from the ore body were completed and the first production from the Phillipson Level, after blasting and subsidence, was obtained in May 1933. Thereafter, as the workings on the Phillipson Level progressed, additional subsidence occurred. 298 Without this development work, production in the taxable year would have been impossible.In the manufacture of steel there are frequently added alloying elements or agents to obtain certain effects either in properties, behavior, or processing. Such steel is referred to as alloy steel. The more commonly used alloying elements are chromium, manganese, molybdenum, nickel, silicon, tungsten, and vanadium. The major categories of steels in which alloying elements are used are engineering steels, corrosion-resistant or stainless steels, high-temperature steels, tool and die steels, and electrical steels. By far the largest tonnage of alloy steels is the engineering steels. Chromium, nickel, manganese, and molybdenum can all be used in the first four categories of alloy steels. Silicon is used mainly in electrical steels, but has some application in engineering25 and tool and die steels. Tungsten is used mainly in tool and die steels and in high-temperature steels, while vanadium is used in engineering, tool and die, and high-temperature steels.In manufacturing alloy steels, the alloying elements are added while the steel is molten. The addition of molybdenum creates a number of effects, including "hardenability" or increased strength and high melting point with consequent heat resistance. Molybdenum also has a pronounced effect in increasing the resistance to corrosion. It improves the hardness or hot strength of steel, and under a number of conditions it improves the toughness of steels. In many alloy steels, molybdenum and one or more other alloying elements are used to secure the quality of steel desired. In the engineering steels, which have by far the largest tonnage of the alloy steels, chromium, manganese, and nickel are also used to increase the hardenability of the steel. Chromium and nickel were used as alloying elements prior to 1900. Manganese first came to be used between 1900 and 1910. Although there was some use of and demand for molybdenum during World War I, it first gained notable acceptance between 1920 and 1925. 26 Prior to this period, molybdenum was considered a rare element, there was very little of it, and it was costly.In making engineering alloy steels, the steel industry in this country selected the alloying elements that would provide the desired properties most economically. In 1900, the only elements used in engineering steels were nickel and chromium. Between 1900 and 1920, vanadium and chromium-vanadium steels were being used with proportionately fewer of the nickel steels. Molybdenum first gained acceptance in 1920 and thereafter increased rapidly at the expense of other alloying elements. The main reasons for the growth of molybdenum in engineering steels were that it did the job better at a given cost than the other elements, it was available, and it was not lost during melting but could be recovered in scrap. Between 1920 and 299 1940, the growth of molybdenum as an alloying element in engineering steels was much greater than the growth of such steels themselves.In corrosion-resistant or stainless steels, molybdenum was mainly of use where severe corrosion conditions existed, such as in the chemical and the pulp and paper industries. Molybdenum was essential in27 low-alloy high-temperature steels in that it imparted strength and resistance to embrittlement. It could also be used in other types of high-temperature steels.Prior to, during, and after 1942, there were three categories of tool and die steels; namely, coldwork steels, hotwork steels, and high-speed steels. Molybdenum was frequently used in the first two categories and became one of the most extensively used elements in high-speed steels. Historically, tungsten was the alloying element most commonly used in hotwork and high-speed steels. By 1905, a high-speed steel known as 18-4-1 (18 percent tungsten, 4 percent chromium, and 1 percent vanadium) had become the established standard all over the world. Tungsten became established first because it was more readily available than molybdenum and worked better in the primitive heat-treating or hardening furnaces then available. During these early years, various molybdenum alloys were tested, but the lack of supply and the unsatisfactory results deterred additional work. In 1932, the first modern molybdenum high-speed steel was introduced; it was cheaper by the pound and produced 8 to 10 percent more tools than the tungsten type. 28 Shortly thereafter, one or two steel tool companies introduced a second type molybdenum high-speed steel which, however, was a specialty type unsuitable for heat treatment or hardening in the average toolshop. In 1938, a general-purpose molybdenum high-speed steel was introduced which could be treated or hardened in any type of heat-treating shop without special precautions. Also toward the end of the 1930's, a chromium-molybdenum type of high-speed steel was developed which became a popular type of high-speed steel. In performance, these molybdenum steels were equal to the tungsten type and were cheaper. The changeover from tungsten to molybdenum steels occurred gradually over a period of years, and today molybdenum high-speed steels account for about 85 percent of the high-speed steels produced and sold in this country. Climax contributed to the development of the various molybdenum steels to the extent of providing an assured supply and maintaining a steady price for molybdenum.Molybdenum has come to be one of the standard alloying elements used in cast and wrought steels. Here, as with alloy steels, it was a latecomer among the alloying elements. It was also widely used29 in gray iron, a form of cast iron. Here again, historically, nickel became established first, while molybdenum was first used very experimentally 300 in the late 1920's. Its use in gray iron increased steadily thereafter as it was available and did the job easier and more economically than any of the other alloying elements.Molybdenum was also used in the nonferrous alloy field, as metallic molybdenum, which field developed during the 1920's when molybdenum was available. Prior to 1941, molybdenum was also used in significant amounts in the chemical industry as catalysts, pigments, and reagents.Prior to 1941, the aforementioned industrial fields were the principal consumers of molybdenum. Although molybdenum competed with the other alloying elements for use in these fields, it was also used together with such other alloying elements to secure properties in steel unobtainable by the use of only one element. The growth or increased use of molybdenum in these fields was mainly attributable to the following factors: Molybdenum was an American alloying element; there was an assured supply; the price was steady; and it was simple to use and did the required job.The main contribution30 made by Climax to the growth in use of molybdenum through the taxable year 1942 was the establishment of an assured supply of the element. The exploration and development of the Climax mine prior to and during 1942 established the existence of ample supplies of molybdenum. The establishment of an assured supply made possible a steady price for molybdenum. It was the policy of Climax not only to keep the price of its molybdenum steady but also to effect reductions in price if it would further the use of molybdenum.During the period 1936 through 1942, Climax contributed to the increased use of molybdenum by disseminating technical information derived from research by steel companies and metallurgical laboratories in this country and abroad. By making molybdenum available to American industry in the form of converted products, it also increased the use of molybdenum in this country. During the period 1936-39, Climax made certain improvements in these converted products which made them cheaper to use by industry in this country. Climax held no patents on molybdenum-type steels.By the end of 1939, the use of molybdenum by the steel, iron, and chemical industries in this country31 had not reached its full development, but there were no major metallurgical or technical problems with respect to molybdenum remaining to be solved. By the end of 1939, increased domestic sales of molybdenum were indicated by its growing use in various industries, but reduced foreign sales were indicated by the outbreak of World War II and Climax's acceptance 301 in December 1939 of the moral embargo on shipments to Russia, Germany, and Japan.The producers of molybdenum in this country in competition with Climax through 1942 were the Molybdenum Corp. of America at its Questa mine in New Mexico; the Kennecott Copper Co. in its byproduct production from its copper mines in Utah, New Mexico, and Nevada; and the Miami Copper Co. in its small byproduct production in Nevada. The byproduct production of molybdenum was geared entirely to the production of copper. The biggest source of molybdenum outside of the Climax mine was in the copper deposit of the Kennecott Copper Co. A large part of this byproduct molybdenum was shipped abroad. Molybdenum from the Climax mine had one advantage over byproduct molybdenum in that it contained less copper. The presence of copper limited the32 use of byproduct molybdenum in high-speed and stainless steels. Competition to Climax from byproduct molybdenum began in the middle 1930's and thereafter became increasingly severe. This molybdenum cost less to produce than that of Climax. There was no decrease in competition from this source in 1942.The Molybdenum Corp. of America maintained a conversion plant at Washington, Pa., where it converted its own concentrates and those of Kennecott Copper Co. into finished products. During 1942, the competitive situation between Climax and the other producers and between molybdenum and the other alloying elements remained unchanged. The demand for molybdenum and the other alloying elements in 1942, however, was such that the world production of tungsten, chromium, nickel, vanadium, and molybdenum, and the domestic production of alloyed steels, exceeded the production of any prior year.Climax maintained a series of accounts in which it recorded certain expenditures in connection with its mine. It was the regular practice of Climax to prepare summary statements in which all the expenditures classified by it as "Development Cost" were accumulated. These statements included preparation33 work preceding actual mining and were cut off at, and did not include "Stoping." The titles of these accounts and a brief description of the type of work charged to each by management follow:Raising. -- All inclined openings advancing upward, such as chute raises, service raises, ore passes, ventilation raises, and miscellaneous raises.Drifting. -- Haulage drifts, grizzly drifts which served grizzly chambers, slusher, ventilation, and miscellaneous drifts.Sinking. -- The inclined shaft, previously mentioned, from the surface to the Phillipson Level.302 Chutes. -- Used in controlling flow of rock from chute raises into ore cars.Grizzlies. -- Chambers on the grizzly level for sizing ore before transfer into chute raises.Loading platforms. -- Openings directly over haulage drifts in slusher system.Concrete. -- Lining of slusher drifts and grizzly chambers with concrete, 1940 to 1942, inclusive.Phillipson Tunnel. -- Adit or tunnel, previously mentioned, from surface to mineralized zone.Stoping. -- All work beginning with driving of finger raises into lower part of undercutting area, the undercutting, the longholing, and the blasting34 of the pillars.Over the years it has been the policy of Climax first to determine the long-range scope of its reserves of ore, both as to tonnage and grade, and then to develop these reserves for a reasonable period ahead. As far as possible, Climax sought to keep the productive capacity of the mine in balance with the capacity of the mill to concentrate the ore. From the middle 1930's through 1942 the mine was usually behind the capacity of the mill to concentrate the ore. Prior to December 1941, the development work at Climax contemplated the maintenance of an efficient operation and a steady growth in business; such development work was not in anticipation of World War II.In April 1941, pursuant to a request from the Office of Production Management that production be increased to maximum as soon as possible, Climax scheduled an operating program which provided for average daily tonnages of 12,500 tons on May 1, 1941, 13,500 tons as of September 1, 1941, and 15,000 tons as of March 1, 1942. For the years 1938, 1939, and 1940, the average daily number of tons mined and milled, based on a 365-day year, were: 1938, 11,903 tons; 1939, 9,400 tons; and 1940, 10,503 tons. Similarly, 35 for 1941 and 1942, Climax mined and milled 12,954 tons and 16,664 tons, respectively.In producing the 1942 tonnage, Climax increased its mining in the areas of the mine where the better grade ores were located. For some time in the operation of its mine, Climax had been attempting to establish a system of draw control over the various draw points in an effort to limit dilution of the ore by the waste overburden. In 1939, Climax was working to make its draw control measures more effective, that is, draw the top of the ore body down in such a gradual manner as not to pull dilution heavily into any one draw point. In 1941, the draw control measures were being relaxed because of the pressure for increased production, and in 1942, there was very little semblance of draw control. With the relaxation of draw control, dilution of the ore body increased as waste material funneled down to the heavily drawn draw points. This dilution, together with increased mining of its higher grade ores, had the effect of reducing the average grade of the ore reserves at the Climax mine.303 In its 1942 milling operation, Climax obtained a higher output by coarsening the grind at the primary grinding36 stage. This permitted a greater tonnage of ore to pass through the mill but reduced the mill's percentage of recovery. When operating with the mill and mine in balance, the most economical grind was 36 to 39 percent on a 100-mesh screen, but in 1942 the mill operated on a grind of 40 to 44 percent. By using a finer grind, Climax would have recovered, under normal operating conditions, approximately 3 percent more concentrate in 1942 than it actually obtained. In terms of 1942 production, this represented a loss through coarser grinding estimated at approximately 1,200,000 pounds of molybdenum.The capacity of the Climax mine to produce ore as of any time was dependent upon the prior exploration and development work. As a general proposition, its maximum capacity tended to be directly proportional to the total number of workplaces available for draw at any given time. At December 31, 1942, Climax had 299 draw points in existence, 159 using the grizzly system of drawing ore and 140 using the slusher system. In 1942, the mine and the mill were capable of producing approximately 30 million pounds of molybdenum without violating good mining practices, but in 1942 said practices 37 were violated in order to achieve maximum production.Climax maintained a townsite in close proximity to its mine consisting of a store, houses, and other facilities for its employees. It was built for the purpose of securing and retaining employees at this undesirable and inhospitable location.The molybdenum concentrates produced by Climax contained sulfur which curtailed their sale in the United States. The sulfur was removed by roasting the concentrates in a multiple-hearth roaster. Prior to 1937, Climax removed the sulfur from the concentrates in a conversion plant located at Langeloth, Pa. As of January 1, 1937, Climax organized a wholly owned subsidiary corporation known as Climax Molybdenum Co. of Pennsylvania. Under date of February 7, 1937, Climax contracted with its Pennsylvania subsidiary to do the necessary smelting and converting of its molybdenum concentrates into molybdenum products which could be used by purchasers in this country most of whom, unlike European purchasers, lacked smelting and converting facilities.During the years involved herein, Climax considered itself a mining company. It conducted the conversion operations because it hoped by such operations38 to further the use of molybdenum by making available in this country converted products which industry could use without any additional smelting or converting.A summary of Climax's sales of molybdenum, in thousands of pounds and dollars, for the years 1924 through 1942, with a breakdown 304 for the years 1931 to 1942, inclusive, between domestic and foreign sales, follows:Sales in pounds and dollarsDomestic salesForeign salesTotal salesYearPoundsDollarsPoundsDollarsPoundsDollars(000)(000)(000)(000)(000)(000)19241681925718192684719271,29719281,91919292,83919302,42319315885122,0649512,6521,46319324603851,9399382,3991,32219331,0258483,9472,2834,9723,13119341,7331,4443,4862,5085,2193,95219353,2062,6866,0213,9479,2276,63319365,0614,26210,9766,98916,03711,25119376,0375,09316,54211,94522,57917,03819383,4652,90616,28112,47119,74615,37819396,3165,33220,56015,14326,87620,47519409,0027,6497,3445,53216,34613,182194117,73115,2606,9104,99324,64120,253194230,88326,30113,54410,16544,42736,46639 A breakdown of Climax's dollar sales between domestic and foreign sales of converted products and concentrates for the years 1931 to 1942, inclusive, follows:Converted productsConcentratesYearDomesticForeignTotalDomesticForeignTotal(000)(000)(000)(000)(000)(000)19314961497169509661932377None37789389461933807None807412,2832,32419341,368None1,368762,5082,58419352,594722,666923,8753,96719364,178944,272836,8946,97719374,8862,1537,0392079,7919,99819382,6391,0943,73326711,37711,64419395,2732445,5175914,90014,95919407,6084858,093415,0475,088194115,2311,07116,302293,9223,951194226,2854,45130,736165,7145,730In August of 1931, Climax organized a wholly owned subsidiary corporation known as Climax Molybdenum Co. of Michigan. This subsidiary, under a contractual arrangement with Climax, engaged in research and other experimental work in Detroit, Mich., through and beyond December 31, 1942. Under its contract the subsidiary agreed that it would --1. * * * devote all of its business 40 activities in carrying on research and experimental work in the interest and for the sole use and benefit of the Climax Company and that it will undertake and prosecute all such experiments and work in connection with enlarging and perfecting the use of molybdenum as an 305 alloying element in the manufacture of steel or otherwise as the Climax Company shall from time to time designate or desire undertaken in connection with such other experiments along the same or other lines as the Michigan Company shall find advisable or consider as likely to be beneficial after consultation with and the approval of the Climax Company.In full payment for these services, Climax agreed to reimburse the subsidiary for all of its costs of operation plus 10 percent as profit, to sell to it all molybdenum products it desired at 5 percent below current or list prices, and to advance without interest all sums needed in the conduct of its business.For many years Climax's Michigan subsidiary maintained a laboratory at Detroit, Mich. Its equipment consisted principally of testing equipment, tensile and hardness machines, and small heat-treating furnaces. In 1935, a furnace of 500 pounds' capacity41 was installed. The laboratory supplemented the efforts of the engineers in the district offices by providing technical services and testing services free of charge to iron foundries. The laboratory maintained by Climax's Michigan subsidiary was small in comparison to those of the major steel companies.During the period here involved, the laboratory also carried on research activities and published technical articles from time to time. These activities included fundamental research into what happens to steel during heat treatment, and why it happens. The laboratory also spent considerable time in the attempted development of a molybdenum high-speed steel containing copper and boron. Prior to 1942, the activities of the laboratory developed no new commercial alloy steel. During 1942, the laboratory was engaged mostly in war projects, such as trying to make ductile chromium and development of new heat treatments for armor-piercing shot.Before and during the period from 1938 through 1942, Climax maintained district offices throughout this country. There were offices in the cities of Pittsburgh, Detroit, Chicago, Denver, and Los Angeles, and in the State of Ohio. These offices42 were headed by graduate engineers most of whom had had practical experience in some field of the steel or iron industry. There was also a metallurgical engineer in Climax's main office in New York. Each office had jurisdiction over a particular part of the country. The duties of these engineers were to promote increased uses for molybdenum and to create new usages for the metal. This was done by calling on metallurgists for the steel companies, iron foundries, and their customers and steel warehouses.The district offices employed no salesmen as such, and the engineers were not permitted to call upon or entertain purchasing agents. The engineers were not permitted to recommend the usage of molybdenum where it neither improved the end product nor reduced the cost of 306 it to the consumer. Climax followed the policy of selling molybdenum purely on its merit, and during the years 1938 through 1941 it used the slogan "A Little Does a Lot." In 1942, this slogan was not used. During 1942, the engineers in the district offices were all concerned one way or another with warwork; and the demand for molybdenum was such that promotional activities were unnecessary.During the years43 1938 through 1942, Climax placed advertising in various technical magazines and journals. Through 1941, most of this advertising was directed to giving examples of successful applications of molybdenum by industry. During 1942, the character of the advertising changed and in the main was concerned with the support of the war effort. These advertisements invited inquiries about molybdenum and some stated that Climax furnished authoritative engineering data on molybdenum applications. Some inquiries were received from iron foundries as a result of this advertising, but it brought few, if any, additional inquiries or orders from steel companies. Such advertising kept Climax's name and product before the public and trade.In July 1934, Climax began publishing a monthly circular, entitled "The Moly matrix," which was mailed to interested persons in the trade. In the first issue, Climax stated the purpose of the publication as follows:The intention of the Climax Molybdenum Company in bringing you the information which will be contained in Moly matrix is not merely to call to your attention Molybdenum steels which, if substituted for a competitive steel, will give you comparative 44 physical properties at lower over-all cost, but also to make you familiar with the irons and steels, that are made possible by the use of this "most potent alloy," which will serve to produce a better product -- withstand more abuse -- and last longer.Thereafter, "The Moly matrix" was published monthly until 1941 when publication ceased after the June issue and was never resumed. Most issues carried examples or illustrations of commercial molybdenum applications in the iron and steel industries. Engineers and metallurgists found that "The Moly matrix" issues provided a convenient summary of available information on the various subjects and applications discussed. The influence, if any, that this publication had on sales of molybdenum is unknown.In 1938, Climax published a book entitled "Molybdenum in Steel" which was a compilation of data on the then various molybdenum steels and their applications. This publication was useful to a metallurgist or heat treater once he decided to make or heat-treat molybdenum steel. Similarly, Climax published various other articles and brochures on molybdenum which were available without charge to interested parties both prior and subsequent45 to 1938. It was the practice 307 of the producers of ferroalloys to publish similar material. Climax did no radio advertising during the period involved herein.The world production (rounded figures) of molybdenum, tungsten, chromium, nickel, manganese, and vanadium, and the production of molybdenum by Climax, for the years 1929 through 1942, may be summarized as follows:World production in metric tons of ore producedYearMolybdenumTungstenChromiumNickelManganeseVanadiumClimax19292,00016,000635,00062,0003,505,0001,60019301,90017,000560,00060,0003,529,0001,40019311,59013,000414,00038,0002,182,0001,20019321,3107,000306,00022,0001,242,00086087019332,99012,000409,00046,0001,731,000602,30019345,14016,000598,00072,0002,916,0001703,80019356,66022,000793,00077,0004,005,0004204,61019369,94025,0001,068,00093,0005,196,0009706,880193714,87039,0001,280,000120,0006,092,0001,95010,310193816,31037,0001,128,000115,0005,292,0002,59012,790193915,10042,0001,163,000122,0004,947,0002,9109,880194017,10044,0001,458,000140,0005,654,0003,02010,330194119,80050,0001,752,000162,0005,479,0002,77012,590194228,20051,0002,031,000165,0005,081,0003,86018,98046 For the years 1931 through 1942, the domestic production of steel, which includes the alloy steels, the domestic production of alloy steel, and the combined total production of steel in Germany, the United Kingdom, Canada, Russia, France, and Japan, in thousands of net tons, as compiled by the American Iron & Steel Institute, were as follows:United States productionCombinedYearforeignSteelAlloy steelproduction (000)(000)(000)193129,0591,631193215,32389427,885193326,0201,73334,981193429,1821,80645,544193538,1842,37453,568193653,5003,23063,491193756,6373,39770,160193831,7521,65472,961193952,7993,21278,734194066,9834,96671,052194182,8398,20669,081194286,03211,52765,963In 1924, Climax sold its products containing molybdenum at an average price of $ 1.9791 per pound of molybdenum. Between 1924 and 1932 the average price dropped steadily until 1932, when it reached 55.14 cents per pound. Thereafter, the average price increased and stabilized, and during the period 1934 to 1942, inclusive, was never less than 70 cents per pound. In 1942, the prices received 47 308 by Climax for its products were not higher than the average prices received for the same products for the 4 previous years.For the years 1938 through 1942, Climax's net sales, cost of goods sold including conversion fees, cost of production at Climax, and net taxable income were as follows (cents omitted):YearNet salesCost of goodsCost of productionNet taxablesoldat Climaxincome1938$ 15,107,592$ 4,496,983$ 5,136,855$ 7,031,069193919,999,4035,908,0184,145,1749,626,254194012,826,9603,802,7344,158,9945,619,740194119,881,9686,615,0765,159,6478,816,118194235,815,78111,203,9336,726,04717,434,637For the years 1938 to 1942, inclusive, Climax's gross profits on sales of its molybdenum concentrates and converted products, as finally adjusted by respondent, included conversion fees paid to its Pennsylvania subsidiary. After excluding such fees, Climax's gross profits were as follows:YearGross profits asConversion feesCorrected grossadjustedprofits1938$ 10,710,609.42$ 100,000.00$ 10,610,609.42193914,191,384.64100,000.0014,091,384.6419409,170,741.63146,515.549,024,226.09194113,490,816.76223,924.7213,266,892.04194225,043,531.64431,684.0224,611,847.6248 For the years 1938 to 1942, inclusive, Climax's corrected gross profits on sales of concentrates and converted products, as hereinabove set forth, also included its income or loss resulting from the conversion of its concentrates and the sale of the molybdenum contained therein in the form of converted products. The profit or loss from the conversion operation was as follows:IncomeYear(or loss)1938$ 48,065 1939(5,516)194098,837 1941(193,046)1942(981,294)309 For 1942, petitioner computed its abnormal income and its net abnormal income to be $ 10,891,651 and $ 10,016,556, respectively, based upon the following computation:CorrectedGain (or loss)Gross classYeargross profiton conversion(C) incomeon sales1938$ 10,610,609$ 48,065 $ 10,562,544 193914,091,385(5,516)14,096,901 19409,024,22698,837 8,925,389 194113,266,892(193,046)13,459,938 Aggregate46,993,112(51,660)47,044,772 Average of gross class (C) income$ 11,761,193 125 percent of such average14,701,491 1942 corrected gross profit onsales24,611,848 1942 gain (or loss) on conversion(981,294)1942 gross class (C) income25,593,142 Less 125 percent of 1938-41average14,701,491 1942 abnormal income10,891,651 1942 direct costs and expenses$ 2,056,293 1942 abnormal income of10,891,651 Over gross class (C) income of25,593,142 gives factor of0.425569X$ 2,056,293=$ 875,095Reduction875,095 Net abnormal income10,016,556 49 During the period 1929 to 1942, petitioner was engaged in an intensive program of exploration and development. The following table sets forth by years from 1929 through 1942 the total development costs incurred by Climax with respect to the Phillipson Level only of its mine and includes costs incurred for undercutting work classified by Climax as "stoping":DevelopmentDevelopmentcosts (including)Repaircosts withoutYearrepairconcretingrepairconcretingconcretingafter 1939)1929$ 151,957.911930184,420.551931111,559.361932127,880.751933396,520.961934393,113.031935408,558.311936855,713.3819371,410,336.141938979,039.901939482,988.87Subtotal5,502,089.16$ 5,502,089.161940663,073.80$ 109,440.23553,633.571941993,999.8584,107.15909,892.7019421,117,173.3461,851.111,055,322.23Total8,276,336.15255,398.498,020,937.66310 Included in the costs of the development of the Phillipson Level set forth above were certain costs for service raises, ore passes, entries and stations, chutes, concreting, and haulage drifts in the total amount of $ 226,781.87 with respect to draw50 points which had been scheduled for construction prior to December 31, 1942, but which were then not yet in existence. The following schedule shows these costs broken down between the years 1929-39, 1940, 1941, and 1942:Total1929-39194019411942Service raises$ 32,577.54$ 5,518.01$ 23,131.00$ 3,928.53Ore passes38,628.9918,270.1116,347.364,011.52Entries and stations25,682.8612,703.1910,402.322,577.35Chutes14,435.84$ 2,674.2511,643.55118.04Concrete1,762.38493.771,268.61Haulage drifts113,694.2687,252.0424,094.842,347.38226,781.8789,926.2972,229.7052,839.8711,786.01In addition to the foregoing amounts, Climax between 1926 and 1942 expended the following sums on its mine with respect to exploratory diamond drilling:YearDiamond drilling1926$ 7,729.7419278,924.93192840,363.57192944,518.4519302,904.95193175.00193219331,513.37193413,522.69193524,938.25193694,938.25193793,211.66193855,745.30193948,644.90Subtotal437,031.06194038,284.32194161,933.091942118,469.65Total655,718.12Of these amounts, $ 3,966.75 represented51 1,040 feet of diamond drilling for the White Level of the mine incurred in 1926 and 1927, and $ 374,571.96 represented 99,400 feet of drilling for levels other than the White and Phillipson. Of this $ 374,571.96, $ 178,852.18 representing 48,149 feet of drilling was expended prior to January 1, 1940, $ 37,979.99 representing 10,257 feet of drilling was expended in 1940, $ 39,270.14 representing 11,076 feet of drilling was expended in 1941, and $ 118,469.65 representing 29,918 feet was expended in 1942. With respect to the Phillipson Level alone, Climax prior to January 1, 1940, expended a total of $ 254,212.13 on exploratory diamond 311 drilling. For the years 1940, 1941, and 1942, the following amounts were so expended with respect to such level:YearAmount1940$ 304.33194122,662.951942Total22,967.28All the exploratory and development work on the Phillipson Level as of 1942 made just so many tons of ore available for extraction.The cost depletion with respect to Climax's mine at Climax, Colo., as reflected by its books and records and the percentage depletion allowed for income tax purposes for the calendar years 1938 through 1942, are as follows: 52 YearCost depletionPercentagedepletion1938$ 19,925.54$ 2,213,447.09193926,447.172,853,722.59194016,915.311,862,705.86194126,242.342,644,676.47194247,827.695,152,821.70For 1941 and prior years, Climax's gross income from the property for purposes of computing percentage depletion was computed by using the average price for concentrates sold. For the year 1942 it was computed on the basis of the use of a market or field price of 75 cents per pound of molybdenum contained in the concentrates. The deduction for percentage depletion as claimed by Climax and allowed by respondent for the years 1938 through 1942 represented no cash outlay by Climax.Climax's direct costs or expenses, deductible in determining the normal tax net income for the year 1942, through the expenditure of which its abnormal income was in whole or in part derived, were $ 2,056,292.61 computed as follows:Total deductions$ 7,665,090.96Less:Percentage depletion$ 5,152,821.70Cost depletion47,827.69Excess of percentage depletion over costdepletion5,104,994.01Turner litigation expenses72,120.32Conversion fee431,684.025,608,798.35Total direct cost and expenses2,056,292.6153 312 During 1942 petitioner's relevant abnormal income, loss on conversion operation, excess over 125 percent of prior 4 years' average, direct costs and expenses, net abnormal income, non-war-induced replacement factor (expressed as a percentage), and net abnormal income due to exploration and development attributable to other years were as follows:Abnormal income$ 25,593,142Loss on conversion operation981,294Excess over 125 percent of prior 4 years' average14,701,491Direct costs and expenses2,056,293Net abnormal income10,016,556Non-war-induced replacement factor [see infra]0.0156Net abnormal income due to exploration and developmentattributable to other years [see infra]150,000Petitioner's gross income for the taxable year 1942 included a separate class of income resulting from exploration and development extending over a period of more than 12 months as described in section 721(a)(2)(C).The sum of $ 150,000 represents the taxpayer's net abnormal income attributable to exploration and development expenditures which should be allocated to each of the years of development in the proportion that each year's development expenses bear to the total54 thereof.OPINIONPetitioner seeks relief under the Internal Revenue Code of 1939 for claimed net abnormal income in 1942, of the class and as defined in section 721(a)(1), (a)(2)(C), and (a)(3). 255 It relies on exploration 313 and development expenditures made over a period in excess of 12 months which in 1942 allegedly produced income in excess of 125 percent of income resulting from such expenditures earned in the 4 previous taxable years. Petitioner concludes that it is entitled to have such income attributed to prior years under section 721(b)3 and excluded from the coverage of the excess profits tax pursuant to section 721(c). 4Respondent denies that there56 was any abnormal income for the year 1942. He further contends, inter alia, that even if there were any such income, none of it can be attributed to any prior year. He relies upon the statutory purpose, and more specifically upon section 35.721-3, Regs. 112. 5 He urges that great weight be given to his regulation because of the legislative history of section 721.57 The World War II excess profits tax was first enacted by the Second Revenue Act of 1940. 6 The two prime objectives of this legislation were (1) to raise revenue for the national defense program, and (2) to insure that the rearmament program should not permit either the creation of "war millionaires" or the further substantial enrichment of already wealthy persons (H. Rept. No. 2894, 76th Cong., 3d Sess., pp. 1-2 (1940), 2 C.B. 496">1940-2 C.B. 496).314 The classes of income defined as abnormal included six 7 separate classes. The common characteristic of each class was that it represented defined income currently received that would have been received in the current year regardless of the presence of World War II. The excess profits tax was designed to tax profits arising from the war effort, and section 721 was inserted as a relief provision to alleviate the impact of the receipt currently of income attributable to events or transactions occurring prior to the imminence 58 of the war.In 1941 Congress amended the 1940 legislation. 8Congress realized that it could not foresee all possible hardship cases under the excess profits tax, and sought merely to outline the general nature of types of income for which it wished to afford relief. The Treasury Department and the then Bureau of Internal Revenue were intentionally given wide discretion in promulgating regulations within the spirit of the legislation. The legislative history explains this as follows (H. Rept. No. 146, 77th Cong., 1st Sess., p. 2 (1941), 1 C.B. 550">1941-1 C.B. 550-551):Experience with excess-profits taxes, both in the United States and abroad, has demonstrated conclusively that relief in abnormal cases cannot be predicated on specific instances foreseeable at any time. The unusual cases that are certain to arise are so diverse in character and unpredictable that relief provisions couched in other than general and flexible terms are certain to prove inadequate.For these59 reasons, the present legislation attempts to provide, both by specific terms and in carefully guarded general terms, a set of flexible rules which should alleviate at least the bulk of the severe hardship cases which may arise. The success or failure of legislation of this type depends, to a considerable degree, upon its intelligent and sympathetic administration. Through its confidence in the experience and ability of the officials of the Treasury Department and the Bureau of Internal Revenue, your committee recommend the present flexible and broad legislation as the most satisfactory method of meeting the contingencies that will arise.Pursuant to this directive, respondent promulgated the regulation quoted above and it has been upheld many times. Primas Groves, Inc., 15 T.C. 396">15 T.C. 396, 401; Soabar Co., 7 T.C. 89">7 T.C. 89, 97; Steel or Bronze Piston Ring Corporation, 13 T.C. 636">13 T.C. 636, 642.60 This case was reopened because the record supports the proposition that the efforts of this petitioner in exploration and development of its mine had made available an adequate supply of molybdenum at a stable price for the first time and that as a result of this, the general use of molybdenum as an alloying element by industry, as a substitute and even as a replacement for other alloys, had been encouraged and had taken place and was continuing, prior to and throughout 1942.315 The rate of use of molybdenum had, through the years, increased faster than the rate of increase in use of other alloying elements which were being replaced by molybdenum. If a proper formula, eliminating wartime pressures, could be devised to measure this difference in increased rate of use and the formula applied to the year 1942, then war-induced increase could be strained out of petitioner's income for such year.The first question is whether petitioner has realized income of a class described in section 721(a)(2)(C). We have found this in the affirmative in our findings and, in language which we here adopt, we noted in the withdrawn opinion that --Petitioner has made expenditures in the exploration61 and development of its mine, especially at the Phillipson Level, without which the increased production of 1942 would have been impossible. Since the terms "exploration" and "development" are not defined in the statute, we must look to their meaning in the mining industry. "Exploration" refers to "The work involved looking for ore," and "development" is defined as "work done in a mine to open up ore bodies, as sinking shafts, driving levels, etc." 9 From the facts of this case there can be no doubt that petitioner expended substantial sums on exploration and development work for a period well in excess of 12 months. It therefore has realized income of the class described in section 721(a)(2)(C).A second question is whether any part of the net abnormal income can be attributed to other years under section 721(b) and section 35.721-3, Regs. 112. In the withdrawn opinion we noted that while some attribution might62 be proper, the evidence did not provide a reliable basis for attribution:Although some small segment of the development expenditures might normally have resulted in increased 1942 production, petitioner's indices do not afford any reliable basis for ascertaining this normal growth * * The supplemental evidence has afforded a reliable basis for ascertaining the relevant growth, and therefore, we may properly attribute a portion of the relevant net abnormal income to other years.It has been found that $ 24,611,848 is the amount of 1942 corrected gross profit on sales. This must be adjusted by the $ 981,294 loss suffered by Climax on the relevant conversion operation, since income or loss from factors not comprehended in section 721(a)(2)(C) must be strained out. The resulting $ 25,593,142 is reduced by 125 percent of the 1938-41 average, or $ 14,701,491, totaling $ 10,891,651. Sec. 721(a)(3)(A).The $ 10,891,651 is next reduced by a ratio in which the relevant direct costs are comprehended. Sec. 721(a)(3)(B). Petitioner does not dispute the use of cost depletion, and, in interpreting "direct costs 316 or expenses" as used in section 721(a)(3)(B), we have included 63 cost depletion rather than the percentage depletion which respondent asserted. Section 721(a)(3) uses the following terms: "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." (Emphasis added.) Climax's deduction in 1942 for percentage depletion did not represent an expenditure or cash outlay through which abnormal income was in whole or in part derived. Cf. Sprague Electric Co., 36 T.C. 1043">36 T.C. 1043, 1086.Percentage depletion does not involve expenditure or cash outlay, nor is it a cost for accounting purposes. Louisiana Iron & Supply Co., 44 B.T.A. 1244">44 B.T.A. 1244, 1246; Mary F. Waggoner, 47 B.T.A. 699">47 B.T.A. 699. Further, our treatment is consistent with Morrisdale Coal Mining Co., 13 T.C. 448">13 T.C. 448, 452, and section 35.721-1, Regs. 112, example 2. Finally, if Congress had meant to refer to all deductions attributable to abnormal income, it would not, in our opinion, have used the terminology "direct costs or expenses" and "expenditure."Using64 the resulting $ 2,056,293 as the direct cost figure, the relevant ratio totals an $ 875,095 reduction from the $ 10,891,651, and we have found that $ 10,016,556 was the 1942 net abnormal income."[Not] unmindful of the difficulties involved," General Tire & Rubber Co., 29 T.C. 975">29 T.C. 975, 988, we have utilized the replacement factor of 0.0156 and, with due regard to Ramsey Accessories Manufacturing Corporation, 10 T.C. 482">10 T.C. 482, we have found that petitioner's net abnormal income for 1942 due to exploration and development and attributable to prior years is $ 150,000.Reviewed by the Special Division.Decision will be entered under Rule 50. Footnotes1. All Code and section references are to the Internal Revenue Code of 1939, as amended.↩2. 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 it is abnormal for the taxpayer to derive income of such class, or, 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 exploration, discovery, prospecting, 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.↩3. (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. * ↩4. (c) Computation of Tax for Current Taxable Year. -- The tax under this subchapter for the taxable year, in which the whole of such abnormal income would without regard to this section be includible, shall not exceed the sum of: (1) The tax under this subchapter for such taxable year computed without the inclusion in gross income of the portion of the net abnormal income which is attributable to any other taxable year, and(2) The aggregate of the increase in the tax under this subchapter for the taxable year (computed under paragraph (1)) and for each previous taxable year which would have resulted if, for each previous taxable year to which any portion of such net abnormal income is attributable, an amount equal to such portion had been included in the gross income for such previous taxable year.↩5. Sec. 35.721-3 Amount Attributable to Other Years. -- The mere fact that an item includible in gross income is of a class abnormal either in kind or in amount does not result in the exclusion of any part of such item from excess profits net income. It is necessary that the item be found attributable under these regulations in whole or in part to other taxable years. Only that portion of the item which is found to be attributable to other years may be excluded from the gross income of the taxpayer for the year for which the excess profits tax is being computed.Items of net abnormal income are to be attributed to other years in the light of the events in which such items had their origin, and only in such amounts as are reasonable in the light of such events. To the extent that any items of net abnormal income in the taxable year are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer, such items shall not be attributed to other taxable years. Thus, no portion of an item is to be attributed to other years if such item is of a class of income which is in excess of 125 percent of the average income of the same class for the four previous taxable years solely because of an improvement in business conditions. In attributing items of net abnormal income to other years, particular attention must be paid to changes in those years in the factors which determined the amount of such income, such as changes in prices, amount of production, and demand for the product. * *↩6. 54 Stat. 974.↩7. Reduced to five in 1941.↩8. The Excess Profits Tax Amendments of 1941, 55 Stat. 17.↩9. A Glossary of the Mining and Mineral Industry (U.S. Dept. of Interior, Bull. No. 95), pp. 255, 214.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619669/	JOAN E. PRATER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; RONALD R. PRATER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPrater v. CommissionerDocket Nos. 22489-89, 10956-90United States Tax CourtT.C. Memo 1993-380; 1993 Tax Ct. Memo LEXIS 385; 66 T.C.M. (CCH) 471; August 24, 1993, Filed 385 Decision will be entered under Rule 155. JP and RP were divorced in 1983. JP received temporary support of $ 2,000 per month until the divorce decree was filed. The divorce decree ordered RP to pay to JP 33 percent of the net proceeds of an oil and gas lease for 121 months. RP claims the payments were for JP's "support and maintenance". JP claims the payments were made as part of a division of property. R is a stakeholder, but agrees with JP. 1. Held: JP's 1984, 1985, and 1986 receipts from RP in the amount of $ 24,000 per year are for support; JP must include them in her income. Sec. 71, I.R.C. 1954. 2. Held, further: JP's 1984, 1985, and 1986 receipts from RP in excess of $ 24,000 per year are part of a property settlement; JP does not have to include them in income. Sec. 71, I.R.C. 1954. 3. Held, further: The amounts includable by JP are deductible by RP; the amounts not includable by JP are not deductible by RP. Sec. 215, I.R.C. 1954. For petitioner in docket No. 22489-89: Ken W. Dannenberg and John A. Vetter. For petitioner in docket No. 10956-90: Thomas R. Docking. For respondent: Bruce K. Meneely. CHABOTCHABOTMEMORANDUM FINDINGS OF FACT386 AND OPINION CHABOT, Judge: Respondent determined deficiencies in Federal individual income tax against petitioners 1 as follows: Joan E. Prater Ronald R. Prater YearDocket No. 22489-89Docket No. 10956-901984$ 14,346.44$ 34,936.00198546,408.6066,746.00198626,709.60After concessions by respondent, the issue for decision 2 is whether payments made by Ronald to Joan are periodic payments includable in Joan's gross income under section387 71(a)(1)3 and are deductible by Ronald under section 215(a), or whether they are part of a property settlement. 4388 FINDINGS OF FACT Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference. Joan and Ronald resided in Wichita, Kansas, at the times their respective petitions were filed in these consolidated cases. Joan and Ronald were married on September 22, 1956. They had two sons, one born about 1960 and the other born about 1962. By mid-1983, both of the children were adults. Ronald filed a petition for divorce on March 20, 1981, in the District Court of Sedgwick County, Kansas (hereinafter sometimes referred to as the Kansas court). The Kansas court held a 2-to-3-week trial in the divorce case in late 1982. About 90 to 95 percent of the time in that trial was devoted to the valuation of an oil and gas lease known as the Binger lease. The Binger lease consists of an 87.5-percent working interest in an oil and gas property in Pratt County, Kansas. Ronald and his brother bought the Binger lease in December 1968. Ronald, a petroleum engineer, has made the operating decisions regarding the Binger lease since December 1968; he bought out his brother's share in 1975. Expert witnesses who testified before the Kansas389 court were not able to agree on a value for the Binger lease, but testified that the Binger lease had a value of between $ 324,000 and $ 1,500,000. At the time of the divorce, Ronald was about 49 years old and Joan was about 44 years old. Joan did not work outside the home during the marriage. At some point, the Kansas court awarded to Joan temporary support of $ 2,000 per month. Ronald paid this amount, and also voluntarily paid to Joan an additional $ 1,000 per month up to September 1982. In the divorce proceeding, Ronald proposed to meet his obligation to support Joan by (1) paying alimony of $ 2,500 per month for 10 years, and (2) using certain proceeds from the proposed sale of the marital home to buy an annuity which would provide Joan with an income of $ 35,448 per year for the 10 years after the end of the alimony payments. Ronald asserted that $ 10,000 per year of the annuity payments would be a tax-free return of capital. Ronald proposed that the $ 2,500 per month support payments "shall cease upon the death of either party or Joan Prater's remarriage or cohabitation." Joan acknowledged the difficulty of setting a value for the Binger lease, and proposed "that the390 only fair and equitable way of handling the situation is to order that the oil and gas production be sold and the net proceeds be equally divided." She proposed that, until the Binger lease was sold, either (1) Ronald continue to pay certain bills and also pay temporary alimony of $ 3,000 per month, or (2) Ronald not pay those bills but pay temporary alimony of $ 11,000 per month. On March 11, 1983, divorce counsel for Joan and Ronald orally argued their analyses of the evidence, and presented and supported their respective proposals. During the course of the presentation, Ronald's divorce counsel described the Binger lease as "simply a business situation in which Joan has an interest, as any other investor would." Ronald's divorce counsel argued for Ronald's retention of the Binger lease and focused on the alimony-annuity-sale-of-family-home approach. Joan's divorce counsel rejected alimony and focused on alternatives as to the Binger lease, as follows: Now, Your Honor, we really don't need to worry about alimony in this case. There's sufficient property to divide up between parties. And by that I'm talking about the oil and gas.The response of the Kansas court judge, 391 rejecting both Joan's recommendations and Ronald's recommendations, was as follows: I can tell you right now the Binger lease is not going to be sold, and I'm not going to order somebody to buy annuities for somebody. What they get is going to come out of what's here, and they do with it as they wish. I also am going to say this before I recess: Somebody has to be absolutely wrong in the valuation of this oil lease when somebody puts it at three hundred and fifty-one or three hundred twenty-four thousand dollars and somebody else puts it at a real good sale at one million seven hundred and some thousand. Now, if you're really trying to get at what the value of something is, you're not going to miss it that much, folks, if either one of you is being honest or if you both are being honest or both know what you're doing. The only other conclusion that the Court can say is somebody is either wrong intentionally or somebody doesn't know what the thunder they're doing. That just comes down to that thing now because one of these things doubles the value and then leaves a million dollars in question, or one of them -- On the other hand, one of them says it is half of what it should392 be, and then there's a million dollars in question. And if those experts couldn't get to it, gentlemen, sure puts me out on a limb with a dozen termites working on the limb at the base of the tree, doesn't it? Court's going to take a short recess. Then we'll come back and we will settle it, if you haven't.On March 25, 1983, the Kansas court issued a memorandum, or letter ruling, announcing the decision in the divorce proceeding. The ruling does not refer to alimony, does not value the Binger lease, awards the Binger lease to Ronald, and orders Ronald to pay to Joan "30% of the net returns from the Binger lease * * * for the next 121 months. * * * The payments above are to be paid for 121 months unless terminal [sic] by the cessation of production on the lease (it peters out) or her death." The ruling does not refer to the contingencies of Joan's remarriage or cohabitation, or Ronald's death. Over the next 3 months, divorce counsel for Joan and Ronald tried to agree on the details of a journal entry, but did not succeed in doing so. On June 8, 1983, Ronald's divorce counsel wrote a letter to the Kansas court (copy to Joan's divorce counsel), which stated in pertinent part393 as follows: 2) Termination of Alimony. We still believe that the alimony should be terminable upon the death, remarriage, or cohabitation of Joan Prater. This is the usual language employed by most courts. Only in unusual circumstances, not present here, does alimony continue in the event of death, remarriage, or cohabitation by the recipient. Furthermore, the [sic] Joan Prater will receive, upon Plaintiff's [Ronald's] death, an immediate tax-free lump-sum payment of $ 300,000.00 or, if the death is accidental, $ 600,000.00. Finally, the continuation of alimony despite these three events obviously has characteristics of a property settlement and therefore there could be tax disadvantages to the plaintiff about which the court has already expressed disapproval and has no desire to impose these severe tax consequences on Plaintiff.A hearing was held on June 28, 1983, at which the Kansas court ruled that Joan would receive 33 percent of the gross income from the Binger lease for the next 121 months, and would have to pay her proportionate share of the lease expenses. The Kansas court ruled that the payments from the Binger lease would not stop upon Joan's remarriage394 or cohabitation, but would stop if production from the Binger lease is terminated for good cause. The Kansas court also ruled that if the Binger lease is sold or assigned, then Joan would receive 33 percent of the proceeds and pay her share of expenses in connection with the sale or assignment. Petitioners were divorced by a Journal Entry divorce decree (hereinafter sometimes referred to as the Journal Entry of Divorce). The Journal Entry of Divorce, which was dated June 28, 1983, but was filed on July 28, 1983, was drafted by Ronald's divorce counsel, and was not signed by Joan or her divorce counsel. The Journal Entry of Divorce awards marital property and liabilities as shown in table 1. TABLE 1CategoryJoanRonaldAssets with values specified$ 653,988$ 716,764in Journal Entry of DivorceLiabilities with values(157,732)(289,086)specified in Journal Entryof DivorceItems which are awarded, butbank accountsbank accountsthe values of which are not1978 Mercedes-Benz1977 Lincolnspecified in Journal Entrypersonal propertyspeed boatof Divorcein her residencehouse boatexcept for certainpersonal pro-itemsperty in hisresidencecertainpersonal pro-perty in herresidence395 In addition, Ronald received the Binger lease, which the Kansas court did not value. The Journal Entry of Divorce provides, under the heading Method of Alimony Payment, that Ronald is to pay to Joan "as alimony and support an amount equal to 33.0% of the gross income, reduced by 33.0% of direct operating expenses * , from the sale of oil and gas produced from the Binger lease beginning July 1, 1983." The Journal Entry of Divorce further provides, under the heading Dispute with Regard to Alimony Payments, that -- 8) The Court reserves jurisdiction over the litigation to determine disputes between the parties as to the method, amount, and payment of the alimony due, and in regard to any manner [matter?] concerning the operation of the Binger lease including, but not limited to determination of income and allowable expenses. * The Journal Entry of Divorce further provides that if the Binger lease is sold or transferred "within 121 months of the filing of this Journal Entry," then Ronald is to "receive 67.0% of the net sale proceeds after expenses and income taxes and * * [Joan] shall receive the remaining 33.0% of the net sale proceeds after expenses of said396 sale." The Journal Entry of Divorce further provides that -- 10) The payment of alimony shall be made for a period of 121 months from July 1, 1983 or until the cessation of economic production from the Binger lease for good cause. The payment of alimony shall cease only in the event of the death of * * [Joan] or the occurrence of any of the events set out in paragraph 9. [I.e., the sale or other transfer of the Binger lease within the 121-month period.]On August 5, 1983, Joan filed a motion to alter or amend the Journal Entry of Divorce, in which she moved the Kansas court to order the sale of the Binger lease and divide the net proceeds of the sale equally, or to award her a one-half working interest in the Binger lease "as a division of property and not as an award of alimony." Joan's motion contends as follows: Defendant [Joan] further shows to the Court that it is unfair that the portions of the Binger lease awarded to her as alimony shall either terminate in ten (10) years or terminate on her death. The Defendant is entitled to an estate of her own and entitled to leave her property to her children. This she cannot due [sic] under the terms and provision of397 the Journal Entry for the reason that her interest in the Binger would terminate upon her death.In the course of his opposition to Joan's motion, Ronald's divorce counsel noted that, if a procedure described in Powell v. Powell, 231 Kan. 456, 460, 648 P.2d 218">648 P.2d 218, 221 (1982), were followed, under which Ronald's Binger lease obligation to Joan is subtracted from the value of the property (including the Binger lease) awarded to Ronald and added to the value of the property awarded to Joan, then "Defendant [Joan] gets an effective award of $ 996,256.00 while the Plaintiff [Ronald] gets an award of $ 991,624.00." Briefs thereafter presented to the Kansas court focused on the expected Federal income tax treatment of Ronald's payments under the Journal Entry of Divorce and various proposed alternatives. In the course of this argumentation, Joan's divorce counsel took the position that "it was the intent of the [Kansas] Court that the alimony payments based on 33% of the Binger lease be deductible by the Plaintiff [Ronald] and ordinary income to the Defendant [Joan]". The Kansas court issued a Journal Entry (hereinafter sometimes referred398 to as the Journal Entry Denying Modification) on March 1, 1984, which denied Joan's motion, and stated that -- 3. The Court reconsidered whether alimony should be granted in the manner set out in the Journal Entry of Divorce and chose not to grant to Defendant [Joan] an interest in the Binger Lease in lieu of alimony. * * * 6. The Court did not reconsider the tax consequences raised by Defendant's [Joan]'s Motion.On June 20, 1983, before the hearing that led to the Journal Entry of Divorce, Joan filed a motion to compel Ronald to reimburse her for certain expenses that she had paid or incurred. This motion was dealt with in a Journal Entry filed on November 20, 1983. In this Journal Entry the Kansas court ordered Ronald to pay $ 1,261.28 to a savings and loan as a mortgage payment on the family residence (which had been awarded to Joan), and to reimburse Joan $ 1,042.16 for certain specified medical expenditures. In this Journal Entry the Kansas court ruled as follows: 7. The payments referred to above are intended to be for the support of Defendant [Joan] by Plaintiff [Ronald] and therefore are maintenance payments.During the years before us, Ronald paid the399 amounts shown in table 2 to Joan pursuant to the Binger lease provision of the Journal Entry of Divorce. TABLE 2YearAmount Paid1984$ 74,823.001985139,828.69198691,846.40Total306,498.09On their tax returns for the years before the Court, petitioners reported their adjusted gross incomes in the amounts shown in table 3. Joan's amounts do not include the payments she received from Ronald. Ronald's amounts are net of his deductions for the payments he made to Joan. TABLE 3YearJoanRonald 1984$ 1,142$ 264,29319852,155126,73519862,4531Of the payments made by Ronald to Joan, $ 24,000 in each year are periodic payments in discharge of a legal obligation imposed on Ronald because of a marital or family relationship; the remainder of the payments in each year are a division of property. OPINION Under section 71(a)(1), 5401 in general, a taxpayer's gross income includes periodic payments received from the taxpayer's former spouse in discharge of a legal obligation which the legal 400 separation decree or divorce decree imposes on the former spouse because of the marital or family relationship. Section 2156 provides that, if an amount is includable in the recipient's gross income under section 71, then the taxpayer may deduct the amount from his or her gross income. Joan and respondent contend that Joan need not include in income the Binger lease payments she received from Ronald, because these payments do not constitute alimony but rather are part of a division of property. Ronald argues that the Binger lease payments he made to Joan do not represent an additional division of marital property; rather, the payments are support to Joan includable in her income and deductible by him. We agree in part with Joan and respondent, and in part with Ronald. Section 71(a)(1) provides that a taxpayer is to include payments in gross income402 if each of a series of requirements has been satisfied. One requirement is that the payments have been made in discharge of a legal obligation imposed "because of the marital or family relationship." 7 The quoted phrase has been interpreted to require that, in order to be includable, the payment must be in the nature of support rather than a property settlement. Riley v. Commissioner, 649 F.2d 768">649 F.2d 768, 772 (10th Cir. 1981), affg. T.C. Memo. 1979-237; Beard v. Commissioner, 77 T.C. 1275">77 T.C. 1275, 1283 (1981); Warnack v. Commissioner, 71 T.C. 541 (1979). In resolving the character of an award in a divorce or separation decree, great weight is given to the language and structure of the decree. Griffith v. Commissioner, 749 F.2d 11">749 F.2d 11, 13 (6th Cir. 1984), affg. T.C. Memo. 1983-278.403 However, the determination of whether payments are in the nature of support or part of a property settlement is not controlled by the labels assigned to the payments by the court in the divorce decree or by the parties in their agreement. Mills v. Commissioner, 442 F.2d 1149">442 F.2d 1149, 1151 (10th Cir. 1971), affg. 54 T.C. 608">54 T.C. 608, 618 (1970); Jacklin v. Commissioner, 79 T.C. 340">79 T.C. 340, 351-352 (1982); Beard v. Commissioner, 77 T.C. at 1283-1284; Warnack v. Commissioner, 71 T.C. at 551. Rather, the issue is a factual one of intent. Crouser v. Commissioner, 668 F.2d 239">668 F.2d 239, 242 (6th Cir. 1981), affg. 73 T.C. 1113">73 T.C. 1113 (1980); Mills v. Commissioner, 442 F.2d at 1151. In the case of an ambiguous decree, resolution of the issue requires an examination of all the surrounding facts and circumstances. Jacklin v. Commissioner, supra; Beard v. Commissioner, 77 T.C. at 1284. This Court has identified the following404 factors, the presence of which indicates that the payments are in the nature of a property settlement, and the absence of one or more of which may tend to indicate that the payments are more in the nature of a support allowance: (1) That the parties in their agreement (or the court in its decree) intended the payments to effect a division of their assets, (2) that the recipient surrendered valuable property rights in exchange for the payments, (3) that the payments are fixed in amount and not subject to contingencies, such as the death or remarriage of the recipient, (4) that the payments are secured, (5) that the amount of the payments plus the other property awarded to the recipient equals approximately one-half of the property accumulated by the parties during the marriage, (6) that the need of the recipient was not taken into consideration in determining the amount of the payments, and (7) that a separate provision for support was provided elsewhere in the decree or agreement.Beard v. Commissioner, 77 T.C. at 1284-1285 (citations omitted). In Beard these factors were marshaled in the context of testing, or classifying, what was arguably405 a principal sum, within the meaning of section 71(c). However, the Beard factors have also been looked to for guidance in situations which do not involve a principal sum analysis. Kan. Stat. Ann. section 60-1610(b) (1983) deals with financial matters in divorce decrees. Paragraph (1) provides, in pertinent part, as follows: (1) Division of property. The decree shall divide the real and personal property of the parties * . In making the division of property the court shall consider * * the allowance of maintenance or lack thereof; * * * and such other factors as the court considers necessary to make a just and reasonable division of property.Paragraph (2) provides, in pertinent part, as follows: (2) Maintenance. The decree may award to either party an allowance for future support denominated as maintenance * * . The decree may make the future payments modifiable or terminable under circumstances prescribed in the decree. * * the court may not award maintenance for a period of time in excess of 121 months. * * * The recipient may file * * * motions for reinstatement of maintenance * * , but no single period of reinstatement ordered by the court406 may exceed 121 months.After examining the ruling, the Journal Entry of Divorce, and the Journal Entry Denying Modification, we conclude that the language used therein is in conflict as to whether the Kansas court intended that the payments Ronald was to make to Joan were to represent support or a division of property. On the one hand, both the Journal Entry of Divorce and the Journal Entry Denying Modification refer to the payments as alimony. On the other hand, the Journal Entry of Divorce does not make any findings as to Joan's need for support or Ronald's ability to pay support, nor are the amounts of the payments under the Binger lease in any way affected by Joan's need or Ronald's ability to pay. Also, on the one hand, the Kansas court rejected Joan's plea for an interest in the Binger lease that would survive her, that she could leave to her children, thus apparently rejecting the property division approach. On the other hand, the Kansas court rejected Ronald's contention that the Binger lease payments should end on Joan's remarriage or cohabitation. Under Kansas precedents (discussed infra) this appears to reject the support payment approach. 8407 Thus, the language of the various court rulings in the divorce proceedings gives support to conflicting conclusions as to the Kansas court's intent. In examining the other Beard factors, we find ourselves faced with an award of the Kansas court which is neither fish nor fowl, partaking of some of the elements of both an award of support and a division of property. I. Analysis of Award of SupportThe Binger lease payments have the following aspects of an award of support: (1) They are labeled "alimony" in the Journal Entry of Divorce; (2) they are for a period of 121 months, the maximum period of time for an award of support under Kan. Stat. Ann. section 60-1610(b)(2) (1983); (3) they are to end on Joan's death; and (4) Joan had a need for some amount of support which is not otherwise provided for in the Journal Entry of Divorce. To conclude that the Binger lease payments are in their entirety an award of support would require us to determine that the Kansas court divided the marital estate substantially unequally. From the information in table 1, supra, it appears that the property and liabilities may have been divided about evenly. However, if the Binger lease408 were added in its entirety to Ronald's side, then Ronald would have substantially more than Joan. Indeed, as we have found, Ronald's divorce counsel told the Kansas court that, if Joan were treated as having been given a property division award of 33 percent of the Binger lease, then Joan and Ronald would have divided the marital property almost exactly in half. Also, if we were to treat the Binger lease payments as support, then the consequences of that conclusion pose difficulties in reconciling the Journal Entry of Divorce with Kansas law. We would have to conclude that the payments satisfy Ronald's obligation to support Joan, even though if the income from the Binger lease decreased and Ronald were to substitute another source of income, then his ability to provide support might remain constant while his required payments to Joan would decrease. Conversely, if Joan were to secure an additional source of income, then her need would decrease while Ronald's obligation would remain constant. Although the Kansas court reserved jurisdiction to rule on calculating the payments under the lease, the Journal Entry of Divorce does not mention any further obligation of Ronald to Joan409 if the Binger lease ceases operations, implying that the Kansas court would not act to redress any inequities which might result from the lease payments. It appears that if the payments are alimony, or maintenance, then the Kansas court has the power to modify or even extend the payments under State law despite the apparent limitations in the language of the Journal Entry of Divorce. Kan. Stat. Ann. sec. 60-1610(b)(2) (1983). Moreover it appears to be the policy of the Kansas courts that a payee's remarriage makes "a prima facie case which requires the court to end it [alimony payments], in the absence of proof of some extraordinary circumstances justifying its continuance." Herzmark v. Herzmark, 199 Kan. 48">199 Kan. 48, 54, 427 P.2d 465">427 P.2d 465, 470 (1967). If we were to conclude that the Binger lease payments were entirely for support, then we would have to conclude that the Kansas court in this instance refused to order support payments to end on Joan's remarriage in the teeth of longstanding policy that (1) support payments ordinarily are to end on remarriage, Herzmark v. Herzmark, supra, and (2) a410 trial court cannot avoid the Herzmark rule by ordering that permanent alimony shall not terminate because of remarriage. Wright v. Wright, 209 Kan. 628">209 Kan. 628, 498 P.2d 80">498 P.2d 80 (1972). II. Analysis of Division of PropertyThe payments also have the following aspects of a division of property: (1) The payments are determined solely by the net income of the lease and are not related to either Joan's need for support or Ronald's ability to pay support; (2) Joan had a vested but undetermined interest in the Binger lease at the time of the divorce, Cady v. Cady, 224 Kan. 339">224 Kan. 339, 581 P.2d 358">581 P.2d 358 (1978); Kan. Stat. Ann. sec. 23-201(b) (1983); 9 (3) Joan received a right to 33 percent of the net proceeds of a sale of the Binger lease if the sale occurs within 121 months of the filing of the Journal Entry of Divorce; and (4) the Kansas court specifically decided that the payments would continue even if Joan remarried or cohabited. 411 To conclude that the Binger lease payments are in entirety a property division, we would have to ignore the contemporaneous analysis of Joan's divorce counsel that "it was the intent of the [Kansas] Court that the alimony payments based on 33% of the Binger lease be deductible by the Plaintiff [Ronald] and ordinary income to the Defendant [Joan]". Also, we would have to conclude that Joan's property interest would be a full 33 percent if the Binger lease were sold, but a much smaller interest (the lesser of a life estate or an interest for a term) if the Binger lease were not sold. Finally, we would have to ignore the many Kansas opinions that indicate that the use of the label "alimony" in a divorce decree may convert an award into support payments even if the substance of property settlement was intended. See Wallace v. Wallace, 214 Kan. 344">214 Kan. 344, 520 P.2d 1221">520 P.2d 1221 (1974); Beck v. Beck, 208 Kan. 148">208 Kan. 148, 490 P.2d 628">490 P.2d 628 (1971). Thus, the Binger lease payments do not fit neatly in the property division category. III. Allocation Between Support and Property DivisionThe parties' efforts have been412 devoted to persuading us that the Binger lease payments were entirely for Joan's support or were entirely to divide the marital property. No party suggests that the Binger lease payments were made, in whole or in part, for any other purpose; e.g., because of an agreement to repay a loan or to transfer property. See Kern v. Commissioner, 55 T.C. 405">55 T.C. 405, 408 (1970). And nothing in the record suggests that the Binger lease payments were made for any purpose other than the two pressed on us by the parties. As our analysis makes clear, the Binger lease payments have some characteristics that fit them for support and others that fit them for property division. They have some characteristics that are incompatible with support and others that are incompatible with property division. It seems to us that the Binger lease payments were intended to serve both functions and that it was not intended that either function predominate. In fact, we may speculate that the Kansas court orders were deliberately crafted to achieve this ambiguous result. Under these circumstances, we believe the appropriate solution is to allocate the Binger lease payments between the413 two categories. See Hayutin v. Commissioner, 508 F.2d 462">508 F.2d 462, 469 (10th Cir. 1974), affg. T.C. Memo 1972-127">T.C. Memo. 1972-127; Soltermann v. United States, 272 F.2d 387">272 F.2d 387, 390 (9th Cir. 1959); Bishop v. Commissioner, 55 T.C. 720">55 T.C. 720, 728 (1971). 10 Although neither the ruling, the Journal Entry of Divorce, nor the Journal Entry Denying Modification makes such a segregation, we believe there is adequate evidence in the record to enable us to make a determination as to the extent to which the payments were intended for support.Joan had received a temporary order for support in the amount of $ 2,000 per month which Ronald paid. 11 This preliminary determination by the Kansas court provides us with convincing evidence of what the Kansas court considered was essential for Joan's support, and we hold, accordingly, that the annual total of414 those payments was paid for Joan's support under the Journal Entry of Divorce. We conclude that out of the amounts paid by Ronald to Joan during the years in issue, $ 24,000 per year (twelve $ 2,000 payments) was415 paid for Joan's support and the remainder was paid by Ronald to Joan as a property division -- essentially to acquire Joan's vested but undetermined interest in the Binger lease. As a result, only $ 24,000 per year of the payments in question was deductible by Ronald on his 1984 and 1985 Federal tax returns and includable by Joan in her 1984, 1985, and 1986 Federal tax returns. The remainder of the payments were part of a property settlement, and, under the provisions of sections 71 and 215, were neither deductible by Ronald nor includable in Joan's income. Ronald argues that if we conclude that the payments are part of a division of property, then as a necessary corollary, Joan must be an owner of the Binger lease and therefore taxable on her share of the income from it. Interestingly, Joan argues that "The structure of the award puts Joan in the same position as an owner of a one-third share in the production." We disagree with both Ronald and Joan. Because we conclude that the State court, in effect, assigned 33 percent of the net proceeds of the Binger lease to Joan without assigning to her ownership of the underlying income-producing property, Ronald is properly taxable 416 on all of the income of the Binger lease and is correspondingly entitled to all the appropriate business deductions, which deductions have not been disallowed by respondent. 12On brief, Ronald contends that -- Granting Joan 33% of the income from the Binger Lease for a period of 121 months can hardly be considered the court's attempt to divide the Praters' assets in half. If the court had intended to effect a 50-50 division of the property, there were certainly more direct and precise ways to accomplish that goal.The "more direct and precise ways to accomplish that goal" would have involved valuation of the property and sale or joint management of the property. The Kansas court evidently tried to get Joan and Ronald to figure out a way to deal with this, especially since the Binger lease was so large a factor in their joint finances, as to both net worth and income. However, valuation417 turned out to be not feasible, and the Kansas court was impressed by Ronald's argument that both sale and joint management were unwise. We conclude that more direct and precise ways to accomplish a property division were not available, as a practical matter. We conclude that the Kansas court undertook to do what Joan and Ronald failed to do -- effectuate a practical and reasonably fair financial arrangement -- under great constraints. The product of the Kansas court clearly was a rejection of each side's basic construct, and not merely a compromise between the spouses' positions. We hold, for Ronald, that $ 24,000 each year is deductible by him under section 215 and includable by Joan under section 71. We hold, for Joan and respondent, that payments by Ronald in excess of $ 24,000 in any year are not includable by Joan under section 71 and not deductible by Ronald under section 215. The Kansas court urged Joan and Ronald to settle their dispute as to the Binger lease and other financial aspects of their divorce. When Joan and Ronald failed to do so, the Kansas court imposed a solution that rejected both litigants' approaches. This solution satisfied the Kansas court's obligations418 to resolve the divorce dispute. Also, it led to the present consolidated cases. This Court urged the parties to settle the instant cases. Respondent indicated a willingness to act as stakeholder and accept any solution that was consistent under sections 71 and 215. At the trial of the instant cases, this Court suggested a possible approach that Joan and Ronald might use to enable them to reach an accommodation. Other approaches were available. Again, Joan and Ronald failed to reach an agreement. Now, after nine briefs, an interlocutory opinion (supra note 4), and many months, we have imposed a solution that rejects both petitioners' approaches. Surely, the many motions made, briefs filed, and hearings held in the Kansas divorce proceedings and the instant tax proceedings, consumed much substance and time that could have been put to better use by Joan and Ronald. The motions, briefs, hearings, and decision-making imposed added burdens on tax-supported courts of the United States and Kansas, burdens that Joan and Ronald could and should have avoided. Because of the foregoing, respondent's concessions on other matters, and various computational adjustments, Decisions419 will be entered under Rule 155. Footnotes1. Although respondent determined a deficiency against petitioner Ronald R. Prater (hereinafter sometimes referred to as Ronald) for 1986, Ronald had already paid the 1986 amount some 3 months earlier and had filed a claim for refund about 12 days before the notice of deficiency. Accordingly, Ronald's petition in this Court does not contest the 1986 deficiency determined by respondent; however, 1986 is before this Court because a deficiency was also determined against petitioner Joan E. Prater (hereinafter sometimes referred to as Joan) for that year.↩2. Other adjustments relating to depletion, medical and dental expense, investment credit recapture and carryover, and self-employment tax are computational; they are to be redetermined based on our holding as to the issue for decision.↩3. The 1984 revision of the income tax treatment of alimony and separate maintenance payments (by sec. 422 of the Deficit Reduction Act of 1984 (DRA 1984), Pub. L. 98-369, 98 Stat. 494, 795), generally does not apply to divorce instruments executed before Jan. 1, 1985. Sec. 422 (e)(1) of DRA 1984, 98 Stat. 798; see sec. 1.71-1T(e), Temporary Income Tax Regs., 49 Fed. Reg. 34458 (Aug. 31, 1984). Because the divorce decree here involved is a 1983 document, the references in this opinion to secs. 71 and 215↩ are references to those sections of the Internal Revenue Code of 1954 as in effect for periods immediately before the enactment of DRA 1984.4. Our denial of Ronald's motion that we take judicial notice of certain recent matters involved in petitioners' divorce is explained in our opinion in T.C. Memo. 1993-273↩.1. Ronald's 1986 year is not before us (supra↩ note 1) and his tax return for that year is not in evidence.5. Sec. 71 provides, in pertinent part, as follows: SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS. (a) General Rule. -- (1) Decree of divorce or separate maintenance. -- If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of * * a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation. * * * (c) Principal Sum Paid In Installments. -- (1) General rule. -- For purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments. (2) Where period for payment is more than 10 years. -- If, by the terms of the decree, instrument, or agreement, the principal sum referred to in paragraph (1) is to be paid or may be paid over a period ending more than 10 years from the date of such decree, instrument, or agreement, then (notwithstanding paragraph (1)) the installment payments shall be treated as periodic payments for purposes of subsection (a), but (in the case of any one taxable year of the wife) only to the extent of 10 percent of the principal sum. For purposes of the preceding sentence, the part of any principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be treated as an installment payment for the taxable year in which it is received.[See supra↩ note 3, for 1984 revision information.]6. SEC. 215. ALIMONY, ETC., PAYMENTS. (a) General Rule. -- In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. No deduction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682, the amount thereof is not includible in the husband's gross income.[See supra↩ note 3, for 1984 revision information.]7. In the instant cases, the parties agree that the other requirements of sec. 71↩ have been met.8. The Kansas Supreme Court has warned parties and courts that "when the original decree of divorce is entered care should be exercised so that any payments to equalize the division of property are not included with payments for future support denominated as alimony." Herzmark v. Herzmark, 199 Kan. 48">199 Kan. 48, 52, 427 P.2d 465">427 P.2d 465, 468 (1967). The Kansas Supreme Court has reaffirmed that warning in later opinions holding that where both court and counsel regarded a lump sum as alimony, the trial court could not later take the position that the award was in the nature of a property settlement, Beck v. Beck, 208 Kan. 148">208 Kan. 148, 490 P.2d 628">490 P.2d 628 (1971); and that where the parties were unable to agree upon cash payments to equalize a property division and upon alimony and requested that any cash award be denominated as alimony to take advantage of Federal tax provisions, the payee could not subsequently take the position that the payments were a property settlement. Wallace v. Wallace, 214 Kan. 344">214 Kan. 344, 520 P.2d 1221">520 P.2d 1221 (1974). The parties have not directed our attention to, and we have not found, any case in which the Kansas appellate courts have ruled on whether the trial court's denomination of payments as "alimony" is controlling when the parties disagree about the nature of the payments and when the trial court's statements and order are somewhat inconsistent with the ordinary indicia of "alimony" under Kansas law.↩9. In Wiles v. Commissioner, 499 F.2d 255">499 F.2d 255 (10th Cir. 1974), affg. 60 T.C. 56">60 T.C. 56 (1973), the Court of Appeals for the Tenth Circuit held that under Kansas law, the wife had no vested rights in her husband's property at the time of the transfer. See McIntosh v. Commissioner, 85 T.C. 31">85 T.C. 31, 38 (1985). After the Wiles opinion, the Supreme Court of Kansas considered the rights of a wife in her husband's property and determined that upon the filing of divorce, each spouse has a vested but undetermined interest in all the property individually or jointly held by the spouses. Cady v. Cady, 224 Kan. 339">224 Kan. 339, 344, 581 P.2d 358">581 P.2d 358, 362-363 (1978). In the meanwhile, the Kansas legislature also was reacting to Wiles. In 1978, Kansas enacted Kan. Stat. Ann. sec. 23-201(b) (1978), which embodies essentially the same rule, prospectively, as Cady v. Cady, supra, shortly afterward announced was already the law. See Wachholz v. Wachholz, 4 Kan. App. 2d 161">4 Kan. App. 2d 161, 603 P.2d 647">603 P.2d 647 (1979). The Court of Appeals for the Tenth Circuit recognized this change in Kansas law in Maus v. Maus, 837 F.2d 935">837 F.2d 935, 939 (10th Cir. 1988), disapproved of on another issue, Farrey v. Sanderfoot, U.S. , 111 S. Ct. 1825">111 S. Ct. 1825, 1828 (1991). In determining what Kansas law is, we follow the Supreme Court of Kansas' exposition of that law. See Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456, 465 (1967); Ward v. Commissioner, 87 T.C. 78">87 T.C. 78, 92↩ (1986). In view of the subsequent decision of the Kansas Supreme Court, we conclude that Joan had a vested but undetermined interest in the Binger lease.10. See also Hall v. Commissioner, T.C. Memo. 1982-605↩.11. We note that Ronald made additional payments of $ 1,000 per month; however, he stopped making the additional payments shortly before the trial in the divorce case, about 10 months before the Kansas court filed the Journal Entry of Divorce. In this respect, Ronald's temporary voluntary payments are distinguishable from the voluntary payments in Bishop v. Commissioner, 55 T.C. 720">55 T.C. 720, 728↩ (1971). At one point, Ronald proposed to pay $ 2,500 per month to Joan as support. Because this would be his total outlay under that proposal and this was offered in opposition to Joan's proposal that she receive a one-half interest (or its equivalent) in the Binger lease, we do not regard Ronald's proposal as persuasive that Joan's proper level of support was more than $ 2,000 per month.12. See also Yonadi v. Commissioner, T.C. Memo. 1992-602↩, on appeal (3d Cir., May 18, 1993).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619670/	Houston Title Guaranty Company, Petitioner, v. Commissioner of Internal Revenue, RespondentHouston Title Guaranty Co. v. CommissionerDocket No. 48482United States Tax Court22 T.C. 989; 1954 U.S. Tax Ct. LEXIS 131; July 30, 1954, Filed July 30, 1954, Filed 131 Decision will be entered for the respondent. Petitioner is a corporation organized under the laws of Texas and during the year 1949 was engaged in the title insurance business conducted as required by article 1302a of the Revised Civil Statutes of Texas and was subject to Federal income tax under the provisions of section 204 of the Internal Revenue Code. Petitioner collected premiums on its title policies in 1949 of $ 162,875.34 and increased the credit balance in an account on its books entitled "Guaranty Loss Reserve" by 5 per cent of its premiums collected as required by section 10, article 1302a, Revised Civil Statutes of Texas. On its income tax return petitioner deducted the amount of $ 8,143.77 as an operating expense in arriving at its taxable income. The Commissioner disallowed the deduction and has increased petitioner's taxable income accordingly. Held, the Commissioner is sustained. The amount is not deductible from income or excludible from gross income under any provisions of section 204, Internal Revenue Code, under which petitioner is taxable. C. M. Hudspeth, Esq., for the petitioner.Paul M. Newton, Esq., for the respondent. Black, Judge. BLACK 989 The Commissioner has determined a deficiency in petitioner's income tax for the year 1949 of $ 1,873.07. The deficiency is due to the addition to the net income reported by petitioner on its return of $ 8,143.77. That adjustment is explained in the deficiency notice as follows:(a) It is held that premiums paid to a title insurance company are earned when received, and that reserves set up to meet future liabilities are not deductible from gross income (See133 Dallas Title and Guaranty Company vs. Comm. 40 BTA Reports, p. 1022). Addition to statutory reserve for guaranty losses claimed on return is herein disallowed.To this adjustment by the Commissioner petitioner assigns errors as follows:(a) The Commissioner erred in disallowing as a deduction the sum of $ 8143.77, which amount was set aside as a reserve required by the laws of Texas.(b) The Commissioner also erred in treating as income said sum of $ 8143.77 when such sum constituted unearned premiums and was not a free asset of petitioner.990 The facts have been stipulated with two exhibits attached to the stipulation, from which we make the following findings of fact.FINDINGS OF FACT.Petitioner is a corporation duly organized in 1908 under the laws of the State of Texas with principal place of business at Houston, Texas. It keeps its books and prepares its income tax returns on the accrual basis of accounting. Its corporate income tax return for the taxable year ended December 31, 1949, was filed with the collector of internal revenue for the first district of Texas.During the year 1949, petitioner was engaged in the title insurance business conducted as required by134 article 1302a of the Revised Civil Statutes of Texas, and was subject to Federal income tax under the provisions of section 204 of the Internal Revenue Code. Section 10 of article 1302a, Revised Civil Statutes of the State of Texas (now article 9.11 of the Texas Insurance Code), which was in effect during the calendar year 1949, provided, as follows:Reserves of title insurance companies.Sec. 10. Every company doing a title insurance business under the provisions of this Act shall set aside annually as a reserve 5% of its gross premiums so collected, before any dividends are paid, the totals of such reserve shall never be required to exceed a total reserve of $ 100,000.00. Such reserve must be maintained separately and apart from the capital of the company, and shall be invested in such securities as are admissible for investment by life insurance companies under the laws of this State. Funds accumulated under this provision shall never be used for the payment of any obligation other than those connected with title insurance, and, in the event of the insolvency of a company, the fund, hereby provided shall be used to protect title insurance policy holders even though there be 135 no accrued title insurance claims and even though there be unpaid obligations of other sorts.At all times throughout the year 1949, petitioner complied with the foregoing Texas statute and maintained separately and apart from its capital 5 per cent of its gross premiums collected during such year. Prior to the calendar year 1949, petitioner had established an account on its books entitled "Guaranty Loss Reserve," and there was a credit balance in said account on January 1, 1949, in the amount of $ 56,532.82.The gross premiums collected by petitioner during the calendar year 1949 within the meaning of article 1302a, section 10, above quoted, amounted to $ 162,875.34 and, therefore, 5 per cent of the gross premiums collected during 1949 amounted to $ 8,143.77.As of December 31, 1949, petitioner increased the credit balance in the account on its books entitled "Guaranty Loss Reserve" to the amount of $ 64,676.59 by crediting that account and debiting an account entitled "Statutory Reserve-Guaranty Losses" with the amount of $ 8,143.77.991 On its income tax return for the taxable year ended December 31, 1949, petitioner deducted the amount of $ 8,143.77 as an operating expense136 in arriving at its taxable net income. In the statutory notice of deficiency mailed to petitioner by respondent on February 17, 1953, such deduction of $ 8,143.77 was disallowed and taxable net income increased accordingly.OPINION.It is agreed by both parties that petitioner, during the taxable year 1949, was engaged in the title insurance business and was subject to Federal income tax under the provisions of section 204, Internal Revenue Code. The applicable portions of section 204 of the Code are printed in the margin. 1137 The question which we are called upon to decide is this: Is the total amount of premiums received in 1949 by petitioner, a title insurance company, includible in its gross income under section 204 without any exclusion or deduction therefrom for an addition made by it 992 during that year to a reserve of indefinite duration required by Texas law and measured by a stated percentage of the gross premiums collected?It is clear that, under section 10 of article 1302a of the Revised Civil Statutes of Texas, petitioner was required to set aside as a reserve 5 per cent of its gross premiums collected in each year. In compliance with this provision of the statute, petitioner did set aside in 1949, 5 per cent of its gross premiums collected to be added to the reserve already carried on its books as "Guaranty Loss Reserve." The amount of this addition was $ 8,143.77, and petitioner deducted it as an operating expense. If section 204 of the Code provided for the deduction of additions to taxpayer's reserves which were made in compliance with law, then unquestionably petitioner would be entitled to the deduction which it claims, but not as an operating expense. But section 204 provides138 no such deduction to the class of insurance companies which are taxable under the provisions of that section. That fact is made clear by the Court of Appeals for the Second Circuit in City Title Ins. Co. v. Commissioner, 152 F. 2d 859, affirming a Memorandum Opinion of this Court. In that case the court said:The revenue statute expressly provides, in sections 202 and 203, * * Int. Rev. Code, that, as to certain insurance companies, percentages of certain reserve funds, including some required by a state statute, may be deducted from gross income. No similar deduction is referred to in section 204, which governs here. Consequently, the existence of a reserve or the mere fact that it was required by a state statute, cannot justify the deduction taxpayer claimed. The sole issue here, then, is whether the sums set apart in the reserve are "unearned premiums."Such is the issue we have in the instant case. Does the $ 8,143.77 in question represent unearned premiums? We think not.In American Title Co., 29 B. T. A. 479, we held that premiums paid a title insurance company for policies guaranteeing land titles 139 are earned when paid and constitute gross income under section 204 of the Revenue Act of 1928 and a reserve set up to meet future liabilities under title insurance policies is not deductible from gross income. We were affirmed by the Court of Appeals for the Third Circuit, see 76 F.2d 332">76 F. 2d 332.Since American Title Co., supra, there have been other cases which have allowed, under the facts and circumstances there present, the taxpayer title insurance company to deduct additions to its reserves as unearned premiums. Among these cases are: Title & Trust Co., 15 T. C. 510, affirmed per curiam (C. A. 9) 192 F. 2d 934; United States v. Pacific Abstract Title Company, (C. A. 9) 192 F. 2d 934; Early v. Lawyers Title Ins. Corporation, (C. A. 4) 132 F.2d 42">132 F. 2d 42. The holding of the cases to which reference is made above is to the effect that, 993 under certain circumstances, a portion of the premiums may be considered as unearned when received if given by law or contract that status for a definite period of 140 time. The leading case establishing that principle is Early v. Lawyers Title Ins. Corporation, supra, wherein the court distinguished the American Title Co. case, supra, though recognizing the validity of the general rule established therein. The Lawyers Title case involved a title insurance company operating under Virginia law. The Virginia statute required a reservation of 10 per cent of the original premiums and an amortization of that premium on a specified formula over the period of risk, with the write-off largest in the early years when the risk is presumably the greatest. If no time was specified in the contract, the statute provided that the risk would be deemed to be for 20 years. The law, as quoted in the court's opinion, further provided:Said sums, herein required to be reserved for unearned premiums on contracts of title insurance, shall at all times and for all purposes be considered and constitute unearned portions of the original premiums. * The court held that the Virginia statute actually gave to that part of the premiums the status of being unearned and that until the times limited in the statute had expired, 141 the premiums were held in trust for the benefit of the policyholders.It is immediately apparent that the distinction in the two lines of cases hinges upon the particular State law involved. As the court in Early v. Lawyers Title Ins. Corporation, supra, said:We must look to the law of the state to determine the nature of the interest which the company has in the portions of the premiums reserved. Having determined this, we look to the federal statute to determine whether such interest is taxable thereunder. * * In Title & Trust Co., supra, we said:Deductibility of the statutorily prescribed reserves out of title insurance premium income thus turns on whether the local statute calls for a mere insolvency reserve of indefinite duration or whether the required reserve is established by segregating a portion of the premium income for a specified period when the risk of loss is presumably greatest. In the latter instance, the reserve becomes taxable income to the company when it is released for general corporate purposes at the expiration of the prescribed period. Commissioner v. Dallas Title & Guaranty Co., 119 Fed. (2d) 211.142 As we construe the Texas statute, section 10, article 1302a, under which petitioner was required to accumulate 5 per cent of its premium receipts into a reserve fund until the amount of the fund reached $ 100,000, the reserve is an insolvency reserve of indefinite duration and it is impossible to tell when, if ever, any part of the reserve will be released as "free assets" for general corporate purposes. Such a reserve, therefore, does not represent unearned premiums within the 994 meaning of such cases as Early v. Lawyers Title Ins. Corporation, supra.In addition to American Title Co., supra, and City Title Ins. Co. v. Commissioner, supra, the Commissioner cites and relies upon Wayne Title & Trust Co. v. Commissioner, 195 F. 2d 401, affirming 16 T. C. 924, and Philadelphia Title Insurance Co., 1068">17 T. C. 1068, affirmed per curiam 199 F.2d 308">199 F. 2d 308.We agree with the Commissioner that the facts in the instant case bring it within the ambit of American Title Co., supra,143 and that line of cases, and it does not fall within the ambit of that group of cases of which Early v. Lawyers Title Ins. Corporation, supra, is the leading case. We, therefore, decide the issue involved in favor of the Commissioner and sustain the deficiency.Both the taxpayer and the Commissioner have made some reference in their briefs to Commissioner v. Dallas Title & Guaranty Co., 119 F. 2d 211, by the Court of Appeals for the Fifth Circuit. We do not think that case is directly in point here for either party. Dallas Title & Guaranty Co., 40 B. T. A. 1022, which was reversed by the Fifth Circuit did not involve, except perhaps indirectly, the deductibility of additions to the taxpayer's reserves. It involved the question as to whether $ 40,000, which the taxpayer in 1934 transferred from an account on its books carried as "Reserves for Unearned Premium" to its undivided profits account, should be taken into income in the year of transfer. The Fifth Circuit's decision rested largely on the principle of estoppel as applied against a taxpayer who, during the years 1912 through144 1927, had excluded from gross income that portion of its premiums which it had annually placed in a reserve under Texas law existing prior to 1929, and then, in 1934, when it transferred a part of the fund to undivided profits, attempted to argue that the amounts added to the reserve should have been treated as earned in those prior years and, hence, could not be taxable in 1934. The court held against this contention on the ground of estoppel. We have examined carefully our opinion in Dallas Title & Guaranty Co., supra, and the Fifth Circuit's opinion which affirmed us in part and reversed us in part, and we do not think there is anything either in our own holding or in the Fifth Circuit's holding which is contrary to what we have held here. In Dallas Title & Guaranty Co., supra, we said:It is now settled, however, that premiums paid a title insurance company are earned when paid and constitute gross income when received, and that reserves set up to meet future liabilities under title insurance policies are not deductible from gross income. American Title Co., 29 B. T. A. 479; affd., 76 Fed. (2d) 332. * *145 We still think that is a correct statement of the law as governs additions to a title company's reserves as required by section 10, article 1302a, Revised Civil Statutes of Texas. As we have already stated, we 995 do not think anything to the contrary was decided in Commissioner v. Dallas Title & Guaranty Co., supra.Decision will be entered for the respondent. Footnotes1. SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.(a) Imposition of Tax. -- (1) In general. -- There shall be levied, collected, and paid for each taxable year upon the normal-tax net income and upon the corporation surtax net income of every insurance company (other than a life or mutual insurance company) * * * taxes at the rates specified in section 13 or section 14 (b) and in section 15 (b).* * * (b) Definition of Income, Etc. -- In the case of an insurance company subject to the tax imposed by this section -- (1) Gross income. -- "Gross income" means the sum of (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property, and (C) all other items constituting gross income under section 22; * (2) Net income. -- "Net income" means the gross income as defined in pargaraph (1) of this subsection less the deductions allowed by subsection (c) of this section; * * (4) Underwriting income. -- "Underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;(5) Premiums earned. -- "Premiums earned on insurance contracts during the taxable year" means an amount computed as follows:From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year. * ** * * (7) Expenses incurred. -- "Expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows:To all expenses paid during the taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the net income subject to the tax imposed by this section there shall be deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by subsection (c) of this section.(c) Deductions Allowed. -- In computing the net income of an insurance company subject to the tax imposed by this section there shall be allowed as deductions: (1) All ordinary and necessary expenses incurred, as provided in section 23 (a); * * *(10) Deductions (other than those specified in this subsection) as provided in section 23;↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619672/	George Delong Bailey and Lella P. Bailey v. Commissioner.Bailey v. CommissionerDocket No. 110354.United States Tax Court1943 Tax Ct. Memo LEXIS 91; 2 T.C.M. (CCH) 884; T.C.M. (RIA) 43447; October 4, 194391 Petitioner, by stockholders' suit, compelled an accounting for profits made by the president of the company by means of stock manipulation. Held, the recovery by petitioner is taxable income. T. Newman Lawler, Esq., for the petitioners. Arthur Groman, Esq., for the respondent. VAN FOSSAN Memorandum Opinion VAN FOSSAN, Judge: The respondent determined a deficiency in income tax of $583.46 for the year 1937, predicated on his holding that "the amount of $7,261.30 received by you [petitioners] in the year 1937 as a result of the judgment in a civil action handed down by the Supreme Court of Pennsylvania against John Jacobs, is taxable as ordinary income." The facts were all stipulated and the stipulation is hereby adopted as the facts in the case. The following statement is sufficient for the purposes of this opinion. [The Facts] On May 23, 1926 petitioner, Lella P. Bailey, became the owner of 540 shares of common stock in Boxboard Products Company, a Delaware corporation, the stock being received in place of stock formerly held by her in Philadelphia Paper Manufacturing Company, which company was merged with the Boxboard Products Company. John Jacobs was president and 92 a director of both the above companies. In 1934 petitioner, together with certain other stockholders of Boxboard Products Company, brought an action in equity in the courts of Pennsylvania against John Jacobs, alleging that both prior and subsequent to the merger of May 23, 1926 Jacobs had so manipulated the stock and property of the company that he had profited personally in large sums of money and had increased his interest in the company at the expense of other stockholders. The plaintiffs in the equity suit demanded inter alia "that defendant be compelled to account to plaintiffs for their proportionate shares as individual stockholders of all profits, dividends, distributions and returns received by Jacobs on said stock" and for other equitable relief. The case was ultimately carried to the Supreme Court of Pennsylvania and resulted in an opinion of that court filed January 11, 1937. The court held as to some of the transactions that recovery was barred by the statute of limitations, but it rendered decision for the plaintiffs on other elements in the case. The following is quoted from the opinion of the court: In all, therefore, defendant purchased with the company's 93 money on items recoverable by plaintiffs in the present proceedings, 28,523 shares, on which he made a total profit of $907,071.52, and for this he should account, with interest on its component parts from the respective dates (June 14, 1926, July 1, 1926, June 1, 1927, and December 17, 1927) when he received the various payments from the Boxboard Company by way of redemption, distribution and liquidation. This sum is distributable among the outstanding 115,235 shares of Boxboard Company stock, less 28,523 shares purchased by defendant (which must legally be regarded as if held in the treasury of Boxboard Company) or 86,712 shares. On this phase of the case, therefore, plaintiffs are entitled to recover on each share of Boxboard Company stock held by them (when the outstanding capital stock was 115,235 shares) the sum of $10.46 per share with interest as above stated. On another angle of the case the court held plaintiffs entitled to recovery and that "such an allocation would amount to $5.55 per share, with interest as stated, and plaintiffs are entitled to that amount upon each share held by them in the Boxboard Company prior to the reduction of the capital stock on June 1, 1937. 94 Pursuant to the decree entered upon the opinion of the Supreme Court of Pennsylvania in the above described action, Lella P. Bailey recovered in the action and received during the calendar year 1937 the net sum of $7,261.30. The Boxboard Products Company, Inc., was dissolved by proclamation of the Secretary of State of Delaware in January 1937, and it is stipulated that "the cost to Mrs. Bailey of her stock in Boxboard Products Company, Inc., shall be zero." Petitioners have filed a three-page brief in which, after summarizing the facts, it is pointed out that Jacobs had abused his position of trust and confidence as an officer and director of the two companies, that the Pennsylvania Supreme Court compelled him "to disgorge the secret profits derived by him from his abuse of his fiduciary duties." Wherefore, "petitioner respectfully submits that the recovery of Mr. Jacobs constituting, as it does, a penalty imposed by law, does not constitute taxable income under the Internal Revenue Code." Petitioners submit their case on citation of , and .95 [Opinion] Respondent correctly points out that to determine whether the amount received by petitioner as the result of the suit she and others brought against John Jacobs is taxable income the nature of that action must be considered. Some recoveries as a result of litigation are taxable ( and other are not (). One test to determine the taxability of proceeds in such a case is whether or not the taxpayer therein involved had sued for and recovered profits. , is to be distinguished from the present case on this ground. The court in that case stated "the settlement was not based on a suit by the taxpayer to recover profits of which it had been deprived." The recovery decreed was in the nature of a penalty imposed by law on a faithless fiduciary. In , the damages in the court action there involved constituted in part a return of capital investment and in part 96 punitive damages, neither of which was held to be taxable. This case also is thus clearly distinguishable. In , on the other hand, where it appeared that the recovery was in part a return of capital and in part a recovery of profits made by the use of petitioner's assets, it was held by the Board of Tax Appeals and affirmed by the Circuit Court of Appeals that the return of capital was not taxable income but that the recovery of profits constitutes taxable income. The facts in that case are substantially similar to those presently before us. As indicated above, the suit in which petitioner was a plaintiff was an equity suit, asking that the defendant be compelled to account to plaintiffs for their proportionate shares as individual stockholders of "all profits, dividends, distributions and returns received." The court's opinion is clearly predicated on the theory of an accounting for profits made. None of the recovery by petitioners constituted a return of capital assets. We sustain the respondent's contention that the entire sum recovered was taxable as ordinary income. By amended petition it was alleged97 that "in the event the said moneys did constitute income to petitioner, Lella P. Bailey, during the calendar year 1937, the Commissioner erred in not determining that said income is properly taxable as long-term capital gain to petitioner, Lella P. Bailey, as a liquidating dividend * *." Since petitioner on brief makes no reference to this alternative allegation, we assume it has been abandoned. In any event, it may be pointed out pertinently that the stipulated facts are wholly insufficient to support petitioner's contention. In the opinion of the court the money was decreed to be payable directly to the petitioning plaintiffs. The funds were not paid into the corporate treasury and were not distributed by it. Attention may also be called to the fact that we have insufficient evidence upon which to base a conclusion as to the nature of the liquidation. We know only that the company was dissolved by proclamation of the Secretary of State of Delaware and that the cost to petitioner of her stock was zero. No conclusion can be predicated on such meager facts. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619673/	Frederick A. and Martha G. Alling, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentAlling v. CommissionerDocket Nos. 6197-84, 15748-84, 29586-84, 31737-84, 37132-84, 5676-85, 29996-85, 41809-85, 39519-86, 45975-86, 29527-87, 27523-88, 5214-89, 22733-90United States Tax Court102 T.C. 323; 1994 U.S. Tax Ct. LEXIS 11; 102 T.C. No. 10; February 24, 1994, Filed 11 Decisions will be entered under Rule 155. Ps deducted straddle losses in years for which deficiencies are now barred by the statute of limitations. They seek to exclude straddle gains in a later open year by the amount of such losses. The parties have stipulated that the transactions in which Ps engaged were the same as those at issue in Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001 (1984), and that they were not entered into for profit. Held, the phrase "to accurately reflect the taxpayer's net gain or loss from all positions in such straddle" modifies the phrase "not allowable as a deduction" and does not permit Ps to offset the straddle losses from closed years, which are otherwise not allowable losses, against reported gains in an open year under sec. 108(c) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, as amended by sec. 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817, since the losses already taken and the offset attempted would be an effective double deduction and would not "accurately reflect" the total straddle transaction. Held, further, Ps' contention that such gains should be excluded because12 respondent was inconsistent in excluding other straddle gains in the years before the Court is rejected. Hugh Janow, for petitioners.Theodore J. Kletnick and Maria T. Stabile, for respondent. Tannenwald, Judge. TANNENWALD323 OPINIONTannenwald, Judge: The parties having settled all but one issue, this case comes before the Court fully stipulated under Rule 122 2 by certain petitioners, on the issue of the tax treatment of the gains in the years involved herein from commodity tax straddles where the losses from those straddles 324 were improperly deducted in the previous year but cannot be disallowed due to the statute of limitations.The transactions in question were of the same type and essentially the same transactions at issue in Fox v. Commissioner, 82 T.C. 1001 (1984)13 (Fox transactions), and all involved the Arbitrage Management Investment Co. (AMIC).Petitioners with respect to whom this issue is to be resolved, their residences at the time of filing of their petitions, and the years and amounts of the deficiencies determined against them by respondent are as follows:Docket No.PetitionerResidenceYear1Deficiency 6197-84Milton and BlancheFort Lee, N.J.1979$ 23,609.00Wasserberger 15748-84Estate of JeromeEnglewood, N.J.197925,568.00Casser, deceased, Barry Casser, executor Estate of CharlotteCasser, deceased, Barry Casser, executor 29586-84Joseph and Alda CasserJoseph-Closter, N.J.197926,366.00Alda-Norwood, N.J.31737-84Roy and AntoinetteRego Park, N.Y.198017,589.52Chapman 37132-84Rony and Ellen KesslerWest Hempstead, N.Y.197934,355.0017,512.005676-85Conrad K. SterrettNew York, N.Y.197850,057.00197922,283.0029996-85Donald and MargueriteWatchung, N.J.197978,793.00Toresco 41809-85Estate of Mary L.Lancaster, Pa.197934,093.00Burkholder, deceased, Guy S. Burkholder, II executor, and John J. Burkholder, Jr., executor 39519-86Charles Diamond andGreat Neck, N.Y.1977107,155.00Hana Diamond 45975-86Ubaldo and NellieCommack, N.Y.197911,473.00Gonzalez 19803,305.0029527-87Benjamin and JudithNew York, N.Y.198072,293.00Handelman 198125,871.00[over-[overassess-assess-ment]ment]27523-88Beno and LisaSchenectady, N.Y.1980100,350.00Sternlicht 5214-89Herbert and IreneMerrick, N.Y.1980188,738.00Freiman 22733-90Gerald D. VogelNew York, N.Y.1980353,015.001981289,090.0014 In accordance with the stipulation of the parties, the findings of fact adopted by the Court in Fox v. Commissioner, supra, are incorporated by reference, including the fact that 325 the transactions involved herein were not entered into primarily for profit purposes as required by section 165. To facilitate understanding of our analysis, further facts stipulated by the parties are hereinafter set forth.The off exchange market in which the trades at issue were executed was unique and specialized and was created and administered by a brokerage firm known as AMIC. The AMIC market was characterized by features unusual for options markets, such as tying options to specific Treasury bills, trading primarily in put options, and trading only in vertical put option spreads.Trading by customers of AMIC in over-the-counter Treasury bill options displayed distinct patterns: (1) Trading was markedly seasonal; i.e., the bulk of all trades was executed in November, December, and then in January of the following year; (2) the customers of AMIC commonly engaged in identical trading sequences; and (3) 15 very few customers realized net economic profits on their transactions in vertical put options.At all times relevant to these cases, AMIC executed trades almost exclusively between and among its own customers and not with outside parties.The basic tax strategy, or template, generally utilized in the AMIC market was comprised of a series of transactions, as follows:(1) In the fall of the initial year (year I), the participant establishes a spread comprised of a long T-bill put option (for example, long 97.75, expiration 3/28/79 3) and a short T-bill put option (for example, short 97.625, expiration 3/28/79). This is commonly referred to as the initiation step.(2) Later that same year, the participant closes the long T-bill put option position (the long 97.75, expiration 3/28/79) through offset using a short T-bill put option (short 97.75, expiration 3/28/79) and simultaneously establishes a new, slightly different long position (for example, long 98.8125, expiration 3/28/79). This is commonly referred to as the "switch" step. For tax purposes and brokerage accounting, the short position described in this paragraph (2) closed the long position referred to in paragraph (1) 16 (long 97.75, expiration 3/28/79) and the short position of paragraph (1) together 326 with the long position in this paragraph (2) (short 97.625, expiration 3/28/79) comprise a new, slightly different spread position.(3) Early the next year (year II), the long and short position remaining open would be closed out for tax and accounting purposes. This is commonly referred to as the closeout step.(4) This trading strategy would typically result in claimed ordinary losses on the long puts in both year I and year II and short-term capital gains on the short puts in year II.(5) This trading strategy would usually be repeated in the fall of year II, although there would be a break between series (spring and summer) and, thus, no transactional link or relationship to the prior series of trades.Each disposition of a long or short position in a series of Fox spread transactions has been treated as a separate transaction for purposes17 of recognition of loss and gain. Generally, each Fox trading series was comprised of one initiation spread (paragraph (1)), a switch (paragraph (2)), both at the end of the initial year, and a liquidation early in the next taxable year (paragraph (3)). See Fox v. Commissioner, 82 T.C. at 1003 (1978-79 series).A variation of the above-described strategy involved an option spread series in which no switch was utilized. Both the long and short legs would be closed simultaneously. A participant would claim losses in year I based on the use of the trade date for reporting losses, while gains would be included in year II based on the position that gains are reportable on the settlement date.A separate strategy and series involved the use of T-bond options to generate putative short-term and long-term losses and gains.Generally, with respect to a spread series (see paragraphs (1)-(5) above for a description of the components), losses realized late in the year would be claimed in year I of the spread series, while gains realized early in the year from that same spread series would be included in year II. The trading sequence described in paragraphs18 (1) to (3) would comprise spread series No. 1. In year II, all petitioners involved herein began a new spread series, which for purposes of this example would be spread series No. 2. Petitioners claimed losses from spread series No. 2 in year II (the 327 first year of spread series No. 2) and included gains in year III (the second year of spread series No. 2).The issue in this case is whether petitioners may exclude gain from the second leg of straddles in a year not barred by the statute of limitations in the amount of the losses from the first leg of such straddles which they deducted in a year which is so barred. 419 Resolution of this issue involves an examination of two questions: (1) Is section 108(c) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, as amended by section 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817 (hereinafter section 108(c)), dispositive of the issue before us; (2) aside from section 108(c), does the "duty of consistency" doctrine apply to petitioners and, if it does, to what extent have the elements of that doctrine 5 been satisfied; and (3) to what extent is the result herein impacted by alleged inconsistent action by respondent. For the most part, the parties have devoted their attention to the application of the "duty of consistency" doctrine to petitioners, with the role of section 108(c) relegated to secondary consideration.20 We think that the disposition of this case turns, at least in the first instance, upon the scope of section 108(c), and it is that problem to which we first turn our attention. Before doing so, we think it important to note what is not involved herein. The stipulation of the parties states that the transactions involved herein were "Fox transactions"; i.e., "of the same type and essentially the same as the transactions at issue in Fox v. Commissioner, 82 T.C. 1001 (1984)", that the findings of fact in Fox are incorporated into the facts of this case, and that petitioners "did not enter into their Fox transactions for the 'for profit' purpose required by Internal Revenue Code § 165 (e.g., primarily for profit)". Thus, the issues 328 of the characterization of Fox type transactions as being without economic substance and therefore "sham", and of the consequences flowing therefrom, are not before us. 6 Cf. Ewing v. Commissioner, 91 T.C. 396 (1988), affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991). Accordingly, although the parties rely on or distinguish, as it suits21 their purposes, the cases applying the "duty of consistency" to "sham" transactions, 7 we will refrain from making any determination that the transactions involved herein were without economic substance and therefore substantive shams. See infra p. 336 for further comment on this aspect of the situation.22 Section 108 provides in pertinent part as follows:(a) General Rule. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions --(1) which were entered into before 1982 and form part of a straddle, and(2) to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply,any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business.(b) Loss Incurred in a Trade or Business. -- For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.(c) Net Loss Allowed. -- If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduction (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer's net gain or loss23 from all positions in such straddle.329 There is no question the straddle transactions herein fall within the scope of subsection (a)(1) and (2) of section 108 and that, by virtue of the stipulation of the parties, the losses sustained by petitioners in the barred year were not "part of a transaction entered into for profit" within the meaning of the remaining portion of subsection (a). Cf. Ewing v. Commissioner, supra.As a consequence, the losses were "not allowable" as a deduction after applying subsection (a) and the transactions fall squarely within the provisions of subsection (c) of section 108. Clearly, if the statute of limitations had not run on the year the losses were deducted, there would be no question but that those losses would be disallowed and petitioners would be entitled under subsection (c) to have those losses, i.e., from the first year, applied against the gains from the straddles realized in the open year, i.e., the second year, in order to determine the net gain or loss reportable by petitioners in the second year. Ewing v. Commissioner, 91 T.C. at 420-421. 824 The question is whether the fact that the loss year is barred precludes the application of section 108(c) and the netting process provided for therein. 9 Respondent premises her position on a requirement that the losses be "disallowed" and concludes that section 108(c) does not apply because the losses involved herein were in effect allowed because of the running of the statute of limitations. Petitioners focus on the phrase "not allowable" and argue that the losses would have been disallowed in the first year had the statute of limitations not run because they were clearly not allowable after 330 the application of subsection (a). Petitioners therefore conclude that they are entitled to the benefit of section 108(c).25 We have very recently had occasion to deal with the distinction between "allowed" and "allowable". In Lenz v. Commissioner, 101 T.C. 260">101 T.C. 260 (1993), we were called upon to interpret the phrase "not allowable as a deduction", used in the definition of "disallowed investment interest" which could be carried over to a subsequent taxable year pursuant to section 163(d). Despite the fact that interest in excess of taxable income could not have been carried over prior to the enactment of section 163(d) and despite the fact that the enactment of section 163(d) had, as its principal purpose, limiting the amount of interest that would otherwise have been deductible (assuming sufficient other taxable income), we held, in a Court-reviewed opinion, that the phrase "not allowable" meant what it said and could not be equated with "not allowed" as respondent had argued. We so concluded even though there was some indication of a contrary intention in the legislative history, a situation which does not exist herein (see infra pp. 330-331). See also Day v. Heckler, 735 F.2d 779">735 F.2d 779, 784 (4th Cir. 1984), where the Court of Appeals carefully26 distinguished the phrase "allowable deduction" from the phrase "allowed deduction".If the application of section 108(c) were controlled solely by the phrase "not allowable as a deduction", Lenz v. Commissioner, supra, would strongly support the adoption of petitioners' position. However, we must consider the impact of the latter part of subsection (c), which provides that the loss be allowed "to the extent required to accurately reflect the taxpayer's net gain or loss" (emphasis added). The question is whether this limitation operates to preclude offsetting gains by the amount of the losses which have already been deducted and allowed because a deficiency would be barred by the statute of limitations.It is arguable that a literal reading of the statutory language requires the conclusion that Congress has decreed that, once a loss is not allowable under section 108(a), the determination of net gain or loss should be made without regard to whether that loss has, in fact, been allowed. But, it is equally arguable that Congress intended that, in order "to accurately reflect the taxpayer's net gain or loss", the fact 331 that the loss has 27 been allowed for tax purposes should be taken into account.We think that the language of section 108(c) is sufficiently ambiguous to permit interpretative analysis in order to give effect to legislative intent and policy objectives of section 108 as a whole. See Helvering v. Stockholm Enskilda Bank, 293 U.S. 84">293 U.S. 84, 93-94 (1934); Sundstrand Corp. v. Commissioner, 98 T.C. 518">98 T.C. 518, 542 (1992). We approach our task recognizing that we do not have the benefit of any direct legislative history in respect of the issue involved herein. Section 108 was inserted in conference and the conference committee report fails to throw any light on the subject. See H. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 1, 170-171. However, the lack of legislative history merely accentuates the challenge; it does not justify a failure of response. As was stated by Lord Justice Denning in Seaford Court Estates Ltd. v. Asher, [1949] 2 K.B. 481, 499:It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when28 a defect appears, a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament * . Put into homely metaphor it is this: A judge should ask himself the question: If the makers of the Act had themselves come across this ruck in the texture of it, how would they have straightened it out? He must then do as they would have done. A judge must not alter the material of which it is woven, but he can and should iron out the creases.Section 108 had, as its principal purpose, rejection of the position respondent was taking at the time of its enactment, namely, that a straddle loss could not be deducted until there was a closed and completed transaction; i.e., the long leg was closed and the net amount realized by the taxpayer was determined -- a position that this Court rejected in Smith v. Commissioner, 78 T.C. 350">78 T.C. 350 (1972), but which respondent continued to take. See H. Rept. 98-861, supra; see also Barrella, "The Deductibility of Pre-ERTA Straddle Losses -- the Impact of Section 108 of the Tax Reform Act of 1984," 63 Taxes 116">63 Taxes 116, 118, 123 (Feb. 1985). By enacting29 section 108, Congress made clear that a pre-ERTA (Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172) loss was deductible in the year in which the short leg of a straddle was closed provided it was incurred in a trade or business or 332 in a transaction entered into for profit. See sec. 108(a). At the same time, Congress provided, in section 108(c), that a taxpayer, who could not obtain the benefit of such a loss under section 108(a), was nevertheless entitled to use the loss to offset the gain on the closing of the long leg of the straddle. Thus, Congress designed section 108 as a relief measure to assure taxpayers that only the net economic result would be taken into account so that respondent could not obtain a windfall by denying the losses and then taxing the gains, resulting from the closing of the straddle.There is not the slightest indication that Congress intended the provisions of section 108 to provide not only relief but a windfall to taxpayers who engaged in pre-ERTA straddle transactions. 10 To permit such a result herein would contravene the principle that "the Code should not be interpreted to allow * * [the taxpayer] 'the practical equivalent30 of double deduction' * * absent a clear declaration of intent by Congress". See United States v. Skelly Oil Co., 394 U.S. 678">394 U.S. 678, 684 (1969) (quoting Charles Ilfeld Co. v. Hernandez, 292 U.S. 62">292 U.S. 62, 68 (1934)); see also Ambac Industries, Inc. v. Commissioner, 487 F.2d 463">487 F.2d 463, 467 (2d Cir. 1973), affg. 59 T.C. 670">59 T.C. 670 (1973); Rome I, Ltd. v. Commissioner, 96 T.C. 697">96 T.C. 697, 704-705 (1991).Losses incurred in a trade or business or in a transaction entered into for profit are "allowed as a deduction" under section 165. Petitioners assert, in their argument in respect of the "duty of consistency", that the loss on the disposition of the short leg of a straddle is a separate transaction from the gain on the disposition of the long leg of a straddle, citing Smith v. Commissioner, supra. We think it clear that our approach31 in that case was confined to determining the proper timing of the deduction for a straddle loss and was not intended to decree an absolute separation, for all purposes, of the gain and loss aspects of a straddle transaction. In the instant case, a different situation exists, namely, the right to "the practical equivalent" of a deduction by way of an offset of straddle losses deducted in a year now barred against straddle gains in the years before the Court.Moreover, it is clear that a complete identity is not required between the transaction in the earlier year and that 333 of the later year. Cf. United States v. Skelly Oil Co., supra, where the Supreme Court required the taxpayer to reduce the deduction in a later year of refunds of overcharges of customers in earlier years by the amount of the depletion deduction which it had taken in respect of such charges in the earlier years. We also note that it has been suggested that the double deduction rule applies only where the action in the barred year was correct and does not apply where such action was erroneous, as is the case herein. See B.C. Cook & Sons, Inc. v. Commissioner, 59 T.C. 516">59 T.C. 516, 521-522 (1972),32 a decision whose precedential value is open to question; see B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422">65 T.C. 422, 432 (1975) (Dawson, J., concurring), and the opinion of the Court of Appeals affirming this decision per curiam 584 F.2d 53">584 F.2d 53 (5th Cir. 1978). We are satisfied that whatever continued vitality this limitation on the application of the double deduction rule may have, it does not extend to restricting our use of such rule as an aid to determining legislative intent, particularly in respect of a statutory provision specifically dealing with the type of transaction involved. Indeed, this is precisely what the Supreme Court did in United States v. Skelly Oil Co., supra, in interpreting section 1341. Nor do we consider ourselves precluded from pursuing this path by the fact that the double deduction rule was not asserted by respondent, since it has long been established that "we can rest our decision for respondent on reasons neither set forth in the notice of deficiency nor relied upon by respondent." Ware v. Commissioner, 92 T.C. 1267">92 T.C. 1267, 1269 (1989); 33 Smith v. Commissioner, 56 T.C. 263">56 T.C. 263, 291 n. 17 (1971).We conclude that to permit an offset of losses from the barred year against gains in the open year before us would in effect constitute a double deduction and would not "accurately reflect" the net gains and losses from the straddle transaction under section 108(c).We are still left with the question whether, despite our conclusion as to the application of section 108(c), petitioners should prevail because of an alleged inconsistency in respondent's treatment of straddle gains and losses in the years before us. In her notices of deficiency, respondent determined that the transactions involved herein lacked economic substance, i.e., were substantive shams, and proceeded to eliminate all straddle gains and losses in those years 334 except the amount of such gains which equaled such losses and which had been deducted in the barred year. However, the "sham" treatment has been superseded by the stipulation of the parties that the instant case should be dealt with on the basis that Fox type transactions are involved. See supra p. 327.In form, in her deficiency notices, respondent eliminated34 the straddle losses in the years before us and excluded the straddle gains to the extent that they exceeded the straddle losses in the barred year. Petitioners do not dispute respondent's actions as far as they go, but assert that having given them the benefit of excluding some of the straddle gains, they are entitled, as a matter of consistency, to have all such gains excluded. They contend that consistency demands that respondent should not be able to pick and choose among the straddle gains to be excluded. Whatever the result might be in the context of substantive sham transactions, see infra p. 336, we do not have that situation here. Moreover, we are not impressed by petitioners' attempt to exploit the form adopted by respondent in her deficiency notices. The issue before us turns upon substance not form. Whether viewed as an exclusion of gains or an offset of losses against gains, the substance of petitioners' position is that, under the guise of a duty of consistency on the part of respondent, they are entitled to "'the practical equivalent of double deduction'". See United States v. Skelly Oil Co., supra.We think petitioners' position35 should be rejected.We have previously concluded that the Fox type transactions involved herein fall within the ambit of section 108(c) and that a proper interpretation of that section permits respondent to deny petitioners the right to offset straddle losses from a barred year against straddle gains in the open years before the Court; i.e., petitioners are not entitled to exclude such straddle gains in the amount of such losses under section 108(c). Adopting petitioners' position on respondent's duty of consistency would in effect be a holding that respondent was inconsistent in doing precisely what we have decided that section 108(c) permitted her to do. In this connection, we note that in respect of two petitioners herein, respondent apparently excluded a small amount of gain in excess of offsetting losses ($ 424 out of $ 25,080 in one case and $ 78 out of $ 174,865 in the other case). We are not persuaded 335 that such actions provide a foundation for accepting petitioners' position as to respondent's duty of consistency and thereby afford petitioners an advantage to which we have concluded they are not entitled under section 108(c).In sum, we are not prepared to36 travel the path urged by petitioners in respect of respondent's duty of consistency because we are satisfied that to do so would defeat the legislative objective of section 108(c), namely, to afford relief to taxpayers who engaged in pre-ERTA straddle transactions by enabling them not to suffer economically by reason of straddle losses which they found themselves unable to deduct despite the taxation of their straddle gains. We emphasize that, as we see it, the disposition of this case turns upon the application of a specific statutory provision. Commissioner v. Mnookin's Estate, 184 F.2d 89">184 F.2d 89 (8th Cir. 1950), affg. 12 T.C. 744">12 T.C. 744 (1949), cited by petitioners, is distinguishable in that it dealt with an accounting question under broadly applicable statutory provisions. Nor can petitioners derive any comfort from Johnson v. Commissioner, T.C. Memo. 1993-178, which involved how a transaction should be characterized, i.e., giving rise to long-term gain or ordinary income, and not the question presented here. Other cases cited by petitioners, e.g., Davis v. Commissioner, 65 T.C. 1014">65 T.C. 1014 (1976),37 Davis v. Commissioner, 69 T.C. 716">69 T.C. 716 (1978), and Vesco v. Commissioner, T.C. Memo 1979-374">T.C. Memo. 1979-374, involve the issue of discrimination among taxpayers where the considerations are entirely different from those present herein.We hold section 108(c) does not permit petitioners to offset their unallowable losses in earlier years, as to which a deficiency is now barred by the statute of limitations, against their gains in the taxable year before us. In so concluding, we find it unnecessary to examine the extent to which certain elements of a "duty of consistency" on the part of petitioners are present herein, see supra note 5, particularly whether petitioners' position rests on an inconsistent or alternative position, 1138 whether the deduction involves a misrepresentation of law and/or fact, 12 and whether respondent 336 relied upon the representation in petitioners' returns for the barred year. 13 Beyond the foregoing, we again emphasize that we leave to another day the disposition of the issue before us where the transactions are "sham" transactions, either substantive in the view of Glass v. Commissioner, supra39 note 9, or factual in the view of Brown v. Commissioner, 85 T.C. 968 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d 351 (9th Cir. 1988). Such disposition will require consideration of whether subsection (c) of section 108 applies to such transactions even though subsections (a) and (b) do not, possible reconsideration of the applicability of subsections (a) and (b) to such transactions in view of the fact that the Courts of Appeals are in conflict on this issue, 14 and consideration of the extent to which the duty of consistency on the part of the taxpayer may be involved together with a critical examination of all the elements of any such duty. Such considerations will need to take into account whether eliminating all gains and losses arising from such transactions, including losses deducted in years barred by the statute of limitations, will produce a situation where full illegitimacy, represented by "sham" transactions, fares better than pseudoillegitimacy, represented by Fox type transactions.40 Our conclusion herein also makes it unnecessary for us to consider the question whether the tax benefit rule has any application to the situation involved herein, see Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370">460 U.S. 370 (1983), a question which was not addressed by the parties and which respondent expressly stated was not involved herein. See also Unvert v. Commissioner, 72 T.C. 807">72 T.C. 807 (1979), affd. 656 F.2d 483">656 F.2d 483 (9th Cir. 1981).337 In order to take into account the settlement of other issues between the parties,Decisions will be entered under Rule 155.APPENDIXFrederick A. and Martha G. Alling, Steven Corsun, Keff I. and Ruth Dank, Irving and Ilene Fish, Stephen J. and Nancy P. Friedman, Murray L. and Dorothy E. Goldberg, Jack and Ruth Guggenheim, Robert Herzog, Lawrence and Carmela Italiano, Howard and Wilma Kaye, Robert J. and Lauren R. Kleeblatt, Gerald and Joan Litzky, Sami Mayyasi, Philip and Florence Mittleman, Emanuel and Helen A. Savas, Arnold and Miriam Schuman, Lawrence I. and Sara C. Schweid, Marc N. and Gloria E. Silverman, Raymond J. and Joy E. Tennison, Estate of William41 Van Looy, deceased, Priscilla Van Looy, executrix, Priscilla Van Looy, Milton and Blanche Wasserberger, Joel and Judith Weinstein, docket No. 6197-84; Richard and Elaine Berman, Edgar G. and Arlene F. Braunstein, Ronald and Ester Breslow, Howard and Nancy Brown, Estate of Jerome Casser, deceased, Barry Casser, executor, Estate of Charlotte Casser, deceased, Barry Casser, executor, Peter B. Cinelli, Sanford and Ethel Dorf, Jan and Annelien Doornbosch, Erwin and Christine Eibert, Barry and Pamela Fingerhut, Irwin and Nora Friedman, Max and Ellen Halbrecht, Robert Herzog, Dennis and Diane M. Howie, Ernest and Rose Wachtel, Herbert V. and Iris Karp, Mitchell and Edith Konner, Larry and Barbara Kopp, George J. and Lillian Liebner, Jack and Anneliese Lindner, C. Stuart and Phyllis Littwin, Jack and Evelyn Melnick, Robert and Frances Nelson, Frank and Nancy Sciara, Leo and Eleanor Zucker, Jonathan and Linda Zurit, Neal H. and Barbara Bettigole, Howard and Claire Spanbock, Estate of Marvin Kopp, deceased, Judith Kopp, executrix and Judith Kopp, docket No. 15748-84; Robert Borra, Michael A. and Sandra Farina, Joseph and Alda Casser, Irving and Ilene Fish, Arthur and Dorothy Greenbaum, Robert42 and Theodora Greenbaum, Paul Rowe, Michael and Jane Silberfein, Wendell A. and Joan N. Smith, Gerald and Susan Wolff, Martin and Gladys T. Roth, docket No. 29586-84; Roy and 338 Antoinette Chapman, docket No. 31737-84; Rony and Ellen Kessler, Abraham and Naomi Mizrachi, Max and Janet Zweibel, docket No. 37132-84; Estate of Joel Spector, deceased, Barbara Spector, executrix and Barbara Spector, Abraham and Annette Badian, Max and Janet Zweibel, Jack F. and Sylvia D. Kramer, Theodore and Patricia O'Lear, Conrad K. Sterrett, and Leonard and Esther Lowery, docket No. 5676-85; Harold T. Eisenman, Aldo and Lucy Genova, Sheila and Marton Grossman, Catherine K. Hardwick, Donn and Rosemarie Sand, Frank and Nancy Sciara, Donald and Marguerite Toresco, Harold and Donna Traub, docket No. 29996-85; Estate of Mary L. Burkholder, deceased, Guy S. Burkholder, II, executor, and John J. Burkholder, Jr., executor, Estate of Stanley Danzig, deceased, Sylvia Danzig, executrix, and Sylvia Danzig, surviving spouse, Nancy A. King, Jack and Anneliese Lindner, James and Rita Murphy, docket No. 41809-85; Charles and Hana Diamond, docket No. 39519-86; Richard and Laurie Allison, Ubaldo and Nellie Gonzalez, *43 Billy and Doris Hellems, Peter and Phyllis Honig, John and Marian Wanner, Julian and Alice Avrutick, docket No. 45975-86; Benjamin and Judith Handelman, docket No. 29527-87; Beno and Lisa Sternlicht, docket No. 27523-88; Herbert and Irene Freiman, docket No. 5214-89; Gerald D. Vogel, docket No. 22733-90. Footnotes1. Cases of petitioners listed in the appendix were previously consolidated for purposes of trial, briefing, and opinion as to the issue presented, although at this point in time, only some of those petitioners, see infra↩ p. 324, are now before us on this issue.2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. Some of the notices of deficiency assert additional interest under sec. 6621.↩3. The actual initial year varied from 1976 through 1979 for petitioners herein.↩4. We refer in the singular to the barred year in the sentence above and hereinafter since we need only discuss the treatment of the barred year immediately preceding each petitioner's first open year before us, despite the fact that (as detailed in the chart supra↩ p. 324) petitioners have a variety of tax years before this Court and as a result the "barred year" differs for the various petitioners from 1976 to 1979.5. The elements of the "duty of consistency" doctrine are stated as follows in Unvert v. Commissioner, 72 T.C. 807">72 T.C. 807, 815 (1979) (quoting Beltzer v. United States, 495 F.2d 211">495 F.2d 211, 212 (8th Cir. 1974)), affd. 656 F.2d 483">656 F.2d 483 (9th Cir. 1981):"(1) the taxpayer has made a representation or reported an item for tax purposes in one year,(2) the Commissioner has acquiesced in or relied on that fact for that year, and(3) the taxpayer desires to change the representation, previously made, in a later year after the statute of limitations on assessments bars adjustments for the initial tax year."↩6. The stipulation herein should be contrasted with the stipulation involved in Fox v. Commissioner, T.C. Memo. 1988-570, revd. sub nom. Horn v. Commissioner, 968 F.2d 1229">968 F.2d 1229 (D.C. Cir. 1992), affd. sub nom. Lerman v. Commissioner, 939 F.2d 44 (3d Cir. 1991), and Kazi v. Commissioner, T.C. Memo. 1991-37, which provided that the transactions involved therein were the same type involved in Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087↩ (1986).7. The leading case dealing with the relationship of the "duty of consistency" in an open year with respect to treatment of a straddle transaction in a barred year where the transactions are substantive shams is Herrington v. Commissioner, 854 F.2d 755">854 F.2d 755 (5th Cir. 1988), affg. Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087 (1986); see also Kielmar v. Commissioner, 884 F.2d 959 (7th Cir. 1989), affg. Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087 (1986); Hines v. Commissioner, 90-1 USTC par. 50,028, 65 AFTR 2d 90-488 (3d Cir. 1989), affg. T.C. Memo. 1989-17; Johnson v. Commissioner, T.C. Memo 1992-369">T.C. Memo. 1992-369; Erickson v. Commissioner, T.C. Memo 1991-97">T.C. Memo. 1991-97. Since we are not directing our attention to the application of the duty of consistency to sham transactions, we have no need to respond to petitioners' request that we reconcile Johnson and Erickson, both of which are memorandum opinions and, in any event, are not controlling precedent. See Darby v. Commissioner, 97 T.C. 51">97 T.C. 51, 67↩ (1991).8. See also Starr v. Commissioner, T.C. Memo. 1991-610↩.9. We note that transactions lacking in economic substance and therefore "sham" have been held not to be within the scope of other portions of sec. 108. See, e.g., Glass v. Commissioner, 87 T.C. 1087 (1986), affd. sub nom. Friedman v. Commissioner, 869 F.2d 785">869 F.2d 785 (4th Cir. 1989) (sec. 108(a)), affd. sub nom. Killingsworth v. Commissioner, 864 F.2d 1214">864 F.2d 1214 (5th Cir. 1989) (sec. 108(a)), affd. sub nom. Lee v. Commissioner, 897 F.2d 915 (8th Cir. 1989) (sec. 108(a)), affd. sub nom. Keane v. Commissioner, 865 F.2d 1088 (9th Cir. 1989) (sec. 108(a)), affd. sub nom. Bohrer v. Commissioner, 945 F.2d 344">945 F.2d 344 (10th Cir. 1991) (sec. 108(a)), affd. sub nom. Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir. 1989) (sec. 108(a)); DeMartino v. Commissioner, 862 F.2d 400 (2d Cir. 1988), affg. T.C. Memo. 1986-263 (sec. 108(b)); Gardner v. Commissioner, 954 F.2d 836">954 F.2d 836 (2d Cir. 1992), affg. per curiam Fox v. Commissioner, T.C. Memo. 1988-570 (sec. 108(b)); Cook v. Commissioner, 90 T.C. 975">90 T.C. 975 (1988), affd. 941 F.2d 734">941 F.2d 734 (9th Cir. 1991) (sec. 108(b)); contra Horn v. Commissioner, 968 F.2d 1229 (D.C. Cir. 1992), revg. and remanding Fox v. Commissioner, T.C. Memo. 1988-570 (sec. 108(b)); see also Yosha v. Commissioner, 861 F.2d 494">861 F.2d 494 (7th Cir. 1988), affg. Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087 (1986) (sec. 108); cf. Dewees v. Commissioner, 870 F.2d 21">870 F.2d 21 (1st Cir. 1989), affg. Glass v. Commissioner, 87 T.C. 1087↩ (1976) (sec. 108(a)).10. Post-ERTA straddle transactions are governed by sec. 1092.↩11. See, e.g., Heer-Andres Investment Co. v. Commissioner, 22 T.C. 385">22 T.C. 385 (1954); McCulloch Corp. v. Commissioner, T.C. Memo. 1984-422; see also Rivers v. Commissioner, 49 T.C. 663">49 T.C. 663↩ (1968).12. Compare, e.g., Herrington v. Commissioner, 854 F.2d 755">854 F.2d 755, 758 (5th Cir. 1988) (whether straddle transactions are "sham", i.e., without economic substance, is at most a mixed question of law and fact) with Kirchman v. Commissioner, 862 F.2d 1486">862 F.2d 1486, 1490 (11th Cir. 1989), James v. Commissioner, 899 F.2d 905">899 F.2d 905, 909 (10th Cir. 1990), affg. 87 T.C. 905">87 T.C. 905 (1986), and Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087, 1172↩ (1986) (whether straddle transactions are "sham", i.e., without economic substance, is a question of law).13. Erickson v. Commissioner, T.C. Memo. 1991-97; Gmelin v. Commissioner, T.C. Memo. 1988-338, affd. without published opinion 891 F.2d 280">891 F.2d 280↩ (3d Cir. 1989).14. Compare Horn v. Commissioner, 968 F.2d 1229">968 F.2d 1229 (D.C. Cir. 1992), revg. and remanding Fox v. Commissioner, T.C. Memo. 1988-570, with cases cited supra note 9; see also Dewees v. Commissioner, 870 F.2d 21">870 F.2d 21 (1st Cir. 1989), affg. Glass v. Commissioner, 87 T.C. 1087↩ (1986).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619675/	Delaware Realty and Investment Company, Petitioner, v. Commissioner of Internal Revenue, RespondentDelaware Realty & Inv. Co. v. CommissionerDocket No. 48065United States Tax Court25 T.C. 51; 1955 U.S. Tax Ct. LEXIS 74; October 19, 1955, Filed 74 Decision will be entered for the respondent. 1. A personal holding company is not entitled to elect to pay the alternative tax on capital gains in lieu of income taxes and personal holding company surtaxes unless the effective normal tax and surtax rate produces a tax which, standing alone, is greater than 25 per cent of net long-term capital gains. Clarence Co., 21 T. C. 615, followed.2. Personal holding company not allowed a deduction for dividends paid carryover from 1948 in computing 1949 personal holding company surtax. Percy W. Phillips, Esq., for the petitioner.Max J. Hamburger, Esq., for the respondent. Withey, Judge. WITHEY51 OPINION.Respondent determined a deficiency of $ 1,345,373.36 in personal holding company surtax liability of petitioner for 1949.The issues presented by the pleadings are the correctness of the respondent's action (1) in disallowing a portion of the deduction claimed for Federal income taxes for 1948 in the computation of petitioner's personal holding company subchapter A net income for 1949, and (2) in disallowing a dividends paid carryover from 1948 in the computation of its personal holding company undistributed subchapter A net income for 1949.The parties are in substantial agreement as to the facts, which are found as follows:Petitioner filed its income tax returns and personal holding company returns for 1948 and 1949 with the collector of internal revenue for the district of Delaware. The returns were prepared on a cash basis.During 1948 and 1949 petitioner was a personal holding company within the purview of section 501 of the Internal Revenue Code of 1939.52 Petitioner reported no personal holding company surtax liability77 for either 1948 or 1949. In computing its personal holding company undistributed subchapter A net income for 1949, petitioner deducted $ 1,072,244.72 as Federal income tax paid during that year. The deduction so claimed represented the Federal income tax reported by petitioner for 1948, computed under the alternative method. Petitioner's income tax return for 1948 disclosed total normal tax and surtax in the amount of $ 674,773.19, computed under the regular method. Petitioner attached to its personal holding company return for 1948 a statement of its intention to elect to be taxed under section 117 (c) of the 1939 Code in lieu of sections 13, 15, and 500, as follows:The tax imposed upon this corporation by sections 13, 14, 15, 204, 207 (a) (1) or (3), and 500, exceed the tax imposed by section 117 (c) of the Internal Revenue Code. The income under each of such sections, when reduced by the income from capital gains, becomes a minus quantity, resulting in a tax under section 117 (c) of the Internal Revenue Code of 25% of the capital gain, or a total tax under section 117 (c) of the Internal Revenue Code, in lieu of all other taxes, of $ 1,072,244.72.Income tax in the amount78 of $ 1,072,244.72 was assessed against petitioner for 1948, and was paid in 1949. No assessment was made with respect to petitioner's personal holding company surtax for 1948 and no notice of deficiency in personal holding company surtax for that year has been issued.The following computation was made by petitioner in its personal holding company return for 1948:Net income [including net long-termcapital gain]$ 11,838,126.17 Less: Net long-term capital gain.(Not required to be distributed)$ 4,288,978.89Federal income tax paid in 1948546,742.824,835,721.71 Subchapter A net income$ 7,002,404.46 Less: Dividends paid credit8,200,000.00 Undistributed subchapter A net income($ 1,197,595.54)If computed under the provisions of sections 500-506 of the 1939 Code, i. e., the regular method, petitioner's personal holding company surtax would have been $ 2,627,475.83.On its personal holding company return for 1949, petitioner claimed a credit for dividends paid in the amount of $ 16,365,595.54, consisting of dividends paid during 1949 of $ 15,168,000 and a dividends paid carryover from 1948 of $ 1,197,595.54 representing the unused portion of the79 dividends paid credit for 1948.Petitioner reported the following computation on its personal holding company return for 1949: 53 Net income [including net long-termcapital gain]$ 17,866,767.33 Less: Net long-term capital gain.(Not required to be distributed)$ 467,188.26Federal income tax paid in 19491,072,244.721,539,432.98 Subchapter A net income$ 16,327,334.35 Less: Dividends paid credit16,365,595.54 Undistributed subchapter A net income($ 38,261.19)In determining the deficiency here involved, the respondent disallowed $ 397,471.53 of the deduction of $ 1,072,244.72 taken by petitioner as income tax paid in 1949. He also disallowed $ 1,197,595.54 of the dividends paid credit of $ 16,365,595.54 taken for 1949, or the portion thereof which represented the unused part of the dividends paid credit for 1948 which was carried forward to 1949.Issue 1.The respondent takes the position that petitioner's correct income tax liability for 1948 is $ 674,773.19 and that, accordingly, only that amount is deductible under section 505 (a) of the 1939 Code 1 in determining its subchapter A net income for purposes of its personal holding80 company surtax computation. He contends that the balance of the tax reported and paid by petitioner, or $ 397,471.53, actually represents payment of its personal holding company surtax for 1948, although no personal holding company surtax liability for 1948 was reported on its return and no determination of such tax has ever been made for that year.In support of his position, respondent relies upon section 117 (c) (1) of the 1939 Code 2 and our decision in Clarence Co., 21 T. C. 615.81 In that case, the taxpayer reported corporation income tax for 1948 in the amount of $ 3,779.22, computed under the regular method, and alternative tax of $ 4,794.75 representing 25 per cent of its net long-term 54 capital gains. Taxpayer reported the alternative tax as its income tax liability for the year 1948. In its personal holding company return for 1948, taxpayer claimed a deduction for income taxes accrued during that year in the amount of $ 4,794.75. The Commissioner determined income tax liability in the amount of only $ 3,779.22 and an overassessment of $ 1,015.53. The Commissioner further determined a deficiency in personal holding company surtax for 1948 in the amount of $ 2,522.74, disallowing the portion of the deduction claimed for Federal income taxes represented by the $ 1,015.53 overassessment.82 We there held that the taxpayer was entitled to deduct only the lesser amount of $ 3,779.22 in computing its personal holding company subchapter A net income on the ground that section 117 (c) (1) permits the utilization of the alternative method only if it produces less tax than the normal tax and surtax imposed by sections 13, 14, and 15 of the 1939 Code.We are of the opinion that our holding in the Clarence Co. case is controlling here. Since the normal tax and surtax rate computed under sections 13, 14, and 15 is less than 25 per cent, the alternative tax does not benefit petitioner. As we pointed out in our opinion in Clarence Co., the personal holding company surtax is separate and distinct from the corporate normal tax and surtax and therefore the taxpayer is not entitled to pay the alternative tax in lieu of its aggregate personal holding company surtax and income tax liability although the total is greater than the alternative tax.Section 505 (a) (1) of the 1939 Code permits the deduction of "Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year" in computing personal holding company surtax subchapter A net income. Since83 petitioner could properly have reported only $ 674,773.19 as its income tax liability (computed under sections 13 and 15 of the 1939 Code) for 1948, it is entitled to deduct only that amount from net income in computing its personal holding company subchapter A net income for 1949.Issue 2.With respect to the disallowance by the Commissioner of the portion of the dividends paid credit reported in 1949, representing the carryover from 1948 in the amount of $ 1,197,595.54, petitioner contends that the computation of its personal holding company undistributed subchapter A net income in 1948, so as to produce an excess of $ 1,197,595.54 in dividends paid over its subchapter A net income, is in harmony with the purpose and policy of Congress in enacting the personal holding company surtax provisions and the alternative tax on net long-term capital gains.55 Respondent's objection to the computation here in question relates solely to the deduction by petitioner of net long-term capital gains in the amount of $ 4,288,978.89 from net income in determining subchapter A net income for 1948. With its subchapter A net income thus reduced, petitioner's dividends paid credit exceeded84 the subchapter A net income by $ 1,197.595.54. Petitioner argues that it had already paid taxes at the maximum rate of 25 per cent on its capital gains and consequently such gains were not required to be distributed and should be eliminated from its personal holding company subchapter A net income.Respondent maintains that there is no statutory basis whatever for the method of computation utilized by petitioner.Although petitioner reported and paid as its income tax liability for 1948 an amount equal to 25 per cent of its net long-term capital gains ($ 1,072,244.72), we have held in Issue 1 that $ 674,773.19 of that amount actually represented payment of its correct 1948 income tax liability, inasmuch as it was required to compute such liability under the regular method. Accordingly, petitioner's contention that it has paid tax at the maximum rate on its long-term capital gains, which is the basis for its proposed computation of personal holding company undistributed subchapter A net income so as to yield an excess in dividends paid amounting to $ 1,197,595.54, is without merit. Since not more than $ 397,471.53 can be said to have been paid by petitioner as taxes on capital gains*85 for 1948, its position that its total capital gains in the amount of $ 4,288,978.89 were not required to be distributed under penalty of the personal holding company surtax cannot be sustained.For the foregoing reason, we hold that petitioner's deduction of a dividends paid credit carryover from 1948 in computing its personal holding company surtax for 1949 was in error.Decision will be entered for the respondent. Footnotes1. SEC. 505. SUBCHAPTER A NET INCOME.For the purposes of this subchapter the term "Subchapter A Net Income" means the net income with the following adjustments:(a) Additional Deductions. -- There shall be allowed as deductions -- (1) Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction under section 23; but not including the tax imposed by section 102, section 500, or a section of a prior income-tax law corresponding to either of such sections.↩2. SEC. 117. CAPITAL GAINS AND LOSSES.(c) Alternative Taxes. -- (1) Corporations. -- If for any taxable year the net long-term capital gain of any corporation exceeds the net short-term capital loss, there shall be levied, collected, and paid, in lieu of the tax imposed by sections 13, 14, 15, 204, 207 (a) (1) or (3), and 500, a tax determined as follows, if and only if such tax is less than the tax imposed by such sections:A partial tax shall first be computed upon the net income reduced by the amount of such excess, at the rates and in the manner as if this subsection had not been enacted, and the total tax shall be the partial tax plus 25 per centum of such excess.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619677/	AMERICAN SOUTH AFRICAN LINE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American S. Afr. Line v. CommissionerDocket Nos. 62955, 68830, 70701.United States Board of Tax Appeals30 B.T.A. 753; 1934 BTA LEXIS 1274; May 17, 1934, Promulgated 1274 Depreciation rate of certain cargo ships operating between New York and South Africa determined at 4 percent and another at 3 1/2 percent. Frank V. Barns, Esq., and Luke D. Stapleton, Jr., Esq., for the petitioner. Henry A. Cox, Esq., for the respondent. STERNHAGEN 753 Respondent determined deficiencies of $2,710.91, $8,304.97, and $9,789.40 in petitioner's income taxes for 1929, 1930, and 1931, respectively. Petitioner assails the recomputation of depreciation on its ships, based on a determined life of 33 1/3 years, and contends that the total useful life of the vessels is 20 or 24 years. 754 FINDINGS OF FACT. Petitioner, a New York corporation with principal office in New York City, is engaged in the operation of freight and passenger vessels between New York City and south African ports. In 1926 it acquired for this service the West Isleta, West Cawthon, Eastern Glen, and Eastern Glade, and Western Knight. The Western Knight was lost in 1929, and the Chincha was purchased in that year to replace it. In January 1930 petitioner acquired a new vessel, the City of New York.The West Isleta,1275 West Cawthon, Eastern Glen, and Eastern Glade are cargo vessels of about 5,600 gross tons, equipped with reciprocating triple expansion engines and Scotch boilers of about 200 pounds pressure. They are of the three-island deck type, with two decks, two masts, and one smokestack. The United States Shipping Board built the West Cawthon in 1918 and the West Isleta in 1919; they have a 24-hour fuel consumption of 135 and 150 barrels of Bunker C oil, respectively. The Eastern Glen and Eastern Glade were built in Japan in 1920, and have respective 24-hour fuel consumptions of 36 and 34 tons of coal. The Chincha is a cargo vessel of 6,348 gross tons, built in England in 1913; it is equipped with a reciprocating quadruple expansion engine and Scotch boilers of 220 pounds pressure. It has two flush decks and one orlop deck, two masts, and one smokestack. All five ships have an average speed of 10 knots an hour. They each have accommodations for 12 passengers. The City of New York is a twin-screw motor ship of 8,272 gross tons, and carries freight and passengers. It was built at Chester, Pennsylvania, at a cost of $1,918,158.88. It is equipped with two1276 Sun-Doxford Diesel engines of 2,700 horsepower each, has two solid propellers, three flush decks, and accommodations for 60 passengers. Its average speed is 13 1/2 knots, and its fuel consumption 140 barrels of Diesel oil in 24 hours. All of petitioner's vessels are classed with the American Bureau of Shipping, and have been insured since acquisition for the following amounts: West Isleta, $318,000; West Cawthon, $310,000; Eastern Glen, $312,000; Eastern Glade, $318,000; Chincha, $355,000; City of New York, $1,200,000, but from June 1930 until 1932, $1,266,667. Upon the loss of the Western Knight petitioner collected about $450,000 in insurance; the Chincha was purchased for $146,521.91. Petitioner's cargoes from New York to South Africa consist of farming and mining machinery, automobiles, foodstuffs, lumber, baled piece goods, stockings, tobacco, hardware, structural steel rails, locomotives, and household goods. Its return cargoes consist of chrome, corundum and copper ores, mica, asbestos, fluorspar, hides, 755 skins, mohair, wool, and tanning bark. Several of the South African ports have little harbor protection and inadequate1277 docking facilities, so that cargo must often be landed by lighter. On its trade route petitioner has to meet the competition of eight foreign lines, mostly British, which have large fleets. Some of these vessels are more modern in design and faster than petitioner's by several knots. An agreement among the competitive lines prevents the simultaneous sailing of vessels on this route. During the past 10 years there has been a tendency to construct cargo vessels abroad with finer hulls and to equip them with improved turbine or Diesel engines capable of developing a speed of 12 or 14 knots an hour. Vessels laid during the period of the World War were designed for great cargo capacity rather than speed, and their materials and workmanship were inferior to those available in normal times. Many of the Shipping Board vessels, in excess of commercial needs, have been since sold for scrap. No cargo ships have been built in the United States for the past 10 years. In December 1932 the American Bureau of Shipping listed 1,275 ships of over 4,000 gross tons burden, of which 999 were classed. Of the total, 8.2 percent were over 20 years old, and 4.5 percent over 25; of the classed1278 ships, 4.5 percent were over 20, 3.1 percent over 25, and 1.1 percent over 30. The probable useful life of the West Isleta, West Cawthon, Eastern Glen, Eastern Glade, and Chincha, from the time of construction, is 25 years each, and of the City of New York, 28 1/2 years. A reasonable allowance to be deducted for 1929, 1930, and 1931 for exhaustion, wear and tear, and obsolescence is 4 percent of the agreed base for the first mentioned five ships and 3 1/2 percent for the City of New York.OPINION. STERNHAGEN: The Commissioner having determined that as to all of the ships owned by the petitioner during the taxable years in question the proper rate to be used in determining the statutory reasonable allowance for depreciation, including obsolescence, is 3 percent, the petitioner has instituted this proceeding to establish that the rate as to all of its ships, except the City of New York, should be 5 percent, and as to the City of New York should be approximately 4 percent. This issue was tried at length, both sides presenting, in addition to the evidence of direct fact as to the properties, the opinions of persons engaged in one way and another in the1279 design, construction, operation, engineering, insurance, registration, survey, inspection, and appraisal of ships generally and of this charcter. 756 Since the determination of the proper rate of depreciation involves a consideration not alone of facts borne of observation and experience, but also of inferences as to future probability, it is impossible to make a purely logical exposition of the decision. The weight given to the opinions of the several witnesses eludes analysis. The contest can not be tabulated like the strikes, balls, hits, and errors of a baseball game. If a complete exposition were made of the evidence and of the manner of its appraisal and consideration, there would still remain an imponderable leap to the conclusion. The crucial part in reaching a decision must be played by the trier who hears the evidence and observes the witnesses. The opinion in such a case can perform only a slight service as a legal precedent. It is merely a specific conclusion which embodies a consideration of the entire record in that case - no more and no less. The rate fixed, unlike the depreciation base, is not unalterable. If it becomes demonstrably evident that the1280 probable period of amortization of the investment is shorter or longer than now determined, the rate applicable to future years is still subject to adjustment in the light of such evidence. With passing years, added experience should reduce the field of necessity for prediction and estimate. We have considered with great care all of the evidence and find it impossible to sustain the Commissioner's determination. Thirty-three and one third years is, as shown by this record, longer than anyone could reasonably expect these ships usefully to last. It would be exceptional if they should do so, and the depreciation rate should not be based on an extraordinary possibility. On the other hand, the facts and circumstances shown by the evidence indicate that the 20-year life predicted by some of the petitioner's witnesses is probably too short. The experience of the Chincha has itself been such as to cause the petitioner to compromise with this 20-year estimate, and it can not be said that the Chincha is atypical. The implication of some of petitioner's evidence is that the depreciation, or more especially the obsolescence, deduction may be an instrument of relief to a taxpayer1281 from the rigors of commercial competition. But the deduction is applicable not to a taxpayer's business, but to the property used in the business. Obsolescence is measured primarily not by earnings, but by the duration, in time, of economic usefulness of the property under investigation. Our own conclusion, from the evidence, is that a reasonable depreciation allowance, sufficient to include obsolescence, should be measured by a useful life of 25 years for all of the petitioner's ships except the City of New York, and that the useful life of the City of New York should be taken at 28 1/2 years. On these periods, the straight-line *757 annual percentage rate which should properly be used is 4 percent upon the Eastern Glen, Eastern Glade, West Isleta, West Cawthon, and Chincha, and 3 1/2 percent upon the City of New York. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619684/	BANK OF WYOMING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bank of Wyo. v. CommissionerDocket No. 16299.United States Board of Tax Appeals22 B.T.A. 1132; 1931 BTA LEXIS 2005; April 9, 1931, Promulgated 2005 1. BAD DEBTS. - Loans made by a bank in the regular course of its business, where it is not shown that the proceeds of the loans went to the president of the bank, who was responsible for making them, and where the loans are evidenced by notes bearing interest and which are carried as assets, are debts and not losses, and must be ascertained to be worthless and charged off during the taxable year in order to be deductible. 2. LOSSES RATHER THAN BAD DEBTS. - Upon the evidence, held, that certain transfers of money to the Olymphia Oil Corporation by the president and minority stockholder of the petitioner, who was, himself, the sole stockholder in the Olymphia Oil Corporation, the latter corporation being insolvent at the time the loans were made and at all times thereafter amounted to a fraudulent appropriation of the petitioner's funds and the losses suffered by the petitioner on account thereof were deductible as losses sustained during the taxable year 1921, instead of as debts ascertained to be worthless and charged off in subsequent years. David C. Howard, Esq., and H. D. Battle, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. 2006 BLACK 1133 Petitioner seeks redetermination of deficiencies for 1920 of $32.56 and for 1921 of $154.41, and as grounds therefor alleges that respondent erred in not allowing deductions of $48,037 as losses or worthless debts. FINDINGS OF FACT. The petitioner is a banking corporation organized and existing under the laws of West Virginia, and during the taxable years was engaged in the banking business at Mullens, W. Va. The capital stock was $50,000 when the bank was organized in 1915, and was increased to $75,000 in 1916, and to $100,000 in 1917. The bank continued in business until 1926, when it was reorganized by the State Banking Commissioner, which involved an assessment against its stockholders of $75,000 to protect its depositors. The reorganized bank is known as the Peoples Bank, and it acquired the assets of petitioner. The Bank of Wyoming was organized by J. C. Sullivan, who resided at Tralee, just outside the town of Mullens, where the bank was located. Sullivan was president of the bank and also president and general manager of some fifteen other enterprises, including several coal companies, controlled by him, which were operated from2007 his office at Tralee. From the time of its organization until early in 1923, the petitioner was entirely dominated by Sullivan. As early as 1920, this was a matter of such concern to the Banking Commissioner that he addressed a letter to the Governor concerning the situation. However, Sullivan continued in control of the bank and early in 1921 was left without any inside check upon his activities by the withdrawal of the only remaining independent directors, D. D. Moran and A. J. Mullens, who resigned from the board on February 10 and April 25, 1921, respectively. 1134 Thereafter, as shown by the record, the board of directors consisted of the following persons in addition to Sullivan, president of the bank: J. B. Frank, auditor of Sullivan's companies, who had no property except a small interest therein; A. W. Daubenspeek, cashier of petitioner, directly subject to dictation by Sullivan; K. S. McClanahan, a brother-in-law of Sullivan and minor employee of Sullivan's companies; J. A. Wood, a business associate of Sullivan, who was paid salaries by petitioner and other of Sullivan's companies, but did very little work; Philip Konrad, superintendent2008 of certain of Sullivan's mines, appointed to take the place of A. J. Mullins, resigned; Roy Daubenspeek, assistant cashier and brother of A. W. Daubenspeek, appointed to take the place of D. D. Moran, resigned; Hiram Sizemore, political associate of Sullivan. In 1921, loans were made by petitioner to the following individuals and corporations in the amounts listed below: Raleigh Fire Creek Coal Co$10,000K. S. McClanahan3,137J. B. Frank2,400Olymphia Oil Corporation9,000Olymphia Oil Corporation8,500John F. Koerner15,000Notes were taken from each borrower in the respective amounts and in some instances were secured by certain purported collateral as hereinafter detailed. Each note was due in four months from the date thereof, and some renewals were afterward taken, but none of the notes was ever paid. The manner in which these loans were made was as follows: A. W. Daubenspeek, the cashier, Roy Daubenspeek, the assistant cashier, and M. H. Lusk, the bookkeeper, were not consulted prior to or at the time the loans were made. They had no authority as to anything that Sullivan passed upon. A note in the amount of each loan was2009 made up in Sullivan's office and the employees of the bank were instructed to credit the particular account with the amount of the note. In no instance did the directors pass on any of the above listed loans before they had been made. The notes were carried as assets and reported as such to the Banking Department of West Virginia. The Kanawha Valley Bank of Charleston, W. Va., a large banking institution, had, from time to time, loaned money to the petitioner. Hayes Picklesimer, its assistant cashier, who had charge of out-of-town banking connections of this character, was brought in contact with the affairs of the petitioner through the examination of 1135 notes forwarded as collateral for loans made by the Kanawha Valley Bank to the petitioner. During the year 1921, this indebtedness of the petitioner to the Kanawha Valley Bank largely increased until on December 31, 1921, it amounted to $60,000. Picklesimer having in this manner secured information as to these questionable loans made during the year 1921, and also information as to similar withdrawals during the year 1922, became cashier of the petitioner in January, 1923. This move was made for the protection of2010 the Kanawha Valley Bank and at its insistence and also because the interests of the petitioner would be equally well served. From February, 1923, until December, 1924, Picklesimer managed the bank. There was little money left to loan and his efforts were largely devoted to attempting to collect where collection was possible and otherwise to conserve petitioner's assets. He carefully investigated the financial responsibility of each of the persons and corporations to whom the loans listed above had been made and found that the purported obligations were not collectible. The obligations were, however, permitted to remain on petitioner's books because to have removed them therefrom would have brought the affairs of petitioner to a crisis, with resulting loss to its depositors. This was done with the approval of the Banking Commissioner's office. The loans here in question were still on the books at the time of the reorganization of the bank in January, 1926. Together with similar withdrawals made by Sullivan in 1920 and 1922, they constituted almost the entire amount of worthless claims existing at that date. Following the reorganization in 1926, Central Trust Company of Charleston, 2011 W. Va., was assigned all assets of the petitioner not taken over by the purchasing bank, including the loans which have been listed above. Nothing was ever collected by it upon them and no recoveries were had on the sums so lost from any source. The financial situation in 1921 of the persons and corporations to which loans listed above were made was, respectively, as follows: Raleigh Fire Creek Coal Company, which was incorporated December 24, 1920. This corporation was the lessee of a coal property formerly operated at a loss by Hines as Battleship Coal Company. The mines were well equipped and during 1921 its gross sales were $194,969.69. The workings were down a slope with water from this and an adjoining mine, always at the face of the coal, making mining difficult and expensive, and impossible to produce coal at a profit in 1921 and subsequent years. A tax return showing a profit for the year 1921 was filed, but on examination by the Commissioner, it was found that there was no taxable income and the amount of tax paid was refunded. The Raleigh Fire Creek Coal Company had purchased its leasehold in 1920, at what turned out to be an exhorbitant price of $42,500 in2012 cash, $382,500 in notes secured by a 1136 first lien on the property, and $300,000 in its own stock. There still remained unpaid at the end of the year 1921 the sum of $322,500. A very substantial decline in the value of coal properties took place between 1920 and 1921 on account of the decline in the price of coal. The gross assets of the Raleigh Fire Creek Coal Company were carried on its books during the taxable year at a valuation of $990,666.02. Included in this total were valuations put on leasehold of $211,335.86 and $188,392.19 on mine development. The evidence shows this valuation was greatly exaggerated and that the property could not have been sold as a going concern in 1921 for anything to compare with the amount shown on its balance sheet as its net worth. It turned out as a failure and went into bankruptcy in a later year. K. S. McClanahan, who was Sullivan's brother-in-law, worked for the latter's companies at a salary of $250 per month. He had no property, real or personal; "no assets"; "no financial standing"; "no credit rating"; "was not entitled to any credit consideration." Loans of $237 and $2,900 were made to him without endorsement and with2013 no collateral except 50 shares of stock in Little War Creek Coal Company, pledged to secure the larger loan. This company was not in 1921 a going concern. It owed large amounts and had no earnings; subsequently, in 1927, it became bankrupt, owing large sums to creditors. J. B. Frank was auditor for Sullivan's companies. He received $5,000 salary per annum and was considered a good credit risk by the Kanawha Valley Bank for amounts ranging from $500 to $2,500 at any one time. He owned two lots, one in Mullens and one in Charleston, each encumbered with indebtedness equal to its value. He had no other sound assets, though he had an interest in some of Sullivan's coal enterprises. The purported security for the loan made to him, 25 shares of stock in Steel Products Company, was worthless, this company having become insolvent and gone out of business in 1920. There was no endorsement upon the note given. Olymphia Oil Corporation, which was a wild-cat oil venture directed by Sullivan, through a corporation in which he owned all the capital stock. The company drilled a dry hole near Olymphia Springs, Ky., completed in April, 1921, and in June was loaned $9,000 without2014 endorsement or collateral. A second dry hole was completed in October, 1921, and $8,500 was loaned without security of any kind to meet the bills so incurred. The company had no property except these dry holes and a lease that was worthless in 1921 at the time the loans were made. John F. Koerner, an employee of Sullivan, received a salary of $250 per month. He had no property, real or personal, except the stock which he put up as collateral for the loan. He lived in a company 1137 house, never had any money, and wrote many bad checks. In November, 1921, he was loaned $15,000 without endorsement, pledging as collateral 165 shares of the stock of the Sullivan Land Company. This was a company organized by Sullivan in 1921, with ambitious plans. He was the principal stockholder. It did not begin active operations until in 1922. It showed a loss of $1,291.28, the first year of its operation and never did show anything but losses until it finally wound up bankrupt in later years. Its balance sheet, as shown on its income tax return, at the end of the year 1921, was as follows: SULLIVAN LAND COMPANYDecember 31, 1921ASSETSAccounts receivable$281,718.80Advanced Royalty2,114.00Investments300,000.00Real Estate402,338.49$986,171.29LIABILITIESNotes Payable511,953.00Accounts payable24,218.29Capital stock450,000.00986,171.292015 Petitioner reported net income for 1921 of $24,430.96 and paid a tax thereon of $4,693.81. No deduction for bad debts or losses with respect thereto was taken by petitioner on its 1921 income tax return. OPINION. BLACK: In its original petition, petitioner stated that it was appealing from deficiencies determined against it by the Commissioner for the years 1920 and 1921. However, no errors were assigned in the petition against the deficiency for 1920. The amended petition, upon which this proceeding was tried, made no mention of any deficiency for 1920, and at the hearing no evidence was offered by the petitioner concerning petitioner's income for 1920. At the conclusion of the hearing, counsel for the respondent moved that petitioner's appeal for 1920 be dismissed for lack of prosecution, with a finding that there is a deficiency for the calendar year 1920 in the amount of $32.56, as shown by the notice of a deficiency dated March 29, 1926. Said motion is granted and the appeal for 1920 is accordingly dismissed with a finding that there is a deficiency due by petitioner for that year of $32.56. 2016 . For 1921, petitioner alleges that it is not only not in default of any deficiency, but is entitled to a refund of taxes for that year in the 1138 amount of $4,593.87. In support of such contention petitioner urges the following assignments of error: 1. The Income Tax Unit has erroneously failed to deduct from petitioner's income for the year 1921 the sum of $48,037, on account of accounts incurred during the year 1921 and ascertained to be worthless and uncollectible prior to December 31, 1921. 2. The Income Tax Unit has erroneously failed to deduct from taxpayer's income for the year 1921, the sum of $48,037, representing losses incurred by the Bank of Wyoming as the result of withdrawal of funds from it, through the making of loans known to be worthless and uncollectible when made. Manifestly, petitioner can not claim its loss under section 234(5) of the Revenue Act of 1921, because that provision not only requires that the debts shall be ascertained to be worthless during the taxable year, but that they shall be actually charged off within the taxable year. Petitioner not only did not charge off the2017 debts set out in its petition during the taxable year, but carried them as assets on its books until 1926. It, therefore, can not secure a deduction for these several items under section 234(5), Revenue Act of 1921. Petitioner next claims the deduction under section 234(4) permitting deductions to the taxpayer for losses sustained during the taxable year and not compensated for by insurance or otherwise. The following cases are cited in support of petitioner's contention on this point: ; ; ; . An examination of the facts in each of the cited cases shows that in each instance the losses claimed resulted from embezzlement by employees not discovered until in years subsequent to when the embezzlement took place. We do not think these cases are in point and we believe they are distinguishable on the facts from those in the instant case. Petitioner also cites 2018 . In that case we held that certain transfers of money and properties by the president and minority stockholder of the petitioner to another corporation, in which the said president and minority stockholder was the principal stockholder, the latter corporation being at all times insolvent, amounted to a fraudulent appropriation of the petitioner's goods and that the losses suffered by the petitioner on account thereof were deductible as "losses sustained during the taxable years 1918 and 1919" instead of as "debts ascertained to be worthless and charged off" within the year such losses were discovered. On the authority of the above decision, we hold that the so-called loans made by petitioner at the direction of J. C. Sullivan, president, to the Olymphia Oil Corporation in 1921, represent losses from the very time they were made, and petitioner is entitled to deduct these 1139 amounts as losses in 1921 under section 234(4), Revenue Act of 1921. Stock in the Olymphia Oil Corporation was owned entirely by Sullivan; it was wholly insolvent at the time the loans were made. These so-called loans were made because Sullivan was2019 the dominating factor in the bank and were losses from the very beginning. They simply represented a raid on the bank to get money for one of Sullivan's enterprises already wholly insolvent. These so-called loans never did represent any real asset of the bank. Such can not be said of the other loans, which petitioner seeks to treat in the same manner. The loan of $10,000 to the Raleigh Fire Creek Coal Company was made to a corporation which was a going concern at the time the loan was made, with large assets, and although it owed large liabilities at the end of 1921, it was by no means in failing condition and during 1921 had gross sales of $194,969.69. There were other stockholders in this enterprise besides J. C. Sullivan, at whose direction the loan was made. There was no evidence to show that this loan was not made in the regular course of business and we have no reason to treat it differently from any other loan made by a going bank. The loans made to K. S. McClanahan, J. B. Frank, and John F. Koerner, were loans made to individuals in the regular course of the bank's business in 1921, and were represented by notes drawn up and signed in the regular way. The notes were2020 secured by collateral of very doubtful value, if not indeed worthless. The loans were made at the direction of J. C. Sullivan, president of the bank, but there is nothing to show that he received any of the money or that they were made for his benefit. Evidently these loans were not such as a careful, prudent banker would have made, but this fact alone does not give us authority to allow them as losses during the taxable year under section 234(4), Revenue Act of 1921. We think the situation as to the foregoing items just described is governed by our decision in . In that case the taxpayer made a loan, secured by a fraudulent chattel mortgage, and it was contended by the taxpayer that the loan was in reality a loss as soon as made. In denying his contention we said: There appears to be no doubt that the petitioner sustained a loss in the amount of the principal of the notes as a result of his loan to the Mollohans. The only question for this Board to determine is whether the loss occurred in 1919, when the loans were made, or in 1922, when the worthlessness of the security was ascertained. The petitioner contends that the loss sustained2021 is comparable to an embezzlement or theft, and that, therefore, it occurred at the date when he parted with his money. With this view we are unable to agree. The loan was made to individuals who gave their notes therefor. It is not disputed that the signers of such notes were the identical persons who negotiated the loans. The chattel mortgage was no more than security for the payment of the notes. For all the record discloses, the Mollohans, at the time 1140 they made the notes, may have owned all the cattle enumerated in the mortgage. In any event, the loans were evidenced not by the mortgage, but by the promissory notes of the Mollohans. We are of the opinion that, regardless of the value of the security, the transaction created a debt. Such debt, not having been ascertained to be worthless until 1922, can not, therefore, be deducted from the petitioner's gross income in the taxable year. To the same effect is ; ; 2022 ; . The amounts of indebtedness due petitioner by the Raleigh Fire Creek Coal Company, K. S. McClanahan, J. B. Frank, and John F. Koerner, did not represent losses during the year 1921, as contemplated by section 234(4), and were not deductible as bad debt losses in 1921 under section 234(5), because they were not charged off in that year, but were carried as assets of petitioner until 1926. Petitioner is not entitled to the deduction of losses claimed by him with respect thereto for the year 1921. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619685/	Estate of Lucy B. Platt, Deceased, Tillotson B. Platt, Lester B. Platt, and United States Trust Company of New York, Executors v. Commissioner.Estate of Lucy B. Platt v. CommissionerDocket No. 11100.United States Tax Court1947 Tax Ct. Memo LEXIS 126; 6 T.C.M. (CCH) 885; T.C.M. (RIA) 47214; July 29, 1947William J. McClellan, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent. DISNEYMemorandum Opinion DISNEY, Judge: This case involves estate tax. The deficiency, all of which is placed in issue, was determined in the amount of $17,646.05. The only question presented is whether the value of property conveyed in trust by the decedent in 1928 is includible in her gross estate under section 811(c) of the Internal Revenue Code, as intended to take effect in possession or enjoyment at or after her death. All of the facts (except proof of payment of taxes to the State of New York, and of payment of the estate tax to the Federal Government, shown on two exhibits) were stipulated, and we find them to127 be as so stipulated, and so shown by exhibits. They may, so far as necessary for examination of the issue, be epitomized as follows: The petitioner is the estate of Lucy B. Platt, deceased, the duly appointed executors of her will being Lester B. Platt, Tillotson Beach Platt, and United States Trust Company. Lucy B. Platt died July 13, 1943, a resident of New York. The estate tax return here involved was filed with the collector for the first district of New York on October 11, 1944. On July 19, 1928, at the age of 63, Lucy B. Platt executed a trust indenture, the provisions of which, here material, are that she retained for her life the net trust income, and that upon her death the trust estate should be divided into four equal parts, one of which was to be held in trust for, and the net income therefrom to be paid to, each of the decedent's two sons, and their respective wives, with provision that in case of the death of either of the four beneficiaries, his or her share was to be divided equally among the decedent's then surviving grandchildren and the then surviving issue of such as might be dead, per stirpes. Investments of the trust fund were during decedent's life subject128 to her approval in writing. Lucy B. Platt was survived by her two sons, their wives, her four grandchildren, and two great grandchildren. A third great grandchild was born after her death. One of her daughters-in-law died December 24, 1943, and under the trust indenture, the one-fourth share of such daughter-in-law was distributed to the decedent's four grandchildren. The estate paid estate taxes to the State of New York, from January 14, 1944, to December 3, 1946, in the total amount of $388.03, and paid to the Federal Government estate tax in amount of $18,974.62 on June 11, 1946. Though the determination of deficiency involves the value of the trust property in the decedent's gross estate under section 811(c) of the Internal Revenue Code, 1 on brief the respondent specifically states that no question of contemplation of death is involved, and agrees with the petitioner that the question is whether the trust comes within that language "of section 811(c) which makes any inter vivos transfer of property so includible which was intended to take effect in possession or enjoyment at or after death." The parties also are in agreement that since the trust was129 set up prior to March 3, 1931, the fact of reservation of life estate in the trustor does not affect this case. 130 The gist of the petitioner's position is that the trust indenture contained no provision for reverter, and that under many cases the trust corpus may not be included in gross estate because of an extremely remote possibility existing only by operation of law. Among cases cited are Lloyd's Estate v. Commissioner, 141 Fed. (2d) 758; Francis Biddle Trust, 3 T.C. 832">3 T.C. 832; Commissioner v. Kellogg, 119 Fed. (2d) 54; Estate of Harris Fahnestock, 4 T.C. 1096">4 T.C. 1096; Estate of Edward P. Hughes, 7 T.C. 1348">7 T.C. 1348. The respondent argues in substance that under Regulations 105, section 81.17, as amended by Treasury Decision 5512, there are two tests whether a trust concerns a "transfer intended to take effect in possession or enjoyment at or after his (grantor's) death," and that the value of the decedent's property interest is includible in his gross estate if (1) possession or enjoyment can be obtained only by beneficiaries who must survive the decedent, and (2) the decedent, or his estate, possesses any right or interest in the property, whether or not arising by express terms of the trust instrument. Both tests, it is argued, are met by the131 trust instrument here, first because possession or enjoyment can be obtained only by beneficiaries who must survive the decedent (for only upon her death was the trust property to be divided and the income paid to beneficiaries, and ultimate remaindermen must survive both the grantor and their parents), and second because the grantor retained a right, "though concededly remote," in the property - since it is conceivable that she might survive all remaindermen and take by reversion, the trust instrument having made no ultimate disposition of the remainder in case of decedent's surviving all beneficiaries. The respondent argues that the element of survivorship is clearly present and death was the "intended event" bringing the subsequent estates into being. [The respondent does not on brief urge effect from that trust investments were, during decedent's life, subject to her approval.] We disagree with the idea that the element of survivorship is present in this matter. The only reference in the trust indenture to survival is the survival of settlor's grandchildren after death of their parents. Nor do we agree that death was the "intended event" bringing the subsequent estates into132 being. We consider it clear that the only question here is whether the remote possibility of reverter to the grantor (only by operation of law, for there was no provision covering such reverter) requires inclusion of the value of trust corpus in gross estate. We can discern no difference in essential fact between this case and Estate of Edward P. Hughes, supra, wherein, following inter alia Francis Biddle Trust, supra, and other cases relied on by the petitioner herein, we held that remote possibility of reverter by operation of law does not justify including trust corpus in gross estate, adhering to our view previously taken, though cognizant of a different interpretation of the law in Commissioner v. Bayne's Estate, 155 Fed. (2d) 475, and other decisions to the same general effect, cited and relied upon herein by the respondent. Recognizing the diversity of opinion on this matter, but still adhering to the views expressed in Estate of Edward P. Hughes, supra, we consider it unnecessary to discuss the issue again or detail the various cases. However, since, as above seen, the respondent particularly relies here upon Treasury Decision133 5512 (C.B. 1946-1, p. 264), we note that in Estate of John M. Neal, 8 T.C. 237">8 T.C. 237 (243), the Commissioner withdrew his contention under section 811(c) because of that Treasury Decision, amending of Regulations 105, section 81.17. We hold that the remote possibility of reverter by operation of law was not effective to cause inclusion of value of trust corpus in gross estate, and that the transfer in trust was not intended to take effect in possession or enjoyment at or after decedent's death, within the meaning of section 811(c), Internal Revenue Code. Decision of no deficiency will be entered. Footnotes1. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States - * *(c) Transfers in Contemplation of, or Taking Effect at Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, 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; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to-his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619686/	JOHN H. COOK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cook v. CommissionerDocket No. 77140.United States Board of Tax Appeals38 B.T.A. 651; 1938 BTA LEXIS 838; September 29, 1938, Promulgated 838 1. An amount received in excess of cost by a bondholder in discharge of his bonds before maturity by order of a court condemning the property which secured the bonds, held not taxable as a capital gain because no sale or exchange occurred. 2. The basis for computing a shareholder's gain on the liquidation of shares received as a dividend from a corporation other than the issuer is their value at the time of distribution, and, in the absence of evidence of such value, the Commissioner's determination of gain is sustained. 3. The "zero basis", applied in Helvering v. Gowran,302 U.S. 238">302 U.S. 238, and Helvering v. Pfeiffer,302 U.S. 247">302 U.S. 247, in the sale of shares received as a "stock dividend", has no application to the sale of shares of another corporation received as a property dividend. J. Nelson Anderson, Esq., for the petitioner. Lloyd W. Creason, Esq., for the respondent. STERNHAGEN 651 The Commissioner determined a deficiency of $2,160.23 in petitioner's income tax for 1931. Petitioner assails the treatment, as ordinary income, of profit on bonds redeemed before maturity in consequence of condemnation839 proceedings against properties securing them, and contests the basis used in computing profit on the liquidation of shares distributed as a dividend in stock. By affirmative plea the Commissioner contends that such shares have a basis of zero. Another issue was settled by agreement. FINDINGS OF FACT. 1. Petitioner, a resident of Paterson, New Jersey, was the owner in 1931 of $52,000 par value bonds of water companies. Of this amount $37,000 par value was issued by the Passaic Consolidated Water Co. (herein called the Water Co.); $8,000 by the Passaic Water Co.; $3,000 by the Montclair Water Co.; and $4,000 by the East Jersey Water Co. The Water Co. was incorporated on October ber 652 31, 1923, by the New Jersey General Security Co. (herein called General Security), which was the sole shareholder of the Passaic, Montclair, and East Jersey water companies and two other water supply corporations. The Water Co. issued its total capital stock, represented by 31,000 shares of a par value of $100 each, to General Security, and received in exchange all the outstanding shares of the five water supply corporations. It then took over all of the latters' assets and assumed840 all of their liabilities. In 1927 the Passaic Valley Water Commission was organized, and, as representative of Passaic and other New Jersey cities, acquired by condemnation all of the physical properties, rights, and franchises of the Water Co. On October 24, 1930, the commission awarded the Water Co. $13,000,000, and paid the amount on the same date into the Court of Chancery of New Jersey to protect the holders of bonds secured by mortgages on the Water Co.'s properties. By order of March 23, 1931, the court directed, inter alia, that bonds issued by the Water Co., to mature in 1939, be paid at 105 percent of par plus accrued interest of 6 percent, and that bonds issued by the Passaic, Montclair, and East Jersey water companies, to mature in 1958, be paid at 102 1/2 percent of par plus accrued interest of 5 percent upon the holders' surrender thereof on or after April 10, 1931. The Water Co. bonds were by their terms subject to call on any interest date after May 1, 1934, on 30 days' notice. The others contained no provision for call prior to maturity. Of the $52,000 par value bonds, petitioner acquired $45,000 par value at a cost of $33,261.50. Under the court order841 he received for them $48,931.75, inclusive of accrued interest of $1,881.75. He had held them for more than two years. In determining petitioner's income tax for 1931, the Commissioner treated the difference between cost and the amount received, or $15,670.25, as ordinary income. 2. In 1931 petitioner received $48,994.40 in liquidation of 910 shares of stock in the Passaic Holding Co. (herein called Holding Co.). He had acquired the shares on December 30, 1926, by distribution from General Security. General Security had just exchanged all but seven of the 35,000 shares of the Water Co., then outstanding, for the entire capital stock of the newly organized Holding Co., represented by 65,000 no par value shares. It immediately distributed the Holding Co. shares among its own shareholders at the rate of 3 1/4 Holding Co. shares to each share of its own stock held. They surrendered none of their General Security shares. Petitioner then held 280 shares of General Security, which he had purchased for $39,812. The Commissioner computed a profit on the liquidation by taking 50.09 percent of the cost of petitioner's General Security shares as 653 the basis of the Holding842 Co. shares. He reduced the cost of the General Security shares by $17,754.80, described as "Nontaxable distribution in 1926 as claimed by you", and thus used $22,057.20 in arriving at a basis of $11,048.45 for the Holding Co. shares. In his income tax return for 1926 petitioner excluded from income $12,715.42 on the ground that it represented a nontaxable distribution of cash and bonds made in 1926 by General Security. The amount was added to income by the Commissioner as representing a distribution of earnings. The Commissioner's determination was sustained by this Board in a memorandum opinion entered January 28, 1938, Docket No. 52074. Decision was entered May 9, 1938, and petition for review was filed by the taxpayer August 9, 1938. OPINION. STERNHAGEN: 1. The Commissioner held that the $15,670.25 received by the petitioner in excess of the cost ($33,261.50) of the $45,000 par value of bonds is taxable as ordinary income. The petitioner urges that the gain was a "capital net gain" as defined in Revenue Act of 1928, section 101 (c)(1). 1 To succeed he must establish that the gain was "from the sale or exchange" of the bonds. 843 He argues that the bonds did not mature and were not redeemed in 1931; that the payment was received out of the condemnation award, and not from the bond obligor or in accordance with the terms of the bond, and that prior decisions 2 involving such circumstances and denying the use of the capital gain rate are therefore distinguishable. The argument is fallacious. The issue must be stated and met in the statutory language of sale or exchange. If there be no sale or exchange, the question whether there was a redemption is of no significance. It is no avail to a taxpayer that his case is not within the scope of earlier adverse decisions unless by showing this he also brings himself within a permissible interpretation of the words of the statute. 844 It is impossible to say that petitioner either sold or exchanged his to an end and he was compensated in the specified amount. No one bought his bonds and he had no choice to hold them longer. It is only because he had held them more than two years that there is reason to think about whether the capital gain tax applies; but the 654 thought is ended when it appears that the occasion on which he received his gain was not a "sale or exchange", ; (on review D.C.App.). 2. The second issue is badly snarled. The petitioner in 1931 received $48,994.40 from the Passaic Holding Co. in liquidation of the 910 shares which he held as the result of the distribution to him in 1926 by the New Jersey General Security Co., in which he held 280 shares; and the question is, How much of this amount is taxable gain in 1931? This question is simple enough, and, as so stated, its answer should not be difficult. But the difficulty is found in trying to adjust the treatment to be applied in 1931 to what has been done in the past. 845 When in 1926 the 910 shares of the Passaic Holding Co. were received from the General Security Co. this was a dividend and taxable to petitioner as such at the full value at that time of the 910 shares. It was not a "stock dividend", . Such value then became the basis to be thereafter used in lieu of cost when the 910 shares were disposed of. The liquidation which occurred in 1931 was ordained by statute to be treated as the equivalent of a sale, Revenue Act of 1928, section 115(c); and hence the gain or loss is the difference between the $48,994.40 received and the basic value. What that value is can not be ascertained from this record. No attempt has been made by either party to prove it, if indeed its materiality has ever been apprehended. The evidence was submitted in a written stipulation of facts filed at the hearing without much discussion or argument. The pleadings have been several times amended, the latest on both sides being filed by consent after the hearing and after the Board's memorandum opinion in the case involving 1926 had been entered and served. It can not be said, therefore, that a full hearing has not846 been had or that either party has had less than an adequate opportunity to prove all the facts or present all the argument necessary to support his position. For the Commissioner no brief has been filed, although by his amended answer filed after the hearing he pleads error in his treatment of the $48,994.40 and prays for an increase in the deficiency "accordingly", thus assuming the burden of proof as to the increase. The petitioner in a reply demurs. In this state of the record the decision can not be made accurately on the merits but must fall as best it can in accordance with the way it is submitted. Apparently the income shown on the petitioner's 1931 return contained no part of the $48,994,40. The Commissioner in determining the present deficiency computed the gain by a complex computation of 655 cost of the 910 shares. 3 From the admitted cost of $39,812 which petitioner had originally paid for his 280 shares of General Security stock, $17,754.80 is subtracted as a nontaxable distribution in 1926 as said to have been then claimed by the taxpayer. The justification for the subtraction does not appear; the deficiency notice shows only that it is the total of 280847 shares at $63.41 a share; and the stipulation states only that in his 1926 return petitioner excluded $12,715.42 "on the basis that it represented a nontaxable distribution of cash and bonds" from the General Security Co., the exclusion of which is the subject matter of Docket No. 52074. It does not appear why the $12,715.42 distribution of "cash and bonds" should have any relation to the distribution of Holding Co. shares or to the figure of $17,754.80. Proceeding with the Commissioner's computation, the remainder of $22,057.20 is treated as the total cost of the composite 280 shares of General Security and 910 shares of Passaic Holding, and of this, 50.09 percent, or $11,048.45, is allocated to the 910 Holding Co. shares as their cost basis. This may, in the absence of assignment of error and evidence, be taken as the value of the 910 shares when received. This in turn is reduced by "nontaxable distributions" in 1929 and 1930. For the entire 920 shares the "adjusted cost basis" is taken as $6,546.45 and the resulting "gain on liquidation" as $42,986.35. 848 The fault which the petitioner in his petition found with the Commissioner's deficiency determination was that $17,754.80 was taken as the amount excluded from income in 1926 to reduce the basis instead of the $12,715.42 which petitioner says he excluded. But, as has been said, the $12,815.42 was not thought to be the value of these 910 shares but the value of some cash and bonds. The Commissioner's affirmative claim for an increase in the deficiency is based upon a use of a so-called "zero basis" referred to in , and . But that "zero basis" was applied to a "stock dividend", that is, a dividend distributed by a corporation in shares of its own stock. It is not shown to have any application to a property dividend such as this. In such a state of the record, we can do no better than leave the deficiency where the Commissioner originally found it. There is a third issue as to salary, which the Commissioner concedes. Thus the determination on the first and second points is sustained, the Commissioner's affirmative claim for an increase is denied, and the determination*849 on the third point is reversed. Judgment will be entered under Rule 50.Footnotes1. (1) "Capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. ↩2. ; ; ; dismissed, C.C.A., 2d Cir.; see also ; ; ; . Cf. ; , which consider the redemption of shares of stock in the light of the statutory provision that liquidation shall be treated as payment for the shares. ↩3. An additional 10 shares admittedly bought in 1928 for $650 was included in the computation; but since it is not the subject of dispute, it is not important here. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619687/	C. J. Kowkabany v. Commissioner.Kowkabany v. CommissionerDocket No. 16841.United States Tax Court1949 Tax Ct. Memo LEXIS 105; 8 T.C.M. (CCH) 705; T.C.M. (RIA) 49191; August 18, 1949105 Robert P. Smith, Esq., Bowen Bldg., Washington, D.C., for the petitioner. Edward L. Potter, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion Respondent determined deficiencies in income tax and penalties for the taxable years ending December 31, 1942, 1943, and 1944, as follows: DeficiencyPenalty1942$ 8,753.76$ 4,376.88194313,832.516,916.26194432,773.1916,386.60Totals$55,359.46$27,679.74The issues for decision are whether petitioner received unreported income to the extent of $13,554.96 in 1942, $15,810.92 in 1943, and $36,591.93 in 1944; and whether respondent erred in the determination of 50% fraud penalties pursuant to section 293 of the Internal Revenue Code. Findings of Fact Petitioner is C. J. Kowkabany, a resident of Jacksonville, Florida. During the calendar years in question, 1942 to 1944, inclusive, petitioner owned five package liquor stores in the general vicinity of Jacksonville. During a part of these years he also owned and operated a dry goods, meat, and grocery business. In general, each store was operated by a manager. The bulk of liquor was purchased106 by C. J. Kowkabany by check from wholesale liquor dealers. The manager was authorized to and did purchase incidentals such as supplies, beer, soda water, kerosene, and ice from cash in hand. Sales were made to individual customers for cash and check. In order to create good will, the managers cashed pay checks without charge for personnel of numerous military bases, and other businesses located in the vicinity. The purchase of merchandise was not a prerequisite to the cashing of checks. Although checks cashed, the majority being U.S. Government paychecks, sometimes exceeded $10,000 for one week in one store, no records were maintained of the number or amount of checks cashed. Sales, however, were placed in the cash register and recorded in the mechanism of the machines. Collections were made each week from each store by petitioner or someone designated by him. The cash receipts and disbursements were checked with the manager and itemized and entered on weekly "store reports." Cash was usually left on hand or retained by petitioner as a revolving fund to cash paychecks which averaged fifty to a hundred and fifty dollars each. The checks in the cash register were deposited in one107 of petitioner's three bank accounts. The weekly store reports, showing the itemized expenditures for merchandise and expenses as well as sales, were turned over to a bookkeeper along with petitioner's bank statement, checks, and stubs. The bookkeeper then entered these figures in permanent form from which he computed petitioner's income for tax purposes. Included in this permanent record were sales, check register, cash disbursements, fixed assets, depreciation, rentals, and interest. This volume contained a record of every transaction entered into by petitioner, including the results of the disposal of the dry goods, grocery, and meat business in 1943. No balance sheet was ever prepared, although an inventory record was maintained. The method of bookkeeping employed was consistent and was practiced for many years, including the period in question. After correction for small errors, the majority of which were mechanical, the records of petitioner show: 1942Gross sales and income$428,888.51Beginning Inventory$ 65,315.32Merchandise purchased348,406.00413,721.32Ending Inventory87,234.72326,486.60Miscellaneous Expenses52,599.63379,086.23Net Profit per books$ 49,802.281943Gross sales and income$753,995.15Beginning Inventory$ 87,234.72Merchandise Purchased607,039.60694,274.32Ending Inventory122,534.39571,739.93Miscellaneous Expenses54,339.73626,079.66Net Profit per books$127,915.491944Gross sales and income$772,009.35Beginning Inventory$122,534.39Merchandise Purchased593,357.44715,891.83Ending Inventory100,084.28615,807.55Miscellaneous Expenses43,414.14659,221.69Net Profit per books$112,787.66108 The taxable income as reported by petitioner was: 1942$ 48,158.491943136,861.961944110,469.01During the period involved, deposits in petitioner's three bank accounts totaled: 1942$522,654.501943927,465.441944939,484.45Upon receipt of the deficiency notice, petitioner hired a firm of accountants to determine his income. This firm spent in excess of 1,400 man hours examining the businesses of petitioner. Petitioner's entire record was verified from original records, including vendor's invoices of all purchases made by petitioner, by canceled checks, check stubs, deposit slips retained by the bank, correspondence, and any other matter bearing on the issue. Public records were examined to discover any other possible source of income. Cash receipts were compared to inventory and average mark-up. Surprise audits were made at the stores. Years, other than the ones in question, were examined. With the exception of minor and mechanical errors, the accuracy of petitioner's records are upheld. The excess of deposits over sales and other income is attributable to inter-bank transfers and to the cashing of pay roll checks which resulted*109 in a transfer of cash on hand to checks deposited in petitioner's bank account. The correct taxable income for petitioner for the taxable years is as follows: 1942, $48,524.50; 1943, $127,414.50 and 1944, $111,818.76. No part of any deficiency for any taxable year was due to fraud with intent to evade tax. Opinion KERN, Judge: The questions posed for decision in the instant proceeding are entirely factual. Based upon the entire record, which was quite voluminous, we have made the foregoing findings of fact and reach the ultimate conclusions stated therein. An extended discussion of the evidence in this opinion would be unprofitable. In our judgment petitioner has borne the burden of proof in establishing his correct taxable income for the taxable years, and the respondent has not borne his burden of proof in establishing that any deficiences with regard to any of the taxable years, was due to fraud with intent to evade the tax. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619649/	Appeal of FEDERAL HOLDING CO.Federal Holding Co. v. CommissionerDocket No. 2003.United States Board of Tax Appeals1 B.T.A. 1144; 1925 BTA LEXIS 2640; May 20, 1925, decided Submitted April 7, 1925. 2640 Arthur L. Jones, C.P.A., for the taxpayer. A. J. Seaton, Esq., for the Commissioner. 1144 Before JAMES, LITTLETON, and TRUSSELL. This is an appeal from a determination by the Commissioner of a deficiency in income and profits taxes of $2,574.54 for the year 1919; $3,109.21 for the year 1920; and $768.63 for the year 1921; a total of $6,452.38. 1145 FINDINGS OF FACT. The taxpayer is an Ohio corporation, engaged in the business of operating a moving-picture theater in Youngstown. It owns a theater building constructed with steel framework and terra-cotta finish. The building is located on leased land on a main thoroughfare of the city, within two blocks of the central square, and in the shopping district. The taxpayer's building, which was designed exclusively for use as a motion-picture theater, was constructed in 1917 and 1918 at a total cost of approximately $252,000. The structure itself cost approximately $167,000, and will reasonably last for any purpose at least 50 years. The interior construction and ornaments, suitable solely for theater purposes, cost approximately $85,000, and will reasonably last approximately 20 years. 2641 In making returns for the years in question, the taxpayer claimed a deduction of 5 per cent on account of depreciation and obsolescence on the total cost of the building. The Commissioner in auditing the returns allowed depreciation at the rate of 2 per cent. These respective depreciation rates are the sole issue before the Board, other than minor adjustments in the invested capital. DECISION. The income of the taxpayer should be recomputed by allowing a depreciation rate of 3 per cent. Final determination will be settled on consent or on 10 days' notice, in accordance with Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619650/	HERBERT W. TULLGREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. S. MINARD TULLGREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Tullgren v. CommissionerDocket Nos. 9738, 32599, 32600.United States Board of Tax Appeals14 B.T.A. 915; 1928 BTA LEXIS 2884; December 26, 1928, Promulgated 2884 ANNUITIES - CHARGE ON LAND DEVISED. - By the will of petitioners' father an annuity of $6,000 a year was given their mother, directed to be paid by petitioners. By that will certain real property was devised them subject to the payment of the annuity. Held, that the annuity was a charge first against the income from the property and as to any arrearage against the corpus, and the income in the several years in question being less than the amount of the annuity, none of it represented income taxable to petitioners. Further, held, that payments from personal funds by petitioners of arrearages in the annuity did not represent losses to them but were capital transactions representing items of cost to them of the property in satisfying the annuity lien. Frank Hormuth, Esq., for the petitioners. J. F. Greaney, Esq., for the respondent. TRUSSELL 916 These proceedings, consolidated for hearing and decision, are appeals from deficiencies determined by respondent in income taxes of petitioners for years and in amounts as follows: 19231924Herbert W. TullgrenNone.$379.01S. Minard Tullgren$172.86360.07All2885 three of these deficiencies involve the same question, the disallowance by respondent of certain deductions made by petitioners from gross income in their returns in the years in question as representing payments made in those years of an annuity provided by their father's will, to be paid their mother and charged by that will upon a certain piece of real property devised them. Respondent, at the hearing, moved that the deficiency as to S. Minard Tullgren for the year 1923, be increased by the inclusion in his gross income of the amount received by him in that year as rents from the property in question. FINDINGS OF FACT. Petitioners are sons of Martin Tullgren, deceased, formerly a resident of White Fish Bay, Milwaukee County, Wis., and are residents of that State. The said Martin Tullgren left a last will and testament, provisions of which pertinent to these proceedings being as follows: Paragraph Two.I hereby give and bequeath to my wife, Barbara K. Tullgren, and direct that there be paid to her by my sons, S. Minard Tullgren and Herbert W. Tullgren, the sum of Five Hundred ($500.00) per month during the term of her natural life, said payments to be made on or before2886 the 10th day of each and every month during said term, and that the payment thereof be and remain secured as hereinafter, in Paragraph Three of this my Last Will and Testament provided for. 917 Paragraph Three.I hereby give, devise and bequeath unto my sons, S. Minard Tullgren and Herbert W. Tullgren, share and share alike, to be theirs, their heirs and assigns forever, all of my right, title and interest in and to that certain apartment building and the land upon which same is situated and which is located at what is known as No. 6 Prospect Avenue, in the City of Milwaukee, Milwaukee County, Wisconsin, and further described as follows: (Here follows description of property) Subject, however, to the payment of the bequest to my said wife, Barbara K. Tullgren, of the sum of Five Hundred Dollars ($500.00) per month as provided for in Paragraph Two of this my Last Will and Testament. Paragraph Four.All the rest, residue and remainder of my property and estate of every name and nature whatsoever and wheresoever situated, I give, devise and bequeath to my sons, S. Minard Tullgren and Herbert W. Tullgren, share and share alike, to be theirs, their heirs and assigns2887 forever. Paragraph Five.I hereby authorize and empower my wife, Barbara K. Tullgren, at any time that she may deem best, to relinquish the said property hereinbefore described and located on Prospect Avenue from the lien or charge for the security of the payment to her of the bequest herein provided, either by taking in its place other security or by making such other arrangement as to her shall be satisfactory. Paragraph Six.I hereby will and direct that no part of my said estate is or shall be in any wise chargeable or shall be charged as security for the payment of the said sum of Five Hundred Dollars ($500.00) herein bequeathed to my wife, Barbara K. Tullgren, except my interest in the Prospect Avenue property hereinbefore described, and that as to all other property herein devised and bequeathed to my said sons, S. Minard Tullgren and Herbert W. Tullgren, they or either of them acting individually, jointly or through any partnership or corporation in which they may be interested, may dispose of all such property and properties free and clear of any claim, right or title thereto on behalf or in favor of my wife, Barbara K. Tullgren. This will designated W. 2888 H. and Thomas T. Churchill of Milwaukee as executors and was by them duly offered for probate on October 24, 1922, and distribution of the estate in accordance therewith was ordered by the county court of Milwaukee County by decree of April 3, 1925. In that decree the court, after describing the property referred to in paragraph 3 of the will as above set out, and determining that decedent had a two-thirds interest therein, provided: That the real estate hereinbefore described be and the same hereby is assigned and transferred unto S. Minard Tullgren and Herbert W. Tullgren, share and share alike, as tenants in common thereof, that is, unto each an undivided one-half interest therein and thereto, to be theirs, their heirs and assigns forever, subject, however, to the payment by the said S. Minard Tullgren and Herbert W. Tullgren, of the sum of Five Hundred ($500.00) Dollars per month to Barbara K. Tullgren, widow of said Martin Tullgren, deceased, for and 918 during the term of her natural life, said payments to be made on or before the 10th day of each and every month during said term, and to remain a lien or charge upon said real estate as the security for the payment2889 to her of said bequest, conditional, however, in that the said Barbara K. Tullgren at any time she may deem best relinquish the said real estate hereinbefore described from the said lien or charge for the security of the payment to her of the bequest herein provided either by taking in its place other security or by making such other arrangements as to her shall be satisfactory. In making his return for the calendar year 1923 the petitioner, S. Minard Tullgren, included in income the sum of $414.56 as representing a one-third undivided share of profits from rents of the Lake Shore Apartment for that year and deducted the sum of $3,000 as representing a payment in that year on the annuity of $6,000 due his mother. Respondent, in determining the deficiency in that petitioner's income for that year eliminated from gross income the item of $414.56 referred to and disallowed the deduction of $3,000 claimed as paid on the annuity. Neither petitioner, in making his return for the calendar year 1924, reported income as received from the Lake Shore Apartment, and each deducted $3,000 as representing payments made in that year of the $6,000 annuity to their mother. OPINION. TRUSSELL: 2890 By his will petitioners' father bequeathed to his widow an annuity of $6,000 per year, charging that it be paid by petitioners. By a subsequent clause of the will he devised to these petitioners certain real property "subject" to the payment of the annuity mentioned. The balance of his estate he gave to petitioners, specifically excepting it from charge on account of the annuity. By bequests of this character the question is raised as to whether the payment of the annuity is to be construed as a condition precedent or subsequent or as a charge upon the land, and by the great weight of authority it is held that it is not a condition precedent unless expressly so directed by the will in language which shows such to have been the testator's intention, and that in the absence of an evidenced intention that failure of the devisee to pay the annuity should work a forfeiture it will not be construed as a condition subsequent but merely a charge upon the land. ; ; 2891 ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; . Even where the devisee is specifically 919 directed by the will to pay the annuity as a condition of the devise the courts hold that the effect is merely to create a charge upon the lands. ; ; ; ; ; 2892 ; ; ; ; ; ; ; ; ; ; ; . In , where the testatrix left certain real estate to a son and daughter "conditioned upon" their paying to other of her children specified sums and providing support for another son during his life, the court said: The first question raised is whether the payment of the sums stated is a condition precedent or condition subsequent, or a charge upon the real estate devised. It is plain that the will does not create a condition precedent, because the devises are to take effect upon the death of the testatrix, while the payment is postponed for three years; nor a condition subsequent, because there is nothing in the will to show an intention of the testatrix to subject2893 the estate to forfeiture. The payments were not for the benefit of her estate or of her heirs, generally, to whom a forfeiture would inure, but a mode of equalizing her gifts by requiring children to whom real estate was devised to make payments of money to other children who received no other gift from her, * * . The use of the word "conditioned" does not necessarily imply a strict condition, either precedent or subsequent. The intention must control. 2 Washb. Real Property (5th Ed.) 446, par. 3, and cases cited in Note 5. We think that the intent in this case was to make the payments a charge upon the estate devised. The rule discussed above is accepted and applied by the courts of Wisconsin, in which State decedent resided, and the will was probated, and under whose laws the rights and obligations of these parties with respect to the property in question must be determined. In ; , in which a bequest similar to the one here in question was involved, the court said: The will does not, in terms, provide that the same should be a charge, but uses the expression that the devise to William is upon the condition2894 that he shall, within one year after the widow's death, pay this amount to Phillipina. The expression "upon condition," if not otherwise qualified, might be construed as a condition precedent so that William could not take the land at all without making such payment, but since he was to take in possession immediately upon his mother's death, and was not required to make the payment until afterwards, namely, within a year, of course no condition precedent was intended. If, then, it is a condition at all, it is a condition subsequent; but there is no suggestion that his title is to be divested upon breach of that condition, and no provision is made for any one else to take the land upon such breach. Hence, it seems necessary to deduce some other practical meaning and purpose from this language. We are persuaded that the trial court reached substantially the right conclusion on this subject. We think it plain that this 920 $5,000 provision for the daughter - all that she receives under the will - was a very dominant purpose in the mind of the testator, and that his wishes, as evidenced by the will, would not be satisfied unless she receives it; hence that he intended to declare2895 his will that out of this farm, constituting nearly half of his estate, should be paid, in any event, $5,000 to the daughter Phillipina; that this purpose should not be defeated either through William's inability to raise that amount of money upon his limited estate therein, or otherwise. To reach this result he must have intended to confer upon her the right to a lien or charge for this amount upon the whole title in these premises, and we agree with the trial court in holding that the will does so. In the case before us the devise to these petitioners is to take effect upon the death of the testator, the payments of the annuity being for succeeding years. There is no indication of an intent that the passing of title should await the expiration of the term of the annuity and that the payment of same is to be a condition precedent; nor is there an indication of an intent that the failure to make such payments shall work a forfeiture, and no such intention can be presumed in view of the fact that the forfeiture would not effect a change in petitioners' interest in the property, for any interest which they might forfeit under this specific devise they would thereupon take, in identically2896 the same proportion, as residuary legatees. An annunity which is a charge against property is from its nature payable first out of income and any deficiency charged against corpus. ; ; ; ; ; ; (affd. ); ; ; ; ; ; . See also . In ; , the court said: Even if there were no express provision in regard to payment, the division of the legacies to each of his children into five equal parts, one to be paid in each year, would be an indication that they were to be paid from income, rather than from the principal of his estate. 2897 In , it was said that "the very nature of an annuity suggests, when those charged with the payment of it have in their hands a fund producing income sufficient to pay it, that the payment should be made from the income, and not from the principal." In the light of the decisions above cited we conclude that these petitioners each took, under the will of their father, an undivided one-third interest in this real property over and above a charge against such interests in the sum of $6,000 a year in favor of their mother, payable first out of the yearly income and as to any deficiency out of corpus. The record shows that in none of the years here involved were the rents from this property sufficient to pay the full amount of the 921 annuity. We hold that none of this represented income taxable to petitioners. The amount necessary in each year to make up the sum of $6,000 was paid by these two petitioners, in equal propertions, from personal funds. These payments are claimed by them to represent losses but it can be readily seen that they are merely payments which would otherwise be satisfied out of the2898 corpus of the property and are no more than the payment of petitioners of any other incumbrance representing a lien upon property to which they hold title. These payments, although made from personal funds, are in fact payments out of the corpus of the property and can not represent losses to these petitioners, for what they took under the will was merely the residuum of the property over and above the extent to which it might be exhausted in meeting annuity payments. Such payments are capital transactions and represent items of the cost to them of the property in satisfying the lien of the annuity. We accordingly sustain the determination of deficiencies as made by respondent in respect to these two petitioners for the years in question. Judgment will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619652/	CHRISTOPHER MANLEY AND STELLA MANLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentManley v. CommissionerDocket No. 4893-81.United States Tax CourtT.C. Memo 1983-558; 1983 Tax Ct. Memo LEXIS 229; 46 T.C.M. (CCH) 1359; T.C.M. (RIA) 83558; September 12, 1983. 229 Held, petitioners had gross income from wages during 1977 of $19,414.39. Their "legal" and constitutional arguments to the contrary are frivolous and wholly without merit.Held further, respondent's disallowance of $17,923 of deductions claimed on petitioner's 1977 tax return is upheld since petitioners failed to introduce any evidence refuting respondent's determination. Held further, petitioners are liable for the addition to tax pursuant to sec. 6651(a), I.R.C. 1954. Held further, on the Court's own motion, damages under sec. 6673 are awarded to the United States since petitioners instituted these proceedings merely for delay. Thomas J. Carley, for the petitioners. Rona Klein, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By notice of deficiency dated December 18, 1980, respondent determined a deficiency of $2,799 and an addition to tax of $139.95 in petitioners' Federal income tax for the taxable year 1977. The issues for decision are (1) whether petitioners had gross income from wages during 1977 totaling $19,414.39; (2) whether petitioners are entitled to deductions for any of their claimed expenses; and (3) whether petitioners are liable for the addition to tax pursuant to section 6653(a), I.R.C. 1954. FINDINGS OF FACT By Court order dated September 20, 1982, portions of respondent's proposed stipulation of facts of facts and portions of petitioner's proposed stipulation of facts were accepted as established and are herewith found as facts for purposes of this case. 1 The stipulation of facts so found and exhibits attached thereto are incorporated herein by this reference. 231 Petitioners, Christopher Manley and Stella Manley, resided in Lake Ronkonkoma, New York, at the time of filing the petition herein. They filed a joint Federal income tax return for the calendar year 1977 with the Internal Revenue Service Center, Holtsville, New York. During 1977 petitioner Christopher Manley was an employee of the Long Island Railroad. He received wages for that year, as reflected on his W-2 Form, totaling $19,414.39. From this sum, the following amounts were withheld: $3,026.96 for United States Income Tax, $1,061.09 for New York State Income Tax, $965.25 for the Railroad Employees Retirement Fund, $17.98 for New York City Income Tax, $410.40 for union dues, and $1,000 for his credit union. On their income tax return for 1977, petitioners did not report the $19,414.39 of compensation received from the Long Island Railroad on line 8, the place for reporting "Wages, salaries, tips, and other employee compensation." Instead, petitioners listed this amount on a Schedule C type form entitled "Christopher Manley," which was attached to their 1977 tax return. Petitioners then reduced this amount by a list of claimed expenses totaling $17,923, which included a232 variety of items such as $8,620 for subsistence and maintenance, $1,797 for auto, and $1,095 for utilities. In his notice of deficiency, respondent disallowed the claimed deductions. He also asserted an addition to tax under section 6653(a) for negligence. OPINION We first address the question of whether petitioners had gross income from wages during 1977 totaling $19,414.39. Although petitioners originally reported this amount on a Schedule C attached to their joint tax return for 1977, they now contend that the return as filed is incorrect and that they actually had no income during the year in question. In support of this contention, petitioners have advanced a multitude of "legal" and constitutional arguments during and after trial. All of these contentions have been asserted unsuccessfully in the past and we continue to find such arguments frivolous and wholly without merit. Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 638-639 (1979). Accordingly, we find that petitioners received compensation in the amount of $19,414.39 during the tax year at issue. The second issue for decision is whether petitioners are entitled to deductions for any of the $17,923233 they claimed in expenses. With respect to this issue, petitioners have failed to offer any evidence to support their claimed deductions, deferring instead to their frivolous contentions that they had no income. Basically, the deductions claimed by petitioners on their return appear to have been for their personal, living, and family expenses. Deductions for such expenses are specifically disallowed by section 262 of the Code. Although petitioners may have incurred some expenses for items legitimately deductible, petitioners bear the burden of proving that respondent's determination is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Accordingly, in light of petitioners' failure to introduce any evidence refuting respondent's determination, we uphold respondent's disallowance of the $17,923 of deductions claimed on their 1977 tax return. Next we address ourselves to the addition to tax asserted by respondent pursuant to section 6653(a). Section 6653(a) imposes an addition to tax equal to 5 percent of the underpayment if any part of any underpayment is due to negligence or intentional disregard of rules234 and regulations. Respondent's determination under such section is presumptively correct. Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 802 (1972). Petitioners offered no evidence on this issue. Moreover, petitioners' conspicuously frivolous constitutional claims are insufficient to rebut respondent's assertion of negligence.Accordingly, we sustain the addition to tax. Finally, in light of the fact that we have been presented with no genuine issue as to any material fact, we have decided, on our own motion, to consider whether to award damages to the United States pursuant to section 6673. In 1981, the time of the initiation of the proceedings in this case, section 6673 2 provided in part: 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. * * 235 We examined the justification for applying this section in September of 1977 in the case of Hatfield v. Commissioner,68 T.C. 895">68 T.C. 895, 899 (1977), where we stated: In recent times, this Court has been faced with numerous cases, such as this one, which have been commenced without any legal justification but solely for the purpose of protesting the Federal tax laws. This Court has before it a large number of cases which deserve careful consideration as speedily as possible, and cases of this sort needlessly disrupt our consideration of those genuine controversies. Moreover, by filing cases of this type, the protesters add to the caseload of the Court, which has reached a record size, and such cases increase the expenses of conducting this Court and the operations of the IRS, which expenses must eventually be borne by all of us. Many citizens may dislike paying their fair share of taxes; everyone feels that he or she needs the money more than the Government. On the other hand, as Justice Oliver Wendell Holmes so eloquently stated: "Taxes are what we pay for civilized society." Compania de Tabacos v. Collector,275 U.S. 87">275 U.S. 87, 100 (1927). The greatness236 of our nation is in no small part due to the willingness of our citizens to honestly and fairly participate in our tax collection system which depends upon self-assessment. Any citizen may resort to the courts whenever he or she in good faith and with a colorable claim desires to challenge the Commissioner's determination; but that does not mean that a citizen may resort to the courts merely to vent his or her anger and attempt symbolically to throw a wrench at the system. Access to the courts depends upon a real and actual wrong--not an imagined wrong--which is susceptible of judicial resolution.General grievances against the policies of the Government, or against the tax system as a whole, are not the types of controversies to be resolved in the courts; Congress is the appropriate body to which such matters should be referred.Although we declined to award damages in Hatfield, we did issue the following warning: "[I]f tax protesters continue to bring such frivolous cases, serious consideration should be given to imposing such damages." Hatfield v. Commissioner,supra at 900. However, despite the warning issued by this Court in Hatfield, we have continued237 to be inundated by unwarranted tax protester cases raising thoroughly frivolous and meritless issues. In recognition of this problem, we awarded damages under section 6673 to the United States upon motion of respondent, Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 639-643 (1979), and under the proper circumstances on our own motion. Sydnes v. Commissioner,74 T.C. 864">74 T.C. 864, 870-873 (1980), affd. 647 F.2d 813">647 F.2d 813 (8th Cir. 1981). In the instant case, petitioners attempted on their return to deduct their personal and living expenses from their legitimately taxable income in order to receive a refund of the entire amount of Federal income taxes that were withheld from Christopher Manley's wages. However, at trial they disavowed their return as filed, asserting instead numerous nonsensical propositions supporting their theory that they received no income during the tax year in question. In taking this stance, petitioners were represented by their tax return preparer and counsel who previously appeared before this Court in the same posture with the same frivolous arguments in the case of Lively v. Commissioner,T.C. Memo. 1982-590,238 affd. 705 F.2d 1017">705 F.2d 1017 (8th Cir. 1983). In Lively, we held that respondent was entitled to summary judgment based on the fact that the taxpayers had presented us with no genuine issue as to any material fact. The taxpayers appealed our decision to the United States Court of Appeals, Eighth Circuit. On May 2, 1983, the Eighth Circuit not only affirmed our decision but also held that the appeal was frivolous and therefore awarded double costs to respondent pursuant to Rule 38 of the Federal Rules of Appellate Procedures. In the instant case, petitioners and their counsel could not have had any reasonable expectation of receiving a favorable decision in this proceeding. Nevertheless, their counsel conducted himself in such a manner as to precipitate an inordinate amount of wasted time and effort on the part of the Court, even for a tax protester case. Accordingly, we find that the proceedings in this case were instituted merely for delay and consider the following language previously adopted by this Court particularly apropos to the instant case: When the costs incurred by this Court and respondent are taken into consideration, 239 the maximum damages authorized by the statute ($500) do not begin to indemnify the United States for the expenses which petitioner's frivolous action has occasioned.Considering the waste of limited judicial and administrative resources caused by petitioner's action, even the maximum damages authorized by Congress are wholly inadequate to compensate the United States and its other taxpayers. These costs must eventually be borne by all of the citizens who honestly and fairly participate in our tax collection system. * * [Sydnes v. Commissioner,supra at 872-873.] Since we have concluded that this case was brought merely for delay, pursuant to section 6673, we award the United States the maximum damages authorized by law ($500). An appropriate order and a decision for respondent will be entered.Footnotes1. Although portions of petitioners' proposed stipulation of facts were deemed established, this was done without accepting the relevance of some of the items contained therein.↩2. We observe that in proceedings commenced after December 31, 1982, this Court is permitted to impose damages up to $5,000 where those proceedings have been instituted or maintained by the taxpayer primarily for delay or where the taxpayer's position in such proceeding is frivolous or groundless. See secs. 292(b) and (e)(2), Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 574.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669058/	ACCEPTED 08-20-00139-CR EIGHTH COURT OF APPEALS 08-20-00139-CR EL PASO, TEXAS 3/11/2021 4:16 PM ELIZABETH G. FLORES CLERK No. 08-20-00139-CR In the Court of Appeals for the Eighth District FILED IN El Paso, Texas 8th COURT OF APPEALS EL PASO, TEXAS 3/11/2021 4:16:56 PM Omar Calderon, ELIZABETH G. FLORES Appellant Clerk v. The State of Texas, Appellee Appeal from the 450th Judicial District Court Travis County, Texas Cause Number D-1-DC-20-904007 Honorable Judge Brad Urrutia, Presiding STATE’S BRIEF JOSÉ P. GARZA District Attorney Travis County, Texas /s/ Nancy Nicolas Nancy Nicolas Assistant District Attorney State Bar No. 24057883 P.O. Box 1748 Austin, Texas 78767 (512) 854-9400 Fax No. (512) 854-4206 Nancy.Nicolas@traviscountytx.gov AppellateTCDA@traviscountytx.gov Oral argument is not requested TABLE OF CONTENTS INDEX OF AUTHORITIES ................................................................ ii STATEMENT REGARDING ORAL ARGUMENT ............................. iii STATE’S REPLY TO APPELLANT’S SOLE POINT OF ERROR ........ 1 The Standard of Review is Abuse of Discretion. .................................. 2 The Statements Made by A.C. to her Therapist Did Not Describe Sufficiently Discernable Allegations of Sexual Abuse to Qualify the Therapist as an Outcry Witness. .......................................................... 3 If the Designation of Detective Dunn as the Outcry Witnesses Was Error, Such Error Was Harmless. ....................................................... 9 CONCLUSION .................................................................................. 12 PRAYER ............................................................................................ 13 CERTIFICATE OF COMPLIANCE AND SERVICE .......................... 14 i INDEX OF AUTHORITIES Cases Carty v. State, 178 S.W.3d 297 (Tex. App.—Houston [1st Dist.] 2005) ........................... 11 Creech v. State, 2011 Tex. App. LEXIS 3340 (Tex. App.—Dallas May 4, 2011) ................ 11 Foreman v. State, 995 S.W.2d 854 (Tex. App. -- Austin [3rd dist.] 1999) ......................... 6 Garcia v. State, 792 S.W.88, at 92 (Tex. Crim. App. 1990). .......................................6,7,15 Gibson v. State, 595 S.W.3d 321, 327 (Tex. App. – Austin [3d dist.] 2020) .................... 13 Hernandez v. State, 973 S.W.2d 787 (Tex. App. -- Austin [3rd dist.] 1998) ...................... 6 Salinas v. State, 2020 Tex. App. LEXIS 1130, 3-4 (Tex. App. El Paso February 10, 2020) (not designated for publication) ........................................................................ 6,8 State v. Akteyarlee, 2006 Tex. App. LEXIS 12930 (Tex. App. – Austin [3rd dist.] 2016) (not designated for publication) ................................................................................ 14,15 Taylor v. State, 268 S.W.3d 571, 592 (Tex. Crim. App. 2008) ........................................ 13 Torres v. State, 2000 Tex. App. LEXIS 4927 (Tex. App.—Austin July 27, 2000) ............ 8 White v. State, 2008 Tex. App. LEXIS 3977 (Tex. App.—Fort Worth May 29, 2008) ..... 11 Statutes Tex. Code Crim. Pro. Art. 38.072 ...............................................................................passim Rules Tex. R. App. P. 44.2(a) ........................................................................................................ 8 Tex. R. App. P. 44.2(b) ..................................................................................................... 8,9 Tex. R. Evid. 103(a) ............................................................................................................. 3 ii STATEMENT REGARDING ORAL ARGUMENT The State believes that oral argument is unnecessary because the facts and legal arguments are adequately presented in the briefs filed by the parties. Therefore, the State is not requesting oral argument. iii No. 08-20-00139-CR In the Court of Appeals for the Eighth District El Paso, Texas Omar Calderon, Appellant v. The State of Texas, Appellee Appeal from the 450th Judicial District Court Travis County, Texas Cause Number D-1-DC-20-904007 Honorable Judge Brad Urrutia, Presiding STATE’S BRIEF To the Honorable Eighth Court of Appeals: Now comes the State of Texas and files this brief in response to that of Appellant. STATE’S REPLY TO APPELLANT’S SOLE POINT OF ERROR Appellant argues that the trial court erred when it held that Detective Dunn was a proper outcry witnesses with respect to allegations made by A.C. against Appellant. App. Brief at 3. The State contends that the trial court did not abuse its discretion, and in the alternative, any error in the ruling was harmless. 1 The Standard of Review is Abuse of Discretion. A trial court’s admission of hearsay testimony that is admissible pursuant to Tex. Code of Crim. Pro. Art. 38.072 is reviewed for abuse of discretion. Hernandez v. State, 973 S.W.2d 787, at 789 (Tex. App. – Austin [3d dist.] 1998). The abuse of discretion standard “applies with equal force to the trial court's determination of who is a proper outcry witness.” Salinas v. State, 2020 Tex. App. LEXIS 1130, 3-4 (Tex. App. El Paso February 10, 2020) (not designated for publication). A trial court's findings concerning the designation of an outcry witness will be upheld when the findings are supported by evidence in the record. Garcia v. State, 792 S.W.2d 88, at 92 (Tex. Crim. App. 1990). The trial court is afforded broad discretion in that determination, and “[t]he exercise of that discretion will not be disturbed unless a clear abuse of that discretion is established by the record.” Id. A ruling that falls within the “zone of reasonable disagreement” will not be reversed. Foreman v. State, 995 S.W.2d 854, at 856 (Tex. App. – Austin [3d. dist.] 1999). 2 The Statements Made by A.C. to her Therapist Did Not Describe Sufficiently Discernable Allegations of Sexual Abuse to Qualify the Therapist as an Outcry Witness. To make determinations under Article 38.072, including who was the “first person” who was given a “statement about the offense,” the trial court must conduct a fact-specific inquiry that demands close scrutiny. Garcia v. State, 792 S.W.2d at 92 (Tex. Crim. App. 1990). The statutory text has been interpreted to mean “that the outcry witness must be the first person, 18 years old or older, to whom the child makes a statement that in some discernible manner describes the alleged offense. We believe that the statement must be more than words which give a general allusion that something in the area of child abuse was going on.” Id. at 91. The Texas Court of Criminal Appeals articulated, “the societal interest in curbing child abuse would hardly be served if all that "first person" had to testify to was a general allegation from the child that something in the area of child abuse was going on at home. Thus we decline to read the statute as meaning that any statement that arguably relates to what later evolves into a allegation of child abuse against a particular person will satisfy the requisites of Sec. 2 (a)(2). The statute demands more than a general allusion of sexual abuse.” Id. 3 It is not uncommon for a child to make a general statement to one adult generally alluding to sexual abuse, and make a subsequent statement to another listener that explicitly sets forth how, when, and where the alleged sexual abuse took place, thereby describing the sexual abuse in a discernable manner in the latter statement. See Torres v. State, NO. 03-99-00485-CR, 2000 Tex. App. LEXIS 4927 (Tex. App.—Austin July 27, 2000). “Consequently, the proper outcry witness is not the first adult to whom the child made any mention of the offense, but the first adult to whom the child related specific details concerning the offense.” Salinas v. State, 2020 Tex. App. LEXIS 1130, *14 (Tex. App. El Paso February 10, 2020). Here, the dispute centered around whether Detective Dunn, who had been designated by the State in a pretrial notice, was an outcry witness based on his interview of A.C. which took place on August 23, 2017. 5 RR 195-6. Appellant’s attorneys contended that Detective Dunn was not the first person to whom A.C. made a statement about allegations of sexual abuse by Appellant, and asserted that A.C.’s therapist, Barbara Ritchie, had in fact heard an outcry statement as to the same events during her therapy sessions which began in 2015. 5 RR 241. Both Detective Dunn and Ms. Ritchie testified in the outcry hearing conducted outside the presence of the jury. 4 Ritchie testified that A.C. first came to see her in December of 2015, to address concerns about her self-harming behavior and depressive symptoms. 5 RR 214. According to Ritchie, A.C. did communicate to her that sexual abuse had taken place and that A.C.’s father was the perpetrator, but that Ritchie did not ask for specifics about what sexual acts had taken place because that was not the focus of the therapeutic sessions. 5 RR 214. Ritchie stated that she understands her role to be helping the client deal with the emotions they feel based on their experiences, and she would refer a child who wished to make an outcry statement to a forensic interviewer. 5 RR 214. Ritchie did learn that there were two separate times the abuse took place, but she had no knowledge of which body parts were involved. 5 RR 217. Ritchie testified that in her trauma narrative process, A.C. probably included some of the specific sexual acts which constituted the abuse, but Ritchie had no recollection of whether A.C. included those details in her narrative. 5 RR 215. Ritchie remembered giving A.C. paper to work on her trauma narrative, and testified that for adolescents it is typical for them to write out their narrative, but stated that the narrative can be in another form of expression and is kept by the child to be destroyed as an act of empowerment. 5 RR 215. When asked if A.C. told Ms. Ritchie the “who, 5 what, where, [and] when” of the abuse, Ms. Ritchie responded, “Yeah. Pieces of it.” 5 RR 220. Based on this testimony, it was reasonable for the trial court to conclude that A.C. had told her therapist an incomplete account of the abuse, such that it constituted a general allusion to sexual abuse but did not convey sufficient detail to be a statement of the abuse within the meaning of article 38.072. While Appellant contends that the trial court’s ruling hinged on Ms. Ritchie’s inability to recall what had been a discernable outcry statement, the trial court’s ruling does not reflect that Ms. Ritchie was ever deemed a recipient of a discernable outcry statement based on her testimony of what was discussed during the therapy sessions: COURT: So the other thing we have, though, is the part with Ms. Ritchie. She clearly cannot remember. She clearly stated her job was to treat -- her job with the child or what she was attempting to do with the child --the reason she was seeing the child, I should say more clearly, was based on the trauma she received from sexual abuse and that was the focus, dealing with the trauma, not with the actual act itself or anything to do with the act itself, and that she wouldn't have. It's clear to me that the testimony she gave was she would be careful not to deal with that because that wasn't the purpose of her work with the child, that if there was an indication that she had been sexually abused or something, knew she would have sent her out for an outcry -- to do an outcry with a CAC interviewer. I think that's actually what she said. And that she had her doing these trauma narratives in 2016. And she can't recall whether any specifics were in that trauma narrative and the reason she 6 couldn't is because those trauma narratives were given to the child. It was the child's. And it was clear the way she described it. I'm not going to describe it articulately at 4:30 in the afternoon after a long day of voir dire, but it was clear. The way she described it was it's apparently a therapy tool by which the child would then destroy the trauma narrative. So it sounds to me like it was a way to get the child in touch with feelings. I can't -- I'm not making a ruling on that. So she clearly does not know anything about the specifics of the case. So the Court's ruling is Detective Dunn is the proper outcry witness. 5 RR 227-8. Therefore, Appellant’s discussion of Foreman is inapposite to the circumstances of this case.1 By contrast, Detective Dunn testified that A.C. told him that the first instance of sexual abuse occurred over Spring Break 2014, on the living room couch of the apartment where her father, Appellant, lived. 5 RR 199-200. A.C. described that Appellant touched her breasts, and that he used his hand to touch outside her vagina and put his finger inside her vagina. 5 RR 201. A.C. also informed Detective Dunn that in April 2014, around the time of her 1 Even if the trial court relied on Foreman’s interpretation of article 38.072 and considered Ritchie’s inability to testify as to the specific details of what A.C. told her because the trauma narrative had been retained by the child and not made part of her file, that reliance would not be an abuse of discretion because several appellate courts have found Foreman to be persuasive. See Carty v. State, 178 S.W.3d 297 (Tex. App.—Houston [1st Dist.] 2005) (finding Foreman instructive where the record did not show the child had given one adult details of the charged offense, and the adult was uncooperative and unavailable); White v. State, Nos. 2-07-089-CR, 2-07-090-CR, 2008 Tex. App. LEXIS 3977 (Tex. App.—Fort Worth May 29, 2008) (not an abuse of discretion where adult who denied child had told her any details of abuse was found not to be an outcry witness), and Creech v. State, Nos. 05-09- 00762-CR, 05-09-00763-CR, 2011 Tex. App. LEXIS 3340 (Tex. App.—Dallas May 4, 2011) (not an abuse of discretion to find that a child psychiatrist who had no recollection or documentation of specific allegations of sexual assault was not an outcry witness). 7 father’s birthday, the second instance of sexual abuse occurred. 5 RR 202. The specific location provided was the bedroom of the same apartment, while A.C. was lying in a bed. 5 RR 202. Detective Dunn testified that A.C. told him that she was awoken by Appellant touching her breasts. 5 RR 202. During that same visit but at a different time of day, Appellant and A.C. were in the bedroom and Appellant exposed himself, rubbed her vagina, and placed her hand on his penis. 5 RR 204. The detail provided to Detective Dunn was sufficient to set forth particular sexual acts and identifiable offenses, unlike the information relayed to Ms. Ritchie which did not mention which specific body parts were involved. Based on this testimony by the potential outcry witnesses, it was rational for the trial court to find that Detective Dunn was the proper outcry witness for what A.C. reported to him, and that Ms. Ritchie had not been made an outcry witness within the meaning of Article 38.072. Particularly in light of the broad discretion afforded to the trial court in this determination, Appellant has failed to substantiate his claim that this ruling was an abuse of that discretion based on the testimony provided. 8 If the Designation of Detective Dunn as the Outcry Witnesses Was Error, Such Error Was Harmless. Under the Texas Rules of Appellate Procedure, an error that does not affect the substantial rights of the accused must be disregarded. Tex. R. App. Pro. 44.2(b). However, if constitutional error that is subject to harmless error review has occurred, then the reviewing court must reverse the conviction unless the court determines beyond a reasonable doubt that the error did not contribute to the conviction. Tex. R. App. Pro. 44.2(a). Additionally, “error may not be predicated upon a ruling which admits or excludes evidence unless a substantial right of the party is affected.” Id., citing Tex. R. Evid. 103(a). The erroneous admission of hearsay testimony by operation of a mistaken outcry witness designation is non-constitutional error. Gibson v. State, 595 S.W.3d 321, 327 (Tex. App. – Austin [3d dist.] 2020). Thus, if the trial court’s ruling was in error, the error is reversible only if it had a substantial and injurious effect or influence on the verdict. Id., citing Taylor v. State, 268 S.W.3d 571, 592 (Tex. Crim. App. 2008). "If we have a fair assurance from an examination of the record as a whole that the error did not influence the jury, or had but a slight effect, we will not overturn the conviction." Taylor v. State, 268 S.W.3d at 592 (Tex. Crim. App. 2008). 9 “In cases involving the improper admission of outcry testimony, the error is harmless when the victim testifies in court to the same or similar statements that were improperly admitted or other evidence setting forth the same facts is admitted without objection.” Gibson v. State, 595 S.W.3d at 327 (Tex. App. – Austin [3d dist.] 2020). In Gibson, the court found no harm from the admission of hearsay where the child complainant testified to the same evidence, where a diagram and the forensic interview were also admitted without objection, and where the accused made a statement that was arguably an admission to the allegations. Id. By contrast, if the improperly admitted hearsay is the only evidence offered to establish the elements of the sexual abuse, then the error will not be found harmless. State v. Akteyarlee, 2016 Tex. App. LEXIS 12930 (Tex. App. – Austin [3d dist.] 2016). Here, A.C. testified before the jury to the same events she recounted to Detective Dunn, with some discrepancies but substantially similarly to the statements he conveyed to the jury. 7 RR 71-80. Notably, A.C. testified that in addition to touching her breasts and touching inside and outside of her vagina, Appellant also used his tongue to touch inside and outside of her vagina, during the first instance of sexual abuse. 7 RR 77. The description of the second instance of sexual abuse was likewise substantially similar. 7 10 RR 89, 98. Additionally, certain details were permitted into testimony as statements made for purposes of medical treatment to the SANE examiner, specifically that A.C. was touched on the inside and outside of her vagina, and touched with a tongue to her vagina, and that she had to put her hand on the offender’s penis. 8 RR 183. Whatever influence Detective Dunn’s testimony had on the jury was likely far less impactful than the influence of the testimony of A.C. herself, and therefore any error in permitting Detective Dunn’s hearsay testimony before the jury was harmless. Unlike in State v. Akteyarlee, in which the complainant’s testimony contained no evidence of sexual abuse and the State relied entirely on the erroneously admitted testimony of an outcry witness to prove the charged conduct, Appellant had full opportunity to test the strength and credibility of A.C.’s account that gave rise to the allegations against him. 2016 Tex. App. LEXIS 12930 (Tex. App. – Austin [3d dist.] 2016). Appellant has not demonstrated that he was deprived of a substantial right, and therefore any error must be disregarded. Tex. R. App. Pro. 44.2(b). 11 CONCLUSION Texas courts have repeatedly declined to find that an underdeveloped or nonspecific narrative of abuse constitutes “a statement about the offense” for purposes of Article 28.072. Garcia v. State, 792 S.W.2d at 92 (Tex. Crim. App. 1990). As such, the listener of a vague statement that later evolves into a discernable allegation of child abuse is not a proper outcry witness. Here, the trial court found that the statements made by A.C. to her therapist were not sufficiently specific or detailed to constitute a statement about the offense within the meaning of Article 28.072. In contrast, the trial court found that the statement to Detective Dunn was adequately specific and designated him as the outcry witness for the offenses described to him. Based on the evidence presented to the trial court at the outcry hearing, these conclusions are supported by the record and were within the court’s reasonable exercise of discretion. 12 PRAYER The State requests that the Court overrule Appellant’s point of error and affirm the trial court’s judgment. Respectfully submitted, JOSÉ P. GARZA District Attorney Travis County, Texas /s/ Nancy Nicolas Nancy Nicolas Assistant District Attorney State Bar No. 24057883 P.O. Box 1748 Austin, Texas 78767 (512) 854-9400 Fax No. (512) 854-4206 Nancy.Nicolas@traviscountytx.gov AppellateTCDA@traviscountytx.gov 13 CERTIFICATE OF COMPLIANCE AND SERVICE I certify that this brief contains 2,732 words, based upon the computer program used to generate this brief and excluding words contained in those parts of the brief that Texas Rule of Appellate Procedure 9.4(i) exempts from inclusion in the word count, and that this brief is printed in a conventional, 14-point typeface. I further certify that, on the 11th day of March, 2021, a true and correct copy of this brief was served, by U.S. mail, electronic mail, telephonic document transmission, or electronically through the electronic filing manager, to Appellant’s attorney, Keith S. Hampton, Attorney at Law, P.O. Box 66488, Austin, Texas 78766, keithshampton@gmail.com. /s/ Nancy L. Nicolas Nancy L. Nicolas Assistant District Attorney 14 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. Vicki Butcher on behalf of Nancy Nicolas Bar No. 24057883 Vicki.Butcher@traviscountytx.gov Envelope ID: 51404207 Status as of 3/11/2021 4:32 PM MST Associated Case Party: State of Texas Name BarNumber Email TimestampSubmitted Status Nancy Nicolas 24057883 nancy.nicolas@traviscountytx.gov 3/11/2021 4:16:56 PM SENT Associated Case Party: Omar Calderon Name BarNumber Email TimestampSubmitted Status Keith Stewart Hampton 8873230 keithshampton@gmail.com 3/11/2021 4:16:56 PM SENT	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669060/	In The Court of Appeals Seventh District of Texas at Amarillo No. 07-19-00355-CR GARY CAREY, APPELLANT V. STATE OF TEXAS, APPELLEE On Appeal from the 361st District Court of Brazos County, Texas Trial Court No. 15-01005-CRF-361, Honorable Steve Smith, Presiding March 11, 2021 MEMORANDUM OPINION Before QUINN, C.J., and PIRTLE and PARKER, JJ. Gary Carey appeals the trial court’s judgment convicting him of theft of property valued between $1,500 and $20,000. A Brazos County jury found appellant guilty of theft, and the trial court heard punishment, after which it imposed an enhanced punishment of six years’ imprisonment. Appellant filed an appeal.1 1 Because this appeal was transferred from the Tenth Court of Appeals, we are obligated to apply its precedent when available in the event of a conflict between the precedents of that court and this Court. See TEX. R. APP. P. 41.3. Appellant’s counsel has filed a motion to withdraw together with an Anders brief.2 Through those documents, he certifies to the Court that, after diligently searching the record, the appeal is without merit. Accompanying the brief and motion is a copy of a letter sent by counsel to appellant informing the latter of counsel’s belief that there is no reversible error and of appellant’s right to file a response, pro se, to counsel’s motion to withdraw and Anders brief. So too did counsel provide appellant with a copy of the appellate record as well as a motion to access the appellate record. By letter dated April 16, 2020, this Court notified appellant of his right to file his own brief or response by May 18, 2020, if he wished to do so. To date, no response has been received, nor has a motion to extend any deadlines by which to file a pro se response. In compliance with the principles enunciated in Anders, appellate counsel discussed potential areas for appeal. Those areas included 1) whether the evidence was sufficient to support appellant’s conviction, 2) whether any error might be associated with the absence of trial court’s oral findings on enhancement allegations, and 3) whether the three judgments nunc pro tunc that followed the original judgment were proper. Ultimately, counsel concluded, none of the foregoing topics presented any arguable issues. We conducted our own review of the record to assess the accuracy of counsel’s conclusions and to uncover arguable error pursuant to In re Schulman, 252 S.W.3d 403, 406 (Tex. Crim. App. 2008), and Stafford v. State, 813 S.W.2d 503, 508 (Tex. Crim. App. 1991) (en banc). No issues of arguable merit were discovered. However, our review did reveal an additional clerical error in the third judgment nunc pro tunc dated October 11, 2019. In that judgment, the offense for which appellant 2 See Anders v. California, 386 U.S. 738, 744-45, 87 S. Ct. 1396, 18 L. Ed. 2d 493 (1967). 2 was convicted is denoted as “THEFT PROPERTY $1,5000 – $20,000.” The record reveals that appellant was convicted of property valued between $1,500 and $20,000, and this valuation is consistent with the amounts outlined in the Texas Penal Code at the time of the offense. See former TEX. PENAL CODE ANN. § 31.03(e)(4)(A) (prior to 2015 amendments which changed the applicable values, providing that the offense is a state jail felony if the value of the property is $1,500 or more but less that $20,000). The comma placement, the record, and the applicable law all indicate that this is a mere clerical error in the judgment. The Court has the authority to modify a trial court’s judgment to make the record speak the truth when it has the requisite data and information. See TEX. R. APP. P. 43.2(b); French v. State, 830 S.W.2d 607, 609 (Tex. Crim. App. 1992) (en banc). We exercise that authority to effectuate this clarification and hereby modify the judgment to reflect that appellant was convicted of the offense of theft of property with a value of more than “$1,500” but less than $20,000. Accordingly, counsel’s motion to withdraw is granted, and the judgment is affirmed as modified.3 Per Curiam Do not publish. 3 Appellant has the right to file a petition for discretionary review with the Court of Criminal Appeals. 3	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669064/	2/3/2021 12:44 PM 08-21-00041-CR Terri Curry County & District Clerk Reagan County, Texas By Terri Curry CAUSE NO. 01993 STATE OF TEXAS § IN THE DISTRICT COURT FILED IN § 8th COURT OF APPEALS vs. § 112th JUDICIAL DISTRICT EL PASO, TEXAS § 3/11/2021 11:29:15 AM ERIBERTO LOPEZ § REAGANELIZABETH COUNTY,G.TEXAS FLORES Clerk NOTICE OF APPEAL TO THE HONORABLE JUDGE OF SAID COURT: Now comes ERIBERTO LOPEZ, Defendant in the above entitled and numbered cause, and gives this written notice of appeal to the Court of Appeals of the State of Texas from the Court’s ruling on the Defendant’s Motion to Suppress. The following matter which is the subject of this appeal was raised by written motion and ruled on before trial pursuant to Rule 25.2(a)(2) of the Texas Rules of Appellate Procedure: 1. Defendant’s Motion to Suppress. Respectfully submitted, /s/ Albert G. Valadez Albert G. Valadez SBT# 20421840 104 West Callaghan Fort Stockton, Texas 79735 432.336.7562 432.336.2600 Fax agvaladez@sbcglobal.net Attorney for ERIBERTO LOPEZ CERTIFICATE OF SERVICE This is to certify that on February 1, 2021, a true and correct copy of the above and foregoing document was served on the 112th District Attorney's Office by electronic service through the Electronic Filing Manager. /s/ Albert G. Valadez Albert G. Valadez 1 TRIAL COURT'S CERTIFICATION OF DEFENDANT'S RIGHT OF APPEAL I, judge of the trial court, certify in this criminal case that the defendant's appeal is on matters that were raised by written motion filed and ruled on before trial, and the defendant has the right of appeal. 2/3/2021 Judge Date Signed ("A defendant in a criminal case has the right of appeal under Code of Criminal Procedure article 44.02 and these rules. The trial court shall enter a certification of the defendant’s right of appeal each time it enters a judgment of guilt or other appealable order other than an order appealable under Code of Criminal Procedure Chapter 64. In a plea bargain case - that is, a case in which a defendant's plea was guilty or nolo contendere and the punishment did not exceed the punishment recommended by the prosecutor and agreed to by the defendant - a defendant may appeal only: (A) those matters that were raised by written motions filed and ruled on before trial, (B) after getting the trial court's permission to appeal, or (C) where the specific appeal is expressly authorized by statute." Texas Rule of Appellate Procedure 25.2(a)(2).) 2	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669065/	In The Court of Appeals Seventh District of Texas at Amarillo No. 07-20-00280-CR DAMON TODD LUTHER, APPELLANT V. THE STATE OF TEXAS, APPELLEE On Appeal from the 84th District Court Ochiltree County, Texas Trial Court No. 5308, Honorable Curtis W. Brancheau, Presiding March 11, 2021 MEMORANDUM OPINION Before QUINN, C.J., and PIRTLE and PARKER, JJ. Appellant, Damon Todd Luther, appeals the judgment revoking his community supervision and sentencing him to six years’ imprisonment. He originally pled guilty to the charged offense of tampering with evidence and was sentenced to a term of six years. The trial court suspended that sentence and placed him on “three years community supervision.” Subsequently, the State moved to revoke his community supervision. After hearing the motion, the trial court found he had violated various conditions of his supervision and reassessed the original six-year prison term. Appellant now appeals. Appellant’s counsel filed a motion to withdraw together with an Anders1 brief. Through those documents, he certifies to the Court that, after diligently searching the record, the appeal is without merit. Accompanying the brief and motion is a copy of a letter sent by counsel to appellant informing the latter of counsel’s belief that there is no reversible error and of appellant’s right to file a pro se response to counsel’s Anders brief. So too did counsel provide appellant with “a hard copy of the appellate record including the Clerk’s Record and the Reporter’s Record.” Appellant filed a response challenging the original charge of tampering. In compliance with the principles enunciated in Anders, appellate counsel discussed potential areas for appeal. They concerned 1) sufficiency of the evidence to support revocation, 2) whether a defense witness failed to show involuntarily, 3) trial court error in denying appellant’s request to dismiss his court-appointed counsel, 4) ineffective assistance of counsel, and 5) punishment. However, he then explained why the issues lacked merit. We conducted our own review of the record and appellant’s response to uncover any arguable error. This was done per In re Schulman, 252 S.W.3d 403 (Tex. Crim. App. 2008), and Stafford v. State, 813 S.W.2d 503 (Tex. Crim. App. 1991) (en banc). No arguable issues were discovered. Accordingly, the motion to withdraw is granted, and the judgment is affirmed.2 Per Curiam Do not publish. 1 See Anders v. California, 386 U.S. 738, 744–45, 87 S. Ct. 1396, 18 L. Ed. 2d 493 (1967). 2 Appellant has the right to file a petition for discretionary review with the Court of Criminal Appeals. 2	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4619688/	SUSAN YOUNG EAGAN AND MARION M. JACKSON, EXECUTORS, ESTATE OF JOHN JOSEPH EAGAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Eagan v. CommissionerDocket No. 26077.United States Board of Tax Appeals17 B.T.A. 694; 1929 BTA LEXIS 2267; September 28, 1929, Promulgated 2267 The owner of a controlling part of the stock of a corporation bequeathed the stock in trust to persons who were representatives of the board of directors of the corporation and of its employees, and to their successors, to receive the dividends and in their discretion so to use them as to provide a living wage to employees of the corporation or, in the event the plant should be shut down or the employee should be disabled, to provide an income for him or his dependents; the trustees were directed, in the control of the corporation, through the control of the stock bequeathed, to manage the corporation in such a manner as to enable it to sell its goods to the public at the lowest possible price consistent with maintenance of the plant and business and payment of reasonable wages; the trustees were expressly designated as trustees for the benefit of the employees and of the purchasing public; the corporation was a business corporation organized for pecuniary gain to its stockholders. Held:1. That in determining whether the trust is charitable in its nature and the amount of the bequest is deductible under section 403(a)(3), Revenue Act of 1921, local laws and decisions as to2268 the nature of the trust will not be considered. 2. That a decree of the court of the State of decedent's domicile, in an uncontested proceeding, holding the trust to be charitable, should not be given any weight. 3. That the objects of the trust were so inseparable from the business welfare of the corporation that the trust can not be said to be charitable. 4. That, in view of the benefits inuring to the corporation through sale of goods at the lowest price consistent with maintenance of its plant and reasonable wages to employees, and through the intermingling of the actual management of the trust with the management of the business of the corporation, the trust was not exclusively charitable. Robert C. Alston, Esq., for the petitioners. Frank T. Horner Esq., for the respondent. STERNHAGEN 695 This proceeding involves a deficiency of $113,171.61 in estate tax. The question is whether the amount of a bequest by decedent to certain trustees is deductible from the value of the gross estate under section 403(a)(3) of the Revenue Act of 1921 as a bequest to trustees exclusively for charitable purposes. FINDINGS OF FACT. John2269 Joseph Eagan died March 30, 1924, a resident of De Kalb County, Georgia. He was survived by his wife, Susan Young Eagan, and two minor children. The value of his gross estate was $1,990,547.43. This included $1,112,125 which was the undisputed value determined by respondent of 1,085 shares of common stock of the American Cast Iron Pipe Co., hereinafter called the Company. Decedent left a will dated April 22, 1922, and a codicil dated April 3, 1923. By the original will, he made certain specific bequests and bequeathed his residuary estate to his wife. No specific mention was made of the aforementioned 1,085 shares. The codicil follows: Whereas I Jno. J. Eagan, did on the twenty second day of April 1922, sign, seal, declare and publish my last will and testament in the presence of A. E. Nettie Catoe and H. A. Etheridge who signed said will and testament as witnesses: And whereas, I desire to add an additional bequest and devise in said will and testament, I, therefore make, declare and publish this codicil to said will and testament, to wit I hereby give, bequeath and devise ten hundred and eighty-five (1,085) shares of the common stock of the American Cast Iron Pipe Company, 2270 being all of my holdings of said common stock of said Company, to the members of the Board of Management and the members of the Board of Operatives of said American Cast Iron Pipe Company jointly, and their successors in office in said Boards, as trustees, in trust for the following purposes, and subject to the directions hereinafter set forth, to wit: First: To receive all dividends paid upon said stock and use so much of the dividends thus received, as said trustees in their discretion may deem advisable 696 in supplementing the salaries and wages of the employees of said American Cast Iron Pipe Company in amounts sufficient in the judgment of the said trustees to insure to each of said employees an income equivalent to a living wage, said trustees to be the sole judges of what constitutes a living wage, and of the amounts, if any, to be paid to each one or any of said employees of said Company. Second: To use such sums from the dividends received upon said stock, as said trustees in their discretion may deem advisable, in paying an income to any employee, or to the wife and minor children of any employee of said American Cast Iron Pipe Company, at such times as the2271 plant of said Company may shut down for any cause, or at such times as said employee through no fault of his or her own, but through accident, sickness, or other unavoidable causes, shall be unable to work and said trustees are hereby made the sole judges of the amounts, if any, which shall be paid by said trustees to any employee, or to the members of any employee's family under the provisions of this paragraph - Third: To vote said certificates of stock in said American Cast Iron Pipe Company at all meetings of stockholders of said Company - It is my will and desire, and I direct, that in determining all questions as to voting said stock, and as to carrying out the provisions of the trust created by this codicil, the members of the Board of Management, as Trustees, shall vote as a unit, and the members of the Board of Operatives, as trustees, shall vote as a unit, the vote of each group to be determined by the majority vote of the members of the respective boards; and that in the event of the failure of the respective groups of trustees to agree upon any question said question in dispute shall be referred to the Board of Trustees, whose decision shall be final - Any member2272 of either of said boards, who shall cease to be a member of either Board for any cause whatsoever shall thereupon cease to be a trustee under this codicil of my will, his or her successor upon either of said Boards, becoming, by virtue of his or her office, a trustee under this codicil, immediately upon his or her acceptance of said trust - Any employee of said American Cast Iron Pipe Company who shall die, or who shall voluntarily or involuntarily for any cause whatsoever, other than the temporary shutting down of the plant or plants of said Company, leave the employment of said Company, shall immediately thereupon cease to have any interest of any kind whatsoever in any income from, or in any part of the trust estate created by this codicil of my will. Any person, who may hereafter at any time enter the employment of said Company, shall immediately thereupon become a beneficiary of said trust estate with all of the rights and privileges enjoyed by the employees of said Company at the time of my death, and subject to the same conditions - The provisions of the two paragraphs immediately preceding this paragraph shall apply to the wife, or child, or the wife and children, or children2273 of said employee of said Company, if there be wife, or child, or children or both, provision having been made for them, in the event of the death of said employee leaving such, under the rules for the management of said Company of its Pension Fund - By this codicil to my will and testament, it is my purpose, will and desire to create a trust estate both for the benefit of the persons actually in the employ of said American Cast Iron Pipe Company, and for such persons as may require the product of said Company. 697 The trustees, appointed by this codicil, in accepting the trust and acting hereunder, will be trustees both for said employees and said persons requiring the product of said Company. It is my will and desire that said trustees in the control of said Company, through the control of said common stock, shall be guided by the sole purpose of so managing said Company as to enable said American Cast Iron Pipe Company to deliver the Company's product to persons, requiring it, at actual cost, which shall be considered the lowest possible price consistent with the maintenance and extension of the Company's plant or plants and business and the payment of reasonable2274 salaries and wages to all of the employees of said Company, my object being to insure "Service" both to the purchasing public and to labor on the basis of the Golden Rule given by our Lord and Saviour Jesus Christ. This third day of April 1923 (Signed) JOHN J. EAGAN. The will and codicil were, on May 5, 1924, admitted to probate. Petitioners are the executors. Thereafter, in August 1924, the executors as plaintiffs instituted a proceeding in the Superior Court of Fulton County, Georgia, against W. D. Moore and others, as trustees for the employees of the Company for the wives and children of said employees and for the general public, and as employees and representatives of all employees of the Company. The petition prayed for an order (1) construing the bequest of 1,085 shares "to be a charitable bequest within the meaning of the law of Georgia, thereby creating a perpetual trust for charitable purposes," (2) construing the words "Boards of Trustees" in the codicil to mean the board of directors of the Company, and (3) directing petitioners to deliver the shares to defendant members of the "Board of Management" and "Board of Operatives" of the Company as trustees. Answer2275 was filed substantially admitting the facts and acceding to the prayer of the petitioners. The jury, on December 15, 1924, found for petitioners as requested, and decree in accordance therewith was on the same day entered. In January, 1925, Susan Young Eagan, as executrix, delivered the 1,085 shares to the trustees. The American Cast Iron Pipe Co. is a Georgia corporation organized in 1905, and its powers, as shown by its original charter and subsequent amendments thereto, are those of a business corporation with the object of "pecuniary gain to the stockholders," with the right to issue common and preferred shares. The original capital stock was fixed at $150,000 divided into shares of $100 each, either common or preferred, or both, with the right to increase the capital to $1,000,000 or to reduce it to $50,000. Decedent was one of the original organizers of the Company. In December, 1921, he became president. In a letter to the stockholders dated January 20, 1922, he stated that he had "accepted [the position] 698 with the understanding that the teachings of Jesus Christ should be the controlling principles in the business." In December, 1921, decedent announced2276 the creation of an executive committee, authorized by article IV, section 11, of the Company's by-laws, as follows: The Board of Directors may appoint an executive committee consisting of not less than three (3) of its members, to whom it may delegate such of its duties as may seem proper. The name of this committee was changed to the "Board of Management" on March 15, 1922. At the time of its creation decedent announced: It is the hope of our Directors to make our organization thoroughly democratic and cooperative. We have begun by a distribution of our responsibilities. This has been divided under four heads: Sales, Manufacturing, Purchases and Employees, and Finance. The "Board of Operatives" was created with the consent of the stockholders. The first steps were taken about the Christmas season of 1921. On March 1, 1922, a report on "Employee Representation" was submitted as follows: The Board of Management of the American Cast Iron Pipe Company asks that the employees of the Company elect representation from their number to constitute and to be known as the Board of Operatives. This Board of Operatives is expected to provide a channel to secure and insure close2277 relations and intelligent cooperation on the part of all connected with our organization. The Board of Operatives will have access to the books of the Company and will be made familiar with its monthly, quarterly and yearly statement of earnings. It will be consulted by the Board of Management on questions affecting the employees, including any important changes in wages, hours of work or working conditions. It will be expected to make recommendations to the Board of Management on such matters affecting the employees as it may desire, and may report these recommendations to the Board of Management either in writing or in person through its chairman, or arrange a conference when all its members may meet with the Board of Management at a time mutually convenient. It will be expected to nominate to the stockholders of the Company two of its members as directors in the Company. In order to facilitate its work it shall appoint three sub-committees, with names and duties as follows: LIVING CONDITIONS COMMITTEE: This sub-committee will make recommendations with a view to helping the management of the Company in its aim to see that every employee working regularly and faithfully2278 for the Company shall be offered constant employment and shall receive such a wage as will enable him to live in reasonable comfort. COMMITTEE ON WORKING CONDITIONS: This sub-committee will make recommendations on matters of wages, working hours, and the comfort and safety of working conditions. 699 COMMITTEE ON RECREATION AND EDUCATION: This sub-committee will make recommendations on matters in connection with the recreation and education of employees and their families. The above named sub-committees will report to the Board of Operatives, which will, after due consideration, make such recommendations to the Board of Management as it may deem wise. DIRECTORS OF COLORED Y.M.C.A. The members of the Colored Y.M.C.A. are asked to elect twelve directors who shall have the same relationship and perform the same duties with regard to the Colored Y.M.C.A. as the present directors of the Acipco White Y.M.C.A. entertain to that organization. In addition to this, these directors shall constitute a Board which the Board of Management or the Board of Operatives may call into conference on any matters affecting the interests of the colored employees. Pursuant to this2279 plan an election was held, at which ten members of the "Board of Operatives" were elected, representing various departments of the Company. The membership of this board is chosen once a year. In June, 1922, an increase of the capital stock to $3,000,000 was authorized by charter amendment, and thereafter preferred stock was issued to replace at book value all outstanding common stock except the 1,085 shares held by decedent. The outstanding preferred stock aggregating $1,337,800 face value is entitled to priority both as to face value and to dividends up to 6 per cent annually. During 1922 decedent requested the "Living Conditions Committee" of the "Board of Operatives" to determine if the Company's workers were receiving a living wage. Pending their report he declined to receive dividends from his 1,085 shares of common stock directing that the monies derived therefrom be administered jointly by the "Board of Operatives" and the "Board of Management" as an "Employees' Fund" for the care of employees or their families in distress due to unemployment, sickness or otherwise, who were not reached by any other welfare agency. During 1922 and 1923 all the dividends from said stock2280 were turned into the "Employees' Fund" and administered by the trustees. In the first quarter of 1924 the committee determined that the Company's employees were receiving a living wage and the 2 per cent quarterly dividend for the first quarter was not paid into the fund. After decedent's death, the two administering boards directed by joint resolution that the undistributed remainder of the dividends in their hands, amounting to $13,718.65, be "set aside as a separate and distinct fund to be known as the John J. Eagan Fund." As trustees of the 1,085 shares of common stock of the company under the codicil of decedent's will, they jointly resolved that the "principal 700 and accretions to the said fund" be used "for the relief of any person in the employ of the American Cast Iron Pipe Company, or for the relief of the dependent or dependents of any such employee, including the relief of the families of deceased or disabled employees in such way, on such terms and to such extent as the said Board may in each individual instance deem to be wise and proper." When entering upon their duties, the trustees expressed their understanding of the principles of the trust as follows: 2281 The said Eagan was an earnest believer in the teachings of Jesus Christ, and lived in accordance with his understanding of those teachings, and it was his purpose and intent that "the teachings of Jesus Christ are to be made the controlling principles of the American Cast Iron Pipe Company." The said Eagan believed that industry should be based on Christianity, and he understood this to mean: (1) A reasonable living wage to the lowest paid workman; (2) Constant employment to every member of the organization; and (3) Actual application of the Golden Rule to relations between employee and employer. Mr. Egan also declared that: "The aim of this Company should be Service"; and be classified this "Service" to be as follows: (1) Service to the public by manufacturing an honest and meritorious product; (2) Service to employees by applying the Golden Rule; (3) Service to the stockholders by making for them a fair return on the investment. * * The Board of Management and the Board of Operatives do now declare, for themselves and for their successors in office, the irrevocable purpose to manage the said trust and the said property in the spirit of the said John J. Eagan, 2282 as herein expressed, that is, to conduct said property in accordance with the teachings of Jesus Christ. All dividends, 8 per cent per annum, on the 1,085 shares of common stock, aggregating $41,230 from decedent's death to December 31, 1928, have been paid to the trustees. The fund derives income solely from these dividends and interest on their accumulation. Its assets totaled $37,485.76 on January 1, 1929; the sum of $23,842.14 has been distributed from it for the relief of employees disabled or in distress. In addition to the Eagan Fund, the employees are benefited by a pension fund established by the Company in 1917. As of December 31, 1928, its assets totaled $635,883, as compared with $289,604 near date of decedent's death; it has made payments aggregating $66,866. On the recommendation of the "Pension Board" the Company's directors voted $15,000 for unemployment insurance on March 24, 1925, and took similar action in succeeding years in an effort to meet what they regarded as the spirit of the trust, and $23,208.91 has been distributed by the Company in this manner. 701 For the relief of employees unable to work because of sickness or accident and to assist2283 in the burial of an employee or his family, the Acipco Mutual Benefit Association was established by the Company, deriving its funds partly from the employees and partly from the Company until June 30, 1922, when the scope of its activities was broadened and the Company undertook to finance it altogether. Since 1917 the Company has paid into it $148,216, of which $104,184 was paid since decedent's death. To the Y.M.C.A. the Company has paid $328,864, of which $163,638 was paid since Eagan's death. In connection with the Y.M.C.A., schools for white and colored boys are maintained. For free medical attention to employees the Company has expended $362,873, of which $290,315 was paid since decedent's death. Group insurance has recently been inaugurated for the employees' benefit, for which the Company has appropriated $500. As additional compensation to officers, salesmen and other employees, it has paid since 1916 in bonuses $2,898,367, of which $1,713,201 was paid since decedent's death. The foregoing appropriations have been made since decedent's death by vote of the trustees, the trustees, controllers of the Company, conceiving that the compensation being paid employees did2284 not constitute a living wage. In October, 1928, the Company employed about 1,400 people and some 6,000 were dependent upon it for support. Its regular weekly pay roll totaled $29,815. With the exception of the dividends declared and paid into the Eagan Fund for disbursement by the trustees, all the other expenditures for the benefit of employees have been made directly by the Company under instructions of the trustees to avoid separate organizations and to escape Federal taxes payable if such sums were included in income, then declared as dividends, and then expended for the same purposes by the trustees. Altogether the amounts which have been spent by the Company to benefit its employees during the period of the trust total $2,391,577. Dividends paid the John J. Eagan Fund during the same period and not included in the foregoing total amounted to $41,231. OPINION. STERNHAGEN: The sole issue is one of law, namely, whether the bequest of the 1,085 shares as set forth in the codicil is within section 403(a)(3), Revenue Act of 1921. The respondent has included the undisputed value of the bequest ($1,112,125) within the net estate subject to estate tax and has accordingly2285 determined a deficiency of $113,171.61. SEC. 403. The for the purpose of the tax the value of the net estate shall be determined - (a) In the case of a resident, by deducting from the value of the gross estate - * * (3) 702 The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money's worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent's death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917. 2286 Since the issue arises under the Federal revenue act, it must, so far as practicable, be swept clear of confusions in various jurisdictions as to charities, charitable uses and charitable trusts. The historical development, since the Statute of Elizabeth, of the law relating to charitable trusts both in England and the United States has taken place independently of the law relating to taxation. The definitions and implications have arisen out of social and political circumstances having little or no relation to government revenue. In their setting, apart from taxation, they are various and conflicting in different jurisdictions, that which is firmly fixed as a charity in one State being unrecognized in another. Even as to local taxes, the exemptions of each State differ from those of others. See Zollman on Charities; Perry on Trusts, vol. 2; and 11 Corpus Juris, Charities. While it must be recognized that the deduction of charitable bequests provided in the revenue act was conceived by a purpose to encourage public charity, 2287 Trinidad v. Sagrada,263 U.S. 578">263 U.S. 578; Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47, it is not necessary for the fulfillment of this purpose to import all of the judicial dicta which have been used to safeguard the chancery power. The administration of this Act must, in matters such as this, transcend any local law of statute or decision. Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110">269 U.S. 110; United States v. Robbins,269 U.S. 315">269 U.S. 315; Weiss v. Wiener,279 U.S. 333">279 U.S. 333; Calhoun Co. v. Ajax Co.,182 U.S. 499">182 U.S. 499, 505. There would be hopeless confusion if deduction were allowed of a bequest because the State of decedent's domicile recognized it as charitable in consonance with the Statute of Elizabeth, and denied a similar bequest of a decedent residing in a State holding a different view. In the present case, the Superior Court of Georgia has decreed this trust to be charitable "within the meaning of the law of Georgia." This decree was entered in an uncontested proceeding, and counsel will concede that it is not binding here. But they ask that it be given weight. 2288 This must be denied. Georgia may, of course, adjudicate those trusts as are 703 within her jurisdiction to suit her own policies and purposes, and to that extent the decrees of her courts must be respected. But "the act of Congress has its own criteria, irrespective of local law," Weiss v. Wiener, supra, and impinges upon the trust at an entirely different point. The States themselves have the right to deny recognition of the charitable exemptions of a sister State. Zollman on Charities, § 781, and cases cited. It matters not, therefore, whether this trust violates the Georgia Code, § 3851, and is utterly void or only voidable at the instance of the protected kin, cf. Jones v. Habersham,107 U.S. 174">107 U.S. 174, and tax free in Georgia until attacked, cf. In re DeLamar's Estate,197 N.Y.S. 301">197 N.Y.S. 301. Section 403(a)(3) is not one providing an exemption from tax. It sets forth a deduction to be used in determining the net estate by which the estate tax is measured. Since the tax is an excise tax, 2289 Knowlton v. Moore,178 U.S. 41">178 U.S. 41; Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47, and not a property tax, and all decedents' estates are taxable by the same general measure, the issue is not subject to the strict rule of construction applied by States to exemptions of charitable property from ad valorem property taxes. The taxpayer here is not claiming special exemption from tax imposed upon all others, but the benefit of a factor of measurement allowed to all. And the only question is whether the circumstances are within the fair intendment of the language used to describe the deduction. The petitioner in a vigorous argument urges that the trust is charitable and relies upon extracts from many decisions. But no case has been cited and we have found none which considers a trust similar to that here in question. This trust is in its nature farther from those which are well recognized as charitable than any which have been so adjudicated. We have no inclination to doubt its fine purpose or to belittle the spirit of magnanimity which actuated the decedent. But it is clear that the business welfare of the American Cast Iron Pipe Co. was inseparable from2290 the purposes of the trust. It was not a mere incident to the relief of the poor and the suffering. It was not primarily to inure to the public benefit. The living wage, the cost price to customers, the reasonable dividends to stockholders and service to such of the public as were affected were all factors of a generous plan which revolved around the profitable operation of the private business of the Company for the benefit primarily of the capital and labor devoted to it. The trustees were such only by virtue of their connection with the business, and their differences were to be arbitrated by the directors of the corporation, whose duty presumably was to protect the interests of the preferred shareholders as well as of the common. The fact that the plan brought about a mutuality of interest between the employer and the employee, however 704 sound in economic policy, does not indicate a charity. And in the eyes of the law it is not made charitable or religious because conducted "on the principles of the teachings of Jesus Christ." But we think there is a more conclusive reason against the petitioners' claim. The language of the statute contains the word "exclusively, 2291 " and this may not be ignored, cf. Curtis v. Androscoggin,99 Me. 356">99 Me. 356; 59 Atl. 518; Grand Lodge v. Taylor,146 Ark. 316">146 Ark. 316; 226 S.W. 129">226 S.W. 129. The last paragraph of the codicil sets forth a purpose to control the Company so that goods may be sold at the lowest price consistent with maintenance and extension of the plant and reasonable salaries to employees. To say that such a purpose is "exclusively charitable" as a basis for the tax deduction is to ignore the distinction between charity and legitimate business ideals and goes beyond any reasonable intendment of the statute. Furthermore, the actual management of the trust has been so mingled with the management of the business of the corporation that its benefits have inured to the corporation. The benefit funds have been made up largely by corporate appropriation as a means to save Federal income taxes. Where the line can be drawn between the activities of the two boards as corporate managers and as Eagan trustees is difficult to say, and surely to the extent the trust is a means to promote the interest of the business corporation it is not "exclusively charitable." 2292 The direction to use the fund to bring about living wages to employees has not been followed except as the corporation has voted funds for such purposes, including bonuses to officers. The trustees have used the trust income (8 per cent dividends) for relief of distressed employees and dependents. But this is not the sole purpose, function or effect of the trust. We are of opinion that the bequest is not deductible under section 403(a)(3). 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/4332644/	MIGUEL MARTIN AND CLAUDIA P. PALOS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMartin v. CommissionerNo. 5871-98United States Tax CourtT.C. Memo 2000-56; 2000 Tax Ct. Memo LEXIS 61; 79 T.C.M. (CCH) 1534; February 22, 2000, Filed 61 Decision will be entered under Rule 155. Miguel Martin and Claudia P. Palos, pro sese.Linette B. Angelastro, for respondent. Gerber, JoelGERBERMEMORANDUM FINDINGS OF FACT AND OPINIONGERBER, JUDGE: Respondent determined a $ 20,244 deficiency in petitioners' 1994 income62 tax. After concessions by petitioners, the issue remaining for our consideration is whether petitioners are entitled to a casualty loss for earthquake damage caused to a residence owned by them.FINDINGS OF FACTPetitioners resided at Monrovia, California, at the time their petition was filed. Petitioners, from 1989 through early 1999, owned real property located at 3748 Military Avenue, Los Angeles, California (Military property). The Military property was first listed for sale on October 1, 1993. Petitioners had been using the Military property as their personal residence up to the time they began their attempt to sell the property. Petitioners began moving their furniture out of the Military property shortly after the October 1993 listing for sale. Petitioners moved in with Mr. Palos' mother at some time prior to the January 17, 1994, earthquake, and, subsequent to the earthquake, moved into a newly purchased residence other than the Military property.During 1993, petitioners commenced making improvements and repairs to the Military property in order to enhance its appearance and value for purposes of sale. The Northridge Earthquake occurred on January 17, 1994, and caused damage63 to petitioners' Military property. After the earthquake, petitioners continued to make improvements to the Military property and also began to repair the damage caused by the earthquake. The improvements, as opposed to repairs from earthquake damage, appear to represent the significantly greater portion of more than $ 60,000 in expenditures involving the Military property. About 4 days after the Northridge earthquake, petitioners rented the Military property.Petitioners filed a claim with their property insurance carrier with respect to the earthquake. The insurance adjuster estimated that the repair necessary to address the earthquake damage was $ 9,221, an amount that was less than petitioners' $ 9,530 policy deductible for earthquake damage. Petitioners consulted with a real estate company, seeking an opinion as to the decrease in fair market value, if any, due to the earthquake. The real estate company opined that the Military property lost approximately $ 30,000 in value due to the earthquake. The reduction in value was attributable to the actual damage and also to the safety issues that may be perceived by potential buyers of damaged older homes in areas prone to earthquake64 damage.On their 1994 joint income tax return, petitioners, on advice of their return preparer, claimed a $ 25,000 business casualty loss on the premise that the Military property was held for business or other income-producing purposes; i.e., for rental or sale at the time of the earthquake. Respondent determined that petitioners were not entitled to a casualty loss.OPINIONSection 165(a)1 allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." Although an individual taxpayer's business and personal casualty losses are deductible under section 165(c), there is a distinction between them. Casualty losses incurred in a business or other profit-seeking activity can be fully deductible, whereas personal casualty losses are subjected to a $ 100 exclusion and must exceed 10 percent of a taxpayer's adjusted gross income. See sec. 165(h)(1) and (2). That distinction is critical to petitioners because the limitations on personal losses may reduce or eliminate petitioners' ability to deduct a casualty loss deduction. There is no dispute about the occurrence of the earthquake, and respondent seems to agree that petitioners had65 some loss; however, respondent contends that the loss was personal and was of an amount that would not have exceeded the threshold limitations.First, we consider the amount of petitioners' loss. A casualty loss is the difference between the fair market value of the property immediately before and immediately after the casualty. See sec. 1.165-7(a)(2)(i), Income Tax Regs. Deductions under the above- cited regulation are, however, "limited to the actual loss resulting from damage to the property." Id. An alternative approach to valuing a loss from damage to property is for a taxpayer to present evidence of repairs to the subject property. See sec. 1.165-7(a)(2)(ii), Income Tax Regs. In that regard, a taxpayer must show that the repairs were made to restore the property to its precasualty condition and not to improve 66 the property. See id.In this case, petitioners provided evidence in an attempt to show the effect of earthquake damage on the fair market value of their property. The real estate agent's opinion that the value decreased by about $ 30,000 is in line with the $ 25,000 claim petitioners made on their 1994 income tax return. The opinion, however, was based on actual damage and also on the safety issues that may be perceived by potential buyers of damaged older homes in areas prone to earthquake damage. Under the above-quoted regulation, however, petitioners' claim would be limited to the amount of actual damage. See id.; see also Kamanski v. Commissioner, 477 F.2d 452">477 F.2d 452 (9th Cir. 1973), affg. T.C. Memo 1970-352">T.C. Memo. 1970-352; Pulvers v. Commissioner, 407 F.2d 838">407 F.2d 838, 839 (9th Cir. 1969), affg. 48 T.C. 245">48 T.C. 245 (1967); Chamales v. Commissioner, T.C. Memo 2000-33">T.C. Memo 2000-33.Petitioners also attempted to show that the damage exceeded $ 25,000 by showing the extensive expense incurred in connection with their Military property during the period preceding and following the earthquake. Petitioners' 67 evidence of actual repairs, however, falls short of showing losses from earthquake damage in excess of $ 9,221, the amount determined by petitioners' insurance company. It is difficult to delineate between amounts that were being used to renovate and improve and those that were directly attributable to the earthquake. In addition, the insurance company's estimate that actual repairs attributable to earthquake damage were $ 9,221 militates against petitioners' claims. We hold that petitioners have not shown that more than $ 9,221 damage occurred from the earthquake.Finally, we must decide whether petitioners' property had been converted from a personal residence to business or income- producing property prior to the time that earthquake damage was incurred. Respondent contends that the record contradicts petitioners' claim that the property had been converted to business (rental) or income-producing property. We agree. The parties have addressed this aspect of the case in two parts. They disagree as to whether petitioners no longer resided in the property and whether the property had been converted to business or income-producing property as of the occurrence of the January 17, 1994, 68 earthquake.The record reflects that petitioners started to move furnishings out of the Military property beginning in October 1993 and that substantial improvements and repairs were begun and remained ongoing after that time and through the time of the earthquake. Petitioners' evidence was sufficient to establish that the Military property was no longer used as their personal residence as of January 17, 1994.Respondent also relies on a statement that respondent's agent testified was made during the examination. The testimony of respondent's agent is as follows: I'm not sure if it was the first interview or the second one. I did see * * * [petitioner] two times, once in his home and once in the office after hours. But I know we discussed the earthquake because I mentioned -- I believe I mentioned to him what happened to us in my home, and I know he said his furniture was in the house and that he wasn't out of the house yet.Petitioners and Mr. Palos' mother, however, testified under oath that they were no longer using the Military property as a residence by the time of the earthquake. In addition, with extensive repairs underway at69 the Military property beginning around October 1993, it is unlikely that petitioners remained in the house when other and better choices were available to them. Accordingly, we find that petitioners were not using the subject property as their personal residence at the time of the earthquake.Respondent also questions whether the Military property was held for sale or rent in such a manner as to be considered business or income-producing property within the meaning of section 165. Property that is used as a taxpayer's residence may be converted to rental or other income-producing property within the meaning of section 165(a). See, e.g., section 1.165-9, Income Tax Regs. (concerning the sale of residential property). On that point, petitioners' evidence did not show that the property had definitively been converted to rental or other income-producing property at the time of the earthquake.Generally, taxpayers must do more than merely list their residential realty to convert its use from personal to one which would permit a loss under section 165 that is not subject to the limitation of section 165(h)(1) and (2). See, e.g., Newcombe v. Commissioner, 54 T.C. 1298">54 T.C. 1298, 1302-1303 (1970);70 Rogers v. Commissioner, T.C. Memo 1965-8">T.C. Memo 1965-8. Although petitioners had listed the property for sale and were continuing to make repairs to enhance the property, some of their furniture remained, and the property was listed for sale rather than for rent. Petitioners were able to lease the property just 4 days after the earthquake occurred, but these events are not sufficient to place them over the threshold necessary to convert their personal residence into property for which section 165(c)(1) or (c)(2) losses would be available. Accordingly, the $ 9,221 casualty loss is subject to the limitations of section 165(h)(1) and (2).Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the tax year under consideration, and Rule references are to this Court's Rules of Practice and Procedure.↩	01-04-2023	11-14-2018
https://www.courtlistener.com/api/rest/v3/opinions/4331076/	HARVEY M. PERT, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; KATHLEEN M. PERT, F.K.A. KATHLEEN M. RIFFE, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPert v. CommissionerDocket Nos. 13783-94, 13784-94United States Tax CourtT.C. Memo 1997-150; 1997 Tax Ct. Memo LEXIS 173; 73 T.C.M. (CCH) 2426; T.C.M. (RIA) 97150; March 24, 1997, Filed 173 An appropriate Order will be issued and decisions will be entered under Rule 155. B. Gray Gibbs, for petitioners. Michael A. Pesavento, for respondent. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: Kathleen M. Pert (Mrs. Pert), formerly known as Kathleen M. Riffe, was married to Timothy C. Riffe (Mr. Riffe) until he died, and later married to Harvey M. Pert (Mr. Pert). Mr. Riffe and Mrs. Pert filed174 joint income tax returns from 1986 to 1989. Respondent determined that Mrs. Pert is liable as a transferee of the assets of Mr. Riffe for his and Mrs. Pert's unpaid income tax and interest and Mr. Riffe's additions to tax from 1986 to 1989. Respondent also determined that Mr. Pert is liable for Mr. Riffe's and Mrs. Pert's income tax and Mr. Riffe's additions to tax as a successor transferee of the assets of Mr. Riffe, or as a transferee of the assets of Mrs. Pert. Mr. Riffe's and Mrs. Pert'sUnpaid Joint Federal Income Tax LiabilitiesFees andTax PeriodCollectionAssessedPaymentsUnpaidEndingTaxCostsInterestMadeBalance1986$ 37,342$ 12$ 25,158$ 43,9761 $ 18,524198719,9911212,885032,888198814,68406,5745,00016,260Total Unpaid Income Tax Liability$ 67,672Mr. Riffe's Unpaid Additions to TaxTaxSubstantialPeriodFraudUnderstatementNegligenceAccuracyTotal1986$ 42,869$ 9,335$ 0$ 0$ 52,204198704,9987,443012,441198803,20573403,93919890003,8193,819Total$ 42,869$ 17,538$ 8,177$ 3,819$ 72,403175 Mr. Riffe's unpaid income tax from 1986 to 1989 is $ 140,075. Mr. Riffe's liability is larger than Mrs. Pert's liability because it includes additions to tax and penalties pursuant to a stipulated decision for 1987 and closing agreements for 1986, 1988, and 1989. In Pert v. Commissioner, 105 T.C. 370">105 T.C. 370, 377, 380 (1995), we held that petitioners could not dispute the tax liabilities of Mr. Riffe and Mrs. Pert because she signed closing agreements for 1986, 1988, and 1989 and agreed to a stipulated decision for 1987. We also held that the statute of limitations does not bar respondent from assessing transferee liability against petitioners for 1986. Id. at 379. We must decide the following issues: 1. Whether Mrs. Pert is liable as a transferee of Mr. Riffe's assets for his unpaid income tax and additions to tax for 1986, 1987, 1988, and 1989. We hold that she is. 1176 2. Whether respondent failed to prove the value of the property transferred from Mr. Riffe's estate to Mrs. Pert, as petitioners contend; the value of assets transferred is $ 399,535, as respondent contends; or the value is some other amount. We hold that the value of assets transferred is $ 399,535. 3. Whether Mr. Pert is liable as a successor transferee of Mr. Riffe's assets for Mr. Riffe's unpaid income tax and additions to tax for 1986, 1987, 1988, and 1989. We hold that he is. 4. Whether Mr. Pert is liable as a transferee of Mrs. Pert's assets for Mrs. Pert's unpaid income tax for 1986, 1987, 1988, and 1989. We hold that he is. 5. Whether respondent failed to prove the value of the assets that Mrs. Pert transferred to Mr. Pert from Mr. Riffe's estate, as petitioners contend; the value is $ 222,206, as respondent contends; or the value is some other amount. We hold that the value of assets transferred to Mr. Pert is $ 126,112. 6. Whether respondent properly credited tax payments that Mrs. Pert made on June 27 and December 11, 1991. We hold that respondent did. 7. Whether we should enter decision in Mrs. Pert's favor because the U.S. Bankruptcy Court for the Middle District177 of Florida discharged Mrs. Pert's liability as a transferee in a previously filed bankruptcy. We hold that we should not. Unless otherwise noted, section references are to the Internal Revenue Code of 1986 as in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT A. PetitionersMr. and Mrs. Pert lived in Palm Harbor, Florida, when they filed their petitions. B. Transferor Timothy C. RiffeMr. Riffe died on February 11, 1991. Decedent and Mrs. Pert had timely filed joint Federal individual income tax returns for 1986, 1987, 1988, and 1989. 1. Mr. Riffe's BusinessesDuring 1986, 1987, 1988, and 1989, Mr. Riffe owned businesses known as West Coast Pest Control and West Coast Florida Pressure Cleaning. West Coast Pest Control sprayed pesticides on lawns. West Coast Florida Pressure Cleaning used a pressure cleaning process to wash cars for car dealers. Mr. Riffe owned the car wash business before he married Mrs. Pert. Mrs. Pert worked long hours in both businesses and ran the car wash business. Mr. Riffe was the sole owner of occupational licenses for both of these businesses. He had sole signature178 authority over the bank accounts for the businesses. Mr. Riffe's and Mrs. Pert's joint income tax returns for 1986, 1987, 1988, and 1989, include Schedules C for the car wash business in Mr. Riffe's name. They reported on their 1988 return that the business paid Mrs. Pert $ 13,800 in wages. Their 1989 return also included a Schedule C for Mr. Riffe's lawn spraying business. 2. Mr. Riffe's Safe Deposit BoxesOn October 23, 1987, Mr. Riffe leased safe deposit box 276 solely in his name from Barnett Bank of Pinellas County (Barnett Bank). He was the only person listed on the signature card and the only person authorized to open safe deposit box 276. He opened safe deposit box 276 more than 300 times from 1987 to 1991. On January 14, 1991, Mr. Riffe leased safe deposit box 204 from First Gulf Bank (safe deposit box 204). He was the only person listed on the signature card and the only person authorized to open safe deposit box 204. He opened it three times before he died. Mr. Riffe also leased a safe deposit box solely in his name from North Carolina National Bank (NCNB). 3. Mr. Riffe's Solely Owned PropertyOn February 27, 1989, Mr. Riffe's grandparents gave him Lot 30, 179 College Hill, Florida. Mr. Riffe was the sole owner of Lot 30, College Hill, until he died. He was the sole owner of Lot 3, Block 95, Town of Sutherland, Florida, from November 20, 1989, until he died. On January 16, 1991, Mr. Riffe deposited $ 350,000 at the Barnett Bank. Several days later, he withdrew $ 325,000 and bought five cashier's checks for $ 65,000, which he deposited in accounts at Citizens and Southern Bank (C&S), NCNB, Sun Bank of Tampa Bay, Florida Bank of Commerce, and First Gulf Bank. 4. Mr. Riffe's DeathMr. Riffe died in a boating accident in a 22-foot Aqua Sport boat near his home on February 11, 1991. He was the sole owner of the boat. When he died, Mr. Riffe and Mrs. Pert lived in a residence at Lot 28, College Hill. The total balance in his six bank accounts (see par. B-3, above) was $ 115,358 when he died. C. Opening the Safe Deposit BoxesDetective John Barna (Barna), an experienced narcotics investigator with the Pinellas County, Florida, Sheriff's office, began to investigate Mr. Riffe's financial activities shortly after Mr. Riffe died. On February 15, 1991, 4 days after Mr. Riffe died, Barna obtained a search warrant for safe deposit box180 204. In it were two sealed bags with $ 132,000 in cash primarily in denominations of $ 50s and $ 100s bundled by paper straps. The Pinellas County Sheriff's office searched only safe deposit box 204. D. Mr. Riffe's Estate1. Administration of Mr. Riffe's EstateMr. Riffe died testate. Mrs. Pert was the personal representative and sole beneficiary of Mr. Riffe's estate. Donald F. Kaltenbach (Kaltenbach) represented Mrs. Pert in her capacity as personal representative of Mr. Riffe's estate. He had previously represented hundreds of personal representatives of estates and was familiar with documents filed in probate proceedings. Early in the probate proceedings, Mrs. Pert and Kaltenbach knew that respondent was investigating the tax liabilities of Mr. Riffe and Mrs. Pert. On February 28, 1991, Revenue Agent Joe Elliott (Elliott) questioned Mrs. Pert about her assets, the business operations of West Coast Pest Control and West Coast Florida Pressure Cleaning, how she derived income from the businesses, and her cash on hand. Mrs. Pert denied that she or Mr. Riffe had a cash hoard or any large sums of cash on hand. Mrs. Pert told Elliott that she had to borrow money from friends181 and family because she had no funds and she had no signature authority over any of the business bank accounts. Kaltenbach was present when Elliott interviewed Mrs. Pert on February 28, 1991. On March 1, 1991, Elliott went to Mrs. Pert's residence to get books and records to start an income tax audit. On March 20, 1991, Kaltenbach and Mrs. Pert deposited $ 115,358 at Peoples State Bank (acct. no. 105209804) for Mr. Riffe's estate to pay estate bills. The $ 115,358 came from Mr. Riffe's six bank accounts. On April 16, 1991, the Pinellas County Sheriff's office gave Mrs. Pert the $ 132,000 that Barna had seized from safe deposit box 204. Before giving her the money, the Sheriff's office required her to present letters of administration. 2. Inventory of Decedent's AssetsIn a Florida probate proceeding a decedent's estate must file an inventory which lists in reasonable detail each asset owned by the decedent and the estimated fair market value of each asset when the decedent died. Fla. Stat. Ann. sec. 733.604(1) (West 1988). Kaltenbach prepared an inventory based on information from Mrs. Pert and a friend of hers whom Kaltenbach knew and trusted. He intended to include only property182 that was owned solely by Mr. Riffe and not to include jointly owned property. He listed the following property in the inventory: Estimated FairAssetsMarket ValueReal Property1.Lot 28, College Hill (homestead)Not included invaluation2.Lot 30, College Hill$ 15,0003.Lot 3, Block 9530,000Personal Property4.Peoples State Acct. # XXXXX9804$ 115,358Under C&S Acct. # XX61505.Certificates of Deposit100,0006.Government Obligation Taxable100,0007.C&S Tax-Free Income Bond45,0008.Cash Equivalent Tax-Free Fund5,0009.C&S Money Market # FV008120328418,00010.22' Aqua Sport Boat5,00011.West Coast Pest Control35,00012.West Coast Florida Pressure Cleaning4,00013.1987 GMC Van ID # 1GTFR24H9HF7255195,00014.1988 GMC Pick-up ID # 2GCFC24H77130696910,00015.1987 GMC ID # 1GTFR24H6F7209734,00016.1987 GMC Astro Van ID # 1G8DM15ZOGB1985095,000Total Property - Wherever Located$ 496,358The value of the boat was the estimated value after the accident in which Mr. Riffe died. Mrs. Pert signed the inventory under penalty of perjury on May 13, 1991. Kaltenbach filed it with the probate court. Kaltenbach did not183 believe that he needed to have appraisals because the total value of the estate was more than $ 60,000 (the threshold for formal administration) but less than $ 600,000 (the threshold for filing a Federal estate tax return), and because Mrs. Pert was the sole beneficiary of the estate. 3. Property Passing Outside of ProbateMrs. Pert was required to report the value of property passing outside of probate, including jointly owned property, to the Florida Department of Revenue (Preliminary Notice and Report). On May 13, 1991, Mrs. Pert reported that Lot 28, College Hill, which she valued at about $ 41,000, passed outside of probate, and that the total value of all property in which Mr. Riffe had an interest was $ 537,358. On June 5, 1991, Elliott met with Mrs. Pert's tax attorney to discuss adjustments Elliot had made to Mr. Riffe's and Mrs. Pert's income for 1986, 1987, 1988, and 1989, and to give Mrs. Pert's tax attorney a copy of Elliott's report detailing the adjustments based on unreported income and including the addition to tax for fraud. Mrs. Pert married Mr. Pert on September 7, 1991, while she was administering Mr. Riffe's estate. Mr. Pert had known Mr. Riffe for many184 years. Mrs. Pert, as representative of Mr. Riffe's estate, signed documents under penalty of perjury on March 23, 1992 (petition to extend time for filing final accounting and petition for discharge), June 19, 1992 (petition to extend time for filing final accounting and petition for discharge), and October 8, 1992 (statement regarding creditors with attachment showing debt owed to Internal Revenue Service (IRS)), in which she stated that respondent had tax claims against Mr. Riffe's estate. On October 6, 1992, Mrs. Pert wrote a check to herself for $ 3,294 to close out the Peoples State Bank account. Mr. Riffe's estate asked the probate court to close the estate. To allow the case to close, Kaltenbach prepared the following document, which Mrs. Pert signed on October 8, 1992: Dated: October 8, 1992 Re: Estate of Timothy Christopher Riffe, aka Timothy C. Riffe, aka Tim Riffe File Number 91-676-E3 The undersigned, KATHLEEN M. PERT, formerly known as KATHLEEN M. RIFFE, as Personal Representative of the above-captioned Estate, will attend to the preparation of Timothy C. Riffe's Final 1040 Individual Return as well as the Final 1041 Estate Income Tax Return. In addition, KATHLEEN185 M. PERT, individually and as Personal Representative of the above-captioned Estate, shall be responsible for any and all obligations which may become due to the Internal Revenue Service and shall hold the law firm of Donald F. Kaltenbach, P.A. harmless from any and all liability therefor. The above-mentioned assurances are being made by the Personal Representative in order to close out the Estate of Timothy Christopher Riffe. /s/ Kathleen M. PertMrs. Pert signed this document to show the probate court that she would pay any claims by the IRS from the estate that might become due, to allow her to be released from her fiduciary duties to the estate, and to allow Mr. Riffe's estate to be distributed to her. On October 8, 1992, Mr. Riffe's estate reported that it had distributed all of its assets to Mrs. Pert according to the plan stated in the petition for discharge. Mr. Riffe's estate used $ 96,823 of the $ 115,358 deposited in Peoples State Bank to pay estate expenses, including $ 57,963 for income tax for Mr. Riffe for tax years 1986 to 1990. The remaining $ 18,535 was distributed to Mrs. Pert or paid on her behalf while she administered the estate. Mr. Riffe's estate was186 closed on October 17, 1992. E. Mr. Pert's Financial Resources1. Mr. Pert's BusinessesMr. Pert started a lawn maintenance business in the late 1980's called Perticular Lawn Service. After he married Mrs. Pert, Mr. Pert helped her run West Coast Pest Control. Mr. and Mrs. Pert combined their landscaping and lawn spraying businesses to form Perticular Lawn, Inc. Mrs. Pert transferred the car washing business and a Chevrolet truck with a pressure washing machine to her father. Mr. Pert incorporated Perticular Lawn, Inc. in 1992 and sold it in 1992 or 1993. 2. Mr. Pert's FinancesMr. Pert had a drug habit (not further described in the record) in the early 1980's, and he had financial troubles from 1985 to 1989. Ford Motor Credit Co. obtained a judgment against him in 1987 for $ 3,098 plus costs and interest. On December 21, 1990, Mr. Pert's father gave Mr. Pert $ 40,000, which he deposited in C&S. He withdrew the $ 40,000 on January 7, 1991. Around July 1991, Mr. Pert's father gave Mr. Pert real property worth $ 46,000. Mr. Pert sold the property shortly after he received it. On October 15, 1991, Mr. Pert bought a certificate of deposit in the amount of $ 30,952. 187 In 1988, 1989, and 1990, Mr. Pert made less than $ 11,000 per year. He reported that he had gross income as follows: $ 8,108 for 1988, $ 8,589 for 1989, and $ 10,680 for 1990. Mr. and Mrs. Pert reported that they had taxable income of $ 34,906 for 1991, $ 16,098 for 1992, and $ 42,395 for 1993. 3. Mr. Pert's HomesMr. Pert owned a home at 1332 Hawaii Avenue that he bought in the mid 1980's. Mr. and Mrs. Pert lived there about a year after they were married. Thereafter, they moved to a house that Mrs. Pert built on Lot 30, College Hill. They lived there for about 8 months. They then moved to a motel for about 30 days, and then to 610 Sandy Hook Road. Mr. and Mrs. Pert had a young son and they were expecting another child when they stayed at the motel. Mr. and Mrs. Pert lived modestly. 4. Mr. Pert's BoatMr. Pert bought a boat for $ 11,000 shortly after he married Mrs. Pert in 1991. He traded in that boat in 1995 for a $ 24,000 22-foot Hydrasport fishing boat. He financed the purchase of the second boat and owed $ 11,000 as of the date of trial. F. The Cash TransactionsOn March 20, 1991, Kaltenbach and Mrs. Pert opened the Peoples State Bank account for Mr. Riffe's188 estate and deposited $ 115,358, as described above at par. D-3. On that day, Mrs. Pert wrote a $ 5,000 check to herself. On April 9, 1991, she wrote a $ 5,000 check to herself for a downpayment on a car. On April 16, 1991, Mrs. Pert deposited $ 268,000 (items 5-9 on the inventory) in cash in C&S account no. XXXX1982. On April 18, 1991, she closed that account, deposited $ 250,000 in C&S trust account no. XX6150 and deposited $ 18,091 in C&S ultima account no. XXXX3284. Mrs. Pert opened the C&S accounts in her name. On May 6, 1991, Mrs. Pert used part of the $ 250,000 from account no. XX6150 to buy a $ 100,000 certificate of deposit, and $ 97,256 to buy a $ 100,000 U.S. Treasury bill. On June 5, 1991, Mrs. Pert used part of the $ 250,000 to pay $ 45,020 to buy shares of the C&S tax-exempt bond fund. On June 27, 1991, Mrs. Pert paid $ 50,000 to the IRS for Mr. Riffe's taxes. On July 2, 1991, respondent applied $ 28,976 of the $ 50,000 payment to 1986 and $ 21,024 to 1989 ($ 50,000 total). On November 5, 1991, Mrs. Pert transferred $ 50,000 from C&S trust account no. XX6150 to C&S ultima account no. XXXX3284. On November 7, 1991, Mrs. Pert withdrew $ 199,628 from C&S trust account189 no. XX6150. On November 8, 1991, at the Florida Bank of Commerce, Mrs. Pert used the $ 100,000 from C&S trust account no. XX6150 to buy a $ 100,000 certificate of deposit (CD 1766), and Mr. Pert bought certificate of deposit no. 2775 for $ 43,072 (CD 2775). The same employee at Florida Bank of Commerce opened both certificate of deposit accounts for Mr. and Mrs. Pert on November 8, 1991. On December 11, 1991, Mrs. Pert paid $ 20,000 to the IRS for Mr. Riffe's taxes. On December 20, 1991, respondent applied $ 15,000 of the $ 20,000 payment to 1986 and $ 5,000 to 1988. When CD 1766 matured around May 12, 1992, Mrs. Pert used $ 50,000 of the proceeds to open joint checking account no. XXXXXX2577 at Citizens Bank of Clearwater. She used the other $ 50,000 to buy joint certificate of deposit no. XXXXXX3611 with Mr. Pert at Citizens Bank of Clearwater. On June 16, 1992, Mr. Pert withdrew $ 6,000 in cash from joint checking account no. XXXXXX2577. On June 17, petitioners prematurely redeemed certificate of deposit no. XXXXXX3611 in the amount of $ 49,716, and paid a $ 469 penalty. On June 17, 1992, the bank distributed the $ 49,716 to petitioners in three cashiers checks as follows: cashier's190 check no. X8580 for $ 20,000 to Mr. Pert, cashier's check no. 18581 for $ 20,000 to Mr. Pert, and cashier's check no. 18582 for $ 9,716 to Mrs. Pert. On June 18, 1992, Mr. Pert withdrew $ 5,000 in cash from joint checking account no. XXXXXX2577. Mr. Pert withdrew a total of $ 11,000 from Citizen's Bank. On June 18, 1992, Mr. Pert used cashier's check no. 18580 to open account no. XXXXXX9909 with $ 20,000 at Sun Bank of Tampa Bay in his name. On June 29, 1992, Mr. Pert added Mrs. Pert to the Sun Bank account. On June 30, 1992, he deposited $ 20,000. Mr. Pert withdrew the following amounts from the Sun Bank account: June 18, 1992$ 5,000June 26, 19925,000June 30, 19923,000July 20, 19923,000July 22, 19924,000July 31, 19923,000Feb. 28, 19937,000Total$ 30,000On June 18, 1992, Mr. Pert used cashier's check no. 18581 to open a joint account at Barnett Bank of Pinellas County. Mr. Pert withdrew the following amounts from Barnett Bank: June 19, 1992$ 5,000June 26, 19925,000June 29, 19925,000July 2, 1992 5,000July 20, 19923,000July 21, 19923,000July 22, 19924,000July 31, 19923,000Total$ 33,000From June191 16, 1992, to February 28, 1993, Mr. Pert withdrew a total of $ 74,000 from Citizens Bank, Sun Bank, and Barnett Bank. On November 23, 1992, respondent issued the notice of deficiency to Mr. Riffe's estate, including the determination for the addition to tax for fraud. During 1991, 1992, 1993, and 1994, petitioners opened more than 20 bank accounts, most of which were closed within 6 months. Some of those accounts were opened only for 2 days. G. Petitioners' Purchase of 610 Sandy Hook RoadOn March 23, 1992, Mrs. Pert distributed Lot 30, College Hill, to herself as sole beneficiary of Mr. Riffe's estate. She had a new house built on that property in 1992. On April 19, 1993, Mrs. Pert sold the house and land for $ 60,000. After deducting selling expenses, Mrs. Pert received $ 56,942 from the sale. On April 20, 1993, Mrs. Pert bought a cashier's check payable to Secure Title in the amount of $ 53,018. She withdrew $ 3,925 from the original proceeds. On February 16, 1993, Mr. Pert's parents wired $ 59,866 to his money market account. On March 4, 1993, Mr. Pert paid the Ford Motor Credit Co. judgment (see par. E-2, above) in full. On April 20, 1993, Mrs. Pert transferred $ 192 53,018 in cash to Mr. Pert. Mr. Pert used the $ 53,018 and other funds, including the $ 59,866 gift from his parents, to buy a house at 610 Sandy Hook Road for $ 128,000. He took title to the Sandy Hook property in his name. He quitclaimed the Sandy Hook property to himself and Mrs. Pert about a month later. H. Vehicles1. 1992 Ford ExplorerIn April 1991, Mrs. Pert used $ 5,000 from Peoples State Bank account no. XXXXX9804(the account she had used to pay administrative expenses of Mr. Riffe's estate) as a downpayment for a Volkswagen. Mrs. Pert made the monthly payments on the loan to buy the Volkswagen from May to December 1991 from C&S ultima account no. XXXX3284. She paid the $ 17,005 balance that she owed for the Volkswagen from C&S ultima account no. XXXX3284. On June 15, 1992, Mr. Pert bought a 1992 Ford Explorer for $ 22,112. He traded Mrs. Pert's Volkswagen, for which he was given credit of $ 12,778, and paid the remaining $ 9,335 with a check drawn from Citizens Bank of Clearwater account no. XXXXXX2577. Mr. Pert titled the Ford Explorer in the name of Perticular Lawn, Inc. 2. 1987 GMC TruckMr. Pert used a 1987 GMC Truck that had been used by West Coast193 Pest Control. I. Mrs. Pert's BankruptcyOn December 22, 1993, Mrs. Pert filed a voluntary petition for relief from creditors under chapter 7 of the U.S. Bankruptcy Code, listing respondent as the primary creditor. In her petition, Mrs. Pert listed as assets a joint interest in Sandy Hook Road worth $ 130,000, $ 12 cash on hand, $ 57 in a joint checking account, household goods and furnishings worth $ 3,108, and other items including clothes, jewelry, and firearms worth $ 530. J. Closing Agreements and Notices of Transferee LiabilityOn April 23, 1993, Mrs. Pert signed closing agreements for 1986, 1988, and 1989 for herself and as personal representative of Mr. Riffe's estate. See Pert v. Commissioner, 105 T.C. 370">105 T.C. 370, 373 (1995). On June 4, 1993, this Court entered a stipulated settlement agreement in Riffe v. Commissioner, docket No. 15214-91, for 1987. Id.On May 27, 1994, respondent issued notices of transferee liability to Mr. and Mrs. Pert determining that each petitioner was liable as a transferee of Mr. Riffe's assets. OPINION We must decide whether, and if so to what extent, Mrs. Pert is liable as a transferee of Mr. Riffe's194 assets, and whether, and if so to what extent, Mr. Pert is liable as a transferee of Mr. Riffe's assets or as a successor transferee of Mrs. Pert's assets. A. Background1. Transferee LiabilityThe Commissioner may collect unpaid income taxes of a transferor of assets from a transferee or a successor transferee of those assets. Sec. 6901(a), (c)(2); Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 42 (1958); Stansbury v. Commissioner, 104 T.C. 486">104 T.C. 486, 489 (1995), affd. 102 F.3d 1088">102 F.3d 1088 (10th Cir. 1996). Petitioners bear the burden of proving that the transferor is not liable for tax and additions to tax. Sec. 6902(a). In accordance with our holding in Pert v. Commissioner, supra, Mr. Riffe and Mrs. Pert are liable for the tax and additions to tax in the amounts set forth in the stipulated decision in docket No. 15214-91 and in the closing agreements with respondent. The Commissioner bears the burden of proving that a taxpayer is liable as a transferee. Sec. 6902(a); Rule 142(d); Gumm v. Commissioner, 93 T.C. 475">93 T.C. 475, 479-480 (1989), affd. without195 published opinion 933 F.2d 1014">933 F.2d 1014 (9th Cir. 1991). State law generally determines the extent of a transferee's liability. Commissioner v. Stern, supra at 45; Gumm v. Commissioner, supra at 479. We apply Florida law in deciding whether petitioners are liable as transferees under section 6901 because all of the transfers occurred there. Commissioner v. Stern, supra;Fibel v. Commissioner, 44 T.C. 647">44 T.C. 647, 657 (1965). 2. Transferee Liability UnderFlorida LawUnder Florida law, a transferee may be held liable for the debts of a transferor if the transferor conveys assets to the transferee fraudulently or in a manner that is "per se" fraudulent. Fla. Stat. Ann. secs. 726.105, 726.106 (West 1988); Hagaman v. Commissioner, 100 T.C. 180">100 T.C. 180, 184 (1993) (transferee liability established by applying Florida fraudulent conveyance law); Schad v. Commissioner, 87 T.C. 609">87 T.C. 609, 614 (1986), affd. without published opinion 827 F.2d 774">827 F.2d 774 (11th Cir. 1987). One way that a creditor196 may show that a conveyance is fraudulent is by showing that the transferor actually intended to defraud or hinder creditors. Fla. Stat. Ann. sec. 726.105(1)(a) (West 1988) 2; Florida Fruit Canners, Inc. v. Walker, 90 F.2d 753">90 F.2d 753, 757 (5th Cir. 1937). A creditor may show that a transferor intended to defraud or hinder creditors under Fla. Stat. Ann. section 726.105 (West 1988), either by direct proof or by using a nonexclusive list of factors (badges of fraud) listed in the statute. Fla. Stat. Ann. sec. 726.105(1) and (2) (West 1988). 197 A creditor may also establish transferee liability by showing that a conveyance is per se fraudulent. Fla. Stat. Ann. sec. 726.106 (West 1988). 3 There are two ways that a creditor can prove that a conveyance is per se fraudulent. First, a conveyance is per se fraudulent if: (a) The transferor transferred assets to the transferee; (b) the transferor had a preexisting liability at the time of the transfer; (c) the transferee paid inadequate consideration for the transfer; and (d) the transferor was insolvent at the time of or due to the transfer. Fla. Stat. Ann. sec. 726.106(1) (West 1988). Second, a conveyance is also per se fraudulent if: (a) The creditor's claim arose before the transfer was made; (b) the transfer was made to an insider for an antecedent debt; (c) the debtor was insolvent at that time; and (d) the insider had reasonable cause to believe that the debtor was insolvent. Fla. Stat. Ann. sec. 726.106(2) (West 1988). 198 B. Whether Mrs. Pert is Liable as a Transferee of Mr. Riffe's Assets1. Contentions of the PartiesRespondent contends that Mrs. Pert is liable as a transferee for Mr. Riffe's unpaid tax and additions to tax for 1986, 1987, 1988, and 1989, and contends that the transfer of Mr. Riffe's assets to Mrs. Pert was both actually and per se fraudulent. As discussed next, we conclude that respondent has established that the conveyances from Mr. Riffe's estate to Mrs. Pert were per se fraudulent under Florida law. 2. Per Se Fraudulent Conveyances UnderFlorida Lawa. Transfer of Assets of Mr. Riffe's Estate to Mrs. PertPetitioners contend that respondent has not shown that the assets which respondent contends were transferred from Mr. Riffe's estate to Mrs. Pert belonged solely to Mr. Riffe. We disagree. Mrs. Pert signed the inventory which showed that Mr. Riffe's estate included assets with a total estimated fair market value of $ 469,358. All of that property less an amount for administrative costs was transferred to Mrs. Pert ($ 469,358 - $ 96,823 = $ 372,535). A personal representative must file an inventory of property of the estate. Fla. Stat. Ann. sec. 733.604(1)199 (West 1988). 4 The personal representative of an estate is required to list only assets belonging to the deceased in his or her individual capacity that pass through probate; jointly held properties such as assets held by the entireties should not be listed. Florida Bar v. McKenzie, 581 So. 2d. 53, 54 (Fla. 1991); Hill v. Morris, 85 So. 2d 847">85 So. 2d 847, 851 (Fla. 1956). Kaltenbach had represented several hundred estates. His normal practice was to identify the property in which the decedent had sole ownership and to estimate the fair market value of the property. He believed that the items listed in the inventory, except for the homestead, belonged solely to Mr. Riffe. 200 Petitioners contend that respondent did not prove that the $ 268,000 in cash from the safe deposit boxes which was deposited in the C&S bank account did not belong jointly to Mrs. Pert and Mr. Riffe. Petitioners contend that the Pinellas County Sheriff's office returned the $ 132,000 cash seized from safe deposit box 204 to Mrs. Pert, individually, and not to Mr. Riffe's estate. We disagree. The Sheriff's office required Mrs. Pert to present letters of administration before releasing the cash. The receipt which Mrs. Pert signed states that the authority to release the cash was the probate of Mr. Riffe's estate as shown by letters of administration. We conclude that the seized cash was released to Mrs. Pert in her capacity as personal representative of Mr. Riffe's estate. Petitioners contend that respondent offered no evidence showing that the other $ 136,000 included in the $ 268,000 was solely Mr. Riffe's property or that it was Mr. Riffe's and not Mrs. Pert's property. We disagree. Mrs. Pert did not know about any of the cash in Mr. Riffe's safe deposit boxes. Mrs. Pert told respondent's revenue agent on February 28, 1991, that she did not know that Mr. Riffe had any cash on hand. 201 She also told him that she had no money or sources of funds and that she had to borrow money from friends and family because she had no signature authority over the business bank accounts. Mr. Riffe was the sole lessee of safe deposit box 204 at First Gulf Bank and safe deposit box 276 at Barnett Bank. He was the only person whose name was on the signature cards, and the only person authorized to have access to those boxes. The lease or signature card for Mr. Riffe's safe deposit box of NCNB is not in the record. However, Kaltenbach testified that it was solely in the name of Mr. Riffe and that Mrs. Pert could not gain access to it without authority from the probate court. Mrs. Pert did not list the $ 268,000 as a jointly owned asset passing outside of probate on the Preliminary Notice and Report. We conclude that the cash from all three safe deposit boxes belonged solely to Mr. Riffe. Petitioners contend that respondent failed to prove that the money did not belong to both Mr. Riffe and Mrs. Pert because she worked hard in the two businesses. We disagree. We are convinced that she worked hard in the businesses, but we think it is implausible that Mrs. Pert's earnings would be part202 of a cash hoard kept by her husband without her knowledge. Petitioners point out that Mrs. Pert opened accounts on April 16, 1991, at C&S in her own name and not in the estate's name, and contend that this shows that the cash in the C&S accounts was not solely Mr. Riffe's property. We disagree. Kaltenbach testified that he allowed Mrs. Pert to do that because she was the only beneficiary and personal representative of the estate and she needed funds. He believed that the claims against the estate, not including those made by respondent, could be paid from the Peoples State Bank account. His testimony and that of the revenue agent show that the funds initially deposited in the accounts at C&S were from Mr. Riffe's estate. Petitioners suggest that Mrs. Pert owned the contents of the safe deposit boxes (and the other items in the inventory) with Mr. Riffe as tenants by the entireties. We disagree. There is no tenancy by the entireties between spouses if a surviving spouse has no control over a safe deposit box, even if the surviving spouse had access to it. Bechtel v. Estate of Bechtel, 330 So. 2d 217">330 So. 2d 217 (Fla. Dist. Ct. App. 1976). Mrs. Pert had neither 203 access to nor control of the safe deposit boxes. Also, Mrs. Pert did not claim that she owned the cash or other property with Mr. Riffe as tenants by the entireties in the Preliminary Notice and Report filed with the Florida Department of Revenue. b. Whether Respondent's Claim Arose Before Mr. Riffe's Estate Transferred Assets to Mrs. PertTo establish liability under Fla. Stat. Ann. section 726.106(1) (West 1988), respondent must prove that respondent's claim arose before Mr. Riffe's estate transferred assets to Mrs. Pert. Petitioners contend that respondent's claim had not arisen when the transfers were made because respondent had not yet determined a deficiency in tax or additions to tax, or otherwise assessed tax. Respondent issued the notice of deficiency to Mr. Riffe's estate, including the addition to tax for fraud on November 23, 1992. Petitioners contend that the fraud penalty did not arise before the transfers occurred from March 19, 1991 to October 17, 1992, when the estate closed, because respondent bears the burden of proving fraud and because respondent had not yet determined, much less proven, that fraud applies. We disagree. Mr. Pert's and Mrs. Riffe's filing204 of incorrect returns in which they did not report income is the act upon which respondent based the underlying determination. The claim arose when they filed their returns, or at the latest, when the returns for those years were due. We have held that the Commissioner becomes a creditor of a taxpayer for transferee liability purposes at the close of the taxable period in which the tax arose. Hagaman v. Commissioner, 100 T.C. at 185 (included additions to tax for fraud); O'Sullivan v. Commissioner, T.C. Memo. 1994-17. Other courts have held that the Commissioner becomes a creditor of a taxpayer when the return on which the tax should be reported is due to be filed. United States v. Ressler, 433 F. Supp. 459">433 F. Supp. 459, 463 (S.D. Fla. 1977), affd. 576 F.2d 650">576 F.2d 650 (5th Cir. 1978). The tax years at issue are 1986, 1987, 1988, and 1989. The tax return for 1989 was due on April 15, 1990. Mr. Riffe's estate transferred all of its assets to Mrs. Pert after April 15, 1990, the latest date that the claim arose. We conclude that respondent's claim arose before any of the transfers occurred. 205 5We conclude that respondent has proven that the claim arose before Mr. Riffe's estate transferred its assets to Mrs. Pert. c. Consideration for Transfers From Mr. Riffe's Estate to Mrs. PertTo establish liability under Fla. Stat. Ann. section 726.106(1) (West 1988), respondent must show that Mr. Riffe's estate did not receive property of a reasonably equivalent value in exchange for the transfers. Mrs. Pert did not pay any consideration to Mr. Riffe's estate for the $ 399,535 in property that Mr. Riffe's estate transferred to her. Petitioners do not contend that she did. We conclude that respondent has proven that Mr. Riffe's estate did not receive any consideration for the assets it transferred to Mrs. Pert. d. Insolvency or Substantial Indebtedness of Mr. Riffe's EstatePetitioners contend that the estate was solvent when Mrs. Pert deposited the $ 132,000 in 206 April 1991. A debtor is insolvent under Florida law when the value of his or her debts exceeds the value of his or her assets. Fla. Stat. Ann. sec. 726.103(1) (West 1988). Insolvency can be measured at the time of or immediately after the transfer. Fla. Stat. Ann. sec. 726.106(1) (West 1988). Each distribution by an estate is one of a series toward the distribution of the entire estate. O'Sullivan v. Commissioner, T.C. Memo. 1994-17 (heirs to decedent who died owing income taxes received distributions from estate as transferees under the Cal. Civ. Code sec. 3439.05 (West 1993 Supp.), which is identical to Fla. Stat. Ann. section 726.106(1) (West 1988)); Ginsberg v. Commissioner, T.C. Memo 1965-36">T.C. Memo. 1965-36. The liabilities of an estate include unpaid Federal taxes, penalties, and interest on the date of the transfer in computing whether an estate is solvent. Leach v. Commissioner, 21 T.C. 70">21 T.C. 70, 75 (1953); LeFay v. Commissioner, T.C. Memo 1982-420">T.C. Memo. 1982-420. When Mr. Riffe's estate transferred its assets to Mrs. Pert, it became insolvent because it had no assets and had a debt to207 respondent. e. Petitioners' Other ContentionsPetitioners contend that respondent must prove that the transferor had fraudulent intent. We disagree. A creditor need not prove that the transferor had fraudulent intent to establish that a conveyance is per se fraudulent under Fla. Stat. Ann. section 726.106(1) (West 1988). Snellgrove v. Fogazzi, 616 So. 2d 527">616 So. 2d 527, 529 (Fla. Dist. Ct. App. 1993); In re Smith, 110 Bankr. 597, 599 (M.D. Fla. 1990). Petitioners contend that the transfer of assets from Mr. Riffe's estate to Mrs. Pert is not a fraudulent conveyance under Florida law because Mr. Riffe and Mrs. Pert were liable for the same debt. Petitioners contend that a transfer of assets between co-debtors does not hinder collection efforts by a creditor. We disagree. Co-debtors should not have the right to decide from which of them their creditors must seek to collect. Petitioners cite no Florida law to support their position. In a case decided under New Mexico law, a spouse who filed a joint return with her husband who later died was held liable as a transferee for the tax liability of her deceased husband. United States v. Floersch, 276 F.2d 714">276 F.2d 714 (10th Cir. 1960).208 We agree with that result. Also, we note that Mr. Riffe and Mrs. Pert are co-debtors only to the extent of the unpaid balance of their joint tax liabilities of $ 67,672 plus interest. Petitioners contend that West Coast Pest Control and West Coast Florida Pressure Cleaning ceased doing business when Mr. Riffe died and that its assets were not distributed by Mr. Riffe's estate. We disagree. Mrs. Pert transferred the car washing business to her father. Mr. and Mrs. Pert tried to continue to operate West Coast Pest Control after they were married, and later combined their businesses to form Perticular Lawn, Inc. 3. ConclusionWe conclude that respondent has shown that the transfers of the assets in the inventory were per se fraudulent under Fla. Stat. Ann. section 726.106(1) (West 1988). 4. Value of the Property TransferredRespondent contends that Mr. Riffe's estate included $ 113,600 of property other than cash. Petitioners contend that respondent has not established the fair market value of the non-cash property listed in the inventory that Mrs. Pert filed with the probate court, and contend that the values given in the inventory are not evidence of fair market value. 209 We agree with respondent. Under Florida law, the personal representative of an estate must file an inventory of the property of the estate, including the estimated fair market value of each asset when decedent died. Fla. Stat. Ann. sec. 733.604(1) (West 1988). Kaltenbach testified that the values used in the inventory were based on the best information available at the time without the expense of appraisals. We do not believe that the absence of appraisals or the fact that Mr. Riffe's estate was larger than $ 60,000 and smaller than $ 600,000 makes the estimate in the inventory unreliable. Mr. Riffe's estate included $ 383,358 in cash. We conclude that respondent has established that the value of assets transferred from Mr. Riffe's estate to Mrs. Pert was $ 399,535. 5. ConclusionWe conclude that respondent has established that Mrs. Pert is liable up to $ 399,535 as a transferee of Mr. Riffe's assets. C. Whether Mr. Pert Is Liable as a Transferee of Mrs. Pert's Assets or as a Successor Transferee of Assets From Mr. Riffe's Estate1. Contentions of the PartiesRespondent contends that Mr. Pert is liable as a transferee of the assets of Mrs. Pert, and as a successor210 transferee of the assets of Mr. Riffe's estate, under Fla. Stat. Ann. secs. 726.101(a) (transfer defined) and 726.106 (West 1988) (per se fraudulent conveyance) and Fla. Stat. Ann. sec. 726.105(1)(a) (West 1988) (actual or constructive fraud). Respondent contends that Mrs. Pert transferred assets which had a total value of $ 222,206 from Mr. Riffe's estate to Mr. Pert when Mr. Riffe's tax debt, additions to tax, and interest were unpaid and before Mrs. Pert filed a voluntary bankruptcy petition under chapter 7 of the U.S. Bankruptcy Code. Petitioners contend that respondent failed to prove that Mr. Pert is liable as a transferee or successor transferee. Petitioners contend that Mrs. Pert spent any money she received from Mr. Riffe's estate, that Mr. Pert's increased financial resources came from gifts from his parents, and that Mr. Pert received no financial benefits from Mrs. Pert. 2. BackgroundThe principles used to decide if a transferee is liable are also used in deciding if a successor transferee (i.e., transferee of a transferee) is liable. Bos Lines, Inc. v. Commissioner, 354 F.2d 830">354 F.2d 830, 834-835 (8th Cir. 1965), affg. T.C. Memo. 1965-71;211 Pert v. Commissioner, 105 T.C. at 377. Thus, to show that Mr. Pert is liable as a successor transferee, respondent must establish that Mrs. Pert fraudulently conveyed assets from Mr. Riffe's estate to Mr. Pert under Fla. Stat. Ann. sections 726.105(1)(a) or (b) (West 1988), or that there was per se fraud under Fla. Stat. Ann. sec. 726.106 (1) or (2) (West 1988). As discussed next, we conclude that respondent has established that there were conveyances from Mr. Riffe's estate through Mrs. Pert to Mr. Pert, and that those conveyances were fraudulent under Fla. Stat. Ann. section 726.105(1)(a) and (2) (West 1988). 3. Mrs. Pert's Transfer of Assets From Mr. Riffe's Estate to Mr. PertRespondent contends that Mrs. Pert transferred the following assets from Mr. Riffe's estate to Mr. Pert: (a) $ 100,000 in cash; (b) a $ 43,072 certificate of deposit; (c) $ 53,018, which Mr. Pert used to buy the 610 Sandy Hook Road property; (d) a 1992 Ford Explorer worth $ 22,112; and (e) the 1987 GMC truck worth $ 4,000. a. $ 100,000 in CashOn April 16, 1991, Mrs. Pert deposited $ 268,000 that she had received from Mr. Riffe's safe deposit boxes in a C&S account. 212 Two days later, she closed that account and opened ultima and trust accounts. She deposited $ 18,000 in the ultima account and $ 250,000 in the trust account. On November 7, 1991, Mrs. Pert withdrew $ 199,628 in cash from the trust account and bought CD 1766 for $ 100,000 at the Florida Bank of Commerce the next day. When CD 1766 matured, Mrs. Pert deposited the $ 100,000 in two joint accounts with Mr. Pert. The transfer of funds from an individual account to a joint account is fraudulent if the transfer is a fraudulent conveyance. Advest, Inc. v. Rader, 743 F. Supp. 851">743 F. Supp. 851, 854 (S.D. Fla. 1990). Mrs. Pert conveyed $ 100,000 to Mr. Pert when she deposited the $ 100,000 into joint accounts. Thus, Mrs. Pert fraudulently conveyed the entire $ 100,000 when she deposited it. Id.b. $ 43,072 Certificate of DepositRespondent contends that Mr. Pert bought a $ 43,072 certificate of deposit (CD 2775) on November 8, 1991, using funds from Mrs. Pert. We disagree. Mr. Pert testified that he used gifts from his parents to buy CD 2775. Mr. Pert could not have used the $ 59,836 gift that he received from his parents in 1993. However, he could have used the 213 $ 40,000 they gave him in December 1990 or the gift of real estate worth $ 46,000 that he sold in July 1991. Respondent contends that we should disregard Mr. Pert's testimony as self-serving and infer that Mrs. Pert gave Mr. Pert the funds to buy CD 2775. Mrs. Pert withdrew $ 199,628 from the C&S Trust account no. XX6150 on November 7, 1991. She bought a $ 100,000 certificate of deposit on November 8, 1991, and Mr. Pert bought CD 2775 at the same branch of Florida Bank of Commerce from the same person on the same day. Thus, it was possible that Mrs. Pert gave Mr. Pert the funds to buy CD 2775. The record shows that there were two possible sources of funds for CD 2775. The source of funds alleged by respondent is closer in time and place, a circumstance on which respondent relies. However, Mr. Pert's testimony on this point was plausible and unrebutted. Respondent bears the burden of proof and failed to carry it here. We conclude that respondent has not proven that Mr. Pert used funds from Mr. Riffe's estate to buy the $ 43,072 certificate of deposit on November 8, 1991. c. Cash To Buy the 610 Sandy Hook Road PropertyMrs. Pert gave Mr. Pert $ 53,018 which he used to buy the214 610 Sandy Hook Road property. Respondent contends that 610 Sandy Hook Road was solely Mr. Pert's property. We disagree. Lot 30, College Hill, belonged to Mr. Riffe when he died. Mrs. Pert received title to it after the probate of Mr. Riffe's estate. Mrs. Pert sold Lot 30, College Hill and received $ 56,942. The following day, on April 20, 1993, Mrs. Pert used the proceeds from the sale of Lot 30, College Hill, to buy a $ 53,018 cashier's check payable to Secure Title. On April 20, 1993, Mr. Pert used the $ 53,018 as part of the $ 128,000 that he paid to buy the house at 610 Sandy Hook Road. He initially mistakenly took title in his name, but corrected it within 30 days to be jointly owned by Mr. and Mrs. Pert. Thus, the $ 53,018 was used to buy Mrs. Pert's half interest in the property. d. The 1992 Ford ExplorerMrs. Pert paid $ 5,000 from the Peoples State Bank account as a down payment to buy a Volkswagen. She made the monthly payments from the C&S ultima account. Mr. Pert bought a 1992 Ford Explorer for $ 22,112. He received a $ 12,777 credit because he traded in Mrs. Pert's Volkswagen. He also used $ 9,335 in cash from the joint account at Citizens Bank of Clearwater, 215 the funds of which came from Mr. Riffe's estate. The 1992 Ford Explorer was titled in the name of Perticular Lawn, Inc., Mr. Pert's business. e. The 1987 GMC TruckThe 1987 GMC truck was transferred from Mr. Riffe's estate to Perticular Lawn. 6 In the inventory, Mrs. Pert said the estimated fair market value of the 1987 GMC Truck was $ 4,000. f. ConclusionWe conclude that respondent has traced $ 126,112 of assets ($ 100,000 cash, $ 22,112 for the 1992 Ford Explorer, and $ 4,000 for the 1987 GMC truck) from Mr. Riffe's estate to Mr. Pert. 4. Statutory Badges of Fraud Under Fla. Stat. Ann. Section 726.105(2) (West 1988)To establish that a transfer is fraudulent under Fla. Stat. Ann. section 726.105(1)(a) (West 1988), respondent must prove that the transferor intended to defraud or delay creditors. Respondent prevails if respondent shows that several of the following non-exclusive216 badges of fraud listed in Fla. Stat. Ann. section 726.105(2) (West 1988) are present in this case. Georgetown Manor, Inc. v. Ethan Allen, Inc., 991 F.2d 1533">991 F.2d 1533, 1539 (11th Cir. 1993); United States v. Romano, 757 F. Supp. 1331">757 F. Supp. 1331, 1335 (M.D. Fla. 1989), affd. without published opinion 918 F.2d 182">918 F.2d 182 (11th Cir. 1990); Munim v. Azar, 648 So. 2d 145">648 So. 2d 145, 152 (Fla. Dist. Ct. App. 1994). Those badges are: (a) The transfer was to an insider; (b) the debtor kept possession or control of the property transferred after the transfer; (c) the transfer was disclosed or concealed; (d) the debtor had been threatened with a suit before the transfer; (e) the transfer was of substantially all of the debtor's assets; (f) the debtor absconded; (g) the debtor removed or concealed assets; (h) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred; (I) the debtor was or became insolvent shortly after the transfer; (j) the transfer occurred shortly before or after a substantial debt was incurred; and (k) the debtor transferred the essential217 assets of the business to a lienor who transferred the assets to an insider of the debtor. a. Whether There Was a Transfer to an InsiderA spouse of a debtor is an insider. Fla. Stat. Ann. sec. 726.102(7)(a)(1), (11) (West 1988). Mr. Pert is an insider for purposes of Fla. Stat. Ann. sec. 726.105 (West 1988). b. Debtor Kept Possession or Control of PropertyMrs. Pert kept possession of the property that became jointly owned and the cash that was deposited in her joint accounts with Mr. Pert. c. Whether the Transferor Concealed the TransfersThere were numerous transfers which made it difficult to trace the funds. The bank transactions were not concealed, but the extensive use of cash hampered efforts to reconstruct the flow of Mr. Riffe's funds. Petitioners contend that they moved their money from place to place with no fraudulent intent. Petitioners contend that, if they had wanted to conceal the transfers, they would have had Mrs. Pert withdraw the cash and give it to Mr. Pert. We disagree that the existence of another way to conceal transfers means that a party did not try to conceal transfers. Petitioners point out that respondent did not analyze Mr. Pert's218 net worth to show that he benefitted from the cash withdrawals. The statute requires respondent to prove that transfers occurred, but it does not require the creditor to perform a net worth analysis of the transferee. Fla. Stat. Ann. secs. 726.102(12), 726.105(1)(a) and (2) (West 1988). d. Anticipated LawsuitA transfer in anticipation of a lawsuit is a badge of fraud. See sec. 4, par. 6(d), Comment to Uniform Fraudulent Conveyance Act, p. 655 (West 1985). Respondent's revenue agent interviewed Mrs. Pert soon after Mr. Riffe died. Kaltenbach referred Mrs. Pert to a tax attorney. At a conference on June 5, 1991, the revenue agent gave Mrs. Pert's tax attorney a copy of a detailed report with his recommended adjustments to tax and additions to tax for 1986, 1987, 1988, and 1989. Mrs. Pert did not agree with the recommendations. We conclude that Mrs. Pert anticipated that the IRS would determine that she and Mr. Riffe owed taxes when she began transferring assets to Mr. Pert. e. Transfer of Substantially All AssetsMrs. Pert filed a bankruptcy petition in December 1993. Petitioners concede that she had no assets at that time. There is no persuasive evidence in the record 219 that she did anything with the assets other than give them to Mr. Pert. Mr. Pert said that Mrs. Pert spent the funds, but he also said that he did not know what she did with them. We conclude that both Mr. Riffe's estate and Mrs. Pert transferred substantially all of their assets. f. Whether the Debtor AbscondedThere is no evidence that Mr. Riffe's estate or Mrs. Pert absconded. This badge does not help respondent. g. Concealed AssetsThere is no record of what Mr. and Mrs. Pert did with the cash they withdrew from banks. This badge does not help respondent. h. ConsiderationMr. Pert paid no consideration for the assets he received from Mrs. Pert. i. InsolvencyMr. Riffe's estate was insolvent when it distributed all of its assets to Mrs. Pert. Mrs. Pert was insolvent in December 1993 when she filed her petition in bankruptcy. Elliott testified that Mrs. Pert's tax attorney told him in September 1993 that, if respondent was successful with the proposed assessments of tax and additions to tax, Mrs. Pert would never have to pay them because she would file for bankruptcy protection. We conclude that the transfers left Mr. Riffe's estate and Mrs. Pert insolvent. 220 j. Whether Mr. Riffe's Estate or Mrs. Pert Transferred Property Shortly Before or After Incurring Substantial DebtMrs. Pert incurred a substantial tax debt to respondent when she signed the joint returns at issue here, the last of which was due April 15, 1990. Elliott interviewed her on February 28, 1991. She began transferring assets on March 19, 1991, when she wrote a $ 5,000 check to herself from Peoples State Bank account. We conclude that she knew that she and Mr. Riffe's estate owed tax and that she transferred the property shortly thereafter. k. Transfer to a LienorThere is no evidence that Mrs. Pert transferred assets to a lienor who transferred them to an insider. This badge does not help respondent. 1. ConclusionWe conclude that respondent has shown that Mrs. Pert had actual intent to hinder, delay, or defraud respondent. 5. Value of the Property Transferred to Mr. PertWe conclude that Mrs. Pert transferred to Mr. Pert $ 100,000 in cash, a 1992 Ford Explorer and the 1987 GMC truck. The total value of the property that Mrs. Pert transferred to Mr. Pert is $ 126,112. D. Whether Mr. Pert is Liable as a Transferee of Mrs. Pert's AssetsRespondent221 contends that Mr. Pert is liable as a transferee of Mrs. Pert's assets for her income tax deficiencies for 1986, 1987, 1988, and 1989, totaling $ 67,672 plus interest. Petitioners contend that respondent failed to show that Mr. Pert is liable as a transferee of the assets of Mrs. Pert for the same reasons discussed above at par. C. In addition to the arguments in par. C, above, petitioners contend that respondent failed to show that collection efforts against Mrs. Pert would be fruitless. We disagree. Fla. Stat. Ann. section 726.105 (West 1988) does not require the creditor to prove that collection efforts would be fruitless. In any event, we conclude that collection efforts against Mrs. Pert would have been fruitless because she had no assets and filed for protection in bankruptcy. We conclude that Mr. Pert is liable as a transferee of Mrs. Pert's assets for her income tax deficiencies for 1986, 1987, 1988, and 1989, and that she transferred assets to Mr. Pert worth $ 126,112. Mrs. Pert's income tax liability for those years is $ 67,672 plus interest. E. Whether Respondent Properly Credited Mrs. Pert's PaymentsPetitioners contend that the amounts of unpaid tax stated in222 the notices of transferee liability are incorrect because respondent did not properly credit Mrs. Pert's payments of $ 50,000 that she made on June 27, 1991, and $ 20,000 that she made on December 11, 1991. We disagree. On July 2, 1991, respondent credited Mrs. Pert's $ 50,000 payment by applying $ 28,976 to 1986 and $ 21,024 to 1989 ($ 50,000 total). On December 20, 1991, respondent credited Mrs. Pert's $ 20,000 payment by applying $ 15,000 to 1986 and $ 5,000 to 1988. F. Mrs. Pert's Motion To Enter Decision Based on U.S. Bankruptcy Court OrderMrs. Pert filed a motion to enter decision in her favor based on the order of the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division, that transferee liability is not a tax, but is a general unsecured claim that is not excepted from discharge under 11 U.S.C. sections 507 or 523 (1994) of the Bankruptcy Code. In re Pert, No. 93-13179-8B7 (M.D. Fla. Sept. 27, 1996) (order granting debtor's motion for summary judgment). The U.S. Bankruptcy Court concluded that Mrs. Pert's previous discharge applied to her transferee liability. Respondent objected to Mrs. Pert's motion. Our*223 conclusion here does not conflict with the U.S. Bankruptcy Court's Order. We are not deciding whether Mrs. Pert was discharged of transferee liability under the bankruptcy laws; we are deciding whether Mrs. Pert is liable as a transferee and whether Mr. Pert is liable as a successor transferee under the Internal Revenue Code. Neither party has informed us that there is a stay in effect. Our opinion here does not interfere with the exercise of the jurisdiction of the bankruptcy court. We need not and should not act to implement the bankruptcy court's order. We have no jurisdiction to decide whether Mrs. Pert's liability as a taxpayer or transferee has been discharged in bankruptcy. See Neilson v. Commissioner, 94 T.C. 1">94 T.C. 1, 8-9 (1990). To reflect concessions and the foregoing, An appropriate Order will be issued and decisions will be entered under Rule 155. Footnotes1. Respondent determined these amounts without explaining apparent math discrepancy.↩1. In light of our holding, we need not decide respondent's contentions that Mrs. Pert is liable as a fiduciary of Mr. Riffe's estate for Mr. Riffe's unpaid income tax and additions to tax for 1986, 1987, 1988, and 1989, and that Mrs. Pert is liable for Mr. Riffe's unpaid income tax and additions to tax for 1986, 1987, 1988, and 1989, because she signed a statement filed with the probate court in which she said that she would pay respondent the taxes which may become due from Mr. Riffe's estate.↩2. Fla. Stat. Ann. sec. 726.105 (West 1988) provides: 726.105. Transfers fraudulent as to present and future creditors. (1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or (b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: 1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or 2. Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.(2) In determining actual intent under paragraph (1)(a), consideration may be given, among other factors, to whether: (a) The transfer or obligation was to an insider. (b) The debtor retained possession or control of the property transferred after the transfer. (c) The transfer or obligation was disclosed or concealed. (d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. (e) The transfer was of substantially all the debtor's assets. (f) The debtor absconded. (g) The debtor removed or concealed assets. (h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. (I) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. (j) The transfer occurred shortly before or shortly after a substantial debt was incurred. (k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.↩3. Fla. Stat. Ann. sec. 726.106 (West 1988) provides: 726.106. Transfers fraudulent as to present creditors (1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor become insolvent as a result of the transfer or obligation. (2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.↩4. Fla. Stat. Ann. sec. 733.604(1) (West 1988) provides: (1) Within 60 days after issuance of letters, a personal representative who is not a curator or a successor to another personal representative who has previously discharged the duty shall file an inventory of property of the estate, listing it with reasonable detail and including for each listed item its estimated fair market value at the date of the decedent's death. Unless otherwise ordered by the court for good cause shown, any such inventory or amended or supplementary inventory is subject to inspection only by the clerk of the court or his representative, the personal representative and his attorney, and other interested persons.↩5. Petitioners erroneously interpret the Florida statute to require that the claim had been "made" rather than "arose" before the transfer.↩6. Petitioners concede that the 1987 GMC truck was transferred from Mr. Riffe's estate to Mrs. Pert or Perticular Lawn, Inc.↩	01-04-2023	11-13-2018
https://www.courtlistener.com/api/rest/v3/opinions/4619691/	Louis Schwartz v. Commissioner.Schwartz v. CommissionerDocket No. 81217. 1United States Tax CourtT.C. Memo 1962-227; 1962 Tax Ct. Memo LEXIS 80; 21 T.C.M. (CCH) 1192; T.C.M. (RIA) 62227; September 26, 196280 Petitioner, a textile jobber during the years 1946 and 1947, in addition to the sales made by him through his regular business, which were fully reported in income, transacted 27 sales through various fictitious named companies which were not reported in income for these years. Held: That petitioner understated his net income from sales for the taxable years 1946 and 1947. Held, further: That a part of the deficiency for each year was due to fraud with intent to evade tax. Donald Steinberg, Esq., and81 Joseph Steinberg, Esq., for the petitioner. Theodore E. Davis, Esq., and Joseph M. Touhill, Esq., for the respondent. FISHERMemorandum Findings of Fact and Opinion FISHER, Judge: This proceeding involves deficiencies in income tax and additions to tax determined against petitioner as follows: Additions to Tax,I.R.C. 1939Sec.Sec. 294YearDeficiency293(b)(d)(2)1946$128,259.62$64,129.81$7,701.791947544.99272.50Totals$128,804.61$64,402.31$7,701.79The issues for our consideration are: (a) Whether, and to what extent petitioner omitted taxable income from his returns for the years 1946 and 1947; (b) whether any part of the deficiency for each year is due to fraud with intent to evade tax; (c) whether the deficiencies are barred by the statute of limitations; and (d) whether petitioner is liable for additions to tax under section 294(d)(2) for substantial underestimation of the estimated tax for the year 1946. Findings of Fact Some of the facts have been stipulated and are incorporated herein by this reference. During the years 1946 and 1947, the only years in issue, Louis Schwartz, hereinafter82 referred to as the petitioner, had been engaged in the jobbing business of piece goods and clothing materials, under the name of General Fabrics Exchange, located in New York City. Petitioner would buy textiles and resell them as an independent jobber rather than as an agent or broker for the supplier. Petitioner had been engaged in such business since 1926. Benjamin Teperberg, an acquaintance of petitioner, was engaged as a salesman in the textile industry in the early 1940's until the firm which employed him was closed. Teperberg, thereafter, encouraged a friend of his, William Eisenberg (a/k/a William Ainsberg), a bookkeeper without any knowledge of the textile business, to join him in the operation of a billing service through which sales could be fully transacted. According to a prearranged plan, Eisenberg registered, at different times, various trade names, including those of Apex Fabrics, Spartan Fabrics, Velmar Company, Venita Company and Sarona Company, the only accounts in issue. Teperberg during this time had maintained his checking account at the Modern Industrial Bank in New York City and was acquainted with its assistant manager, Irving Cohen. Teperberg recommended83 Eisenberg to Cohen, and Eisenberg established with the bank checking accounts under the names of the various fictitious trade names. The signature cards signed by Eisenberg were of fictitious names and in each instance the business and address named was then, and at all times subsequent thereto, nonexistent, and fictitious. Eisenberg was the only person with authority to write checks on such accounts and was the only person who drew checks against the accounts. Petitioner did not maintain any accounts at the Modern Industrial Bank and he was not known to Cohen. The service was operated in the following manner. When a seller wished to use the services of Eisenberg and Teperberg, he would notify Eisenberg who would either write up an invoice for such sale on an invoice of one of the fictitious companies, or he or Teperberg would leave a blank invoice for the seller to fill out himself. The seller would then send such invoice to his customer. The check in payment for such merchandise, made out to the fictitious company listed on the invoice received by him, was either sent to the seller who then gave it to Eisenberg or Teperberg, or Teperberg would pick up the check from the buyer. 84 Eisenberg would then deposit such check in the proper account and, generally, would immediately write checks to cash equalling such amount and cash them. The cash thus obtained was brought by Eisenberg to the seller after deduction of one percent of the gross amount which amount was a commission divided equally between Eisenberg and Teperberg for their services. In order to avoid suspicion, Eisenberg would generally withdraw the amounts deposited in the accounts with several checks to cash in smaller amounts, generally ranging from $600 to $900. It was his policy not to write checks to cash in excess of $1,000. The period of time each of the five trade name accounts in issue were in use is as follows: AccountDate OpenedDate ClosedApex FabricsJan. 2, 1946Apr. 11, 1946Spartan FabricsJan. 22, 1946Mar. 7, 1946Velmar CompanyApr. 4, 1946May 17, 1946Velmar CompanyOct. 1, 1946June 26, 1947Venita CompanyMay 14, 1946July 22, 1946Venita CompanyOct. 25, 1946Sept. 22, 1947Sarona CompanyJune 25, 1946June 12, 1947No particular accounts were used for any particular seller using the service. Eisenberg and Teperberg used a room85 at the Hotel Pennsylvania as an office from which they operated their billing service. During the years in issue petitioner used the services of Eisenberg and Teperberg for 27 sales totaling $30,532.36. (See Schedule C, infra.) All of these sales were made to two of petitioner's main customers, Beattie & McGuire, Boston, Massachusetts, and Miles Silk Shop, Louisville, Kentucky. All of the sales made by petitioner to Beattie & McGuire and Miles Silk Shop during the years 1946 and 1947 were transacted through the service, and all goods so sold were purchased by petitioner from one of his principal sources of supply, Samson, Polay & Goodman, Philadelphia, Pennsylvania, in the regular course of business. In addition to petitioner's main place of business, he rented storage facilities for his merchandise at the World Storage Company. Persons, in addition to petitioner, used the billing service to transact their sales during the period in issue. Among them was Abraham S. Hershenson, a textile jobber. Shortly after the opening of the various bank accounts with the Modern Industrial Bank, Eisenberg asked its assistant manager, Cohen, to recommend a stock broker. Cohen referred Eisenberg86 to Phillip Schiffman who handled all stock transactions for the bank. On October 25, 1945, a brokerage cash account with Edward A. Viner & Co. was opened in the name of William Ainsberg, Hotel Pennsylvania, New York City, an alias used by Eisenberg. All stocks purchased under the brokerage account were mailed by special delivery or physically delivered to Eisenberg, and all stocks sold through this account were physically delivered by him to the broker. The stocks were registered in "street names." The employee of Edward A. Viner & Co. handling the account was Murry Schiffman, the son of Phillip Schiffman of the Modern Industrial Bank. Eisenberg personally delivered all payments toward the account to the brokerage house. Such payments were as follows: SCHEDULE ADateAmountOctober 29, 1945$ 1,827.00October 29, 19451,146.00October 30, 19451,929.78October 30, 19451,202.97November 23, 194510.00January 2, 19461,842.06January 2, 19461,992.44January 3, 19463,496.19January 3, 19463,082.62January 4, 19462,180.41January 4, 19461,829.53January 22, 19462,815.75January 29, 19461,253.09January 29, 1946850.50February 5, 19463,634.00March 7, 1946937.26March 7, 19462,000.00March 7, 19462,000.00June 18, 19463,753.28July 5, 194684.05September 11, 194611,277.95September 25, 1946256.3387 All payments were made by check except for the payment of $84.05 on July 5, 1946, which was made by cash. The brokerage account was closed on May 8, 1947. Included in the numerous checks drawn by Eisenberg on the various bank accounts maintained by him were the following: SCHEDULE BDateAccountAmountJanuary 22, 1946Apex$2,815.75January 29, 1946Spartan850.50January 30, 1946Spartan1,253.09February 5, 1946Spartan3,634.00March 5, 1946Delta4,937.26The above checks include the only checks written on the five accounts in issue in excess of $1,000. Petitioner filed Federal income tax returns for the calendar years 1946 and 1947 based upon a cash receipts method of accounting with the collector of internal revenue for the third district of New York. Petitioner reported in Schedule C of his income tax return for 1946 total receipts from his business of jobber in piece goods and clothing materials the amount of $181,530.23, a net cost of goods sold of $152,089.54 (or 83.78 percent of gross receipts), and gross profit of $29,440.69. Petitioner reported in Schedule C of his income tax return for 1947 total receipts from his88 business in the amount of $172,874.37, a net cost of goods sold in the amount of $150,821.23 (or 87.24 percent of gross receipts), and gross profit of $22,053.14. Petitioner had no inventory at the beginning or end of the aforesaid years and no other costs to be subtracted when computing his gross profits. The only business records maintained by petitioner during the years in issue were checkbooks, cancelled checks and bank statements of the business bank account maintained by petitioner under the name of General Fabrics Exchange. Petitioner's accountant prepared the returns for both years from these records. Such returns were consistent with the records maintained. Petitioner's records did not reflect any sales made by petitioner through the billing service. No sales other than those reflected in his records were disclosed to his accountant and no sales other than those made through his regular business were reported in income for the years in issue. Petitioner was indicted on March 6, 1953, for filing a false and fraudulent income tax return for the year 1946 with the intent to evade and defeat income tax in violation of section 145(b), I.R.C. 1939. On November 23, 1953, he89 pleaded guilty to the charge in the United States District Court for the Southern District of New York. Hershenson, Eisenberg and Teperberg were also indicted in the District Court, Southern District of New York for conspiracy to evade Federal income taxes and for tax evasion for the year 1946, and were convicted on their pleas of guilty to evasion. During the years 1946 and 1947 the following amounts were deposited to the five bank accounts in issue: Name19461947Sarona$233,760.79Venita228,818.38Velmar219,719.53$15,563.66Apex95,638.49Spartan109,403.30Respondent's agents obtained copies of the deposit slips for all the bank accounts maintained by Eisenberg and Teperberg. By means of the clearing house numbers of the checks listed on such deposit slips, and subsequent tracing, they were able to identify the drawers of some of the checks deposited to these accounts. The agents then obtained from these companies copies of the invoices received by them under the various fictitious trade names and were able thereby to associate specific invoices with a specific deposit to the trade name accounts. These companies were also questioned concerning90 the identity of the person from whom they had received the invoices. The following companies were discovered by respondent as having purchased merchandise through the billing service: Beattie & McGuire, Miles Silk Shop, Maternity Miracles, Jacob Shapiro, J. Brock & Co., Fred A. Block, Inc., and Cohen, Friedlander Martin Co.Respondent alleges that all the following sales made to Beattie & McGuire and Miles Silk Shop through the billing service during the years in issue were made by petitioner. SCHEDULE C1946Date ofBillDrawer of CheckSaronaVenita1-20-46Beattie & McGuire2-11-46Beattie & McGuire3-20-46Beattie & McGuire4-30-46Beattie & McGuire5-12-46Beattie & McGuire$1,512.166- 5-46Beattie & McGuire1,879.996-24-46Beattie & McGuire$ 1,203.967- 9-46Beattie & McGuire889.347-18-46Beattie & McGuire412.807-18-46Beattie & McGuire24.747-25-46Beattie & McGuire1,548.628- 8-46Beattie & McGuire903.609- 6-46Beattie & McGuire1,755.579-17-46Beattie & McGuire859.1010- 2-46Beattie & McGuire2,615.1211- 4-46Beattie & McGuire11- 8-46Beattie & McGuire1,793.5911-12-46Beattie & McGuire11-29-46Beattie & McGuire12- 2-46Beattie & McGuire1,061.72Miles Silk ShopMiles Silk ShopMiles Silk Shop5-16-46Miles Silk Shop909.118-16-46Miles Silk Shop1,101.8910- 8-46Miles Silk Shop714.48Total$14,884.53$4,301.2619472- 6-47Miles Silk Shop91 SCHEDULE C1946Date ofBank AccountsBillVelmarApexSpartan1-20-46$1,244.772-11-46$ 504.583-20-461,608.204-30-46$2,935.915-12-466- 5-466-24-467- 9-467-18-467-18-467-25-468- 8-469- 6-469-17-4610- 2-4611- 4-461,546.4511- 8-4611-12-46562.2611-29-46495.8112- 2-461,019.82129.23317.635-16-468-16-4610- 8-46Total$5,540.43$3,579.46$1,244.7719472- 6-47$ 981.91Respondent also alleges that the sales made through the service traced to Maternity Miracles and Jacob Shapiro were made by Teperberg in his own behalf, and that the sales traced to the other three companies were made by Hershenson. In addition, respondent determined that a percentage of the other deposits to these five bank accounts in 1946 and 1947 (which he refers to as the "unidentified deposits") totaling $183,552.13 and $1,330.71, respectively, represent sales made by petitioner through the billing service which were also not reported in income. These figures were computed in the following manner: SCHEDULE DCOMPUTATION OF UNREPORTED SALES19461946SaronaVenitaVelmarApexCompanyCompanyCompanyFabrics1. Total deposits$233,760.79$228,818.38$219,719.53$95,638.492. Unidentified de-posits181,965.58175,234.97173,404.6892,012.223. Deposits identifiedto Schwartz14,909.29 4,301.265,540.433,626.27 4. Deposits identifiedto Hershenson4,699.6229,166.348,433.285. Deposits identifiedto Teperberg32,211.0620,115.8132,341.146. Total identifieddeposits51,795.2153,583.4146,314.853,626.277. Petitioner's per-centage of iden-tified deposits28.8%8.0%12.7%100%8. Petitioner's allo-cable share ofunidentified de-posits (lines2 X 7)52,381.3314,018.8022,022.3992,012.229. Unreported salesby petitioner(lines 3 + 8)67,290.6218,320.0627,562.8295,638.4992 SCHEDULE DCOMPUTATION OF UNREPORTED SALES194619461947SpartanGrandVelmarFabricsTotalCompany1. Total deposits$109,403.30$887,340.49$15,563.662. Unidentified de-posits77,934.78700,552.2310,478.003. Deposits identifiedto Schwartz1,244.7729,622.02981.914. Deposits identifiedto Hershenson30,223.7572,522.995. Deposits identifiedto Teperberg84,668.012,820.486. Total identifieddeposits31,468.52186,788.265,085.66 7. Petitioner's per-centage of iden-tified deposits4.0%12.7%8. Petitioner's allo-cable share ofunidentified de-posits (lines2 X 7)3,117.39183,552.131,330.719. Unreported salesby petitioner(lines 3 + 8)4,362.16213,174.152,312.62Respondent allowed the amount of $45,262.65 as cost of goods sold for the year 1946. No amount was allowed for cost of goods sold for the year 1947. Respondent's determination of unreported net income93 may be summarized as follows: 19461947Deposits identified topetitioner$ 29,622.02$ 981.91Unidentified deposits at-tributable to petitioner183,552.131,330.71Total deposits$213,174.15$2,312.62Cost of goods sold45,262.65Net income$167,911.50$2,312.62Percentage of profits79%100%Petitioner transacted no sales through the billing service during the years in issue other than the 27 sales to Beattie & McGuire and Miles Silk Shop. The net profit realized by petitioner on these sales was $4,497.58 and $115.47 for the years 1946 and 1947, respectively. Such net income was not reported by petitioner during these years due to a fraudulent intent to evade and defeat tax. Opinion Understatements of Income Respondent determined that petitioner understated his net income from sales in the amounts of $167,911.50 and $2,312.62 for the years 1946 and 1947, respectively, and that such understatements were due to a fraudulent intent to evade tax. The basis for respondent's deficiency determinations is that petitioner transacted sales in the amounts of $213,174.15 and $2,312.62 through the Eisenberg-Teperberg billing service during94 the years 1946 and 1947, respectively; that no part of such gross income was reported on petitioner's returns for these years; and that, after an allowance by respondent of $45,262.65 for cost of goods sold in 1946 (no amount being allowed for 1947), unreported net income from such sales amounted to $167,911.50 and $2,312.62 for 1946 and 1947, respectively. In determining a deficiency in income tax, the respondent's determination is presumed to be correct. The burden of proof is thus placed upon the petitioner to show that such determination is erroneous or invalid. Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935). The parties agree that petitioner's returns for the years in issue properly reflect all sales transacted by petitioner under his own business name, General Fabrics Exchange, and the costs of such sales. They also agree, however, that any sales made by petitioner through the various fictitious trade names or the billing service were not reported on his business records or his income tax returns for 1946 and 1947. The only issues before us, then, are to determine the total amount of sales transacted by petitioner through the billing service during each of these years, 95 the net income realized on such sales, and whether some part of any deficiency for each of said years was due to fraud with intent to evade taxes. Petitioner concedes that the 27 identified deposits representing sales to Beattie & McGuire and Miles Silk Shop totaling $29,550.45 and $981.91 for 1946 and 1947, respectively, represent sales made by him through the service which were not reported in income. The only issue concerning the total amount of sales made by petitioner through the service, then, concerns the allocation by respondent of a portion of the unidentified deposits in each of the five accounts in question to petitioner. Petitioner has not maintained any records of the sales which he made through the billing service and thus has made the respondent's task of auditing his returns immeasurably more difficult than it should be. This conduct is not to be condoned. We are not, however, empowered to approve a deficiency determination merely because records have not been maintained. The absence of such records merely justifies the respondent in using some reasonable method of reconstructing petitioner's income, with the burden upon petitioner to show that respondent's method96 is erroneous, unreasonable or arbitrary. Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935), Maurice Cross, 24 B.T.A. 1079">24 B.T.A. 1079, 1081 (1931). In determining whether respondent's allocation method is reasonable and not arbitrary, we must consider any evidence in the record, either direct or circumstantial, showing that petitioner transacted any sales through the billing service to any companies other than Beattie & McGuire and Miles Silk Shop, or, in other words, whether petitioner transacted any sales in this manner other than those specifically identified to him by respondent. In these respects, we consider the testimony of Eisenberg and Teperberg, both of whom testified as witnesses for respondent. Eisenberg testified that he had known Teperberg personally prior to 1945; that Teperberg and his family had been engaged in the textile business; and that during 1945, Teperberg discussed with him the possibility of "coming in with him to learn the textile business." He further testified that he first was introduced to petitioner by Teperberg about this time and that at a meeting of the three men they discussed the problem of disposing of merchandise. In connection97 with such meeting, he testified, he opened the several bank accounts in issue under names suggested by petitioner and that he signed the signature cards for each account with various fictitious names. Eisenberg testified that he was the only person authorized to withdraw funds from the accounts, and that his sole duties were to write up invoices for sales transacted through the service, to deposit checks from customers sold through the service, and to withdraw an equivalent amount of cash from the account at the same time. First, Eisenberg testified that petitioner was the only person interested in the accounts and the only person to whom he had given the proceeds of the checks which he deposited to them. When questioned further, he testified that Hershenson had also used the service and that he had given the proceeds of Hershenson's customers' checks to Hershenson, but that Hershenson and petitioner were the only persons to whom he had ever given the cash proceeds of the checks deposited. He also testified that he had received checks to deposit to the various bank accounts from Hershenson and Teperberg only; that Teperberg was acting as a salesman for petitioner for all sales98 made in such manner by petitioner; and that Teperberg picked up the checks from petitioner's customers which he gave to Eisenberg to deposit. For his services, he testified that he received a one percent commission which he divided equally with Teperberg. Eisenberg, who admittedly handled all the checks deposited to the various trade accounts, testified that he was not able to recall the names of any of the customers to whom sales were made through the service. He testified that he was not even able to recall whether he was asked to name such customers at a 1950 meeting with internal revenue agents. When asked whether he, at that meeting, disclosed any names, he, however, was able to recall telling them that he couldn't possibly remember the names unless they were shown to him. While he admitted having received checks from the same customers many times, and that he was quite familiar with them in 1950, (only four years later) he testified that "there were so many names that I couldn't possibly remember any of the names." Finally, after being led by respondent, Eisenberg testified that he recalled depositing checks from Beattie & McGuire and Miles Silk Shop. Respondent also99 relies upon the testimony of Eisenberg to associate petitioner with some o6 the unidentified deposits in another manner. The record shows that some of the unidentified deposits were withdrawn with checks drawn to the exact amounts as some of the deposits made to a brokerage account with Viner & Co. maintained under the name of William Ainsberg, an alias often used by Eisenberg. Eisenberg testified that the brokerage account, while in his name, was maintained solely for petitioner's benefit, and that he received all amounts to be deposited to such account from petitioner or from Teperberg who told him it originated with petitioner. When questioned further, however, as to whether he could recall ever receiving cash directly from petitioner for the brokerage account, he testified: "As far as I can recall, I could say the possibility is that I did receive, but I wouldn't be able to remember specifically." Nor could he recall whether he ever drew any checks on the various bank accounts to pay toward the brokerage account or whether petitioner had ever instructed him to do so. Yet, only minutes before, he testified that all checks on the various accounts were drawn to cash and cashed at100 the same time and the cash delivered to either Hershenson or petitioner. When questioned as to whom he had delivered the stocks received by him from the broker, he testified first that they were all delivered to petitioner. Then he testified that he delivered them to Teperberg, who, in turn, gave them to petitioner, sometimes in his presence. Still later, he testified that he delivered all stocks to either Teperberg or petitioner, depending upon who was available. For all of his work in connection with such brokerage account, Eisenberg testified that he received no compensation. Eisenberg also testified that he knew nothing about the stock market and that he was "so far removed from any knowledge of brokerage that it was very funny"; that it was Teperberg who handled all transactions through the account and that Teperberg knew a customer's man at the brokerage, Murry Schiffman. Irving Cohen, who was an assistant manager of the Modern Industrial Bank in 1946, however, testified that it was Eisenberg who asked him to recommend a broker and that he recommended Phillip Schiffman, who handled all stock transactions for the bank, and who was also the father of Murry Schiffman. This101 testimony is contrary to that of Eisenberg who testified that he had nothing to do with the operation of the brokerage account. Also, while Eisenberg testified that he could not recall the names of any customers at the trial or even in 1950, only four years later, he was able at the trial to identify the names of two stocks purchased through the brokerage account. We find it also incredible that Eisenberg would have consented to use his name for a brokerage account and act as a deliveryman without receiving any compensation. After reviewing the entire testimony of Eisenberg concerning petitioner's relationship with the billing service and the brokerage account, which is replete with inconsistencies and evasions, we find him unworthy of belief. Nevertheless, it is pertinent to note that Eisenberg never directly testified that petitioner even suggested the operation of the billing service; that petitioner used the service for a great many sales or more than any other person; nor, indeed, did he ever testify that petitioner sold to any customers besides Beattie & McGuire and Miles Silk Shop. His most enlightening direct testimony, therefore, is that petitioner and Hershenson were102 the only users of the billing service. Concerning this point, the parties agree, and the record supports them, that contrary to Eisenberg's testimony, Teperberg also used the billing service to transact sales for his own account. Indeed, in respondent's allegations concerning identified deposits, the highest percentage of such deposits were identified to Teperberg. (See Schedule D, supra.) Respondent, in addition, admits that there were still other users of the service besides petitioner, Teperberg and Hershenson. Concerning the brokerage account, Eisenberg could not specifically recall ever having received cash directly from petitioner, nor having received instructions from petitioner to draw a check directly to the broker on his behalf. Eisenberg's testimony that Teperberg told him that the cash which the latter gave to him originated with petitioner is pure hearsay. Also, his testimony that while he never gave any stocks to petitioner, but only to Teperberg, he sometimes witnessed the latter giving the stock to petitioner is subject to much doubt. It would appear unreasonable for Eisenberg to have given stock to Teperberg for petitioner if he was present to witness the transfer103 from Teperberg to petitioner. Apart from Eisenberg's testimony, it is pertinent to note that while respondent maintains and the record shows that amounts withdrawn from the Delta Fabrics account were deposited to the brokerage account, respondent does not even contend, nor is there any evidence in the record, that such account was ever used for petitioner's sales. Teperberg also testified not that petitioner had suggested or initiated the billing service, nor that it was maintained primarily for his use, but only that petitioner suggested the various names to be used. He also testified that he was engaged as a salesman for petitioner in 1945 and 1946; that his sales on behalf of petitioner were "so excessive that it didn't require any other job," and that all such sales were transacted through the various bank accounts in issue with the help of Eisenberg. For all of this work, he testified that he received a commission of one percent of the sales, which he divided equally with Eisenberg. Teperberg, however, testified that he wasn't able to recall the amount of the commissions earned by him or the total amount of sales allegedly transacted by him for petitioner during 1945 or104 1946. This witness, who presumably would have been in close contact with petitioner's customers had he sold to them, testified that the only customer he could recall selling to on behalf of petitioner through the service was Maternity Miracles. We find it extremely difficult to believe that, had Teperberg been a full-time salesman for petitioner transacting an "excessive" amount of sales, he would be unable to recall the name of more than one customer sold to over a two-year period. Even when Teperberg was questioned by an internal revenue agent in 1953 concerning the customers to whom he had allegedly made sales on behalf of petitioner, he named only Beattie & McGuire, Miles Silk Shop and Maternity Miracles. At the same time, however, he was able to recall the names of deliverymen and suppliers of petitioner during 1946. Teperberg would certainly have had less contact with these men than with the customers with whom he had allegedly dealt. That Teperberg ever made sales to Beattie & McGuire on behalf of petitioner is highly doubtful in the light of the testimony of an employee of that company, a disinterested witness, that most of its purchases were made from petitioner personally. 105 We also think it incredible that, had Teperberg been a salesman for petitioner as he testified, he would have received only one-half percent commission for his services, the same amount received by Eisenberg whose sole function was to write up invoices and deposit and withdraw funds from several accounts. Petitioner testified that he never employed Teperberg to sell merchandise for him. An employee of Maternity Miracles testified that all purchases made by his firm through the various fictitious trade names were made from Teperberg as "the seller." Indeed, respondent himself alleges that it was Teperberg for his own account rather than petitioner who sold to Maternity Miracles through the billing service. While Teperberg testified that he was a salesman for petitioner during 1945, and that all of his sales went through the billing service, the first deposit to the various bank accounts in issue was made on January 2, 1946. Probably the greatest factor discrediting Teperberg's testimony that he was a salesman for petitioner is the testimony of Teperberg himself who, when questioned concerning the reason petitioner employed his and Eisenberg's service, testified: Because these106 goods were without bills. He [petitioner] could not account for the sale of these goods; otherwise in what way would he use me and Mr. Ainsberg [Eisenberg] if he had bills for these goods? He bought goods on certain bills, and where he could account for it, he put it on his own billhead. But where he could not account for it, we were used. The above is not a statement from one who was a full-time salesman or employee of petitioner, but of one who, as petitioner testified, was used only when petitioner wanted a sale transacted through the billing service. At another point, Teperberg testified that petitioner paid cash for renting space in a warehouse. But, when later asked whether he knew if petitioner paid by check, he testified that he did not know. After a careful analysis of this witness' testimony, which is abundant with inconsistencies, evasions and contradictions, we conclude that he is unworthy of belief. Aside from this factor it is also pertinent to note that his only direct testimony concerning whether petitioner ever used the service for sales, other than those to Beattie & McGuire and Miles Silk Shop, was his testimony that he sold to Maternity Miracles on behalf107 of petitioner. Concerning this point he is far from a disinterested witness, for respondent himself alleges that Teperberg made such sales on his own behalf and we believe the record supports such allegation. It is also pertinent to note that while Eisenberg testified that it was Teperberg who was petitioner's agent in transacting stock purchases, Teperberg did not testify concerning his association with the brokerage account. Petitioner testified that his only association with Eisenberg and Teperberg concerned the sales made to Beattie & McGuire and Miles Silk Shop for which he paid a one percent commission. His only reason for using their services for these sales, he testified, was that he was forced to receive the merchandise, which was the subject of these sales from Samson, Polay & Goodman on a cash basis without proper invoices. He also testified that he had never owned any stock during his lifetime. Petitioner's testimony concerning this point is partially corrobated by Charles Goodman, of Samson, Polay & Goodman, who reluctantly testified that his firm sold merchandise to petitioner on a cash basis during 1946. Even Teperberg testified that petitioner would use the service108 only when he had received goods without invoices. Another factor in support of petitioner's testimony is that when he was first questioned by internal revenue agents concerning the various trade name accounts, he did not deny using them, but freely admitted such use and at that time he stated that the only customers to whom he sold in such manner were Beattie & McGuire and Miles Silk Shop. An agent for respondent also testified that the only invoices of the various trade companies located which were in petitioner's handwriting were those made out to these two companies. Based upon the record as a whole, with the above in particular, we conclude that the only sales made by petitioner through the billing service during the years in issue were the 27 sales to Beattie & McGuire and Miles Silk Shop. We, therefore, do not believe that there is any reasonable basis, from the record before us, from which to attribute any percentages of the unidentified deposits to petitioner. Assuming arguendo that the record disclosed some evidence of further sales by petitioner through the service, we still believe that the method employed by respondent to recreate them is arbitrary and unreasonable. 109 First, while such allocation is based upon the premise that only petitioner, Teperberg and Hershenson used the billing service during the two-year period in issue, respondent himself admits that there were other unidentified users of the service. Second, inasmuch as the record shows that there were no particular accounts used by a particular seller, or any pattern of use, there is no more of a reasonable basis to presume that petitioner made further sales through the five accounts in issue than there is to presume that he made other sales through the accounts not in issue. Third, the percentages obtained by respondent depend solely upon the extent of respondent's investigation and allegations of identified deposits. Had respondent concentrated upon finding only deposits belonging to petitioner, or failed to allege that some of the deposits were identified to other persons, the percentages attributable to petitioner under his method would have been substantially different. A glaring example of the unreasonableness of the method manifests itself especially in connection with the Apex Fabrics account. While there was no pattern in the use of the various accounts nor any evidence110 or, indeed, any allegation that petitioner was the only person using such account, under this method, the entire amount of deposits to such account of $95,638 is attributed to petitioner because deposits to this account totaling $3,579.46, were identified to petitioner, and respondent contends that he was unable to identify any other deposits to this account. We conclude, therefore, that under the particular facts in this case, respondent's method of recreating sales allegedly made by petitioner lacks a reasonable basis and the minimal rational guarantees of reliability which are required of sanctioned methods. Respondent has attempted to discover petitioner's net worth for the years in issue and has found nothing incompatible with his income tax returns for these years. While we recognize the difficulty faced by respondent in this case in making an effective audit, we do not believe that the alternative lies in the effort to apply an unrealistic and arbitrary formula. Having found respondent's determination concerning the unidentified deposits to be erroneous, we conclude that the total amount of sales transacted by petitioner through the billing service was $29,550.45 and $981.91111 for the years 1946 and 1947, respectively. Our next question concerns the total net income realized by petitioner on such sales. Respondent, in effect, determined that the net profit realized on such sales was 79 percent in 1946 and 100 percent for 1947. No explanation was made by respondent concerning the method used to arrive at such percentages in his deficiency determination nor on brief. Petitioner testified that the reason he did not report the 27 sales made by him through the billing service was that, unlike the reported sales made by him under his own business, these sales were made by him as a commission broker for Samson, Polay & Goodman, for a five percent commission; and that after paying a one percent commission to Eisenberg and Teperberg, and other "expenses," "there was nothing left, practically." Charles Goodman of Samson, Polay & Goodman, testified that petitioner had never sold merchandise for his firm as an agent or commission broker, and that his firm had only sold merchandise to petitioner for resale in the ordinary course of business. Petitioner's testimony concerning this point is a conglomeration of confusion, inconsistency and contradiction. While he112 admitted that he was primarily a jobber who purchased merchandise for resale, he testified that he needed the merchandise sold by Samson, Polay & Goodman for his customers, but he refused to buy such merchandise because they demanded that all purchases be made on a cash basis. Because of such refusal, petitioner testified that he was forced to receive such merchandise to sell on a five percent commission basis. Petitioner, however, then testified that they "trusted" him, that he bought other merchandise for resale from them, sending them a check upon receipt of the goods, and that he even paid cash for the goods which he allegedly received on a commission basis, less a five percent commission. Why Samson, Polay & Goodman would demand cash for some sales and accept checks for others, and why petitioner would be willing to pay cash for the merchandise he allegedly received as a commission broker when the refusal to pay cash was allegedly the reason he refused to purchase the goods outright, is unexplained. When questioned why he was willing to make almost $30,000 of sales while recognizing little or no profit, petitioner first testified that such sales were made merely to "accommodate" 113 his two main customers, Beattie & McGuire and Miles Silk Shop. Petitioner also testified that these sales were the only sales made to these two customers during the years in issue. While we recognize that petitioner may have been willing to forego normal profits on an occasional sale to "accommodate" good customers, we cannot accept the view that petitioner would have been willing to voluntarily forego normal profits on all sales made to his two main customers during a two-year period. Petitioner then testified that he "didn't care about the profit" on these sales, and that, instead of returning the merchandise to the supplier, he figured he "might as well sell it in order to keep in good with the account" inasmuch as they were "a good source of supply." Petitioner here attempts to give the impression that he was stranded with unsalable merchandise, and that he unloaded it, sacrificing normal profits rather than return the merchandise and lose the good will of his supplier. Petitioner, however, testified that he would not even order any merchandise until after he had obtained a buyer. Petitioner, therefore, would not have sustained any risk and would have known that he had a buyer114 and what his exact profit would be on each sale regardless of how he received the merchandise. Throughout his testimony, petitioner referred to the merchandise received from Samson, Polay & Goodman, which is the subject of the 27 sales in issue as the "memorandum" purchases, or merchandise received "on memorandum." In an effort to substantiate the fact that he received goods from Samson, Polay & Goodman as an agent or commission broker, he relies upon the fact that some of the invoices received from that company, which were received in evidence, had the words "On Memo" written across the bottom of them. In business usage, the term "on memo" on an invoice merely indicates that the buyer has the privilege of returning the billed merchandise if it is not sold. Webster's New International Dictionary, 2d Ed. (1954). The use of such term on the invoices, indeed, even indicates that petitioner did not receive such goods as an agent or broker, for in such event, there would be no need to grant petitioner this privilege. Petitioner has not explained the reason he used the billing service to transact the 27 sales in issue. We may only conclude, from all the circumstances, that he intended115 to conceal such sales. Would petitioner seek to conceal sales upon which he realized "practically" no profit, and even pay a one percent commission for the privilege? We think not. We conclude, after reviewing petitioner's entire testimony concerning this point, that he is unworthy of belief and believe the testimony of Goodman insofar as he testified that petitioner never sold merchandise for his firm as a commission broker, but that he purchased goods from his firm as an independent jobber for resale. The percentages of profit realized by petitioner on the sales he made as an independent jobber through his regular business was 16.22 percent in 1946 and 12.76 in 1947. Respondent does not contend that such percentages are unreasonable or erroneous. We believe that it is reasonable to infer that petitioner, transacting the 27 sales in issue in the same markets as these other sales, realized the same percentages of profits as the reported sales. In any event, there is no acceptable evidence establishing a lower percentage. Accepting the percentages of net profits on the reported sales as evidence of the percentage of profits realized by petitioner on the unreported sales, and after116 allowing for the one percent commission paid by petitioner to Eisenberg and Teperberg, we conclude that petitioner realized net profits on the unreported sales in the amounts of $4,497.58 and $115.47 for 1946 and 1947, respectively, which he failed to report as net income. Fraud We now consider the question whether or not a part of the deficiencies for the years 1946 and 1947 was due to fraud with intent to evade tax within the meaning of section 293(b) of the Code of 1939. The burden of proof with respect to fraud is, of course, upon the respondent and he must establish fraud on the part of the petitioner by clear and convincing evidence. Arlette Coat Co., Inc., 14 T.C. 751">14 T.C. 751 (1950). It should be noted at the outset that our conclusion in this respect must be based upon consideration of the entire record properly before us, and that we are not limited to a consideration of respondent's affirmative evidence. Frank Imburgia, 22 T.C. 1002">22 T.C. 1002, 1014 (1954). We also recognize that in this case, as in many fraud cases, the proof of fraud, if it is to be established, must depend in some aspects upon circumstantial evidence. Fraudulent intent can seldom be established117 by a single act or by direct proof of the taxpayer's intention. It is usually found by surveying his whole course of conduct and is to be adduced as any other fact from all of the evidence of record and inferences properly to be drawn therefrom. M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518 (1930). After a painstaking analysis of all the evidence in this case and bearing in mind the above-stated principles, we are convinced that petitioner received taxable net income during the years 1946 and 1947 in the amounts of $4,497.58 and $115.47, in excess of that reported on his returns for those years, and that a part of such deficiencies or understatements was due to fraud with intent to evade tax. It is well established that respondent, in sustaining his burden of proof, need not prove the precise amount of the deficiency or underpayment attributable to such fraud, but only that a part of the deficiency or underpayment is attributable thereto. United States v. Chapman, 168 F. 2d 997 (C.A. 7, 1948), certiorari denied 335 U.S. 853">335 U.S. 853. The record is replete with facts and circumstantial evidence which sustains the view that respondent has met his burden of establishing118 that petitioner knowingly and intentionally failed to report income during the years 1946 and 1947 with the aim to evade taxes. Without suggesting that the following discussion is at all complete, we merely advert to the following indicia of fraud. The record does not expressly explain why petitioner went through such great lengths to conceal the sales in issue through the fictitious trade companies maintained by Eisenberg and Teperberg. We think it clear from the circumstantial evidence, however, that the aim was to conceal them from both the OPA and the taxing authorities. This inference is strengthened by the fact that petitioner maintained no records of the sales which he transacted through the billing service. Petitioner's accountant testified that in his preparation of petitioner's returns for these two years, no sales other than those reflected on petitioner's business records were disclosed to him by petitioner. While petitioner has not even so contended, we cannot believe that such failure was a mere oversight or due to negligence. Out of a total net income earned by petitioner in 1946 of $18,465.18, a total of $4,497.58 was not reported. This understatement of net income119 was both substantial in amount and substantial in proportion to reported net income, such amounts being about 24 percent of total net income. This is also an indication that petitioner must have known, at the time he signed his returns, that his net income was greater than that reported, and that his failure to report such income was due to an intentional act to evade tax. While we recognize that the unreported net income in 1947 was trifling in amount and in proportion to reported income, this does not detract from the fact that the sale made in 1947 which was not reported was still part of petitioner's over-all method of concealing certain sales from the taxing authority. Persuasive indicia of fraud are also found in the fact that petitioner pleaded guilty in criminal proceedings involving the year 1946. No testimony or argument on brief was advanced to explain the circumstances surrounding such plea or to mitigate the inference normally to be drawn therefrom. Bennett E. Meyers, 21 T.C. 331">21 T.C. 331, 348 (1953); Harry Gleis, 24 T.C. 941">24 T.C. 941, 953 (1955), affd. per curiam 245 F. 2d 237 (C.A. 6, 1957); Leon Papineau, 28 T.C. 54">28 T.C. 54, 58 (1957).120 Petitioner, who was an experienced businessman, was "not a person who could fail to understand what the law requires of him under the circumstances." Louis Halle, 7 T.C. 245">7 T.C. 245, 250 (1946), affd. 175 F. 2d 500 (C.A. 2, 1949). Nor is there any element of bookkeeping errors involved here, or inefficiency or negligence in maintaining books and records. Gutterman Strauss Co., 2 B.T.A. 433">2 B.T.A. 433 (1925), W. F. Shawver, 20 B.T.A. 723">20 B.T.A. 723 (1930). Petitioner must have been fully aware that the total net income realized by him from the 27 sales made by him through the billing service was fully taxable and the size of the omission and petitioner's conduct convinces us that the omissions were not due to any mere oversight, but due to a conscious effort to conceal profits from the taxing authority in an effort to evade tax. We recognize that the foregoing is based to some extent upon inference and circumstantial evidence, but it is equally clear that circumstantial evidence, if clear and convincing, is sufficient in itself to establish a fraudulent understatement, especially when taken in connection with petitioner's failure to keep proper records. 121 Upon the basis of the foregoing, we hold that part of the deficiency for each of the years 1946 and 1947 was due to fraud with intent to evade taxes, and we, therefore, hold that the additions to tax under section 293(b) are to be applied, subject to recomputation under Rule 50 because of our determination reducing the net understatements of income. Upon the same facts as those on which we base our determination that some part of the deficiencies for the years 1946 and 1947 was due to fraud with intent to evade tax, we find that petitioner's returns for the years 1946 and 1947 were false and fraudulent with intent to evade tax within the meaning of section 276(a). Accordingly, the statute of limitations is not applicable to the deficiencies determined for these years. Additions to Tax Under Section 294(d)(2) Respondent has determined an addition to tax under section 294(d)(2) for substantial understatement of estimated tax for the year 1946. Petitioner, upon whom the burden of proof rests, has offered no evidence or argument on brief on this point. We have no occasion, therefore, to discuss the problem here except to state that the addition to tax under section 294(d)(2) for122 this year will be redetermined in accordance with the deficiency in tax ultimately determined. William G. Lias, 24 T.C. 280">24 T.C. 280, 322 (1955), affd. 235 F. 2d 879 (C.A. 4, 1956). Decision will be entered under Rule 50. Footnotes1. The instant case presents problems similar in some respects to those involved in Abraham S. Hershenson v. Commissioner, Docket No. 81045, in which case Findings of Fact and Opinion are filed simultaneously herewith. The proceedings in the two cases have not been consolidated. What otherwise would appear to be inconsistent results stem from the material differences in the records of the respective cases as presented to us.↩. The record does not reconcile the total with the total of the identified deposits on Schedule C. ↩**. The record does not disclose to whom deposits totaling $1,283.27 were identified by respondent.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619692/	Arthur Gladstone Bush v. Commissioner.Bush v. CommissionerDocket No. 58857.United States Tax CourtT.C. Memo 1957-57; 1957 Tax Ct. Memo LEXIS 195; 16 T.C.M. (CCH) 243; T.C.M. (RIA) 57057; March 29, 1957195 Curtis Bush, Esq., for the petitioner, Drew R. Tillotson, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion This proceeding involves a deficiency in income tax of petitioner for the year 1952 in the amount of $1,329.23. The sole issue is whether petitioner is entitled to the benefits of section 107(a) of the Internal Revenue Code of 1939. Findings of Fact The stipulated facts are found accordingly. Petitioner, since 1895, has been a duly licensed and practicing attorney-at-law with offices at Davenport, Iowa. His return for the calendar year 1952 was filed with the district director of internal revenue for the district of Iowa. On July 7, 1927, Harry I. Klepper, a resident of St. Louis, Missouri, died testate. On July 9, 1927, his will was admitted to probate. The St. Louis Union Trust Company and Fred G. Zeibig were named executors and trustees of decedent's estate and duly qualified. The decedent's will, after making certain bequests, devised and bequeathed the remainder of his estate to his trustees in trust, to pay the income, rents, and profits, in equal shares to his four sisters for life. On the death of the survivor of the196 life beneficiaries, the corpus was to be paid over the decedent's "legal heirs." On completion of the probate proceeding on November 5, 1930, the remainder estate was turned over to the trustees. Harry Joseph, a nephew and son of decedent's sister, Arabel Joseph, claimed to be a legal heir of the decedent. On August 13, 1930, Marquis E. Kidd and James M. Klepper, stepchildren of the decedent, instituted an action in equity in the Circuit Court of the City of St. Louis, Missouri, against the trustees, the life tenants, and Harry Joseph and Effa M. Shields, a niece of decedent, as legal heirs, as defendants. The plaintiffs prayed that they be adjudged to be the adopted children of the decedent, and entitled to his estate as pretermitted heirs. In August 1930, after the institution of such suit, Harry Joseph employed petitioner, on a contingent fee basis, to represent and defend his interest as an heir of decedent's estate. Petitioner filed an answer for Harry Joseph in the equity action. The firm of Bryan, Williams, Cave and McPheeters of St. Louis represented the trustees of the trust, the life beneficiaries, and Effa M. Shields, under a contingent contract dependent upon197 their successful defense of such suit. The said action came to trial in the Circuit Court of the City of St. Louis on May 18, 1931, and an amended decree in favor of the plaintiffs was entered on January 29, 1932. On appeal, the Supreme Court of Missouri reversed the judgment and dismissed the complaint on July 17, 1934. An application for rehearing was overruled on September 18, 1934. After the final decision of the Supreme Court, Cave, representing his law firm and the petitioner, agreed that the attorneys' fees that accrued in such suit would be divided on a basis of two-thirds to the firm and one-third to petitioner. On or about November 14, 1934, testator's surviving sisters, Effa Shields, a niece, and Harry Joseph, a nephew, signed or acquiesced in an agreement that the attorneys' fees should be prorated between the life tenants and the remaindermen, and authorized the payment by the testamentary trustees of one-fourth of the accumulated trust income on hand and the current income as it accrued, and one-fourth of the corpus of the trust on the termination of the trust, and that such payments were to be divided one-third to petitioner and two-thirds to Cave's firm. Thereafter, 198 and at various times up to November 14, 1950, the trustees of the trust paid the total sum of $2,595.42 to petitioner as provided in said agreement. At the death of the last survivor of the four sisters of the testator in November 1950, the trust terminated. In order to discharge the outstanding obligations it was necessary to sell the trust real estate. To secure a policy of title insurance, it was necessary to have a judicial construction of decedent's will as to who constituted his "legal heirs." Accordingly, a suit was instituted by the trustees for a construction of the will. A decree was entered in said action holding that the term "legal heirs" as used in the will referred to the legal heirs living at the time of decedent's death. The decree further directed the trustees to pay to the law firm of Bryan, Williams, Cave and McPheeters, the sum of $17,354.14 from the corpus of the trust. On April 23, 1952, the latter firm paid to the petitioner, pursuant to their prior agreement in 1934 referred to herein, one-third of $17,354.14, or $5,784.71. The payments aggregating the amount of $2,595.42 during the years 1934 to 1950, and the payment of $5,784.71 in the taxable year199 1952, were received by petitioner from the trust estate for personal legal services rendered in the Klepper will-trust litigation. The sum of $5,784.71 received by petitioner in 1952 was less than 80 per cent of the total compensation for personal services rendered by him in connection with such litigation. Opinion LEMIRE, Judge: The question presented is whether petitioner is entitled to the benefits of section 107(a) of the Internal Revenue Code of 1939, with respect to the receipt of $5,784.71, in the taxable year 1952. The respondent contends that section 107(a) is not applicable for the reason that the sum of $5,784.71, received in 1952, was less than 80 per cent of the total compensation of $8,380.13, received by the petitioner for legal services rendered by petitioner from September 1930 to October 1934. The petitioner contends that the amount of $2,595.42, received over the period 1934 to 1950 from the income of the trust estate, was a gift or gratuity, and hence the amount of $5,784.71 received in 1952, constituted 100 per cent of the total compensation. Petitioner, in the alternative, contends that the payments received prior to 1952, represented a separate source200 of income and may not be combined with the 1952 payment for the purpose of determining the applicability of section 107(a). Furthermore, petitioner also argues that the 1952 payment was a gratuity. The record is so completely devoid of evidence indicating a gift or gratuity was intended that we are reluctant to believe that such contention is seriously advanced. The petitioner filed herein raises no such issue. Petitioner reported all the amounts in question as income. The record is replete with evidence that the total payments were received as compensation for the legal services rendered by petitioner in connection with the Klepper will-trust litigation. Evidence of any donative intent is wholly lacking. Petitioner has the burden to clearly establish that the receipt of 80 per cent of the total compensation was received in one taxable year. Estate of Marion B. Pierce, 24 T.C. 95">24 T.C. 95; Drysdale v. Commissioner, 232 Fed. (2d) 633, affirming a memorandum opinion of this Court. [14 TCM 227, (M); T.C. Memo. 1955-71.]Petitioner contends that the prior aggregate payments of $2,595.42 may not be combined with the 1952 payment of $5,784.71201 in determining the application of section 107(a) of the Code. This contention is apparently premised on the fact that the prior aggregate payments were made from trust income, while the 1952 payment was from trust corpus. We find no merit in that contention. The total compensation was received from a single employment. There was a continuity in all the services rendered in that they were for the purpose of protecting the interest which his client, Harry Joseph, claimed to have in decedent's estate. All the compensation received by petitioner was paid to him pursuant to the agreement made in 1934, after the successful defense of the will contest suit instituted by decedent's step-children. Petitioner's client was a signatory to that agreement. Unless the services themselves are divisible, the compensation received therefor, regardless of source, must be lumped together. George J. Hoffman, Jr., 11 T.C. 1057">11 T.C. 1057; Ralph E. Lum, 12 T.C. 375">12 T.C. 375; Alfred J. Loew, 17 T.C. 1347">17 T.C. 1347, affd. 201 Fed. (2d) 368; Rosalyne A. Lesser, 17 T.C. 1479">17 T.C. 1479; and W. Harold Warren, 20 T.C. 378">20 T.C. 378. On the present record we are convinced that202 the total payments for compensation for petitioner's personal services must be considered together. Therefore, the payment of $5,784.71 received in the taxable year 1952, was less than 80 per cent of the total compensation paid to petitioner for the services rendered under his employment contract. We sustain the respondent's determination that section 107(a) of the Internal Revenue Code of 1939 is not applicable. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619696/	Alfonso Diaz and Maria de Jesus Diaz, Petitioners v. Commissioner of Internal Revenue, RespondentDiaz v. CommissionerDocket No. 714-71United States Tax Court58 T.C. 560; 1972 U.S. Tax Ct. LEXIS 94; June 29, 1972, Filed 94 Decision will be entered for the petitioners. Three sheets of tickets in the Mexican National Lottery, all bearing the same number, were purchased in August 1966. The number turned out to be the one entitled to the grand prize of $ 3 million. Held, on the facts, all the tickets were owned by petitioner's uncle, a nonresident Mexican citizen, and not by petitioner, who was a United States citizen and resident, with the result that the winnings are not taxable to petitioner. Wayne Windle, for the petitioners.Ralph V. Bradbury, Jr., and Douglas R. Fortney, for the respondent. Tannenwald, Judge. TANNENWALD560 Respondent determined a deficiency of $ 1,621,220.23 in petitioners' income tax for 1966. The only issue for decision is whether Alfonso Diaz, one of the petitioners herein, was 561 the owner of winning tickets in the September 16, 1966, Mexican National Lottery.FINDINGS OF FACTSome of the facts have been stipulated and, along with the exhibits in support thereof, are incorporated by reference.The petitioners are husband and wife and were residents of Juarez, Mexico, at the time their petition herein was filed. They filed their 1966 joint95 income tax return with the district director of internal revenue at Austin, Tex. Maria de Jesus Diaz is a party to this proceeding only by reason of having joined in such return. Any references herein to "petitioner" shall be deemed to refer to Alfonso Diaz.Petitioner was born in El Paso, Tex., but was raised in his grandmother's house in Juarez, Mexico, until he was 13 or 14, at which time he moved back to El Paso and resided with his mother at the Hotel Fisher, where she was employed as manager. After graduating from high school in El Paso, petitioner attended the American Institute of Banking and, in May of 1961, began working for the El Paso National Bank. From October 1965 to September 16, 1966, petitioner worked as a shipping clerk in El Paso; his take-home pay was over $ 100 per week. He lived with his wife, their two children, and his mother at the Hotel Fisher. His wife was 7 or 8 months pregnant in August -- September 1966.Jose Amado Diaz (hereinafter referred to as Jose) is one of petitioner's three maternal uncles. He is a citizen of Mexico and has always resided in Juarez, Mexico, with his mother (petitioner's grandmother), two sisters, four children of one sister, 96 and a maid.Jose suffers from severe myopia, walks with a limp, and has no formal education beyond the fourth grade in grammar school. He is a very religious man and has attended church daily since he was a child. In addition, he makes an annual pilgrimage to Mexico City to pay homage to the Virgin of Guadalupe, the patron saint of Mexicans.Prior to 1966, Jose worked as an errand boy in a Juarez shoe store for 15 years; from January of 1966 until the end of April 1966, he worked as an errand boy for a Juarez photography store. His salary at both places was 150 pesos per week, or $ 12.Jose loved to save money, and, inasmuch as his two sisters were making enough money to support the household, he was never asked to contribute to its upkeep. His sisters, brothers, and Alfonso used to give him spending money every Sunday. Because of his thriftiness, he was able to lend money to other members of his household 562 when they needed it; he was usually repaid at the time they received their next paycheck. By August of 1966, Jose had accumulated at least $ 150 in American money and a like sum in pesos.The Mexican National Lottery for September 16, 1966, was one of several "grand" 97 lotteries held throughout the year; there were smaller weekly drawings as well. Tickets for the September 16 lottery could be purchased individually or in sheets. Each sheet contained 25 tickets, all bearing the same number; each number in the September 16 lottery was printed on three sheets. Thus, on any given number, there were 75 tickets and an individual could purchase from one to 75 tickets bearing the same number, subject to their availability. Each ticket in the September 16 lottery cost 50 pesos, or $ 4. The cost of three sheets, therefore, was 3,750 pesos, or $ 300.Several days prior to August 6, 1966, Jose had a dream in which the Virgin of Guadalupe told him to buy lottery number 37281. When he next saw petitioner, Jose told him about his dream and asked him for help in obtaining that number, since Jose felt that petitioner's superior education and experience would be helpful in this undertaking. Jose and petitioner then went to see Edmundo Valdez, the Juarez representative of the Mexican National Lottery, in order to ascertain the whereabouts of number 37281. In response to their inquiry, Valdez sent a telegram, dated August 6, 1966, to the Department of Distribution98 and Sales of the lottery, located in Mexico City, soliciting information as to the location of number 37281. A few days later, they again visited Valdez and learned that the number Jose desired was in Monterrey. On August 16, 1966, petitioner sent a telegram in his name to the lottery office in Monterrey reserving "all three sheets containing No. 37281" for the September 16 drawing. Petitioner appended Jose's address to the telegram. A money order dated August 21, 1966, was sent to the Monterrey lottery office in the amount of 3,750 pesos, or 300 American dollars. It indicated that, upon receipt of the money order, all of the tickets bearing number 37281 were to be sent to "Alfonso Diaz, 1213 Texcoco, Juarez." All of the money used to pay for the tickets belonged to Jose. All 75 tickets bearing number 37281 were sent, with a covering letter dated August 22, 1966, in an envelope addressed as indicated above. Upon receipt, Jose opened the envelope and placed the tickets in a metal box, where he kept his cash savings and other personal belongings and where they remained at least until the night of September 15, 1966.The drawing of the winning numbers in the lottery occurred on99 September 15, 1966, and the principal results were announced on the late news show at 11 p.m. on that date. Jose and his mother were listening 563 to the news and became very excited when number 37281 was announced. In their excitement, they were unable to find the key which opened the metal box in which the tickets were contained, and Jose pried it open with a screwdriver. There was no telephone in their house, and Jose, although he wanted petitioner's help in cashing the tickets, decided to wait until the next day before phoning him. When Jose telephoned the next morning, petitioner's mother told him that petitioner had already left for work but that she would call petitioner there and tell him that he should go see Jose; Jose told her that he had won the lottery but did not know how much he had won.After hearing of Jose's good fortune, petitioner went to Juarez on September 16, 1966. When he arrived, petitioner found his uncle and grandmother excited and nervous. To enable Jose to cash his tickets, petitioner and Jose left by bus that afternoon for Monterrey and arrived the next day, September 17, which was a Saturday. 1 Jose wore two pairs of pants on the journey100 and carried the tickets in the pockets of the undermost pair; they were attached by several safety pins.Inasmuch as the banks in Monterrey were closed for the weekend, petitioner and Jose stayed in Monterrey until Monday, September 19, when they presented the winning tickets to the Mexican Commercial Bank of Monterrey, S.A. (hereinafter the bank) for collection. After deduction for taxes, Jose was left with 31,835,126.25 pesos; this sum was deposited in a checking account in his name only.Jose and petitioner then flew to Mexico City and, on Tuesday, September 20, went to visit the personnel of the investment department of the bank.After counseling with petitioner, to whom he looked for advice, Jose placed 30 million pesos, or $ 2,400,000, on deposit with the bank at a guaranteed interest rate of 9 percent for a minimum time period of 1 year. At the bank's suggestion, petitioner was given signatory powers. In addition, every instruction sent to the bank by Jose required the101 signature of petitioner. It was Jose's intention that petitioner, because of his superior education and business background, manage the money for him. Petitioner never withdrew any of the funds on his own signature.Subsequently, 24,183,000 pesos, or $ 1,934,640, was invested in long-term time certificates at interest rates varying between 9.625 and 10.60 percent per annum. Under the terms of these agreements, only Jose can endorse the certificates affecting a transfer of the funds to another party and, in any event, the funds cannot be withdrawn from the bank prior to the expiration of the applicable time period. At all times, Jose has had complete control over the initial disposition of the monthly interest 564 payments; petitioner has had none. Presently, the time certificates are producing about $ 15,000 per month interest, all of which is paid into a checking account against which either petitioner or Jose may draw checks.There is also the equivalent of another $ 816,000 invested in Mexican corporate securities.Various members of the family, including petitioner, receive monthly allowances from the aforementioned checking account. None of them works any longer. 102 Other members of the family receive money also whenever they need it.Some time subsequent to September 16, 1966, petitioner renounced his United States citizenship in order to own property in Mexico, inasmuch as Mexico has certain prohibitions regarding ownership of such property by foreigners. At that time, he took up residence in Juarez, Mexico, where he has since resided.Jose, his mother, his two sisters, and the four children of one sister still live in the same house as they did in 1966. It is Jose's mother's wish to remain in the house (built for her by her husband) until she dies, and her wishes are being respected. Petitioner lives in a modest house of his own with his wife, mother, three children, and a maid.ULTIMATE FINDING OF FACTJose Amado Diaz was the owner of the winning lottery tickets.OPINIONThis case epitomizes the ultimate task of a trier of the facts -- the distillation of truth from falsehood which is the daily grist of judicial life. He must be careful to avoid making the courtroom a haven for the skillful liar or a quagmire in which the honest litigant is swallowed up. Truth itself is never in doubt, but it often has an elusive quality which makes 103 the search for it fraught with difficulty. That this is so is clearly illustrated by the situation herein. Many of the objective facts are as consistent with a finding that the lottery tickets belonged to petitioner as they are with a finding that they belonged to his uncle, Jose; indeed, some of these facts support the former conclusion, for which respondent strenuously contends. If this were all we had to go on, we would be inclined to hold that petitioner had failed to sustain his burden of proof. But we also have before us an extensive transcript of oral testimony. The question is whose testimony and how much of it should we believe.We have a vivid recollection of the trial itself. Such recollection has revitalized the written record (a document having the characteristics of "a dehydrated peach," see (C.A. 2, 1949)) and has given perspective to our review thereof. That record reveals the story (told for the most part in Spanish through an interpreter) of a simple family coping with the commonplace problems of daily living against a backdrop of deep religious 104 conviction and mysticism. Out of that conviction and mysticism came the miracle of sudden and substantial wealth through the ownership of a winning set of lottery tickets. 2 To be sure, the story unfolded principally through the testimony of petitioner, Jose, and other members of the family, all of whom ultimately benefited from that wealth and concededly had an interest in the outcome of this case. But the fact of the matter is that, despite some confusion, there was a consistent thread to their testimony which supports the conclusion that petitioner's uncle owned the winning tickets. Beyond this, the testimony of petitioner's 86-year-old grandmother, who was also Jose's mother, was most convincing. Obviously closer than most to her Maker and face-to-face with her priest in the courtroom, she completely corroborated the essential elements of the testimony of petitioner and his uncle (her son) -- testimony which she had not heard because witnesses were excluded from the courtroom.*105 In the final analysis, our decision herein rests upon our evaluation of the entire record and the credibility of the witnesses who appeared before us. On this basis, we are satisfied that Jose, not the petitioner, owned the winning lottery tickets.Decision will be entered for the petitioners. Footnotes1. Monterrey is 700 miles from Juarez.↩2. Indeed, it might be possible to conclude that ownership of the tickets was vested in the family group, with the result that petitioner might be held to have received his pro rata share of the winnings. But this theory was not advanced either in the deficiency notice, at trial, or on brief.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619697/	DAVID M. AND BARBARA KAHL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKahl v. CommissionerDocket No. 1853-76.United States Tax CourtT.C. Memo 1981-222; 1981 Tax Ct. Memo LEXIS 524; 41 T.C.M. (CCH) 1433; T.C.M. (RIA) 81222; May 4, 1981. Robert M. Tyle, for the petitioners. Anthony M. Bruce, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Murray H. Falk pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE FALK, Special Trial Judge: Respondent determined deficiencies of $ 2,428.79, $ 1,503.21, and $ 209.39, respectively, in petitioners' 1969, 1970, and 1972 federal526 income taxes. Other issues raised by the pleadings having been resolved by agreement of the parties, the questions remaining are: (1) Whether (and if so in what amount) petitioners are entitled to a deduction under section 162 for 1972 for local transportation expenses and (2) the amount of the loss in 1972 arising from flood damage to a house and its contents owned by petitioners so as to give rise to a deduction under section 165 for 1972 and net operating loss deductions under section 172 for 1969 and 1970. FINDINGS OF FACT Some of the facts are stipulated, and they are so found. Petitioners, husband and wife, filed their joint federal income tax returns for each of the years at issue with the Internal Revenue Service Center at Andover, Massachusetts. At the time the petition herein was filed, they resided at Corning, New York. Issue 1. Local transportation expenses. Petitioner David M. Kahl was employed after January of 1972 as a plant comptroller by Corning Glass Works. The plant in Erwin, New York, where his office was located from February through the end of the year, was approximately 8 miles from the company's plants in Corning, New York. Once or twice527 a day, he was required in the performance of his duties to travel in his private automobile between his office in Erwin and other facilities of the company in Corning; an aggregate of 4,175 miles in 1972. He was not reimbursed for any of that transportation. Issue 2. Casualty loss. On June 13, 1972, petitioners purchased a two-story house for $ 31,500, intending to occupy it as their residence on June 24. On June 23, flood waters spawned by Hurricane Agnes flooded the house. Water rose to a level of a foot on the second floor causing extensive damage to the structure and some personal property on the premises. After the flood, the National Guard removed debris from the property with a bulldozer and petitioners and members of their family cleaned up the mess. Petitioners paid approximately $ 14,000 for labor and materials to repair the house. The repairs did not cure all of the damage caused by the flood. Petitioners received disaster loans from the Small Business Administration (SBA) in the sum of $ 11,900. Repayment of $ 5,000 was forgiven by the SBA. The fair market value of the realty was $ 31,500 immediately before the flood and $ 14,500 immediately thereafter. 528 The property had an adjusted basis in petitioners' hands in excess of $ 17,000. On their 1972 federal income tax return, petitioners claimed a casualty loss deduction of $ 33,615, as follows: Damage to realty$ 31,225Damage to personalty2,106Post flood clean up384Total loss$ 33,715Less sec. 165(c)(c) limitation100Deduction$ 33,615Respondent determined the allowable deduction to be $ 10,992.85, as follows: Structural damage$ 13,986.85Personal property damage2,106.00Gross loss$ 16,092.85Less: SBA loan forgiveness$ 5,000$ 100 limitation100Total5,100.00Deductible loss$ 10,992.85Petitioners now concede that the amount of their claimed loss should be reduced by the amount ($ 5,000) of the SBA indebtedness which was forgiven. OPINION Issue 1. Local transportation expenses. 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." Employees' unreimbursed expenses of local transportation, incurred in the performance of their business as employees, are deductible. Petitioner David529 M. Kahl's convincing testimony persuades us that he used his automobile in the performance of his employment duties to drive 4,175 miles in 1972, and we hold that petitioners are entitled to a deduction in the amount based upon that mileage in accordance with the standard mileage rate of Rev. Proc. 70-25, 2 C.B. 506">1970-2 C.B. 506. Issue 2. Casualty loss. Section 165(a) permits individuals to deduct losses suffered upon the damage to or destruction of nonbusiness property by reason of fire, storm, shipwreck or other similar casualty to the extent that the loss not compensated for by insurance of otherwise from each such casualty exceeds $ 100. See sec. 165(c)(3). Respondent does not contest petitioners' claim of $ 2,106 as the value of their personalty lost in the hurricane. Petitioners now concede that the amount of the loss should be reduced by $ 5,000; the amount of the SBA loan forgiveness. The only dispute is the amount of the loss to petitioners' realty caused by the storm. That issue is essentially factual, and petitioners have the burden of proof. Pfalzgraf v. Commissioner, 67 T.C. 784">67 T.C. 784, 787 (1977); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 256 (1971).530 "The proper measure of the loss sustained has generally been said to be the difference between the fair market value of the property immediately before the casualty and its fair market value immediately thereafter, but not to exceed its adjusted basis." Lamphere v. Commissioner, 70 T.C. 391">70 T.C. 391, 395 (1978). The purchase of the property by petitioners shortly before the storm seems clearly to establish its fair market value at or near that amount. There being no other evidence here of its value immediately before the flood, we have found as a fact that it was the amount petitioners paid for it; $ 31,500. Petitioners maintain that they expended $ 16,130.67 to repair the property. Some of those expenses, however, appear to have related to personalty and the evidence of others is too unspecific to permit us to give it full weight. All in all, we have found that petitioners expended approximately $ 14,000 for labor and materials to make repairs. Keeping in mind that the repairs did not cure all of the damage done to the realty by the flood, with the description of the damage and all the other evidence in the record before us, and in light of the admonitions of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930),531 we have found as a fact that the fair market value of the realty was $ 14,500 immediately after the flood. Accordingly, we find that petitioners suffered a loss to their realty in the amount of $ 17,000 before taking into account the SBA loan forgiveness and the $ 100 limitation of section 165(c)(3).We hold that petitioners are entitled to a deduction under section 165 in the amount of $ 14,006 for 1972. In accordance with the foregoing, Decision will be entered under Rule 155. 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.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/2923544/	NUMBER 13-03-449-CV COURT OF APPEALS THIRTEENTH DISTRICT OF TEXAS CORPUS CHRISTI - EDINBURG ____________________________________________________________ IN THE INTEREST OF TRAVIS JAMES DILLON WARREN, A MINOR CHILD, ____________________________________________________________ On appeal from the 36th District Court of Aransas County, Texas. ____________________________________________________________ MEMORANDUM OPINION Before Chief Justice Valdez and Justices Hinojosa and Yañez Memorandum Opinion Per Curiam Appellants, James Warren and Lynn Warren, perfected an appeal from a judgment entered by the 36th District Court of Aransas County, Texas, in cause number A-93-0285-CV-A. No clerk=s record has been filed due to appellants= failure to pay or make arrangements to pay the clerk=s fee for preparing the clerk=s record. If the trial court clerk fails to file the clerk=s record because the appellant failed to pay or make arrangements to pay the clerk=s fee for preparing the clerk=s record, the appellate court may dismiss the appeal for want of prosecution unless the appellant was entitled to proceed without payment of costs. Tex. R. App. P. 37.3(b). Notice was given to all parties that this appeal was subject to dismissal pursuant to Tex. R. App. P. 37.3(b). Appellants were given ten days to explain why the cause should not be dismissed. Appellants responded to this Court=s notice; however, said response fails to establish that appellants are entitled to proceed without payment of costs. The Court, having examined and fully considered the documents on file, is of the opinion that the appeal should be dismissed for want of prosecution. The appeal is hereby DISMISSED FOR WANT OF PROSECUTION. PER CURIAM Memorandum Opinion delivered and filed this the 26th day of January, 2006.	01-04-2023	09-11-2015
https://www.courtlistener.com/api/rest/v3/opinions/265149/	335 F.2d 120 NATIONAL LABOR RELATIONS BOARD, Petitioner,v.COMMUNITY MOTOR BUS COMPANY, Inc., Respondent. No. 9196. United States Court of Appeals Fourth Circuit. Argued Jan. 16, 1964.Decided July 27, 1964. Anthony J. Obadal, Atty., National Labor Relations Board, (Arnold Ordman, Gen. Counsel, Dominick L. Manoli, Associate Gen. Counsel, Marcel Mallet-Prevost, Asst. Gen. Counsel, and Warren M. Davison, Atty., National Labor Relations Board, on brief), for petitioner. John A. MacKenzie, Portsmouth, Va., for respondent. Before HAYNSWORTH, BOREMAN and BELL, Circuit Judges. HAYNSWORTH, Circuit Judge. 1 In this unfair labor practice case we grant enforcement, for the Board's findings are adequately supported by the record considered as a whole. 2 Preliminarily, the employer tenders a question of the jurisdiction of the Board over this local transit company operating bus lines in the City of Portsmouth, Virginia. The question, however, is not properly before us, because not urged before the Board. 3 The respondent, in its answer, denied that it was engaged in commerce within the meaning of 2(6) of the Labor Management Relations Act as amended. The Trial Examiner found that it was. He did so on the basis of evidence of direct purchases by it of parts from suppliers out of the State of Virginia and its purchase of large quantities of gasoline imported into Virginia by one of the major oil companies. This jurisdictional finding of the Trial Examiner was not made the subject of an exception before the Board. The employer filed exceptions to all of the substantive findings of unfair labor practices, but it apparently abandoned its jurisdictional question when the case went before the Board. It affirmatively informed the Board, 'We raise no contest over the 'commerce' clause finding, although we find no criteria for delineating its applicability to a small local bus line.' 4 By 10(e) of the Act, we are precluded from considering any 'objection that has not been urged before the Board, its member, agent, or agency * * .' While the jurisdictional question was technically raised by the answer, it was not only not raised before the Board; it was clearly abandoned. Under those circumstances, the attempt to have this Court now pass upon it is unavailing.1 5 The principal question on appeal is whether the employer violated 8(a)(3) of the Act when it refused to re-employ Roland J. Bell, one of its bus drivers. 6 Originally Bell claimed that he had been unlawfully discharged because of his union activities. This was said to have occurred on February 23, 1962. At the hearing before the Trial Examiner, he also claimed that he had been unlawfully refused re-employment on February 28, 1962, and the Trial Examiner found that he had been both unlawfully discharged on the 23rd and unlawfully refused re-employment on the 28th. The Board, however, refused to accept the Trial Examiner's recommended finding of an unlawful discharge on February 23rd and rested its finding of violation of 8(a)(3) of the Act solely upon the refusal of re-employment on February 28th. The Board thus found, in effect, that on February 23rd Bell had voluntarily quit his employment. It was because of that finding of the Board that we denied a motion of the employer to remand the case to the Board for further findings based upon a claim of after discovered evidence consisting of testimony by some of Bell's fellow employees that he had told them that he had voluntarily quit his employment on February 23rd. 7 Bell testified that on the morning of February 22nd, Archie B. Stewart, the employer's general manager, charged Bell with attempting to organize the bus drivers into a union. Bell had previously testified of his organizational activity, but he testified that he disclaimed to Stewart knowledge of any such efforts. Stewart responded that he knew what was going on and admonished Bell, 'If you have been engaged in any union activities, you better watch yourself.' 8 On the next day, February 23, 1962, Bell received his weekly check which he thought was $5.10 short. He undertook to speak to Stewart about it, and the two apparently got into an argument. According to Bell's testimony, this ended with a statement by Stewart that if 'These damn union men you have been messing with * * (have) offered you (a job) you better take it.' 9 Bell testified that he understood from those words of Stewart on the 23rd that he was discharged, but the Board has found that he was not. 10 Bell telephoned Stewart at his home on the evening of February 27th, expressing a wish to talk to him and was informed that Stewart would see him the next morning at approximately 10:00 o'clock. According to Bell's testimony, when he saw Stewart on the morning of the 28th he asked if Stewart would put him back to work. Bell's testimony of Stewart's response to this is as follows: 11 'He told me, he said, 'Bell you been mixed up with this union' and he said, 'We're not going to have a union out here, if there is anything I can do about it.' He said, 'We had a union here one time' and he said, 'We had to lay out men off like hell.' Then he said, 'We are not just going to have it.' He said, 'I'm not going to have it.' 'Q. Did he use any profanity or obscenity? 'A. Yes. 'Q. In describing his feelings? 'A. Yes, he did. 'Q. Would you tell us for the record what he said? 'A. He said, 'I can't understand why you want to pay those Son-of-a-bitches eight dollars a month to dictate to you.' 'They tell you when you can work and when you can't work." 12 Stewart, in his testimony, disagreed with Bell's version of these events in every substantial particular. According to him the two had never discussed the union or Bell's association with organizational efforts. Bell, according to Stewart, simply failed to report for work on February 24th, 25th, 26th or 27th, but did come to see him on the morning of the 28th pursuant to an appointment made with him by telephone the previous evening. Stewart testified that on the morning of the 28th, Bell, who had been previously cautioned about absenteeism, undertook to explain his most recent absences and sought to be put to work. Stewart testified that he had told Bell to come back at 2:00 o'clock and that, if he appeared then, Stewart would inform him whether or not he could go back to work. After Bell left, he told two supervisors to put Bell to work if he did report back at 2:00 O'clock, but Bell did not show up again until over a month later. 13 This is the plainest kind of case in which the finder of fact must resolve the conflicting evidence. 14 Stewart's version of the events discloses no unlawful discrimination against Bell, and his version is supported in part by that of the two supervisors to whom he spoke after talking with Bell on the morning of the 28th. Bell's testimony, however, is quite sufficient to support a finding of refusal to re-employ Bell on the morning of February 28th solely because of Bell's efforts on behalf of the Union. Stewart testified he then needed additional drivers, indeed that he was willing to re-employ Bell. If Bell's testimony is accepted as true, in light of the employer's admitted need of additional drivers, he was clearly denied re-employment because of his union activity. Bell's testimony is corroborated to some extent by the testimony of a number of other witnesses of very strong and violent antiunion remarks by Stewart and another supervisor. If we might find Bell less credible than Stewart, it was for the Board to resolve this pure question of credibility. 15 Several other employees testified that because of their prounion activity, they were threatened by Stewart and another supervisor. Each of these instances was denied by Stewart or the other supervisor involved, but, again, it was for the Board to resolve these questions of credibility, and its finding of a violation of 8(a)(1) of the Act must be accepted. 16 Finally, the employer protests the Board's finding of a violation of 8(a)(1) of the Act through unlawful surveillance of a union meeting. There was testimony that some of the bus drivers met at a downtown hotel in Portsmouth on a number of occasions, beginning in the late evening hours and lasting until the early hours of morning. Several of them, and the wife of one, testified that on one such occasion Stewart and the Street Supervisor were seen in and in front of an all night lunch counter immediately across the street from the hotel entrance, and that they lingered there for more than half an hour. Stewart and the Street Supervisor denied the charge, but the testimony was enough to support an inference by the Board that on that occasion they were seeking to learn who was in attendance at the union meeting, or to give the bus drivers the impression that their organizational efforts were being closely watched by the employer.2 This is enough to warrant the inclusion in the Board's order and the notice to be published of a prohibition against, and renunciation of, surveillance of union meetings. 17 Since we find in the record as a whole support for the Board's findings, its decree will be enforced. 18 Decree enforced. 1 N.L.R.B. v. Ochoa Fertilizer Corp., 368 U.S. 318, 322, 82 S. Ct. 344, 7 L. Ed. 2d 312; Marshall Field & Co. v. N.L.R.B., 318 U.S. 253, 255, 63 S. Ct. 585, 87 L. Ed. 744; N.L.R.B. v. Pugh & Barr, Inc., 4 Cir., 194 F.2d 217, 220-221; N.L.R.B. v. Pappas & Co., 9 Cir., 203 F.2d 569, 571 2 Hendrix Manufacturing Company v. N.L.R.B., 5 Cir., 321 F.2d 100, 104 n. 7; N.L.R.B. v. United Wire & Supply Corporation, 1 Cir., 312 F.2d 11, 13-14	01-04-2023	08-23-2011
https://www.courtlistener.com/api/rest/v3/opinions/4619699/	Ed Haren v. Commissioner. Ed Haren and Sallie Haren v. Commissioner.Haren v. CommissionerDocket Nos. 80497, 80498.United States Tax CourtT.C. Memo 1961-97; 1961 Tax Ct. Memo LEXIS 252; 20 T.C.M. (CCH) 432; T.C.M. (RIA) 61097; March 31, 1961252 Held, that respondent has not established by clear and convincing evidence that the returns for the taxable years involved were false or fraudulent with intent to evade tax within the meaning of section 276(a) of the 1939 Code. Accordingly, assessment and collection of the deficiencies in income tax and additions to tax are barred by the limitation provided in section 275(a). John Y. Merrell, Esq., Shoreham Bldg., Washington, D.C., and K. William O'Connor, Esq., for the petitioners. Frederick T. Carney, Esq. 253 , for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: The respondent in Docket No. 80497 determined, through use of the increase in net worth plus nondeductible expenditures method, deficiencies in income tax and additions to tax against petitioner Ed Haren, for years and in amounts as follows: Additions to TaxYearDeficiencySec. 293(b)Sec. 294(d)(2)1945$1,551.82$ 775.911946551.53275.7719472,232.041,116.02$125.4119481,883.70941.85In Docket No. 80498, respondent determined, through use of the net worth method, deficiencies in income tax and additions to tax against petitioners Ed and Sallie Haren, for years and in amounts as follows: Additions to TaxSec.Sec.YearDeficiencySec. 293(b)294(d)(1)(A)294(d)(2)1949$1,340.88$ 670.44$ 153.90$102.6119502,333.451,166.73228.02152.0019513,352.921,676.46772.66530.4119527,454.783,727.391,130.25753.5019536,100.604,641.12220.34 Respondent conceded in the course of his opening statement at the trial herein, that petitioners were not liable for254 the additions to tax under section 294(d)(2) of the Internal Revenue Code of 1939, 1 for the years 1949 through 1952. The cases were consolidated for trial. The issues presented for decision are: 1. Are the assessment and collection of the deficiency and additions to tax for each of the taxable years 1945 through 1953, barred by the statute of limitation contained in section 275(a)? Solution of this issue hinges upon whether the return for each of said years was false or fraudulent with intent to evade tax, within the meaning of section 276(a). 2. What is the correct taxable income of the petitioners for each of the taxable years involved? 3. Was any part of the deficiency for each of said years due to fraud with intent to evade tax, within the meaning of section 293(b), so as to render the petitioners liable for additions to tax under said section? 4. Are the petitioners liable for the additions to tax under section 294(d)(1)(A) for failure to file a declaration of estimated tax, for each of the years 1949 through 1953? 5. Is petitioner Ed Haren liable255 for the additions to tax under section 294(d)(2) for substantial underestimate of estimated tax, for the year 1947? Findings of Fact Some of the facts have been stipulated. The stipulation of facts, together with the exhibits referred to therein and attached thereto, is incorporated herein by reference. Petitioners Ed and Sallie Haren are husband and wife; and they reside in Etowah, McMinn County, Tennessee. Petitioner Ed Haren timely filed an individual Federal income tax return for each of the years 1945 through 1948, with the collector of internal revenue for the district of Tennessee. Petitioners Ed and Sallie Haren timely filed a joint Federal income tax return for each of the years 1949 through 1953 with the collector or district director of internal revenue for the district of Tennessee. The term "petitioner" will hereinafter have reference to Ed Haren. Petitioner was born in 1890. His only formal education consisted of 3 months of the first grade, which he received at the age of 14. He has never prepared an income tax return; and he did not, during the taxable years, have an understanding of the double-entry system of keeping books of account. He has resided at Etowah256 since 1918, and he enjoys a good reputation for honesty and integrity in his home community, and also with the businessmen there and elsewhere, with whom he has dealt. Facts re Petitioner's Business Interests From 1923 to about 1931, petitioner was employed full time as a traveling salesman by various wholesale hardware companies. In the years following 1931 and extending through 1953, petitioner continued to travel for hardware companies, but not on a fulltime basis. During 1931, petitioner was president of a corporation known as Tennessee Plumbing and Electric Company, which corporation was declared bankrupt in 1932. From 1933 to 1935, petitioner was president of the Seminole Drug and Chemical Company, a manufacturer of patent medicine. From 1936 to 1940, petitioner operated as a sole proprietor, a plumbing business in Etowah. In 1941 he formed a partnership for the operation in Etowah of the same type of business. In 1942, petitioner resumed operation of a plumbing business as a proprietor, doing business at various times under the name of Etowah Plumbing and Heating Company, and at other times under the name of Etowah Heating Company. (Petitioner's activities in connection257 with said proprietorship, which will hereinafter be called the "Heating Company," are the principal of his activities involved in the instant case.) Petitioner continued to operate the Heating Company proprietorship throughout the taxable years involved and thereafter. In 1941, petitioner formed another partnership, for the conduct of a plumbing business in Maryville, Tennessee, known as Maryville Plumbing and Heating Company. At the time of the formation of the Maryville partnership, petitioner had as his equal partner an individual named William E. Cline. The Maryville partnership continued to operate through 1953; and during an unspecified portion of the 12-year period of its existence, petitioner's son, E. B. Haren, Jr., was an equal partner therein, with his father and Cline. Cline apparently was the managing partner in charge of the business of the Maryville partnership. On September 1, 1950, petitioner and an individual named Roy T. Prichard, formed a partnership or joint venture under the name of Prichard and Haren, for the execution of a contract for the construction of a school at the village of Vonore, Tennessee. Said partnership or venture was dissolved on July 15, 1951, upon258 completion of the above-mentioned contract. In about October 1951, petitioner and certain other unnamed and unspecified individuals organized a corporation known as Lenoir Plumbing and Heating Company. This corporation operated at a loss, and was dissolved in about June 1953, at which time the business was taken over by a partnership formed by petitioner and the above-mentioned William Cline. Said partnership was operated under the name of Haren and Cline. The principal place of business of both the corporation and the partnership was at Lenoir City, Tennessee. Facts re Operations of Etowah Heating Company From 1942 through 1945, the business of the Heating Company consisted of the sale of plumbing supplies; but in 1946 the operations of this proprietorship were expanded to include, in addition, the sale and installation of heating equipment (such as furnaces for houses and business establishments), and also the sale and installation of air conditioning equipment. In 1950 or 1951, petitioner further expanded the activities of the Heating Company to include operations of a general construction prime contractor (i.e., the erection of buildings), as well as those of a subcontractor259 installing plumbing and heating equipment for other prime contractors. Petitioner did not himself maintain the books of account and records of the Heating Company. From 1944 through 1947, these records were maintained by an individual named Jackson, who was a retired locomotive engineer on the Louisville & Nashville Railroad. Jackson died some time late in 1947; and he was succeeded as the Heating Company's bookkeeper by an individual named W. D. Truitt, whose accounting training and experience is not revealed by the record. Truitt died at some time late in 1948 or early 1949; whereupon petitioner hired Edna Battle (hereinafter, for convenience, referred to simply as "Edna") to keep the books and act as his secretary. Edna's academic training for the position consisted of a 3-months' course in accounting and typing, taken while she was attending a small college; and she had had no prior bookkeeping experience. Edna was the bookkeeper for the Heating Company throughout the remainder of the taxable years, with the exception of the summer of 1949 and a 1-month period from mid-February to mid-March, 1953. During said periods of Edna's absence, petitioner relied upon either his daughter260 or a young woman who had clerked in a grocery store, to keep the Heating Company's books and records. The books of account kept for the Heating Company for the years 1944 through 1948 consisted of a journal (described in the testimony as a "day book"), and an accounts receivable ledger. When Edna became the bookkeeper, she installed a double-entry system of accounts, utilizing a general journal ("day book"), cash receipts and disbursements journal, a general ledger, and an accounts receivable ledger. At some time thereafter, additional subsidiary ledgers of an unspecified character were installed. With respect to billings and payments for work performed by the Heating Company as either a prime contractor or a subcontractor, Edna would customarily make the following entries. When an invoice (billing) was sent to a particular customer, a debit was made to accounts receivable, and a credit was made to sales. When the customer paid such invoice, an entry was made to debit cash and to credit accounts receivable. 2261 Facts re Preparation of Income Tax Returns Petitioner's tax return for each of the years 1945 through 1948 was prepared by Clarence Littleton, a deputy collector of internal revenue stationed in Knoxville. Littleton also prepared the joint return filed by petitioner and his wife for each of the years 1949 and 1950. Each of the foregoing returns, insofar as the income and expenses of the Heating Company were concerned, was prepared through use of a profit and loss statement taken by the Heating Company's bookkeeper from the books and records of said proprietorship. The joint return filed by petitioner and his wife for the year 1951 was prepared by C. H. Lockerby, a certified public accountant. Lockerby had had occasion to examine the books of account and the bank statements of the Heating Company in December 1951, during the course of a professional engagement occasioned by the fact that said proprietorship's business had expanded and petitioner desired assurance that Edna was keeping the books properly. Thereafter in January 1952, petitioner brought to Lockerby's office data and figures prepared by Edna from the Heating Company's books and records; and utilizing such materials, 262 Lockerby prepared the above-mentioned 1951 joint return. The Heating Company's income and expenses, as they appeared on Schedule C thereof, were in line with the income and expense figures which Lockerby had found and computed in the December 1951 examination of the proprietorship's records. The record does not establish the identity of the person or persons who prepared the 1952 joint return filed by petitioner and his wife. The 1953 joint return filed by petitioner and his wife was prepared by another certified public accountant, Keith Sherrod. Sherrod prepared said return directly from the books and records of the Heating Company, insofar as the income and expenses of the proprietorship were concerned. Other information necessary for the preparation of said return was obtained from records which petitioner had and made available to Sherrod. Facts re Respondent's Audit and Determination Agents of the respondent began an audit of the returns of petitioner and his wife in October 1954. At that time, the books and records relating to the Heating Company for the years prior to 1949 (i.e., prior to the time when Edna installed the doublentry system) were no longer available; and, 263 as regards the years 1949 through 1953, the agents determined that the books and records relative to these years did not correctly reflect income, due to the fact that certain items of income were not recorded in the books of account. Said agents decided that it would be necessary in the light of the foregoing circumstances, to compute the income of petitioner and his wife through use of the increase in net worth plus nondeductible personal expenditures method. The following table shows the assets, liabilities, net worth, increases in net worth, personal expenditures, certain miscellaneous adjustments, and the resultant alleged understatement of income for petitioner and his wife for each of the years 1945 through 1953 - all as determined by the agents of the respondent (items of assets, liabilities and personal expenditures marked by an asterisk () are in dispute): COMPUTATION OF NET WORTHYears ending December 31, 1944-December 31, 1948ItemNo.ASSETS12-31-4412-31-451 Cash on handNone None 2 Cash in banks (checking ac-counts): (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Ed Haren d/b/a EtowahHeating Co.$ 4,247.69 $ 6,486.40 (2) Ed Haren - Personal(b) First National Bank, Athens,Tenn.(1) Ed Haren - Personal(c) Bank of Maryville, Mary-ville, Tenn.(1) * Ed Haren - Personal5,850.00 (d) Bank of Riceville,Riceville, Tenn.(1) Ed Haren - Personal2.092.093 War bonds4,500.004,500.00 4Materials inventory - Heating896.001,485.40Co.5Office supplies inventory -Heating Co.6 Accounts receivable - HeatingNone None Co.7Notes receivable - Heating Co.8Contracts receivable - HeatingCo.9Prepaid interest - Heating Co.10Advance to Prichard & Haren,Vonore, Tenn.11 Capital account - Maryville983.80 525.22 Plbg. & Htg. Co.12Investments: (a) Etowah Funeral Home(b) W. E. Hamby Const. Co. -Loan(c) Lenoir Plbg. & Htg. - com.stk.(d) Etowah Builders & Devel-opers(1) Common stock - 183 shs.(2) Preferred stock - 47 1/2shs.(e) Missouri-Kansas Pipe Line -1,200.001,200.00com. stk.13 Office equipment - Heating Co.360.00 360.00 14 Shop tools - Heating Co.888.00 888.00 15 Trucks - Heating Co.600.00 600.00 16 Business automobile - Ed HarenNone None 17 Personal automobile - SallieHaren18Household furnishings19M. L. Hutchinson property2,725.0020Land & Buildings - Heating Co.21Haren & Cline farm (1/2 int.)22Tom Long property23Residence, Etowah, Tenn4,800.004,800.0024Residence, Tucson, Arizona25Residence improvements, Tucson26Martin lots27Watts Bar Lake lotsTOTAL ASSETS$21,202.58$ 26,697.11LIABILITIES28Notes Payable: (a) Cantrell Banking Co.,Etowah, Tenn.(1) Etowah Heating Co.(2) Ed Haren - Personal(b) Citizens National Bank,Athens, Tenn.(1) Ed Haren - Personal29Mortgages Payable: (a) Valley National Bank,Tucson, Arizona(1) Residence, Tucson, Ariz.- 1st Mtg.(b) R. W. Poe, Tucson, Arizona(1) Residence, Tuscon, Ariz.- 2nd Mtg.30Accounts payable - Heating Co.31Subcontracts payable - HeatingCo.32Advances on contracts - HeatingCo.33Accrued interest34Taxes payable35Advances - Prichard & Haren36Reserve for depreciation$ 674.40$ 949.20TOTAL LIABILITIES$ 674.40$ 949.20NET WORTH$20,528.18$ 25,747.91Previous year net worth20,528.18Increase in net worth$ 5,219.7337Add personal expenditures: (a) Income tax payments76.88(b) * Personal living expenses4,000.00(c) Gifts to Frank Haren, son(d) Gifts to Mrs. Art McGee,daughter(e) Gifts to Jimmy Haren, sonTOTAL$ 9,296.6138Less capital gain and otherexclusions: (a) M. L. Hutchinson property(262.50)(b) Haren & Cline farm (1/2int.)Corrected net income$ 9,034.11Net income reported on return2,645.22Unreported net income$ 6,388.89264 COMPUTATION OF NET WORTHYears ending December 31, 1944-December 31, 1948ItemNo.ASSETS12-31-4612-31-4712-31-481 Cash on handNone None $ 48.592 Cash in banks (checking ac-counts): (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Ed Haren d/b/a EtowahHeating Co.$ 6,082.05 $ 870.98 $ 598.22(2) Ed Haren - Personal(b) First National Bank, Athens,Tenn.(1) Ed Haren - Personal2,000.001,069.24(c) Bank of Maryville, Mary-ville, Tenn.(1) * Ed Haren - Personal3,695.98 (d) Bank of Riceville,Riceville, Tenn.(1) Ed Haren - Personal2.092.092.093 War bonds4Materials inventory - Heating3,025.008,919.629,555.93Co.5Office supplies inventory -Heating Co.6 Accounts receivable - HeatingNone 5,551.21 3,161.23Co.7Notes receivable - Heating Co.8Contracts receivable - HeatingCo.9Prepaid interest - Heating Co.10Advance to Prichard & Haren,Vonore, Tenn.11 Capital account - Maryville143.78 1,508.64 3,158.94 Plbg. & Htg. Co.12Investments: (a) Etowah Funeral Home(b) W. E. Hamby Const. Co. -Loan(c) Lenoir Plbg. & Htg. - com.stk.(d) Etowah Builders & Devel-opers(1) Common stock - 183 shs.(2) Preferred stock - 47 1/2shs.(e) Missouri-Kansas Pipe Line -1,200.001,200.001,200.00com. stk.13 Office equipment - Heating Co.360.00 631.90 2,000.19 14 Shop tools - Heating Co.888.00 888.00 2,987.55 15 Trucks - Heating Co.1,010.49 1,010.49 1,010.49 16 Business automobile - Ed Haren1,485.00 1,485.00 1,447.81 17 Personal automobile - SallieNone Haren18Household furnishings19M. L. Hutchinson property20Land & Buildings - Heating Co.4,000.008,000.008,000.0021Haren & Cline farm (1/2 int.)1,750.0022Tom Long property23Residence, Etowah, Tenn4,800.004,800.004,800.0024Residence, Tucson, Arizona15,000.0015,000.0025Residence improvements, Tucson761.00761.0026Martin lots27Watts Bar Lake lotsTOTAL ASSETS$ 30,442.39$ 51,697.97$ 53,732.04LIABILITIES28Notes Payable: (a) Cantrell Banking Co.,Etowah, Tenn.(1) Etowah Heating Co.$ 5,000.00$ 1,000.00(2) Ed Haren - Personal(b) Citizens National Bank,Athens, Tenn.(1) Ed Haren - Personal29Mortgages Payable: (a) Valley National Bank,Tucson, Arizona(1) Residence, Tucson, Ariz.- 1st Mtg.4,576.794,399.30(b) R. W. Poe, Tucson, Arizona(1) Residence, Tuscon, Ariz.- 2nd Mtg.3,273.7530Accounts payable - Heating Co.3,335.0131Subcontracts payable - HeatingCo.32Advances on contracts - HeatingCo.33Accrued interest34Taxes payable35Advances - Prichard & Haren36Reserve for depreciation$ 1,083.10$ 1,974.85$ 2,598.93TOTAL LIABILITIES$ 1,083.10$ 14,825.39$ 11,333.24NET WORTH$ 29,359.29$ 36,872.58$ 42,398.80Previous year net worth25,747.9129,359.2936,872.58Increase in net worth$ 3,611.38$ 7,513.29$ 5,526.2237Add personal expenditures: (a) Income tax payments77.82592.25141.83(b) Personal living expenses4,000.004,000.005,929.85 (c) Gifts to Frank Haren, son(d) Gifts to Mrs. Art McGee,daughter(e) Gifts to Jimmy Haren, sonTOTAL$ 7,689.20$ 12,105.54$ 11,597.9038Less capital gain and otherexclusions: (a) M. L. Hutchinson property(b) Haren & Cline farm (1/2(125.00)int.)Corrected net income$ 7,689.20$ 11,980.54$ 11,597.90Net income reported on return5,175.603,069.31(2,625.94)Unreported net income$ 2,513.60$ 8,911.23$ 14,223.84265 Years ending December 31, 1949-December 31, 1953ItemNo.ASSETS12-31-4912-31-5012-31-511Cash on hand$ 27.38$ 357.20$ 73.292Cash in banks (checking ac-counts): (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Ed Haren d/b/a EtowahHeating Co.(245.80)9,319.2977.17(2) Ed Haren - Personal175.0010.021,021.41(b) First National Bank, Athens,Tenn.(1) Ed Haren - Personal(c) Bank of Maryville, Mary-ville, Tenn.(1) Ed Haren - Personal(d) Bank of Riceville, Riceville,Tenn.(1) Ed Haren - Personal2.092.092.093War bonds4Materials inventory - Heating Co.8,783.3115,324.2617,530.005Office supplies inventory - Heat-ing Co.32.6724.74127.806Accounts receivable - Heating Co.2,094.035,733.9018,133.607Notes receivable - Heating Co.1,105.278 Contracts receivable - Heating Co.9Prepaid interest - Heating Co.10Advance to Prichard & Haren,Vonore, Tenn.20,000.0011 Capital account - Maryville Plbg.& Htg. Co.7,381.93 9,197.87 12,431.02 12 Investments: (a) Etowah Funeral Home200.00200.00(b) * W. E. Hamby Const. Co. -Loan10,000.00 (c) Lenoir Plbg. & Htg. - com.stk.1,000.00(d) Etowah Builders & Devel-opers(1) Common stock - 183 shs.(2) Preferred stock - 47 1/2shs.(e) Missouri-Kansas Pipe Line -com. stk.1,200.001,200.001,200.0013 Office equipment - Heating Co.2,000.19 2,000.19 2,000.19 14 Shop tools - Heating Co.2,987.55 2,987.55 2,987.55 15 Trucks - Heating Co.2,874.83 5,220.83 5,220.83 16 Business automobile - Ed Haren2,044.24 2,044.24 2,044.24 17 Personal automobile - Sallie HarenNone 2,700.00 2,700.00 18Household furnishings580.80580.80580.8019M. L. Hutchinson property20Land & Buildings - Heating Co.8,000.008,000.008,000.0021Haren & Cline farm (1/2 int.)22Tom Long property1,500.001,500.0023Residence, Etowah, Tenn.4,800.004,800.004,800.0024Residence, Tucson, Arizona15,000.0015,000.0015,000.0025Residence improvements, Tucson761.00761.00761.0026Martin lots27Watts Bar Lake lotsTOTAL ASSETS$58,499.22$106,963.98$108,496.26LIABILITIES28Notes Payable: (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Etowah Heating Co.$ 5,000.00$ 6,000.00(2) Ed Haren - Personal10,500.0010,000.00(b) Citizens National Bank,Athens, Tenn.(1) Ed Haren - Personal10,000.0029Mortgages Payable: (a) Valley National Bank, Tuc-son, Arizona(1) Residence, Tucson, Ariz.- 1st Mtg.$ 4,213.684,019.523,816.45(b) R. W. Poe, Tucson, Arizona(1) Residence, Tuscon, Ariz.- 2nd Mtg.30Accounts payable - Heating Co.2,559.496,521.244,730.8131Subcontracts payable - HeatingCo.32Advances on contracts - HeatingCo.33Accrued interest34Taxes payable35Advances - Prichard & Haren10,000.0036Reserve for depreciation3,497.675,527.087,639.48TOTAL LIABILITIES$10,270.84$ 51,567.84$ 32,186.74NET WORTH$48,228.38$ 55,396.14$ 76,309.52Previous year net worth42,398.8048,228.3855,396.14Increase in net worth$ 5,829.58$ 7,167.76$ 20,913.3837Add personal expenditures: (a) Income tax payments369.26199.95(b) * Personal living expenses6,499.94 7,193.35 6,488.67 (c) Gifts to Frank Haren, son1,545.30 (d) Gifts to Mrs. Art McGee,daughter600.001,003.20(e) Gifts to Jimmy Haren, sonTOTAL$12,329.52$ 15,330.37$ 30,150.5038Less capital gain and other ex-clusions: (a) M. L. Hutchinson property(b) Haren & Cline farm (1/2 int.)(c) 1948 income tax refund re-ceived in 1949(141.83)Corrected net income$12,187.69$ 15,330.37$ 30,150.50Net income reported on return5,224.364,149.1622,044.40Unreported net income$ 6,963.33$ 11,181.21$ 8,106.10266 Years ending December 31, 1949-December 31, 1953ItemNo.ASSETS12-31-5212-31-531Cash on hand$ 246.78$ 414.082Cash in banks (checking ac-counts): (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Ed Haren d/b/a EtowahHeating Co.1,823.571,869.66(2) Ed Haren - Personal1,599.2825,386.63(b) First National Bank, Athens,Tenn.(1) Ed Haren - Personal(c) Bank of Maryville, Mary-ville, Tenn.(1) Ed Haren - Personal(d) Bank of Riceville, Riceville,Tenn.(1) Ed Haren - Personal2.092.093War bonds4Materials inventory - Heating Co.14,366.2716,924.595Office supplies inventory - Heat-ing Co.126.61108.926Accounts receivable - Heating Co.23,829.707,599.417Notes receivable - Heating Co.1,927.151,503.598 Contracts receivable - Heating Co.17,221.00 9Prepaid interest - Heating Co.320.9110Advance to Prichard & Haren,Vonore, Tenn.11 Capital account - Maryville Plbg.& Htg. Co.10,545.92 12,261.17 12 Investments: (a) Etowah Funeral Home200.00(b) * W. E. Hamby Const. Co. -Loan(c) Lenoir Plbg. & Htg. - com.stk.1,000.00(d) Etowah Builders & Devel-opers(1) * Common stock - 183 shs.18,300.00 (2) Preferred stock - 47 1/2shs.4,750.00(e) Missouri-Kansas Pipe Line -com. stk.1,200.001,200.0013 Office equipment - Heating Co.2,000.19 2,882.29 14 Shop tools - Heating Co.11,541.06 27,186.69 15 Trucks - Heating Co.6,893.76 9,893.76 16 Business automobile - Ed Haren2,729.20 2,729.20 17 Personal automobile - Sallie Haren2,700.00 2,700.00 18Household furnishings896.001,633.4119M. L. Hutchinson property20Land & Buildings - Heating Co.8,000.008,000.0021Haren & Cline farm (1/2 int.)22Tom Long property1,500.001,500.0023Residence, Etowah, Tenn.4,800.004,800.0024Residence, Tucson, Arizona15,000.0015,000.0025Residence improvements, Tucson761.00761.0026Martin lots2,500.0027Watts Bar Lake lots200.00TOTAL ASSETS$130,909.58$170,427.40LIABILITIES28Notes Payable: (a) Cantrell Banking Co., Eto-wah, Tenn.(1) Etowah Heating Co.$ 9,500.00$ 5,000.00(2) Ed Haren - Personal(b) Citizens National Bank,Athens, Tenn.(1) Ed Haren - Personal29Mortgages Payable: (a) Valley National Bank, Tuc-son, Arizona(1) Residence, Tucson, Ariz.- 1st Mtg.3,604.043,381.86(b) R. W. Poe, Tucson, Arizona(1) Residence, Tuscon, Ariz.- 2nd Mtg.30Accounts payable - Heating Co.2,007.9614,843.0231Subcontracts payable - HeatingCo.7,193.682,722.5532Advances on contracts - HeatingCo.11,071.5133Accrued interest97.5034Taxes payable1,057.60487.8835Advances - Prichard & Haren36Reserve for depreciation9,305.5518,470.13TOTAL LIABILITIES$ 32,668.83$ 56,074.45NET WORTH$ 98,240.75$114,252.95Previous year net worth76,309.5298,240.75Increase in net worth$ 21,931.23$ 16,012.2037Add personal expenditures: (a) Income tax payments5,568.3210,369.04(b) * Personal living expenses6,957.97 8,504.26 (c) * Gifts to Frank Haren, son(d) Gifts to Mrs. Art McGee,daughter96.57(e) Gifts to Jimmy Haren, son1,500.00TOTAL$ 36,054.09$ 34,885.5038Less capital gain and other ex-clusions: (a) M. L. Hutchinson property(b) Haren & Cline farm (1/2 int.)(c) 1948 income tax refund re-ceived in 1949Corrected net income$ 36,054.09$ 34,885.50Net income reported on return20,272.4113,543.63Unreported net income$ 15,781.68$ 21,341.87267 With respect to the foregoing disputed items, the Court makes the following findings of fact: Item No. 1. - The petitioner had some amount of cash on hand (as distinguished from cash on deposit in banks) at December 31 of each of the years 1944 through 1947. The amount thereof at each such date can not be determined from the record. Item No. 2(a)(1). - Petitioner had on deposit in the checking account of the Heating Company at the Cantrell Banking Company in Etowah, on December 31 of each of the years 1944 through 1947, the amounts determined by the respondent. Item No. 2(c)(1). - Petitioner had on deposit, at December 31, 1945 and 1946, in his personal checking account at the Bank of Maryville, the amounts determined by the respondent. Item No. 2(d)(1). - Petitioner did not have on hand $4,500 in "war bonds" at December 31, 1945. Said bonds had been redeemed in 1945, and the proceeds were deposited in petitioner's personal account in the Bank of Maryville. Item No. 6. - Petitioner had some trade accounts receivable for the Heating Company on December 31 of each of the years 1944 through 1946. The amount thereof at each such date can not be determined from the record. Petitioner268 has not established that the trade accounts of the Heating Company at December 31, 1947, were in an amount different from that determined by the respondent. Item No. 8. - The amount of contracts receivable at December 31, 1952, as determined by respondent, $17,221, is overstated by $7,201.90, made up of: (a) $5,701.90 which was included in accounts receivable, and (b) $1,500 representing a liability owing by petitioner to the prime contractor for damage done by petitioner to the work of another contractor. Item No. 11. - Petitioner's capital account in the partnership Maryville Plumbing and Heating Company was in an amount larger than that shown in the respondent's statement, as of December 31 of each of the years 1944 through 1949, by reason of the fact that petitioner's original investment in such partnership and additional contributions for the years 1941 and 1942 were not considered by the respondent's agent in making up the net worth statement. The amount of the understatement of said capital account as of each of the above-mentioned dates can not be determined from the record. Petitioner has not established that the amount of his capital account in the Maryville partnership, 269 as of December 31 of each of the years 1950 through 1953 is different than that determined by the respondent for each such date. Item No. 12(b). - Petitioner, either individually or in his capacity of proprietor of the Heating Company, had an investment of $10,000 as of December 31, 1951, representing a loan to the W. E. Hamby Construction Company. Item No. 12(d)(1). - Petitioner's cost basis for the 183 shares of Etowah Builders & Developers common stock which he owned at December 31, 1953, was $18,300. Items Nos. 13, 14, and 15. - The amounts shown for these items in the above statement were correctly determined by the respondent. Item No. 16. - Petitioner had an automobile which he used for business purposes, at December 31 of each of the years 1944 and 1945. The adjusted basis of said automobile at each of said dates can not be determined from the record. Item No. 17. - Petitioner's wife owned an automobile at December 31 of each of the years 1948 and 1949, and for many years prior thereto. The cost or other basis of the said automobile at December 31, 1948, and 1949, can not be determined from the record. Item No. 34. - Petitioner had liabilities for taxes payable270 of $1,547.26 at December 31, 1953, instead of $487.88 as determined by the respondent. Item No. 37(b). - Pursuant to concession of the respondent made at the trial herein, the amount of petitioner's personal living expenses for the year ending December 31, 1953, are to be reduced by $1,500. Of the living expenses determined by respondent for the year 1952, an indeterminate portion thereof represented deductible traveling expenses of the petitioner for said years. Petitioner has not established that his personal living expenses for the years 1945 through 1951, were less than determined by the respondent. Item No. 37(c). - Pursuant to concession by the respondent, the alleged gift of $1,545.30 in 1951 to petitioner to his son Frank is to be eliminated from the personal expenditures for said year. Facts re Alleged Specific Acts of Fraud On January 9, 1951, Maryville Plumbing and Heating Company issued its check in the amount of $382.98 payable to the Heating Company. When this check was received, Heating Company's bookkeeper stamped the Heating Company's endorsement thereon, and credited the Maryville Company's account with $222.98 as being payment in full. The balance of $160271 was not recorded on the Heating Company's books by the bookkeeper. No explanation of the omission was required or presented by the bookkeeper in the course of her testimony. On March 1, 1951, W. E. Cline (petitioner's partner in the Maryville Plumbing and Heating Company) drew a check payable to the Heating Company for $2,360. Petitioner endorsed the Heating Company's name on the check, cashed the same, and deposited $1,700 of the proceeds in the Heating Company's bank account. An entry was made in the Heating Company's day book debiting cash and crediting the account of the First Avenue Baptist Church in Lenoir City, for whom work had been performed. The balance of $660 represented reimbursement to petitioner and Cline, in their individual capacities, for out-of-pocket expenses for labor and materials which they had paid in connection with the performance of the work for the church. During 1951 and 1952 pipe was in short supply due to the military requirements occasioned by the Korean War. Petitioner was able to purchase more pipe than he actually required for plumbing jobs being performed by the Heating Company. The excess pipe was disposed of by petitioner, at cost, to other272 contractors and business houses with whom he dealt. Most of such excess pipe was purchased by petitioner individually for cash. The parties to whom petitioner sold such pipe, paid for the same in some instances with checks drawn payable to the Heating Company, which petitioner endorsed and deposited in his personal bank account. On two occasions in 1951, petitioner's purchases of surplus pipe (in the respective amounts of $342.75 and $86.52) were charged as expenses on the Heating Company's books, through error. One of the firms to which petitioner sold excess pipe was the Hammer Supply Company of Athens, Tennessee. Said company issued five checks payable to the order of the Heating Company in payment for pipe, in the total amount of $3,216.85 in 1951, and one check in the amount of $343.09 in 1952. The foregoing six checks were deposited in petitioner's personal bank account. The amounts thereof were not recorded as sales on the Heating Company's books. During 1952, petitioner received checks from the Jones-Sylar Supply Company of Chattanooga, Tennessee, representing commissions for sales of merchandise made by petitioner acting as a salesman for said company. Said checks were in273 the respective amounts of $8.20, $8.77, $16.20, and $29.55, and were received after petitioner had quit working for the Jones-Sylar Company. Petitioner did not report the commissions as income on his 1952 return. On February 19, 1953, petitioner received a check in the amount of $17,221 drawn by W. E. Hamby Construction Company, payable to the Heating Company, as the final payment for work as the plumbing and heating subcontractor on a job known as the Clinton Housing Project. Petitioner deposited the entire amount of said check in his personal bank account, without recording it on the books of the Heating Company, for reasons set forth in the statement attached to the amended return hereinafter mentioned. On May 11, 1953, the city of Etowah drew its check in the amount of $4,844.98, payable to the Heating Company for work done on a job known as the De Lano gas line contract. This check was endorsed by petitioner and deposited to his personal bank account. The receipt of said check was not recorded on the Heating Company's books, nor was the amount of said check included in gross income in the original joint return filed by petitioner and his wife for the year 1953 (see statement274 attached to amended return hereinafter mentioned). Petitioner was hospitalized for diabetes from December 17, 1952, through December 26, 1952. He also was hospitalized for a period of 8 days immediately after January 7, 1953. Since his last period of hospitalization, petitioner has been required to follow a diabetic diet and to take daily dosages of insulin. During the period from January 7, 1953, to December 31, 1954, petitioner was required to see his physician on 27 occasions because of his diabetic condition. Petitioner and his wife filed an amended return for the year 1953, on April 28, 1958. Appended to said amended return was a typewritten statement entitled "Explanation of Amended Return," in which the following statements were included: 4. By an oversight, because of change of book-keepers, and due to sickness, the following items of income were overlooked and not registered as income February 19, 1954, for 1953, to wit: (a) February 21, 1953, check from Hamby Construction Company contract (or its bonding company) of $17,221.00, in payment of its stock repurchased at cost of $10,000.00, and leaving net income of $7,221.00. (b) May - 1953 warrant from City of Etowah, 275 Tenn., on contract, $4,844.98. 5. In 1945 [should be 1954] when assisting E. R. Swafford, Jr., I.R.A., in checking the joint return for errors, said items were discovered by Ed Haren and called to attention of said agent, and offered to be paid at once, if the agent would figure the additional tax for him. Taxpayer did not know how to figure or pay it. This assistance has never been given taxpayer by any agent; and he has now had his attorneys figure it as best they can, with 6% interest from March 15, 1954 when due, to April 25, 1958. 6. Additional tax due March15, 1953$3,181.64Interest at 6% to April25, 1958785.87$3,967.41As hereinabove found, the return of petitioner, or of petitioner and his wife, for each of the taxable years 1945 through 1953 here involved, was timely filed. The notices of deficiency covering said years 1945 through 1953 were not mailed to the petitioner and his wife until April 20, 1959, more than 5 years after the due date for filing the return for 1953, the most recent of the taxable years here involved. Ultimate Facts None of the returns filed by petitioner, or by petitioner and his wife, for any of the years 1945276 through 1953, was false or fraudulent with intent to evade tax within the meaning of section 276(a). Opinion Assessment and collection of all the asserted deficiencies and additions to tax involved in the instant case are barred by the statute of limitation contained in section 275(a), unless the respondent establishes by clear and convincing evidence that the returns filed by the petitioner, or by the petitioner and his wife, were false or fraudulent with intent to evade tax within the meaning of section 276(a). After seeing and hearing the witnesses (including the petitioner) and, after weighing and giving careful consideration to all the evidence of record, we have concluded that the respondent has not successfully borne his burden; and we have accordingly hereinabove found as an ultimate fact, that none of the returns was false or fraudulent with intent to evade tax. Respondent relies mainly upon an alleged consistent and sizable understatement of income and also upon certain alleged specific acts of fraud on petitioner's part, to carry his burden of proving fraud. Respondent used the increase in net worth plus nondeductible expenditures method to determine income for each277 of the years involved. We have set forth in our Findings of Fact, respondent's net worth statement in full; and also we have made findings relating to the disputed items in said statement. The latter group of findings shows several errors of consequence in the net worth statement. Some of these errors were proven by petitioner; for example, petitioner proved that there was a duplication of assets for the year 1945 which resulted from respondent's inclusion of $4,500 of United States war bonds among petitioner's assets at the close of that year, when in fact the bonds had been sold earlier and the proceeds deposited in petitioner's bank account. Other errors in the net worth statement were conceded by the respondent; for example, an overstatement of personal living expenses for 1953 by $1,500. In addition to the foregoing and other proven or conceded errors appearing in the net worth statement, we have serious doubts as to the accuracy of other portions of the net worth statement; for example, we are satisfied beyond doubt that petitioner had trade accounts receivable for his Heating Company proprietorship at December 31 of each of the years 1944, 1945, and 1946; but the petitioner278 has not satisfied us as to the amount of such receivables at either of the mentioned dates, and we accordingly are unable to displace the zero figure determined by the respondent with any other figure. The impact upon us of these errors and doubts is that, while we believe that there probably were understatements of income for each of the years, we are certain that they were not so great as those determined by the respondent, and we can not be certain of the exact amounts of the understatement for any year. Thus, while the petitioner and his wife have not sustained their burden of proving the determined deficiencies wholly incorrect, the respondent on the other hand has not established by clear and convincing evidence a pattern of clear, consistent, and substantial understatements extending over a series of years. We next consider the alleged specific acts of fraud charged against the petitioner by respondent. These acts consist mainly of alleged omissions of specific items of income from the returns. As regards the items for 1951 and 1952, they were not significant in amount; and the failure to include them on the returns was, we are convinced, due to errors of judgment or to oversight, 279 but not due to any fraudulent intent to evade a tax to be owing. The omitted items for 1953 were larger in amount; but we are not convinced that the failure to report them was due to fraud. Petitioner was a seriously ill man in 1953; and he was operating without the service of his regular bookkeeper for a month during that year. It was during this month that the check for $17,221 was received from the Hamby Company. Also, it is a close question whether the $17,221 was income for 1953 at all. 3 Also, during the same month of the bookkeeper's absence, the invoice was sent to the city of Etowah, with respect to which the unreported check from the city was paid. But it is to be remembered that the regular practice in keeping the Heating Company's books of account was to credit the sales income account at the time the invoices were mailed. However, the substitute bookkeeper failed, through lack of accounting knowledge, to make a credit to the sales account when she mailed out the invoice to the city of Etowah. The subsequent receipt of the check in payment would not, in the normal course of affairs, have constituted an income transaction with the Heating Company. The failure to treat such280 receipt as an income transaction was not, on the facts of the instant case, fraudulent. We hold that the respondent has not sustained his burden of proving by clear and convincing evidence that the returns of petitioner, and of petitioner and his wife, were false or fraudulent with intent to evade tax. Accordingly, assessment and collection of the deficiencies and additions to tax involved in the instant case are barred by the statute of limitation. We do not reach the remaining issues set forth in our preliminary statement. Decisions will be entered for the petitioners. Footnotes1. All section references herein are to the Internal Revenue Code of 1939, as amended, unless otherwise specified.↩2. In one instance occurring in April 1953, a payment was received by the Heating Company from the city of Etowah for work performed. The check was turned over to petitioner, and a debit was made to his drawing account (rather than cash) and a credit was made to the account receivable with the city. Petitioner either cashed the check or deposited the same in his individual bank account.↩3. Indeed the respondent's net worth statement includes as an asset at December 31, 1952, a contract receivable for $17,221. This has the effect of including said amount in income for 1952.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619701/	United States Mineral Products Company, Petitioner v. Commissioner of Internal Revenue, RespondentUnited States Mineral Prods. Co. v. Comm'rDocket No. 4733-66United States Tax Court52 T.C. 177; 1969 U.S. Tax Ct. LEXIS 138; 162 U.S.P.Q. (BNA) 480; May 5, 1969, Filed 138 Decision will be entered under Rule 50. Petitioner is a United States corporation engaged in the manufacture and sale within this country of sprayed-insulation products. Prior to 1959 its products were sold to a distributor in Canada who applied the products and sold to other applicators. In order to compete against Canadian products, petitioner organized a wholly owned subsidiary under Canadian law and transferred to it in March 1959 certain rights relating to patents, trademarks, and know-how which comprised the collective technical and production knowledge essential to petitioner's business. Through its own manufacturing and marketing facilities the subsidiary then began to operate independently the entire business within Canada. Held: (1) Petitioner transferred a going business consisting of several assets whose taxable nature must be individually determined. (2) The trademarks and know-how constituted "property" within the meaning of 139 sec. 1221, I.R.C. 1954. (3) The payments to petitioner are attributable wholly to the sale of 140 capital assets and are taxable at capital gains rates. Arnold J. Zurcher, Jr., David W. Feeney, and John M. Fedders, for the petitioner.Julius M. Jacobs and Denis M. Neill, for the respondent. Dawson, Judge. DAWSON482 177 Respondent determined deficiencies in petitioner's Federal income tax for its taxable years ended March 27, 1960, and March 26, 1961, in the respective amounts of $ 12,575.32 and $ 17,952.92.The issue for decision is whether amounts received by petitioner during the years in issue from its Canadian subsidiary as payments for the transfer by it to the Canadian subsidiary of certain141 rights relating to patents, trademarks, and know-how are taxable as long-term capital gains or as ordinary income.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner is a corporation organized under the laws of the State of New Jersey on April 10, 1937, and having its principal office and place of business in Stanhope, N.J. It uses the accrual method of accounting and reports its Federal income tax on the basis of a fiscal year ending the last Sunday in March. Federal income tax returns for its fiscal years ended March 27, 1960, and March 26, 1961, were filed with the district director of internal revenue at Newark, N.J.Petitioner is engaged generally in the manufacture and marketing of mineral wool based products for insulation, fireproofing, and acoustical 178 treatment. Prior to 1954, petitioner manufactured and supplied mineral wool to a company headed by James Louis Kempthorne (herein referred to as Kempthorne) which blended the mineral wool with asbestos and other products to produce an insulating material which was applied by spraying devices. Although the company had a marketable product and applicators throughout the United142 States, it experienced financial difficulties which led to bankruptcy in 1952 or 1953. Petitioner's officers, in their efforts to recover on the bankruptcy as a creditor of the company, became acquainted with Kempthorne and his business.Kempthorne, a graduate engineer, began a career in the business of sprayed insulation in 1929 utilizing a product composed of ground newsprint and emulsified asphalt. In 1942 he developed a straight asbestos material, but during World War II when the supply of asbestos became scarce he formulated a more efficient product for use in Government construction consisting of rock wool, asbestos, and cementitious material. In addition, he developed an adhesive material which was sprayed on a surface to prepare it to securely hold the insulating material. Kempthorne then constructed a plant to manufacture the product and acquired for it an Underwriters' Laboratories, Inc., label certifying its uniformity and performance. On April 17, 1950, in connection with a U.S. Government Atomic Casualty Commission project which tested sprayed insulating material, he was certified by the U.S. Government as an expert in the field of sprayed insulation. He presently143 holds approximately 30 patents in the sprayed-insulation industry. His business flourished until a Government-imposed freeze on asbestos in 1952 predicted the ultimate bankruptcy.Three of Kempthorne's former employees and his former foreman organized in 1950 a competing company, Asbestos Spray, utilizing Kempthorne's product formulations and his manufacturing, sales, and application procedures.At the bankruptcy sale of Kempthorne's company, Smith and Kanzler purchased Kempthorne's trademark "Spray Kraft," his fiber formulations, his raw material specifications, his adhesive formulas, and his list of approved suppliers.After extensive discussions with Kempthorne, petitioner's officers decided to enter the sprayed-insulation industry via his connections and know-how. As a result, on February 24, 1954, petitioner organized a wholly owned subsidiary, Columbia Acoustics & Fireproofing Co. (herein referred to as CAFCUS), under the laws of the State of New Jersey for the purpose of marketing the insulation materials which 179 were to be developed and manufactured by petitioner. No formal written agreement was entered into between petitioner and CAFCUS. On the same day, CAFCUS144 entered into an agreement with Kempthorne (herein sometimes referred to as the Kempthorne agreement) which provided, inter alia:Whereas, Kempthorne represents that he has invented, developed, tested, publicized and promoted certain formulae, processes, procedures, machinery and materials used and useful in the field of sprayed insulation for fire retarding, insulating and acoustical purposes, and has knowledge and a reputation in said field, all of which he desires to make available on an exclusive basis to Company, andWhereas, Trustee [Kempthorne] is the owner by virtue of assignment from said Kempthorne of Letters Patent and Applications for Letters Patent483 heretofore issued to and applied for by said Kempthorne, said assignment having been made pursuant to a certain Agreement bearing date March 26th, 1952, copy of which is annexed hereto and Marked Schedule 1, and Trustee desires to authorize Company to manufacture, sell and otherwise act exclusively under said letters Patent and under such Letters Patent as may be issued hereafter pursuant to such Applications; andWhereas, all of the parties hereto desire to enter into an arrangement upon the terms hereinafter set forth; 145 Now Therefore, in consideration of the sum of One Dollar by each of the parties unto the other paid, receipt of which is hereby acknowledged, and in further consideration of the keeping and performing of the several covenants and conditions hereinafter contained to be kept and performed, the parties hereto have agreed and by these Presents do agree as follows:1. Kempthorne and Trustee grant to Company and its assigns for the period from the date of this Agreement to April 1, 1959, full, sole and exclusive rights, privileges and licenses to manufacture and to have others manufacture for it, the blended fibers, slurry mix, binder material and other ingredients, devices, equipment, machinery and apparatus used or useful in sprayed insulation applications, as prescribed in Kempthorne's formulae and processes or under the Letters Patent or Applications for Patents pending, owned by Trustee (said Letters Patent and Applications for Patents pending being set forth in Schedule A, part of Schedule 1, annexed hereto), and as prescribed or defined in any improvement, development, Letter Patent or Application for Patent hereinafter developed, granted or applied for by or on behalf of Kempthorne146 or Trustee during said period; and the sole and exclusive right, privilege and license to sell and distribute throughout the world, except in the Metropolitan New York City area, as hereinafter defined, all of the said blended fibers, slurry mix, binder material, other ingredients, devices, equipment, machinery and apparatus for the said period.2. Kempthorne agrees forthwith to reduce to writing and deliver to Company, and to explain to and instruct Company's designated employees in the correct use of, all formulae, processes and procedures now known to him, or invented, improved upon or developed by him during the term of this agreement, used or useful in the businesses of manufacturing and applying blended fibers, slurry mix, or other materials or combinations thereof to structures or to portions 180 thereof or to products of every nature whatever, for the purposes of strengthening the same or imparting to them fire-retardant, insulating or acoustical properties.3. Kempthorne agrees to make available to Company or to such person or firm as it may designate, promptly on Company's request, his services as a consultant on problems within the scope of his knowledge or talents. 147 4. Kempthorne agrees to communicate and disclose promptly to Company full and complete information concerning any new inventions or improvements discovered or developed by him, including the disclosure of the method of manufacture, the formulae and all other information required to enable Company under its said full, sole and exclusive right, privilege and license, to manufacture and have others manufacture for it according to such new processes, or such new products, as the case may be, and to sell and to distribute the products of such manufacture, all without payment of compensation or charges other than as specified herein during the term hereof or any renewal or extension.5. Kempthorne agrees to cooperate fully forthwith, upon request of Company, in arranging for, conducting, writing up and publicizing, under Company's direction and control, such tests of materials and products manufactured, sold and distributed under said licenses as Company shall desire to have made, at Company's expense; and agrees further that the said tests and reports thereof shall be the property of Company. Further, upon Company's request and payment by it of the expense of patent proceedings relating148 thereto, Kempthorne and Trustee agree to take such action as may be required to assign, transfer and vest in Company for the term hereof and all renewal periods sole control of all rights derived from and proceedings with respect to applications for patents or inventions concerned with any phase of the sprayed insulation field, now or hereafter pending or owned or otherwise held or controlled by Kempthorne, Trustee or either of them. Further, said parties agree that if this contract is not renewed at the end of said484 term or any renewal period, thereafter either Kempthorne or Trustee (whichever may be so entitled) or Company, or both, may license others upon a non-exclusive basis to use such patents or rights as may then exist concerning such inventions, and shall share equally the royalties or other proceeds derived from such licenses.* * * 7. Company agrees that Kempthorne shall have the sole and exclusive rights to purchase from Company for distribution, sale and installation in the Metropolitan New York City area, hereinafter defined, the products manufactured, sold and distributed by Company under the licenses herein granted, upon the following terms and conditions: * * 149 (f) Company grants Kempthorne, for himself and for any corporation controlled by him aforesaid, in connection with his said business in the Metropolitan New York City area, the privilege of using the reports of tests hereinbefore mentioned, and agrees to make available to him the products, machinery and equipment manufactured, sold or distributed by it pursuant to the rights, privileges and licenses granted it by this Agreement, including those products, machinery and equipment prepared according to Kempthorne's and Trustee's present formulae, processes and patents and presently pending applications for patents, and also those developed or improved by Kempthorne or by Company during the term of this Agreement and any extension or renewal thereof.181 Pursuant to this agreement, Kempthorne gave to CAFCUS the product formulations for the insulating materials, known as SprayDon Standard and SprayDon Type I, which he had developed. In addition, he gave to it his list of approved suppliers, his list of applicators throughout the country, and his list of completed jobs along with pictures of the jobs and testimonials from satisfied customers.Kempthorne began to exercise his exclusive150 marketing rights under the agreement in the New York metropolitan area through Sprayon Insulation & Acoustics, Inc., which he had reorganized on April 13, 1953.Within a short time after the Kempthorne agreement was formalized the amiable and cooperative relationship between the parties began to deteriorate. Petitioner's officers had some difficulty in acquiring the precise product formulations from Kempthorne, and the mixed product did not perform as well as anticipated. As a result, petitioner manufactured and CAFCUS marketed very little of the product during the ensuing year.The basic formulation developed by Kempthorne was used by petitioner to manufacture the insulation material first marketed by it. "Factory Inspection and Label Service Procedures" were issued to Sprayon Insulation & Acoustics, Inc., on July 21, 1954, authorizing the use of Underwriters' Laboratories, Inc., labels on the product called "SprayDon Fire Test Fiber" and to CAFCUS on August 5, 1954, authorizing the use of such labels on the product called "Cafco Spray Fiber." The procedures contained the same specifications since the products were identical and were both manufactured by petitioner. Underwriters' 151 Laboratories, Inc., is an independent testing agency whose label is required to meet the specifications for fireproofing materials of most construction contracts in the United States. The results of all tests conducted by it are set out in its listing books which are distributed to all fire-rating organizations, insurance companies, building officials, and municipalities having a building code related to these tests.A test by Underwriters' Laboratories, Inc., of the product manufactured in accordance with Kempthorne's basic formulation (referred to in the report as Cafco Spray Type 1), as applied to a structural steel column, which was conducted on October 29, 1954, and reported on October 27, 1955, indicated that the product was capable of acting as a fire retardant for more than 2 hours. The test report had little commercial value because a 3- or 4-hour rating is required in the industry for the protection of columns.The report of October 27, 1955, did not mention the SprayDon product marketed by Kempthorne, as Kempthorne understood that it 182 would. After a protest by Kempthorne, CAFCUS wrote to him certifying that its product was identical to his and that the test 152 results were properly applicable to both.The principal machine developed by Kempthorne for applying his insulation product was known as the model A machine. The machine sprayed approximately 5 pounds of fiber per minute through a maximum hose length of 50 feet, which was reduced to 15 feet when the hose was in a vertical position. Consequently, the machine and the sprayed product had to be elevated on scaffolding and moved frequently, which485 required considerable labor, to do high ceilings and multistory buildings. The machine operated on the centrifugal blower principle by which the fiber came into direct contact with the blades of the blower as it was propelled into and through the hose in its dry state, causing the blades to be worn out within 2 weeks of operation.A problem of excessive dust was incurred in the use of any machine which propelled the mineral fiber through a hose in a dry state. Under the terms of the Kempthorne agreement, Kempthorne delivered to petitioner a patented device consisting of a spray nozzle with pipes for air and water by which water was injected into the model A machine near the end of the blower causing the fiber to be moistened as it entered the153 hose. The dust control device proved to be impractical because it wetted the fiber excessively causing a buildup and clogging in the spray hose.Petitioner and CAFCUS determined that a considerable research effort was required before a sprayed-insulation product could be marketed under the CAFCO trade name. Consequently, in November 1954, petitioner employed Frank M. Stumpf (herein referred to as Stumpf), a graduate chemical engineer with experience in the sprayed-insulation field, to head its research department. In consideration of his employment, Stumpf agreed that all inventions, developments or improvements discovered by him relating to mineral wool manufacturing and application would become the property of petitioner.Shortly after Stumpf was employed by petitioner, Kempthorne was denied free access to petitioner's plant and was directed to deal exclusively with petitioner's president, James P. Verhalen (herein called Verhalen). Kempthorne did not participate in any research projects conducted by Stumpf but made numerous suggestions to Verhalen relating to the projects.Within a year, petitioner's research staff under Stumpf's direction developed a product capable of fire154 retarding, soundproofing, and thermal insulating first called "CAFCO Spray Standard" (and later marketed as "CAFCO Blaze-Shield") which consisted of the same 183 materials as Kempthorne's original product but in significantly different proportions. The average variance in the percentages of the three ingredients (or groups of ingredients) common to both products was approximately 23 percent. The ingredients in Kempthorne's product had not been blended in any particular order and with only a general direction as to time. CAFCO Spray Standard was blended according to a particular recipe for a more exact period of time. For a period from 3 to 9 months after its development, the product was field tested and found to be dependable. A test by Underwriters' Laboratories, Inc., on CAFCO Spray Standard was conducted on October 4, 1955, and, as a consequence, the product was given a 3-hour rating as protection for structural steel beams in a report issued on February 17, 1956. Two later tests utilizing greater thicknesses of the product which were reported on May 8, 1958, gave it 4- and 5-hour ratings. A report issued by Underwriters' Laboratories of Canada on September 8, 1958, 155 gave CAFCO Spray Standard a 3-hour rating.In September 1956, Underwriters' Laboratories, Inc., revised its Factory Inspection and Label Service Procedure of August 5, 1954, for the product then called CAFCO Spray Fiber, substituting the name "CAFCO Spray Type 1" and altering the formulation greatly, principally by increasing the percentage of cementitious material by over 600 percent. CAFCO Spray Type 1 was later marketed as "CAFCO Sound-Shield" to function principally as an acoustical finishing product.A third product first called CAFCO Spray Industrial, and now marketed as CAFCO Heat-Shield, was developed by petitioner's research department. It consists of the same basic materials combined in different proportions resulting in a less expensive product with lesser fireproofing capacity.The registration of the trade names was obtained by petitioner in the U.S. Patent Office and in the Canadian Trade Marks Office as follows:DateTrademarkCountry5/10/55CAFCOUnited States.12/21/56CAFCOCanada.3/24/59Sound-ShieldUnited States.11/3/59Blaze-ShieldUnited States.11/3/59Heat-ShieldUnited StatesAs part of its efforts to maintain quality control and to avoid156 variances from the specifications in the Underwriters' "Laboratories Factory Inspection and Label Service Procedures," petitioner's research department under Stumpf's direction tried unsuccessfully to break down samples of the CAFCO products from completed jobs into their 184 component parts and determine the percentages of the various raw materials. It determined that consistency could be486 maintained only by careful observation of the mixing process to determine that the raw materials were included in the proper proportions and in the proper mixing order.Soon after becoming an employee of petitioner, Stumpf, at the urging of petitioner's officers and Kempthorne, set out to develop a dependable dust control device for the model A machine. After considerable research during which 25 different nozzles were tested, a successful design was arrived at which consists of two fine tubes, one inside the other, through which water (or other liquid) and air under pressure pass causing a finely atomized moisture to emanate from the joint orifice. The tubelike nozzle is positioned inside the rigid hose leading from the blower through which the dry fiber passes at high speeds causing it157 to be moistened. A length of flexible tube, called a flapper tube, is situated immediately in front of the nozzle and between two sections of rigid hose causing a vibration which prevents the wet fibers from building up and thus self-cleans the system.A patent application was submitted on the device listing Kempthorne and Stumpf as joint inventors. A patent was issued in their joint names noting the assignment of Stumpf's rights to petitioner.Because of the unsatisfactory performance of the A machine for certain types of jobs and its inefficiency, Stumpf began research which resulted in the development of the model H machine which uses a positive pressure blower that propels fiber materials through a feeder without the materials coming into contact with the blower. The model H machine can apply 20 to 25 pounds of fiber per minute with hose lengths in excess of 200 feet. These features along with its capacity to propel the spray to great vertical heights often allow the completion of an entire building without moving the machinery or the fiber materials. A U.S. patent application was submitted on the machine on July 1, 1958. Patents were subsequently issued on it in the United158 States, Canada, and Australia listing Stumpf as inventor and petitioner as owner by assignment.Richard L. Kempthorne, son of James L. Kempthorne, was employed on a full-time basis by CAFCUS from April 1954 until June 1956. In his first few months with the company he helped spray the product developed by his father for certain tests. Thereafter, his duties were confined to sales of the CAFCO products and to the preparation of a sales manual. He was not authorized to have access to the CAFCO product formulas.Approximately 6 months before he left the full-time employ of CAFCUS, Richard L. Kempthorne notified the company of his decision to leave. At about that time, he wrote the formulas for CAFCO 185 Spray Type I and CAFCO Spray Standard on the back of his desk calendar pad at CAFCUS, and he took the information with him when he left.CAFCO products were purchased from petitioner by CAFCUS, then sold to distributors throughout the country, outside of the Metropolitan New York area, who were licensed to use the patented machinery and certain sales and application know-how. The distributors received expansive manuals containing technical and practical information helpful in159 sales and application. They were required to use the proper equipment, to train their supervisory personnel, and to apply and sell the CAFCO products in accordance with the manuals.The sprayed-insulation products of petitioner's competitors contained basically the same raw materials as the CAFCO products but in varying qualities and quantities. Some competitors prepared sales manuals which were generally less comprehensive than petitioner's. Sometimes contractors would substitute a competing product when the specifications called for "CAFCO or equal."On June 1, 1957, CAFCUS entered into a license agreement with E. T. Sampson & Co., Ltd. (herein referred to as Sampson), a Canadian corporation having its principal place of business in Montreal, Canada, granting to it the exclusive rights for 3 years to sell, distribute, and apply CAFCO products in all of Canada. CAFCUS agreed to sell to Sampson its requirements of CAFCO sprays and application equipment and to keep it informed of the latest technical developments. In return, Sampson agreed to purchase all necessary materials from CAFCUS. At the outset, Sampson operated primarily as an applicating contractor but later developed160 more of a distributor function, sublicensing others to apply CAFCO products.As a result of the election as Canada's Prime Minister in 1957 of John Diefenbaker, a member of the Conservative Party who had campaigned on the slogan of "Buy Canadian," products manufactured in Canada were given a 10-percent preference in Government contracts. In order to bid competitively on several large Canadian Government contracts, petitioner organized in April 1958 a wholly owned Canadian subsidiary,487 Columbia Acoustics & Fireproofing Co. (Canada), Ltd. (herein referred to as CAFCAN), to manufacture the CAFCO products in Canada.CAFCAN began operations in August 1958 under an oral license from petitioner. The "basic element," a mixture of specific amounts of portland cement, bentonite clay, and asbestos, of the CAFCO products continued to be manufactured by petitioner and was sold to CAFCAN to be mixed with rock wool and asbestos to form the final products. CAFCAN then sold the final products to Sampson, the sole 186 Canadian distributor, which, in turn, sold them to applicators throughout Canada. CAFCAN paid petitioner 3 cents for every pound of CAFCO product it mixed.In a contract dated161 October 10, 1958, CAFCUS agreed to sell to two Australian companies (herein referred to as the Bowsers) the CAFCO Spray basic element and granted to them "an exclusive license * * to sell, distribute and apply CAFCO Spray" for the mainland of Australia, New Zealand, and two other Pacific islands. The Bowsers were authorized to mix, in those areas, the basic element with the other ingredients required to constitute CAFCO Spray, provided that they buy all the basic element and spray equipment from CAFCUS, that they comply with its standards of quality, and that they pay royalties quarterly at the rate of 3 cents per pound of all CAFCO Spray mixed by them. CAFCUS agreed to furnish all the Bowsers' requirements of the basic element and spray equipment and to make available to them the latest research information and technical advice.By late 1958 the increasingly fractious relationship between petitioner and Kempthorne had reached the breaking point with each party completely dissatisfied with the performance of the other under the Kempthorne agreement. Petitioner felt that Kempthorne did not have the technical know-how that he purported to have and that sales in the New York area162 had not been as great as they should have been. Kempthorne, in turn, felt that petitioner's officers had not fully cooperated with him, that they had unjustifiably denied him access to their research facilities, and that as a result of their failure to include his SprayDon products in Underwriters' Laboratories, Inc., test reports and labeling procedures, he was precluded from bidding on many large jobs in the New York area. He adamantly maintained throughout that all CAFCO products were essentially the same in formula as the products whose formulas he originally revealed to petitioner in 1954.In late 1958, however, petitioner offered to renew the Kempthorne agreement for a 5-year period at a reduced royalty if he would relinquish his rights to market in the New York area. Kempthorne rejected the terms of the offer, and the agreement was permitted to expire on March 31, 1959.On March 18, 1959, CAFCUS sent letters to all of its customers informing them that the Kempthorne-CAFCUS relationship would expire, that the CAFCO products were developed solely by the research department of petitioner and were the sole property of petitioner, and that after the termination date CAFCUS would163 commence sales in the New York area.187 Thereafter Kempthorne issued a notice to the trade affirming the termination of the Kempthorne agreement and denying that the CAFCO product formulations were developed solely by petitioner's research department.Subsequently, in 1961, Kempthorne, individually and as trustee, and Sprayon Insulation & Acoustics, Inc., instituted a suit against CAFCUS, petitioner, and Stumpf in the Superior Court of New Jersey, Chancery Division, Essex County. The complaint generally alleged that (1) by the terms of the Kempthorne agreement, CAFCUS was to provide Kempthorne with certain test reports which it refused to give him and which refusal caused Kempthorne severe damage, (2) CAFCUS had refused to account to Kempthorne for the full amount of royalties owed to him under the agreement, and (3) the patent for the dust-control device should be the sole property of Kempthorne or that he should receive royalties resulting from any license of such patent.In the answer, the defendants (1) alleged that Kempthorne had the privilege of using the test reports only during the term of the agreement and only within the Metropolitan New York City area, (2) denied164 that CAFCUS refused to render an accounting to Kempthorne or refused to permit him or anyone designated by him to examine its books to determine the accuracy of the payments, and (3) denied that Kempthorne was the sole inventor of the dust-control device patented by him and Stumpf jointly.CAFCUS, petitioner, and Stumpf counterclaimed for an order restraining Kempthorne and Sprayon Insulation & Acoustics, Inc., from misrepresenting that any of their products were the same as those of CAFCUS or petitioner or were manufactured by them,488 and from misrepresenting that Stumpf was in their employ. Kempthorne and Sprayon Insulation & Acoustics, Inc., answered the counterclaim with a general denial.On April 11, 1963, the parties settled the suit and a final order was entered. The defendants paid Kempthorne $ 5,000, and Kempthorne and Sprayon Insulation & Acoustics, Inc., were ordered to "refrain from representing in any manner that products manufactured or sold by them are manufactured by defendants or any of them, or are the same as products manufactured or sold by defendants or any of them," and to refrain from representing that Stumpf was employed by them.With respect to the patents165 on the dust-control device issued jointly to Stumpf and Kempthorne and any patents covered by the Kempthorne agreement, the order stated that CAFCUS and petitioner could use the patents as they desired without compensating Kempthorne or 188 Sprayon Insulation & Acoustics, Inc., and that they could license others to use the patents on a nonexclusive basis.On April 22, 1959, two agreements were simultaneously executed whereby Sampson ceased to be the exclusive distributor in Canada of the CAFCO products and equipment for CAFCUS and became the exclusive distributor of the products for CAFCAN. Sampson retained the equipment delivered to it by CAFCUS under terms and conditions which survived the termination of their earlier contract, and CAFCUS agreed to continue to make new research information available to Sampson through CAFCAN. All of the Kempthorne patents and patent applications, including the joint patent of Kempthorne and Stumpf issued in the United States and in Canada, were listed in the agreement between CAFCAN and Sampson. Also listed were the United States and Canadian patents issued to petitioner, as assignee of Stumpf, on the model H machine and the Canadian trademark166 applications of Blaze-Shield, Heat-Shield, and Sound-Shield (which were thereafter issued to CAFCAN).In September 1960, petitioner and CAFCAN executed an agreement (sometimes referred to herein as the Canadian agreement) dated March 16, 1959, which granted:to Cafco, Canada, the following exclusive rights, licenses and privileges, to be exercised solely within the territorial limits of Canada, and subject only to the conditions set forth in this agreement.(a) To manufacture, use and sell, and to grant to others sub-licenses to manufacture, use and sell, products embodying the inventions described in the patents listed on Schedule 1 annexed hereto; and(b) to use and to grant to others the right and privilege to use the trademarks listed on Schedule 1 annexed hereto; and(c) to use and to grant to others the right and privilege to use the manuals, reports and other documents listed on Schedule 2 annexed hereto.In return, CAFCAN agreed to pay petitioner quarter-annually 3 cents per pound of blended fibers mixed by it. The Canadian patents listed in schedule 1 covered, with one exception, the same inventions which were the subjects of the grant in the Kempthorne agreement. The167 exception was the dust-control device for which a Canadian patent was issued on July 23, 1957, listing Kempthorne and Stumpf joint inventors. Schedule 1 also listed a Canadian patent application filed November 21, 1958, on the model H machine which resulted in the issuance of Canadian patent No. 628,135 to petitioner, as assignee of Kempthorne, on September 26, 1961. The trademarks referred to in the agreement consisted of one issued Canadian trademark (CAFCO) and three Canadian trademark applications (Sound-Shield, Blaze-Shield, and Heat-Shield) which were issued in October and December 1960.189 The manuals and reports listed in schedule 2 of the Canadian agreement consisted of a manual of manufacturing methods for blended fibers, raw material specifications, finished-product specifications, quality-control procedures and devices for measurement, design specifications for mixing plant and material handling system, all test data for acoustical, insulating, and fireproofing properties of blended fiber products, applications and sales material (setting forth procedures and cautions with respect to application of CAFCO products, recommended methods of selling, promoting, and168 estimating costs of application), and research reports concerning uses and properties of CAFCO products.The manuals and reports contained specific data concerning every aspect of petitioner's successful operations. This data included the product formulations for the three basic CAFCO products, precise quality specifications for raw materials comprising the CAFCO products (which were of equal importance with the formulas relating to the quantity of each material), specifications for liquid CAFCO Adhesive (a priming 489 material) and CAFCO Sealer (a plastic finishing material) references to acceptable sources of supply, tests exclusively applicable to the CAFCO products which enable the applicator to determine whether the finished product will perform satisfactorily, fire-test reports to aid in marketing the product, and techniques developed by experience relating to sales, cost estimating, and application. Although the information was constantly updated, the great bulk of the materials was compiled more than 6 months prior to March 16, 1959. Some portion of this material was accessible to petitioner's competitors, but most was not generally known in the industry or was uniquely applicable169 to the CAFCO products.The exclusive grant of rights, licenses, and privileges under the Canadian agreement was to remain effective for the periods during which the various patents and trademarks were in force unless sooner terminated by petitioner as a result of CAFCAN's default in the performance of any of its obligations. Petitioner could terminate CAFCAN's rights upon 30 days' notice if CAFCAN's remittance to petitioner for any year totaled less than $ 5,000, or if CAFCAN became insolvent. CAFCAN covenanted to keep complete books and records of the accounts of its business and to make periodic reports to petitioner.Conferences held by petitioner's attorney regarding the drafting of the formal agreement occurred intermittently from April 28, 1960, to September 27, 1960. The final agreement provided that its provisions related back to, and were effective commencing, June 15, 1958.190 From 1959 through 1961 all of the officers of CAFCAN were officers or employees of petitioner or CAFCUS, or both, and the boards of directors were substantially the same. None of them were stationed at the Canadian office but all were stationed at the main offices of petitioner and CAFCUS170 in Stanhope, N.J. The Canadian office and factory of CAFCAN was located in Montreal, Canada, and was in charge of a manager who was a Canadian national and who had an average of three employees working under his supervision. He took care of filling Sampson's orders for CAFCO products after confirmation by petitioner; he supervised the final mixing stage of the CAFCO Spray basic element with asbestos and the rock wool purchased from petitioner and, after March 1959, supervised the entire mixing process; he supervised the bagging of the CAFCO products; and he took care of shipping them to their ultimate destination. CAFCAN has its own bank accounts, payroll, and personnel and is operated independently from petitioner. Petitioner does supply certain administrative and bookkeeping services to CAFCAN.During its fiscal years ended March 29, 1959, March 27, 1960, and March 26, 1961, petitioner received from CAFCAN, in payment of the 3 cents per pound of CAFCO products it had mixed in those years, the amounts of $ 26,686.20, $ 46,575.30, and $ 71,872.20, respectively (expressed in U.S. dollars). In its Federal income tax return for the fiscal year ended March 29, 1959, petitioner reported171 the $ 26,686.20 received from CAFCAN as ordinary income; in its Federal income tax returns for the fiscal years ended March 27, 1960, and March 26, 1961, the 2 years involved herein, it reported the respective amounts of $ 46,575.30 and $ 71,872.20 as "Payments received on exclusive assignments of patents and trademarks" taxable as capital gains from the sale of property held for more than 6 months.In its Canadian income tax returns covering the years in issue herein, CAFCAN deducted as expenses the payments made to petitioner of the 3 cents per pound of the CAFCO product it mixed. In addition, it withheld and remitted to the Receiver General of Canada 15 percent of such payments as withholding tax on nonresidents.During the years in issue CAFCUS filed separate Federal income tax returns and did not file any consolidated return with petitioner.Upon audit of petitioner's income tax returns for the fiscal years ended March 27, 1960, and March 26, 1961, respondent, among other adjustments, disallowed the capital gains treatment of the respective amounts of $ 46,575.30 and $ 71,872.20 and determined that they were taxable as ordinary income.191 ULTIMATE FINDINGS OF FACTThe172 Canadian agreement was a bona fide recordation of an oral contract entered into by petitioner and CAFCAN on or about March 16, 1959.As of March 16, 1959, the formulas for the CAFCO products constituted trade secrets.OPINIONRespondent's position that the payments in issue are taxable as ordinary income is based upon four principal arguments: (1) The Canadian agreement was not a bona fide agreement of sale but rather a paper transaction set up between a parent corporation and its490 wholly owned subsidiary to alter the tax consequences of a preexisting licensing arrangement; (2) petitioner did not own the patents listed in the Canadian agreement but had only the right to grant CAFCAN a nonexclusive license to manufacture and to license others to use the patents in Canada; (3) the CAFCO formulas and "know-how" did not have the quality of exclusivity so as to constitute "property" within the purview of sections 1221 or 1231, I.R.C. 1954; 1 (4) 192 where an entire business is sold in a "package deal," it does not constitute a single capital asset but several individual assets, among which the sales price must be allocated to determine tax consequences; and to the extent that any173 part of the intangibles transferred under the Canadian agreement constituted section 1221 or section 1231 property, petitioner failed to prove a portion of the entire consideration allocable to it.174 It is petitioner's contention that under the Canadian agreement which became effective on or about March 16, 1959, it transferred all substantial rights in certain patents, trademarks, applications, and know-how, which it had possessed for more than 6 months, to a separate entity, its wholly owned Canadian subsidiary, giving rise to capital gains treatment of the proceeds of the "sale" under sections 1221 and 1231. Petitioner argues that the principal portion of the know-how was secret and was a requisite to the profitable utilization of the patents and trademarks; the remainder was an incident of the patents and trademarks and assumed their nature. Petitioner does not contend that it was a "holder" of the property rights within the meaning of section 1235. 2175 We first consider respondent's contention that petitioner and CAFCAN did not in fact make a bona fide agreement of sale on March 16, 1959, the date appearing on the subsequently drafted Canadian agreement. It is well established that "an agreement between a corporation and its sole stockholders [or, it follows a fortiori, its wholly owned subsidiary] is valid and enforceable, if the arrangement is fair and reasonable, judged by the standards of the transaction entered into by parties dealing at arm's length." Stearns Magnetic Mfg. Co. v. Commissioner, 208 F.2d 849">208 F. 2d 849, 852491 (C.A. 7, 1954); Leonard Coplan, 28 T.C. 1189 (1957).Two key factors convince us of the bona fides of the transaction between petitioner and CAFCAN. First, the location of the entire manufacturing process for the Canadian market within Canada was motivated by business considerations. The Canadian Government began in 1958 granting a 10-percent preference in Government contracts to products manufactured in Canada. CAFCAN would have lost a substantial portion of its business if it had been compelled to compete at this disadvantage. In addition, 176 the location of the manufacturing facilities in Canada caused a reduction in raw material costs since the asbestos used in the CAFCO products comes from Canadian sources. 193 Secondly, the sales price of 3 cents per pound of fiber mixed by CAFCAN was reasonable in comparison with payments made by other companies located outside the United States which distributed the CAFCO products. See Stearns Magnetic Mfg. Co. v. Commissioner, supra.Respondent refers to the Canadian agreement as "window-dressing," citing the predating as an attempt to retroactively alter tax consequences. Clearly, however, it "is competent for the parties to agree that a written contract shall take effect as of a date earlier than that on which it was executed, and when this is done, the parties will be bound by such agreement." Brewer v. National Surety Corporation, 169 F. 2d 926, 928 (C.A. 10, 1948). After a careful review of the evidence before us, we hold that the facts comport to the form of the transaction, i.e., the existing licensing arrangement between petitioner and CAFCAN was transformed into a complete sale of petitioner's177 Canadian operations to CAFCAN on or about March 16, 1959. We note that the agreement provides that its terms relate back to June 15, 1958; the parties concede that CAFCAN did not begin operations until August 1958, and the evidence indicates that it operated as a licensee for a few months. See Rose Marie Reid, 26 T.C. 622">26 T.C. 622 (1956).In essence, what we have here is the transfer of a going business in Canada carried on by a U.S. corporation with the marketing aid of a Canadian distributor to a wholly owned Canadian subsidiary formed for the purpose of carrying on the entire operation within the bounds of Canada. 3 We decline, however, to treat the business as a single asset and determine whether it is essentially capital in nature, as petitioner would have us do, but instead we shall categorize the various assets transferred and determine their taxable nature individually. Redman L. Turner, 47 T.C. 355 (1967); Watson v. Commissioner, 345 U.S. 544">345 U.S. 544 (1953); Williams v. McGowan, 152 F. 2d 570 (C.A. 2, 1945). See also 194 Brainerd, "Income From Licensing178 Patents Abroad," 38 Taxes 209">38 Taxes 209 (1960).179 Five Canadian patents listing Kempthorne as inventor covering spray equipment (relating to the model A machine) and processes and one Canadian patent issued in the joint names of Stumpf and Kempthorne were granted to CAFCAN under the Canadian agreement "to manufacture, use and sell, and to grant to others sub-licenses to manufacture, use and sell, products embodying the inventions" within the territorial limits of Canada.A patent is intangible property whose value is protected by a Government-imposed monopoly for a period of time over which its development costs are normally depreciable. Sec. 1.167(a)-3, Income Tax Regs. Because it constitutes depreciable property when used in the operation of a business, it does not qualify as a capital asset under section 1221, but, if held for more than492 6 months, its sale or exchange may result in capital gain under section 1231. 4 See 3B Mertens, Law of Federal Income Taxation, secs. 22.126 and 22.133 (1966 rev.).180 Petitioner (through CAFCUS) was in the business of selling products, not patents. See Albright v. United States, 173 F. 2d 339 (C. A. 8, 1949). Therefore, the patents and patent application, which were the subject of the transfer of CAFCAN, did not constitute petitioner's stock in trade or inventory, nor were they "property held by [petitioner] primarily for sale to customers in the ordinary course of [its] trade or business." The determinative question remains, however, whether the transfer in question constituted a "sale" or a "license." If it was in the nature of a license, the consideration paid for it constituted a royalty and is taxable as ordinary income. Sec. 61(a)(6); Redler Conveyor Co. v. Commissioner, 303 F. 2d 567 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court. Whether the payment is made in a lump sum or over a period of time in amounts based upon the use of the invention by the grantee is immaterial to this determination. Arthur C. Ruge, 26 T.C. 138">26 T.C. 138 (1956); Vincent A. Marco, 25 T.C. 544">25 T.C. 544 (1955).195 To determine 181 the quantum of interest in the five Kempthorne patents transferred to CAFCAN under the Canadian agreement, we must look first to the legal relationships established by the Kempthorne agreement. Kempthorne granted to CAFCUS the exclusive right to manufacture, and the exclusive right to sell throughout the world except in the Metropolitan New York area, the sprayed-insulation materials and equipment developed by him for the period from February 24, 1954, to April 1, 1959. Upon the termination of that period without renewal, both Kempthorne and CAFCUS were to have the right to license others upon a nonexclusive basis to use the patents and invention rights. It is clear from the terms of the agreement that Kempthorne retained ownership of his patents and inventions. The most critical factor was the limitation of the contract period to approximately 5 years, a period not coterminous with the lives of the patents. See Redler Conveyor Co., supra;Thomas D. Armour, 22 T.C. 181 (1954); Lynne Gregg, 18 T.C. 291">18 T.C. 291 (1952), affd. 203 F. 2d 954 (C.A. 3, 1953). Since CAFCUS received182 limited rights in the patents, less than the whole interest which Kempthorne possessed and could have transferred to it, the transfer constituted a license, not a sale. Waterman v. Mackenzie, 138 U.S. 252">138 U.S. 252 (1891).Plainly, petitioner transferred under the Canadian agreement all substantial rights it may have possessed in the patents to CAFCAN. The grant was for the lives of the patents and embodied the magic language "manufacture, use and sell" (Waterman v. Mackenzie, supra); the right of petitioner to terminate upon certain conditions subsequent did not constitute the retention of "substantial rights." Allen v. Werner, 190 F. 2d 840 (C.A. 5, 1951); Commissioner v. Celanese Corp. of America, 140 F.2d 339">140 F.2d 339 (C.A.D.C. 1944). Petitioner could, however, convey to CAFCAN no greater rights than it possessed. CAFCUS received a license in patents from Kempthorne and could, in turn, grant to others no more than a sublicense. Federal Laboratories, Inc., 8 T.C. 1150 (1947). It should be noted that nowhere in this record do183 we find direct evidence that CAFCUS transferred its rights under the Kempthorne agreement to petitioner. CAFCUS operated as a separate legal entity and filed its Federal income tax returns as such during the years in issue. We hold that any amounts received by petitioner as a consequence of the transfer of its rights in the five Kempthorne patents listed in the Canadian agreement constituted royalty income.We likewise conclude that, to the extent of Kempthorne's interest, CAFCAN received a sublicense in the Canadian patent on the dust-control device issued jointly to Kempthorne and Stumpf. We are not persuaded on this record by petitioner's argument that Kempthorne 196 had no valid interest in the493 patent because Stumpf did the final development of the invention. Since Stumpf's interest was assigned absolutely to petitioner, petitioner was in a position to, and did in fact, sell that interest to CAFCAN.Petitioner possessed, through assignment from Stumpf, all property rights in the model H machine, which had been reduced to practice more than 6 months prior to the date of the Canadian agreement. The Canadian patent application, which constituted a manifestation of these184 rights, was assigned absolutely for its life to CAFCAN under the Canadian agreement. A patent application is an assignable property right (Saunders v. Commissioner, 29 F. 2d 834 (C.A. 3, 1928)), but not a depreciable asset. When the patent is issued depreciation may be taken over its life. Hershey Manufacturing Co., 14 B.T.A. 867 (1928), affd. 43 F. 2d 298 (C.A. 10, 1930). We hold that the application constituted a capital asset which was sold. See Samuel E. Diescher, 36 B.T.A. 732">36 B.T.A. 732 (1937), affd. 110 F. 2d 90 (C.A. 3, 1940), certiorari denied 310 U.S. 650">310 U.S. 650 (1940).The second category of assets transferred under the Canadian agreement consisted of the Canadian trademark and trademark applications, the exclusive use of which was granted to CAFCAN for all of Canada for the lives of the trademarks. The common-law right to prevent unfair competition and the statutory right permanently to exclude others from the use of a registered name certainly are valuable property rights which may be assigned. Those rights185 with respect to the names referred to in the Canadian agreement constituted capital assets which were sold under the agreement. Seattle Brewing & Malting Co., 6 T.C. 856">6 T.C. 856 (1946), affd. 165 F. 2d 216 (C.A. 9, 1948); see also Norwich Pharmacal Co., 30 B.T.A. 326">30 B.T.A. 326 (1934). The Canadian trademark "CAFCO" was issued on December 21, 1956; the trade names for which Canadian trademark applications had been made were first used in September 1958.The third category of assets transferred may be loosely termed "know-how" 5 and is represented by the manuals, reports, and other documents. Petitioner argues, and respondent denies, that the ideas reduced to tangible form in these papers possess the attributes of "property" within the meaning of section 1221.An inventor's property right in his invention exists at the time of its reduction to actual186 practice; a patent later granted for the invention merely creates an additional monopoly right to exclude others from its use for a period of years. Samuel E. Diescher, supra. The right of property in industrial knowledge has long been recognized 197 by this Court. George S. Mepham, 3 B.T.A. 549">3 B.T.A. 549 (1926). Similarly, we have held that a secret formula used in a manufacturing business constitutes property. Wall Products, Inc., 11 T.C. 51">11 T.C. 51 (1948). Neither the fact that the formula is simple and may be broken down into its constituent parts by a competent chemist 6 nor that a patent for the formula has not been applied for negatives the property right. Wall Products, Inc., supra.Without question, the187 formulas for the CAFCO products were the heart of petitioner's business. The parties agree that if they were "secret," they constituted "property" within the meaning of section 1221. This record is replete with conflicting testimony on this point, largely as a result of the apparent ill will between Kempthorne and petitioner's officers. Concrete evidence relating to competitor's formulas was not made available and the exact formulation of the various CAFCO products as compared to SprayDon formulas developed by Kempthorne prior to 1954 is far from clear. But, on the preponderance of the evidence, we have found as a fact that the Kempthorne formulas were changed substantially without the aid or knowledge of Kempthorne after Stumpf became an employee of petitioner and were, at the time of the transfer to CAFCAN, trade secrets.All products in the sprayed-insulation field are composed of essentially the same basic ingredients. Not all, however, have the same heat or flame retarding or acoustical properties, as a result of a variance in the quality and quantity of the various ingredients and the method by which they are mixed. This is reflected by the great weight afforded the Underwriters' 188 Laboratories, Inc., tests and factory label procedures throughout the industry. Consistency in performance and economy in application are the most essential attributes of a successful product and depend entirely upon a precise formulation."CAFCO Spray Standard" developed by Stumpf differed from Kempthorne's494 basic formulation, "SprayDon Fire Test Fiber" (and initially called CAFCO Spray Fiber by petitioner), in at least three material respects: (1) The average variance in the percentages of the three ingredients (or groups of ingredients) common to both products was approximately 23 percent; (2) CAFCO Standard was mixed according to a precise recipe controlling both the order and time of mixing, while Kempthorne mixed his product without order and for imprecise periods of time; and (3) CAFCO Standard contained a single (alternative) grade of Canadian asbestos while the Kempthorne product contained a blend of three particular grades of Canadian asbestos. The formulation for CAFCO Spray Type 1 differed 198 from the SprayDon formulation to even a greater extent. A "Factory Inspection Procedure" issued September 21, 1956, on "CAFCO Spray Type 1" revising an earlier procedure 189 on "CAFCO Spray Fiber" (which, again, was identical to SprayDon Fire Test Fiber) set out a formulation in which the percentage of the various ingredients varied greatly, with over a 600-percent increase in the percentage of cementitious materials. It is clear that the formulas were "so substantially [improved] that [petitioner] became invested with the ownership." Reynolds Metals Co. v. Skinner, 166 F. 2d 66, 76 (C.A. 6, 1948). And it appears from this record that, as a corollary to this change in formula, the performance of the CAFCO products was substantially changed.It follows, therefore, that the formulas acquired from Kempthorne by Asbestos Spray in 1950 and Smith & Kanzler in 1953, two of petitioner's competitors, were not the same formulas transferred by petitioner to CAFCAN. Petitioner carefully protected its formulas from becoming known in the trade, particularly in its dealings with its licensee in Australia and with CAFCAN before the final "sale" was made. The "basic ingredient" was mixed by petitioner and was then shipped to the licensees who, within their own territories, blended it with the other ingredients to form the final products. 190 By keeping the formula for the basic ingredient secret, petitioner was able to prevent the overall formulas from becoming known in the trade. They were no less trade secrets because of a breach of confidence by Richard L. Kempthorne, the son of James Kempthorne, in copying them before leaving the employ of petitioner. Petitioner's interest in the formulas was sufficient to evoke injunctive relief to prevent Richard L. Kempthorne from using them or disclosing them to others. Club Razor & Blade Mfg. Corporation v. Bindzsus, 131 N.J. Eq. 283">131 N.J. Eq. 283, 25 A. 2d 31 (1942); Nelson v. Commissioner, 203 F. 2d 1 (C.A. 6, 1953), reversing a Memorandum Opinion of this Court. We hold that the formulas constituted "property" as that term is used in section 1221. 7191 The design of a special device created by petitioner to measure the bulk density of fibers was transferred to CAFCAN as part of the "know-how." The evidence indicates that it was not known to the trade, and respondent does not contend otherwise. Accordingly, we hold that it constituted a capital asset.By granting to CAFCAN the exclusive right within the territorial limits of Canada to use and to grant to others the right to use the 199 formulas and the design, petitioner conveyed its most important property right in them, viz, the right to prevent unauthorized disclosure. See E. I. Du Pont De Nemours and Co. v. United States, 288 F. 2d 904 (Ct. Cl. 1961). Consequently, we hold that they were the subject of a "sale" rendering the gain realized taxable at capital gains rates.The finished product specifications, quality-control procedures, and the test data and research reports relating to the properties of the CAFCO products constituted technical information unique to the CAFCO products and necessary for the effective utilization of the transferred formulas. The formulas for CAFCO adhesive and sealer were essential to CAFCAN in order192 to obtain a supply for its distributors. Without these products a proper application of the CAFCO products would have been difficult or impossible. This information was an incident of the patents and assumed their nature as capital assets. Heil Co., 38 T.C. 989">38 T.C. 989 (1962).Our conclusion is the same with respect to the bulk of the other materials contained in the manuals which dealt principally with sales, cost estimating, and application techniques. Even though much of the material was available to competitors, it constituted valuable marketing information, developed through practice, which was oriented toward the particular properties of the CAFCO495 products and which could be obtained from no other source. Assuming arguendo that this information was tantamount to consulting services, as respondent contends, we find that it was of the type usually called for to implement the sale of highly technical inventions and, thus, was ancillary and subsidiary to the assignments of the formulas and the patent application. Arthur C. Ruge, 26 T.C. 138">26 T.C. 138 (1956); see also Rev. Rul. 55-17, 1 C.B. 388">1955-1 C.B. 388.193 The vast majority of the materials comprising the "know-how" transferred to CAFCAN was compiled and dated before March 16, 1959. The remainder we consider de minimis with respect to our conclusion that the "know-how" constituted a capital asset held by petitioner for more than 6 months prior to its transfer to CAFCAN.Finally, we must allocate the sales price in accordance with our comminution of the bundle of rights transferred into its fragments. Williams v. McGowan, supra. There is no question that the deferred payments should be included in income when received. See C. W. Titus, Inc., 33 B.T.A. 928 (1936).The only patent transferred by Kempthorne under the Kempthorne agreement which proved to be of substantial value to petitioner was the model A machine patent. After the development of the model H machine, the model A machine became impractical for all but a very limited number of jobs and was not manufactured thereafter. The only 200 patent transferred under the Canadian agreement, then, which had any significant value as of March 16, 1959, was the patent issued jointly to Stumpf and Kempthorne 194 for the dust-control device. The patent application on the model H machine and the secret formulas and incidental know-how represented the lion's share of the value transferred to CAFCAN. Accordingly, we conclude on this record that the entire 3 cents per pound constitutes consideration paid for the sale of capital assets and section 1231 assets owned by petitioner. See Arthur C. Ruge, supra; cf. Redman L. Turner, 47 T.C. 355">47 T.C. 355 (1967); Rev. Rul. 55-17, 1 C.B. 388">1955-1 C.B. 388.In order to reflect certain adjustments not contested by petitioner,Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.SEC. 1221. CAPITAL ASSET DEFINED.For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include -- (1) stock in trade of the taxpayer or other 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, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;(3) a copyright, a literary, musical, or artistic composition, or similar property, held by -- (A) a taxpayer whose personal efforts created such property, or(B) a taxpayer in whose hands the basis of such property is determined, for the purpose of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of the person whose personal efforts created such property;(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1); or(5) an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue.SEC. 1231. PROPERTY USED IN THE TRADE OR BUSINESS AND INVOLUNTARY CONVERSIONS.(a) General Rule. -- If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * *↩2. This Court has held that "if a transfer is not one described in subsec. (q) [of sec. 117, I.R.C. 1939, which was the progenitor of sec. 1235, I.R.C. 1954], the provisions of this subsection have no application in determining whether or not such transfer constitutes a sale or exchange of a capital asset; and the tax consequences of such transfer must be determined under other provisions of the internal revenue law." F. H. Philbrick, 27 T.C. 346">27 T.C. 346, 355 (1956). See also Leonard Coplan, 28 T.C. 1189↩ (1957).3. Sec. 1249 specifically covers transactions such as the one in issue here consummated after Dec. 31, 1962.SEC. 1249(a). General Rule. -- Gain from the sale or exchange after December 31, 1962, of a patent, an invention, model, or design (whether or not patented), a copyright, a secret formula or process, or any other similar property right to any foreign corporation by any United States person (as defined in section 7701(a)(30)) which controls such foreign corporation shall, if such gain would (but for the provisions of this subsection) be gain from the sale or exchange of a capital asset or of property described in section 1231, be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. [Emphasis supplied.]With respect to whether this section constitutes a codification or a change in preexisting legal principles, we note the Senate Finance Committee explanation of the purpose of the section:"Your Committee recognizes that the transfer of U.S. developed patent and similar rights by a U.S. corporation to a controlled foreign corporation causes a diversion of income from U.S. sources. It believes that taxing any gain on such transfer as ordinary income will, however, correct this situation as to such transfers in the future." (S. Rept. No. 1881, 87th Cong., 2d Sess. (1962).)↩4. SEC. 1231(b). Definition of Property Used in the Trade or Business. -- For purposes of this section -- (1) General Rule. -- The term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not -- (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or(C) a copyright, a literary, musical, or artistic composition, or similar property, held by a taxpayer described in paragraph (3) of section 1221↩.5. See generally Brainerd, "Income From Licensing Patents Abroad," 38 Taxes 209">38 Taxes 209↩, 229-234 (1960).6. Respondent has shown in this case no more than that it is theoretically possible to break the CAFCO products down into their component parts after a complicated and costly laboratory process.↩7. In other contexts, it has been held that the term "property" within the tax laws should not be given a narrow or technical meaning. See, e.g., United States v. Graham, 96 F. Supp. 318 (S.D. Cal. 1951), affirmed sub nom. 195 F. 2d 530 (C.A. 9, 1952), certiorari denied 344 U.S. 831">344 U.S. 831 (1952); Citizens State Bank of Barstow, Tex. v. Vidal, 114 F.2d 380">114 F.2d 380↩ (C.A. 10, 1940).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619704/	James Vernon Truesdell, Petitioner v. Commissioner of Internal Revenue, Respondent; James and Linda Truesdell, Petitioners v. Commissioner of Internal Revenue, RespondentTruesdell v. Comm'rDocket Nos. 28176-84, 28177-84United States Tax Court89 T.C. 1280; 1987 U.S. Tax Ct. LEXIS 180; 89 T.C. No. 88; December 30, 1987; As amended January 4, 1988 December 30, 1987, Filed 180 An appropriate order will be issued and decisions will be entered under Rule 155. P diverted to his own use income from his solely owned corporations. None of the diverted funds were reported as income on P's individual income tax returns or on the corporations' income tax returns for the years in issue. R determined that the full amount of the diverted funds was taxable to P under sec. 61(a), I.R.C. 1954. Held, the diverted funds were constructive dividends and taxable to P in the manner provided by secs. 301(c) and 316(a). DiZenzo v. Commissioner, 348 F.2d 122">348 F.2d 122 (2d Cir. 1965,) and Simon v. Commissioner, 248 F.2d 869 (8th Cir. 1957,) followed. Leaf v. Commissioner, 33 T.C. 1093">33 T.C. 1093 (1960), affd. per curiam 295 F.2d 503">295 F.2d 503 (6th Cir. 1961), distinguished. Benes v. Commissioner, 42 T.C. 358 (1964), affd. 355 F.2d 929">355 F.2d 929 (6th Cir. 1966), to the extent a contrary result was reached on analogous facts, will no longer be followed. Held, further, P is liable for additions to tax under sec. 6653(b). James 181 Vernon Truesdell, pro se.Lenore Lambert and Karl Zufelt, for the respondent. Nims, Judge. Sterrett, Chabot, Parker, Whitaker, Korner, Shields, Hamblen, Cohen, Clapp, Swift, Jacobs, Gerber, Wright, Parr, Williams, Wells, Ruwe, and Whalen, JJ., agree with this opinion. NIMS1281 In his statutory notices of deficiency, respondent determined the following deficiencies in petitioners' income tax and additions to tax for the following taxable years:Additions to taxYearDeficiency1 sec. 6653(b) 1977$ 4,736.25$ 2,368.1319788,472.54 4,236.27 197926,678.44 13,339.22 182 In his amended answers respondent redetermined deficiencies in petitioners' income tax and additions to tax for the 1977 and 1978 taxable years as follows:Additions to taxYearDeficiencysec. 6653(b)1977$ 6,424.09$ 3,212.05197818,969.90 9,484.95 Respondent's redetermination increased the deficiencies for 1977 and 1978 in the amounts of $ 1,687.84 and $ 10,497.36, respectively, and increased additions to tax for those years in the respective amounts of $ 843.92 and $ 5,248.68.Respondent has conceded that the deficiency for the taxable year 1979 is $ 18,925.18 and asserts that the addition to tax for that year is $ 9,462.59. This concession decreases the deficiency by $ 7,753.26 and the addition to tax by $ 3,876.63 for the taxable year 1979.1282 Petitioner James Truesdell filed a Federal income tax return for the taxable year 1977 listing himself as an unmarried head of household. Petitioners James and Linda Truesdell filed joint Federal income tax returns for the taxable years 1978 and 1979. Hereinafter James Truesdell will be referred to as petitioner, and Linda Truesdell will be referred to as Linda.Respondent issued a statutory notice of183 deficiency to petitioner for the taxable year 1977 and a statutory notice of deficiency to petitioner and Linda for the taxable years 1978 and 1979. These cases have been consolidated for the purposes of trial, briefing, and opinion.Linda did not appear at trial in person, nor was she represented by counsel. Accordingly, this Court will grant respondent's oral motion to dismiss the case as to Linda for failure to properly prosecute and to establish the deficiency due from her at the amount due from petitioner for the taxable years 1978 and 1979. An order will be issued to reflect the granting of this motion. Respondent has conceded that Linda is not liable for additions to tax under section 6653(b).After concessions, the issues for decision are: (1) Whether petitioner failed to report $ 22,231.86 in taxable income for the taxable year 1977; (2) whether petitioner and Linda failed to report $ 46,083.48 and $ 45,659.71 in taxable income for the taxable years 1978 and 1979, respectively; and (3) whether the resulting deficiencies are due to fraud.FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated184 herein by this reference.Petitioner and Linda were residents of California at the time the petitions in this case were filed.During the taxable years 1977 and 1978, petitioner was the president and sole shareholder of Asphalt Patch Co., Inc. (hereinafter referred to as Asphalt Patch). The corporation filed Federal income tax returns for the taxable years ending March 31, 1978, and March 31, 1979. Asphalt Patch ceased operating in 19791283 On January 1, 1979, Jim T. Enterprises, Inc. (hereinafter referred to as Jim T. Enterprises), was incorporated. Petitioner's son, Robert Truesdell (hereinafter referred to as Robert), was named president of the corporation. In 1979 Robert was the sole shareholder of Jim T. Enterprises. Robert was 17 years old in 1979 and was claimed as a dependent on petitioners' income tax return for that year. Petitioner has conceded that although Robert was the record shareholder of Jim T. Enterprises, petitioner was actually the sole shareholder of the corporation.Petitioner purchased two flower shops. One flower shop, known as Flowers By Eleanor, was purchased, as an ongoing business, from Eleanor Humphrey on December 1, 1978. Title was taken185 in the name of Asphalt Patch. However, no mention of the ownership of this flower shop appears on the corporation's Federal income tax returns or on its books.The second shop, Jim T. Florist & Photographic Shoppe, was established in a building owned by Vern Forbes on San Bernadino Road in Covina, California. With petitioner's knowledge, Kenneth Peterson filed a fictitious business name statement stating that Jim T. Florist & Photographic Shoppe located on San Bernadino Road was a general partnership owned by petitioner and Kenneth Peterson, Sr. Petitioner and Peterson applied to subscribe to the American Floral Service as owners of Jim T. Florist & Photographic Shoppe. Petitioner and Peterson in their individual capacities both signed an application for membership in Teleflora.Jim T. Florist & Photographic Shoppe conducted business in 1978. During that period, expenses for the shop totaled $ 22,900. Sales from the shop as listed in sales journals presented to Revenue Agent Joseph R. Coscarelli totaled $ 12,963.Petitioner was corporate secretary and general manager of Jim T. Enterprises. Jim T. Enterprises filed a Federal income tax return for the calendar year 1979.Asphalt186 Patch engaged in three lines of business: asphalt bagging, trucking or hauling, and installing asphalt paving. Jim T. Enterprises engaged in the same three lines of business.1284 Petitioner directed and controlled the activities of Asphalt Patch and Jim T. Enterprises. Petitioner and his son were the only persons authorized to sign corporate checks. Petitioner authorized all corporate bank deposits.Petitioner arranged all the deliveries of bagged asphalt and supervised the recording and billing of bagged asphalt sales for both corporations. Checks received in payment for bagged asphalt sales were placed on petitioner's desk.Petitioner also managed all the trucking work, keeping all the records relating to the trucking aspects of the business of the corporations and handling all the billing for trucking work. All checks received in payment for trucking work were placed on petitioner's desk.The asphalt bagging business was the primary business of both corporations. Purchasers who contracted for large quantities of bagged asphalt used charge accounts. An order for bagged asphalt was written on an invoice that was later sent as a bill to the customer. Payments received187 for bagged asphalt were recorded in a ledger book by invoice number, number of bags sold, and amount of payment received.Some of the invoices were numbered, and some were not. Customers who purchased bagged asphalt "off the street" would pay cash and take the materials with them. "Off the street" purchases were recorded on unnumbered invoices. Unnumbered invoices were placed on petitioner's desk.Trucking customers placed orders by telephone. Trucking work was not recorded on invoices. Unnumbered bills were sent to trucking customers. Petitioner handled all the billing for trucking work and kept the trucking records himself.Petitioner had a special book in which he recorded trucking income. It was necessary to keep records of trucking income so that they would be available to the various trucking broker-customers and their bookkeepers. Nevertheless, paperwork relating to trucking work was frequently thrown away.Paving job inquiries were received by telephone, recorded in a telephone logbook, and referred to an estimator. Kenneth Lyndes estimated many of the corporations' paving jobs. Lyndes wrote estimates for paving jobs on Asphalt Patch forms and on his own forms, stamped188 1285 "Payable to Jim T. Enterprises." These forms were given to petitioner. The estimate forms were not numbered.Petitioner personally supervised the paving work. Because paving customers usually paid petitioner upon completion of the job, they usually were not billed. Petitioner frequently threw the contract away after a customer paid for a paving job.Kenneth Peterson was employed by Asphalt Patch and Jim T. Enterprises from February 1978, until June or July 1980. He was paid $ 200 per week. Peterson's duties included writing checks on the corporate account at petitioner's direction.Asphalt Patch maintained checking account number XX-XX828-9 from October 19, 1976, until April 3, 1978, and checking account number XX-XX007-7 from April 3, 1978, until April 24, 1979, at the Brea, California, office of the National Bank of Whittier. Jim T. Enterprises maintained checking account number XXX-XX076-4 at the Brea, California, office of the National Bank of Whittier from October 19, 1978, until April 27, 1982. Only petitioner and Robert were authorized to sign checks or withdraw funds from these three corporate accounts.During the years in issue, petitioner used corporate189 funds for personal expenditures or deposited checks made payable to Asphalt Patch or Jim T. Enterprises into his personal checking and savings accounts. During the calendar year 1977, petitioner deposited checks totaling $ 10,530.78 made payable to Asphalt Patch into his personal checking account at the Brea office of the National Bank of Whittier and deposited checks totaling $ 1,244.50 made payable to Asphalt Patch into his personal savings account at Crocker National Bank in Covina, California. These checks were drawn in payment for paving and trucking work done by the corporation.During the calendar year 1977, petitioner endorsed and cashed or deposited into a personal account $ 7,231.63 worth of checks made payable to Asphalt Patch in payment for trucking and paving work performed by the corporation.In 1977, Andrew and Cindy Pouastrini issued two checks totaling $ 2,250 for paving work performed by Asphalt Patch at Rosevilla Mobile Court, 1329 West Mission 1286 Boulevard. Petitioner deposited these checks into his personal checking and savings accounts.Vern Forbes rented a store to Jim T. Florist & Photographic Shoppe. Forbes cashed some checks payable to Asphalt190 Patch or Jim T. Enterprises at the request of petitioner or Kenneth Peterson. The proceeds of these checks were applied to the rent due on the florist shop, and any amount in excess of the rent due was returned to petitioner or Peterson in cash.In 1977, petitioner and Forbes endorsed a check issued to Asphalt Patch by Lucas Specialty Rock & Sand Co. (hereinafter referred to as Lucas Rock) for $ 750. During 1977, petitioner cashed two checks totaling $ 224.95 issued to Asphalt Patch by Lucas Rock.During 1978, petitioner deposited into his personal checking accounts checks totaling $ 1,787.45 issued to Asphalt Patch in payment for paving and trucking work. In the same year, petitioner deposited into a joint savings account in his name and in the name of Robert Truesdell checks totaling $ 7,980 issued to Asphalt Patch. During 1978, petitioner cashed or deposited into his personal accounts checks totaling $ 19,113.93 issued to Asphalt Patch in payment for paving and trucking work.In 1978, Peterson cashed checks totaling $ 7,091.85 issued to Asphalt Patch in payment for paving and trucking work. Peterson cashed these checks at petitioner's direction and gave the proceeds to petitioner. 191 In 1978, petitioner deposited a check in the amount of $ 451.20 issued by Lucas Rock to Asphalt Patch into the account of Jim T. Florist. In February 1978, Lucas Rock issued a check in the amount of $ 353.35 to Asphalt Patch that was endorsed by petitioner and F.J. Timmel. In the same year, petitioner deposited into a personal account a check in the amount of $ 100 issued to Asphalt Patch by Victor P. Aprea.During 1978, petitioner and Vern Forbes endorsed checks issued to Asphalt Patch in payment for paving and trucking work totaling $ 3,353. Proceeds of checks endorsed by Vern Forbes were applied to rent owed by Jim T. Florist & Photographic Shoppe or given to petitioner.1287 During 1979, petitioner deposited checks totaling $ 3,460.12 issued to Jim T. Enterprises for paving and trucking work into his personal checking account at the Brea, California, branch of the National Bank of Whittier. In the same year, petitioner cashed or deposited into a personal account checks totaling $ 17,325.26 issued to Jim T. Enterprises for paving and trucking work and deposited into his personal checking account a check in the amount of $ 255 issued to Asphalt Patch.In 1979, at petitioner's192 direction, Peterson cashed checks totaling $ 8,688.21 made payable to Jim T. Enterprises. Peterson cashed these checks at the Brea branch of the National Bank of Whittier and gave the proceeds to petitioner.Petitioner exercised complete control over all the paving jobs done by the corporation. Customers paid for paving work by making a partial payment before the work began and then by paying in cash or by check upon completion of the job. In 1979, Harry Fleming gave Peterson $ 560 in cash as payment for paving work done pursuant to a contract with Jim T. Enterprises. In 1979, petitioner deposited into a joint savings account, in his name and in the name of Robert Truesdell, a check in the amount of $ 500 issued by Industry Realty for paving work.In the same year, petitioner cashed a check in the amount of $ 9,662.40 issued by Forest City Dillon-Tecon Pacific to Jim T. Enterprises for paving work. At petitioner's first meeting with Internal Revenue Special Agent Grant Hovey on June 23, 1980, the agent asked petitioner whether his company had done any work for Forest City Dillon-Tecon Pacific. Approximately 1 month later, on July 21, 1980, Jim T. Enterprises filed an amended193 return, declaring additional income of $ 9,760 from this source. The larger sum appearing on the amended return did not reflect the subtraction by Forest City Dillon-Tecon Pacific of a discount of 1 percent ($ 97) from the invoiced amount before issuing the check.During 1979, petitioner cashed or deposited into a personal account four checks totaling $ 3,004.50 made payable to the Kenneth Lyndes Paving Co. Kenneth Lyndes estimated asphalt paving jobs and driveway sealing jobs for 1288 Jim T. Enterprises. Lyndes received a 10-percent commission when the bids for the jobs he estimated for Jim T. Enterprises were accepted. When a check for a paving job done by Jim T. Enterprises was made payable to Kenneth Lyndes Paving Co., Lyndes would cash the check and pay petitioner what he owed him.In 1979, petitioner and Vern Forbes endorsed two checks totaling $ 779.22 issued to Jim T. Enterprises for paving and trucking work.Petitioner did not report as income on his individual Federal income tax returns for the taxable years 1977, 1978, and 1979 any of the checks issued to Asphalt Patch or Jim T. Enterprises that were cashed or deposited into petitioner's personal accounts.In 194 July 1978, Lawson & Valley, Inc., auctioneers, issued a check to Asphalt Patch in the amount of $ 11,852.70 in payment for equipment sold on behalf of Asphalt Patch. On July 5, 1978, petitioner negotiated this check, depositing $ 6,000 into the corporate account of Asphalt Patch and retaining $ 5,852.70 in cash for himself. The $ 5,852.70 in cash was not reflected on petitioner's individual Federal income tax return for the taxable year 1978.During the calendar year 1979, Jim T. Enterprises paid $ 1,425 in bonuses to petitioner. The corporation deducted this payment as wages on its income tax return for the taxable year 1979. Petitioner did not include this amount as income on his joint income tax return for the taxable year 1979.Petitioner often bought and sold automobiles, trucks, and equipment at a profit. He made frequent purchases of equipment at auction for resale. Profit from these sales of vehicles and equipment was not reported as income on petitioner's income tax returns for the years in issue.One such transaction was the purchase of a truck from Ortho Ira Cockrell that petitioner sold on the same day, realizing a profit for himself of approximately $ 12,000. The195 certificate of ownership of the truck was never filed in petitioner's name. The entire transaction was carried out in cash. Petitioner paid Cockrell cash for the truck. The buyer cashed a check at petitioner's bank and gave Peterson $ 29,000 in cash, and Peterson gave the money to petitioner.1289 Asphalt Patch employed Moard Business Service (hereinafter referred to as Moard) to maintain a general ledger for the corporation in 1977. Paul Zeh was the owner of Moard. Petitioner, like other clients of Moard, provided the bookkeeping service with records for use in preparing the ledger.Debby Peabody prepared Asphalt Patch's ledger under the direction of Zeh. Sometime after Zeh's death, Peabody was employed by petitioner to keep the ledger. Petitioner or someone in his office would provide Peabody with check stubs, deposit stubs, and sales journals from which she kept the ledger.It was Peabody's practice, both before and after Zeh's death, to prepare a record of cash disbursements for the ledger at the same time she prepared a record of cash received. Peabody prepared a record of checks drawn on Asphalt Patch for the taxable year ended March 31, 1978, and a record of cash196 received by Asphalt Patch for the taxable year ended March 31, 1979. Petitioner gave these records to Special Agent Hovey pursuant to summons. Petitioner produced no record of checks drawn on Asphalt Patch for January, February, or March 1978.Peabody prepared a record of checks drawn on Asphalt Patch for the months of July 1978, through December 1978, and a record of cash received for the months of July 1978, through October 1978. These records were submitted to Special Agent Hovey by petitioner. The record of cash received presented to Hovey contained no entries for November and December 1978.The record of cash received in July, August, September, and October 1978, shows only totals; it does not list the names of each payor as prior records of cash received had. Peabody prepared these entries without a list of payors because she was shown only totals, and not the sales journal.Kenneth Peterson prepared some of the sales summaries, or sales journals, listing income from sales of bagged asphalt for the years 1978 and 1979. These sales records were given to the bookkeeper for use in preparing the "record of cash received" entry in the ledger.Moard Bookkeeping Service, and 197 later, Peabody, returned all sales journals of Asphalt Patch to petitioner after 1290 preparation of the ledger entries. The sales summaries of Asphalt Patch for the calendar years 1977 and 1978 were recopied by petitioner's stepdaughter, at his direction, in preparation for audit by the State of California.Peabody worked on an account entitled "Notes Payable, James Truesdell." The last sum in the "balance" column of this document is $ 30,645.68, showing that on October 31, 1977, Asphalt Patch owed petitioner $ 30,645.68. Peabody was not told that any of the income of Asphalt Patch was not deposited into the corporate account. She did not know that some items of corporate income were not recorded on the corporation's books.Edward Brown prepared the corporate income tax return for Asphalt Patch for the taxable year ended March 31, 1978. Brown obtained information for the return from Asphalt Patch's general ledger that he obtained from Moard Bookkeeping Service. Brown did not know that all corporate income of Asphalt Patch was not reflected through the corporate ledger.Petitioner hired Alexander Kozloff in early 1979 to keep the financial records of Jim T. Enterprises and198 to prepare income tax returns for the corporation and for petitioner. Kozloff maintained an account entitled "Notes Payable-Truesdell." The first entry for 1979 shows a carryover balance from 1978 of $ 87,299.01.Kozloff recorded all the information he received regarding payments to the corporation. Kozloff was never told that Asphalt Patch or Jim T. Enterprises had income that was not deposited into the corporate bank account. Kozloff often received information regarding purchases of corporate assets long after the purchase.At his first meeting with Special Agent Hovey, petitioner told the agent that his corporation ceased paving work in 1978, that income from paving jobs had been recorded on invoices, and that he supposed that all of Asphalt Patch's income had been declared on its corporate returns.Hovey later served summonses on petitioner for records of Asphalt Patch, including articles of incorporation, bank records, delivery receipts, sales invoices and contracts, and also served a summons on Alexander Kozloff, the bookkeeper and accountant of the corporation, requesting the 1291 same records. Kozloff told the agent that he had given the records of Asphalt Patch 199 to petitioner.On August 7, 1980, petitioner met with Hovey and produced the incorporation documents, corporate minutes, bank statements, canceled checks, packages of invoices, and a list that purported to be the sales journals of those invoices. Petitioner also produced a post binder of Asphalt Patch containing general journals, subsidiary journals, and payroll information. Petitioner did not produce the paving job contracts that had been requested in the summons.Hovey was unable to reconcile all the sales figures in the post binder of Asphalt Patch that had been provided by petitioner. The post binder was looseleaf, and its pages were not numbered consecutively. Hovey could not determine whether entries were missing or pages had been removed. Hovey copied the records he received from petitioner and returned them to petitioner's attorney.Later Hovey served a summons on petitioner requesting the records of Jim T. Enterprises. Hovey received the records and copied them at petitioner's office. Hovey also went to Kozloff's office and made copies of the general ledger and post binder of Jim T. Enterprises that were in Kozloff's possession.The summons Hovey served on petitioner200 requested records of paving contracts and trucking statements of Jim T. Enterprises. Petitioner failed to produce these records.Petitioner voluntarily showed Hovey invoices that he said were included on the amended corporate return of Jim T. Enterprises. Petitioner explained that these invoices had not been included on the original return because the invoices had been stolen during a burglary. Petitioner did not explain, however, why these invoices were not numbered.Hovey also served summonses on banks to obtain records of the corporations' bank accounts and petitioner's personal bank accounts. Petitioner wrote to the banks requesting them not to comply with the summons. Hovey received the bank records only after obtaining a court order mandating that the bank records and corporate records that had been requested in the summons be produced.1292 After obtaining the court order, Hovey met again with petitioner and his attorney. However, petitioner still did not produce the proposal and contract forms for paving work or the statements for trucking work that had been requested in the summons. Petitioner kept a record of trucking work and understood the importance of keeping201 such records.ULTIMATE FINDINGS OF FACTPetitioner controlled the activities of Asphalt Patch and Jim T. Enterprises. Although most of the income from the corporations' sales of bagged asphalt was accurately recorded on the books and reported on the tax returns of the corporations, income from trucking and paving work was not accurately recorded on the books or reported on the tax returns of the corporations for the years in issue. Petitioner kept records of trucking and paving work in such a manner that the corporations' bookkeepers and accountants were unaware of much of the income from trucking and paving.During the years 1977 and 1978, petitioner diverted to himself $ 22,231.86 and $ 46,083.48, respectively, from the income of Asphalt Patch. During the year 1979, petitioner diverted to himself $ 44,234.71 from income of Jim T. Enterprises. This diverted income was not recorded on the corporations' books nor reported on the corporations' income tax returns. Nor was it reported as income on petitioner's income tax returns for the years in issue.Petitioner also failed to report income from sales of bagged asphalt to "off the street" customers. Bonuses of $ 1,425 paid to petitioner202 in 1979 were not reported as income on petitioner's income tax return for that year.OPINIONAs a preliminary matter, we note that although petitioner bears the burden of proof as to the underlying income tax deficiencies determined in the notices of deficiency (Rule 142(a)), respondent bears the burden of proof as to the additions to tax for fraud under section 6653(b). Sec. 7454(a); Rule 142(b). Respondent also bears the burden of proof as to the increases in the income tax deficiencies and additions to tax asserted in his amended answers. Rule 1293 142(a). Respondent's concessions as to the deficiency and addition to tax for the taxable year 1979 do not relieve petitioner of his burden of proof or place any burden on respondent. Silverman v. Commissioner, 538 F.2d 927">538 F.2d 927 (2d Cir. 1976); Gobins v. Commissioner, 18 T.C. 1159">18 T.C. 1159, 1168-1169 (1952), affd. per curiam 217 F.2d 952">217 F.2d 952 (9th Cir. 1954)Diverted IncomeRespondent takes the position that the entire amounts diverted by petitioner from Asphalt Patch and Jim T. Enterprises during the taxable years 1977 and 1978 are includable in petitioner's203 income. Petitioner argues that he did not divert any corporate funds to his own use. However, petitioner also maintains that if this Court finds that he did divert corporate funds to his own use, the diverted funds constitute constructive dividends to petitioner and, therefore, the amounts includable in his income are limited to the earnings and profits of the corporations during the years in issue.Petitioner contends that the amounts he diverted from Asphalt Patch and Jim T. Enterprises during the years in issue were used to pay corporate expenses and were not used for petitioner's personal expenses. Petitioner asserts that some of the funds diverted to himself from the corporations were spent on the operation of two flower shops and that expenditures for the flower shops somehow conferred a benefit upon the corporations.The evidence does not support this assertion. Petitioner and Peterson operated a business called Jim T. Florist & Photographic Shoppe from August until December 1978. Jim T. Florist & Photographic Shoppe was a partnership owned by petitioner and Peterson. Jim T. Florist & Photographic Shoppe was not an asset of either Asphalt Patch or Jim T. Enterprises. 204 Accordingly, any expenditures made by the corporations on behalf of Jim T. Florist & Photographic Shoppe inured to the benefit of petitioner and Peterson and not to the benefit of petitioner's corporations.Petitioner introduced into evidence a document indicating that on December 1, 1978, Asphalt Patch acquired title to a shop called Flowers by Eleanor for the sum of $ 10,000. However, no evidence was presented to show how this sum 1294 was paid or that it was actually paid. There is no mention of this purchase in the records of Asphalt Patch or on its income tax return. Moreover, petitioner has produced no evidence from which we can determine how much was spent by Asphalt Patch to keep Flowers by Eleanor in business.Approximately 3 months after Flowers by Eleanor was purchased, petitioner decided to leave the flower business. Accounts of his departure from the business vary. Petitioner testified that he obtained a hammer, demolished the contents and fixtures of both stores, and hauled them to the dump. Peterson testified that petitioner first notified the florists in the area that he was going out of business, moved all the salable items to one shop, sold fixtures and205 supplies from both stores, pocketed the proceeds, and then destroyed the nonsalable items and took them to the dump. It is impossible to determine whether petitioner left the flower business with more, less, or approximately the same amount of money that he brought to it.The flower shops were never treated as corporate assets. There is no mention of them in the corporate records. When the businesses were terminated, disposal of the assets was not conducted in a manner that benefited the corporations. Accordingly, we find that neither of the flower shops was a corporate asset. Any expenditures on behalf of the shops did not benefit petitioner's corporations.Petitioner's most cogent argument, however, is that the funds he diverted constitute constructive dividends to him, and, therefore, are taxable as income to him only to the extent of the earnings and profits of the corporations. Under sections 301(c)2 and 316(a), 3 dividends are taxable to 1295 the shareholder as ordinary income to the extent of the earnings and profits of the corporation, and any amount received by the shareholder in excess of earnings and profits is considered as a nontaxable return of capital206 to the extent of the shareholder's basis in his stock. Any amount received in excess of both the earnings and profits of the corporation and the shareholder's basis in his stock is treated as gain from the sale or exchange of property.207 Dividends may be formally declared or they may be constructive. The fact that no dividends are formally declared does not foreclose the finding of a dividend-in-fact. Noble v. Commissioner, 368 F.2d 439">368 F.2d 439, 442 (9th Cir. 1966), affg. T.C. Memo. 1965-84. The crucial concept in a finding that there is a constructive dividend is that the corporation has conferred a benefit on the shareholder in order to distribute available earnings and profits without expectation of repayment. Noble v. Commissioner, 368 F.2d at 443. We find that the diverted funds in this case constitute constructive dividends to petitioner.Respondent, himself, determined that the earnings and profits of Asphalt Patch were $ 23,540 and $ 4,594 in the taxable years 1978 and 1979, respectively, and that the earnings and profits of Jim T. Enterprises were $ 16,127.69 in the taxable year 1979. Petitioner failed to introduce any evidence that the earnings and profits of either corporation for any of the years in issue were less than the amounts determined by respondent. Accordingly, we find that the earnings and profits of Asphalt208 Patch were $ 23,540 and $ 4,594 in the taxable years 1978 and 1979, respectively, and that the earnings and profits of Jim T. Enterprises were $ 16,127.69 in the taxable year 1979.Because neither party introduced evidence as to the earnings and profits of Asphalt Patch for the taxable year 1977, petitioner has failed his burden of proving that there 1296 were not sufficient earnings and profits to support the deficiency determined in respondent's notice of deficiency for that year. However, respondent has failed his burden of proving that Asphalt Patch had sufficient earnings and profits to support the increase in deficiency for that year asserted in his amended answers.Respondent has failed to prove that the earnings and profits of the corporations were sufficient to permit the full amount of the funds diverted by petitioner during the taxable years 1977 and 1978 to be taxed as ordinary income under a constructive dividend theory. Deficiencies in excess of the earnings and profits of the corporations were asserted in respondent's amended answers. Respondent bears the burden of proving the amounts in excess of the deficiencies determined in the notices of deficiency. Rule209 142(a). Respondent maintains, nevertheless, that it is unnecessary to characterize the diverted funds as constructive dividends and that, therefore, the full amount diverted is taxable to petitioner as ordinary income. 4Respondent does not attempt to describe the diverted funds as additional salary, illicit bonuses, commissions, or anything more than diversions. Instead, respondent argues that any diversions from a corporation by its sole shareholder are taxable to the shareholder as ordinary income.Respondent relies on Leaf v. Commissioner, 33 T.C. 1093 (1960), affd. per curiam 295 F.2d 503">295 F.2d 503 (6th Cir. 1961), in which we held that the taxpayer, who unlawfully had diverted funds from his insolvent210 corporation with the intention of defrauding creditors, was liable for taxes on the full amount of the diverted funds regardless of the lack of earnings and profits of the corporation. In Leaf we based our holding on section 22(a) of the Internal Revenue Code of 1939, the predecessor of section 61(a), which defines gross income as "all income from whatever source derived," and on the following language in Rutkin v. United States, 343 U.S. 130">343 U.S. 130, 137 (1952):An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he 1297 derives readily realizable economic value from it. That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to dispose of it at will, even though it may have been obtained by fraud and his freedom to use it may be assailable by someone with a better title to it.Such gains are taxable in the yearly period during which they are realized.Leaf and Rutkin are distinguishable from the instant case. Leaf and Rutkin both involved an unlawful receipt of funds by the 211 taxpayer. The taxpayer in Rutkin had extorted funds from another individual, and the issue was whether extorted money was taxable to the extortionist despite the holding in Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404 (1946), in which the Supreme Court had decided that embezzled funds did not constitute taxable income. 5In Leaf, corporate funds that should have been available to creditors were fraudulently transferred to the taxpayer in contemplation of bankruptcy. We need not and do not express an opinion on the need to apply a constructive dividend analysis in a situation where the shareholder utilized the corporation to steal from, embezzle from, or otherwise defraud other stockholders or third parties dealing with the corporation or shareholder. The taxpayer in Leaf had argued 212 that the diverted funds were loans and therefore not taxable as income to him. We refused to adopt the taxpayer's characterization in the absence of any evidence of an intention to make repayment at the time of the taking.The issue in Leaf was whether the taxpayer's obligation to repay the diverted funds and his actual restitution of some of those funds in a later year precluded his liability for tax on their receipt. We held that the taxpayer had such control over the funds that they represented taxable income to him for the year in which they were taken. Although the taxpayer in Leaf was the sole shareholder of the corporation, he did not argue that the diverted funds constituted constructive dividends, and, therefore, this issue was not before the Court.Respondent's reliance on American Insulation Corp. v. Commissioner, T.C. Memo. 1985-436, Rosenbaum v. Commissioner, 1298 T.C. Memo. 1983-113, n. 10, and Halpern v. Commissioner, T.C. Memo. 1982-31, n. 9, is also misplaced. In each of those cases our statement indicating that it may be unnecessary to classify a sole shareholder's213 diversions of corporate income as constructive dividends was not a predicate to the holding in the case and therefore constituted dicta.In this case, petitioner's diversions of income from Asphalt Patch and Jim T. Enterprises were not per se unlawful. The diverted funds were not, at least on their face, stolen, embezzled, or diverted in fraud of creditors. There has been no suggestion that the diversions were improper as a matter of corporate law. They are most appropriately described as distributions made by the corporations to their sole shareholder. DiZenzo v. Commissioner, 348 F.2d 122">348 F.2d 122 (2d Cir. 1965), revg. T.C. Memo. 1964-121; Simon v. Commissioner, 248 F.2d 869">248 F.2d 869 (8th Cir. 1957), revg. a Memorandum Opinion of this Court. See also Gardner, "The Tax Consequences of Shareholder Diversions in Close Corporations," 21 Tax L. Rev. 223">21 Tax L. Rev. 223, 226-242 (1966).Respondent also relies on Davis v. United States, 226 F.2d 331">226 F.2d 331 (6th Cir. 1955), and Weir v. Commissioner, 283 F.2d 675">283 F.2d 675, 684 (6th Cir. 1960), revg. a Memorandum214 Opinion of this Court, in which the Sixth Circuit held that it is not necessary to classify a sole shareholder's diversions of corporate income as constructive dividends. The Sixth Circuit reasoned in both cases that the taxpayer's dominion and control over the diverted funds warranted taxation of the diverted funds as ordinary income.We respectfully disagree with the analysis of the Sixth Circuit. As a general proposition, where a taxpayer has dominion and control over diverted funds, they are includable in his gross income under section 61(a) ( Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426, 431 (1955)), unless some other modifying Code section applies. The latter is the situation here, since Congress has provided that funds (or other property) distributed by a corporation to its shareholders over which the shareholders have dominion and control are to be taxed under the provisions of section 301(c).1299 We believe that the Eighth Circuit more aptly described the manner in which such diversions should be treated for tax purposes:The corporate distribution here was made with the knowledge of the stockholders and was acquiesced in by them. 215 The corporation is liable for a substantial tax upon the diverted income it failed to report. Further tax will be collected from taxpayers under the constructive dividend theory. Fraudulent tax dealings should not be encouraged. Criminal penalties are provided for tax evasion, and fraud and delinquency penalties are assessed upon taxes due when the circumstances warrant. The Government should be allowed to collect all tax and penalties authorized by law, but it is not our function to expand tax liability to fields not covered by statute. We find nothing in the Tax Court's opinion to indicate that the diverted sums represented salary or any other recognized ordinary income. We believe that the only way that the diverted income already taxed to the corporation can be taxed to the individual taxpayers is by the treatment of such diversions as dividends and corporate distributions. * * [Simon v. Commissioner, 248 F.2d 869">248 F.2d 869, 876-877 (8th Cir. 1957).]In Benes v. Commissioner, 42 T.C. 358">42 T.C. 358 (1964), affd. 355 F.2d 929">355 F.2d 929 (6th Cir. 1966), cert. denied 384 U.S. 961">384 U.S. 961 (1966),216 we rejected a constructive dividend theory and held that a sole shareholder was taxable to the full extent of the economic benefit conferred upon him when his corporation built a residence for him, regardless of the amount of earnings and profits of the corporation. Benes, however, was appealable to the Sixth Circuit, and we gave substantial deference to the holding in Davis v. United States, supra. In Benes v. Commissioner, 42 T.C. at 378, we followed the Sixth Circuit's holding on consideration of Benes' appeal from his conviction in the related criminal case that "The rationale of Davis v. United States, supra, is controlling here." Benes v. United States, 276 F.2d 99">276 F.2d 99, 105 (6th Cir. 1960).The instant case is appealable to the Ninth Circuit, and therefore we are not bound by the holding in Davis v. United States. 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). Our research has revealed no civil tax 217 case in which the Ninth Circuit has ruled on this issue, nor have the parties drawn our attention to any.1300 Respondent relies on United States v. Miller, 545 F.2d 1204 (9th Cir. 1976), in which the Ninth Circuit refused, in a criminal proceeding, to apply the constructive distribution rules automatically to shareholder diversions of corporate funds. As the Miller court explained:This court must decide whether the rules of constructive distribution are to be automatically applied in the present situation, a review of a criminal tax proceeding. In civil tax cases the purpose is tax collection and the key issue is the establishment of the amount of tax owed by the taxpayer. In a criminal tax proceeding the concern is not over the type or specific amount of the tax which the defendant has evaded, but whether he has willfully attempted to evade the payment or assessment of a tax.The difficulty in automatically applying the constructive dividend rules to this case is that it completely ignores one essential element of the crime charged: the willful intent to evade taxes, and concentrates solely on the issue of the nature of the funds218 diverted. The latter aspect is not the important element. Where the taxpayer has sought to conceal income by filing a false return, he has violated the tax evasion statutes. It does not matter that that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course. To apply the constructive distribution rules to this situation would nullify all of the taxpayer's prior unlawful acts.[545 F.2d at 1214. Emphasis in original; citations and fn. ref. omitted.]The Ninth Circuit ultimately agreed with the trial court's holding that the diversions in question constituted salary to the defendant. Respondent does not claim nor has he introduced evidence that the diversions were in the nature of salary to the petitioner.In concluding our discussion of the constructive dividend issue, we would emphasize that in a case such as this, diverted amounts taxed to a shareholder as constructive dividends also remain fully taxable to the corporation to which attributable. The record indicates that the corporations in question did not report the diverted funds. But respondent's agents became well aware of the existence of Asphalt219 Patch and Jim T. Enterprises, and the fact that taxable income had been diverted from them, during the examination of petitioner's tax affairs. We know of nothing which would have prevented a parallel examination of the corporate tax affairs and a determination of the correct taxable income reportable by the corporations.For the foregoing reasons, we hold that the amounts diverted by petitioner from his corporations constitute 1301 constructive dividends and are taxable to him under the provisions of section 301(c). To the extent that this Court's decision in Benes v. Commissioner, supra, reaches a contrary result, it will no longer be followed.FraudRespondent takes the position that underpayments of petitioner's income tax for the years in issue are due to fraud and that a 50-percent addition to tax should be imposed against petitioner, but not Linda, for each of those years. Section 6653(b)6provides that a taxpayer must pay an addition to tax if any part of an underpayment of tax required to be shown on a return is due to fraud. Respondent has the burden of proving, by clear and convincing evidence, that some part of an underpayment220 for each year in issue was due to fraud. Sec. 7454(a); Rule 142(b). Respondent must establish (1) that petitioner has underpaid his taxes for each year and (2) that some part of the underpayment is due to fraud. Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983). Respondent has established that petitioner has underpaid his taxes for each of the years in issue. Respondent's burden of proving fraud is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). The existence of fraud is a question of fact to be resolved from 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). Fraud is not to be presumed. Drieborg v. Commissioner, 225 F.2d 216">225 F.2d 216, 218 (6th Cir. 1955);221 Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970). Because fraud can rarely be established by direct proof of the taxpayer's intention, fraud may be proved by circumstantial evidence. Rowlee v. Commissioner, supra at 1302 1123. The taxpayer's entire course of conduct can be indicative of fraud. Stonee v. Commissioner, 56 T.C. 213">56 T.C. 213, 224 (1971). Upon consideration of the entire record, we conclude that respondent has sustained his burden of proving fraud by clear and convincing evidence for each of the years in issue.222 Although mere understatement of income alone is not sufficient to prove fraud, the consistent and substantial understatement of income is, by itself, strong evidence of fraud. Marcus v. Commissioner, 70 T.C. 562">70 T.C. 562, 577 (1978), affd. without published opinion 621 F.2d 439">621 F.2d 439 (5th Cir. 1980). Petitioner diverted to his own use $ 22,231.86, $ 46,083.48, and $ 44,234.71 of income earned by his solely owned corporations during the years 1977, 1978, and 1979, respectively, and failed to report any of this income either on the corporations' income tax returns or on his own individual returns for those years.A pattern of consistent underreporting of income, especially when accompanied by other circumstances showing an intent to conceal, justifies the inference of fraud. See Holland v. United States, 348 U.S. 121">348 U.S. 121, 137 (1954); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96 (1969); Probber v. Commissioner, T.C. Memo 1985-193">T.C. Memo. 1985-193, affd. without published opinion 788 F.2d 3">788 F.2d 3 (2d Cir. 1986). In this case, petitioner failed to keep records223 of income from trucking work and paving jobs that he diverted to his own use. None of the bookkeepers he employed knew that this income existed. Petitioner destroyed invoices for paving jobs and paperwork relating to trucking work. 7 Rather than deposit checks made payable to the corporations in payment for work done by the corporations into the corporations' accounts, petitioner either cashed them or deposited them into his own 1303 account. We find that the diversions of corporate funds to petitioner's personal use were carried out in this manner with the purpose and design of concealing their existence and avoiding income tax on these amounts.224 Petitioner's conduct throughout the investigation of his returns further evidences his fraudulent intent. When Special Agent Hovey first met with petitioner on June 23, 1980, petitioner told Hovey that his corporation had stopped doing paving work in 1978. However, the evidence shows that in 1979 Jim T. Enterprises had been paid by Forest City Dillon-Tecon Pacific for paving work. When Hovey asked petitioner whether his corporation had done work for Forest City Dillon-Tecon Pacific, petitioner replied that the firm was next door. A check issued to Jim T. Enterprises from Forest City Dillon-Tecon Pacific was included on an amended corporate return filed 1 month after the meeting. Petitioner's false and misleading statements to respondent's agent are indicia of fraud. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1 (1980). Petitioner's filing of an amended return in no way mitigates the fraud perpetrated in the filing of the original return. Naples v. Commissioner, 32 T.C. 1090">32 T.C. 1090, 1097 (1959).Hovey served summonses on several banks requesting records of checking and savings accounts maintained by petitioner personally and 225 by the corporations. Petitioner wrote to the banks asking them not to comply with the summonses. Hovey was forced to obtain a court order to enforce the summonses and receive the bank records. Petitioner's interference with respondent's investigation is also indicative of his intent to conceal the diverted income and evade tax. 8226 1304 To reflect the foregoing,An appropriate order will be issued and decisions will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.On the first two pages of his statutory notice in docket No. 28177-84 for the taxable years 1978 and 1979, respondent indicated that the additions to tax for those years were determined pursuant to sec. 6653(a). However, on the third page of his statutory notice, respondent stated:"It is determined that the underpayment of tax required to be shown on your returns for the taxable years 1978 and 1979 is due to fraud. Consequently, the 50 percent addition to tax as provided by section 6653(b) of the Internal Revenue Code is asserted for those years."In addition, respondent has made affirmative allegations of fraud in his answers and amended answers. Thus, the additions to tax have been determined under sec. 6653(b), as to which respondent bears the burden of proof. Rule 142(b)↩.2. Sec. 301(c)provides, in pertinent part:SEC. 301(c). Amount Taxable. -- In the case of a distribution [of property made by a corporation to a shareholder with respect to its stock] -- (1) Amount constituting dividend. -- That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.(2) Amount applied against basis. -- That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.(3) Amount In Excess of basis. -- (A) In general. -- Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as a gain from the sale or exchange of property.↩3. Sec. 316(a)provides:SEC. 316(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. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301↩ applies, such distribution shall be treated as a distribution of property for purposes of this subsection.4. We note that the record contains no evidence pertaining to petitioner's basis in the stock of the corporations in question and that respondent does not make the alternative argument that any part of the distributions to petitioner are taxable as capital gain income.↩5. Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404 (1946), was later overruled by the Supreme Court in James v. United States, 366 U.S. 213">366 U.S. 213↩ (1961).6. Sec. 6653(b) as in effect during the years in issue provided as follows:SEC. 6653(b)↩. Fraud. If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. In the case of income taxes and gift taxes, this amount shall be in lieu of any amount determined under subsection (a). In the case of a joint return under section 6013, this subsection shall not apply with respect to the tax of a spouse unless some part of the underpayment is due to the fraud of such spouse.7. Peterson testified that petitioner threw invoices for paving jobs and paperwork relating to trucking work into the wastebasket. Petitioner attacks Peterson's credibility, contending that Peterson was a "disgruntled ex-employee * * * out to get petitioner."We had an opportunity to observe Peterson's demeanor on the witness stand, and we find his testimony credible. Moreover, other evidence corroborates Peterson's testimony. Petitioner has conceded that he did not report as income, either on his individual or joint income tax returns or on his corporations' corporate income tax returns, the amounts of $ 22,231.86, $ 46,083.48, and $ 45,659.71 for the respective taxable years 1977, 1978, and 1979, that were earned by his corporations. These amounts were also omitted from the corporate records. Although Special Agent Hovey served summonses on petitioner requesting records that might document the receipt of this income, petitioner failed to produce any. Accordingly, we conclude that Peterson told the truth when he testified that petitioner destroyed the records.↩8. Our findings of fact regarding petitioner's conduct during the investigation of his returns is based on the unrefuted testimony of Special Agent Hovey. Petitioner argues on brief:"The Government wants to make a large issue of the fact that Mr. Hovey, Special Agent, had a difficult time in his investigation. It is quite obvious that Mr. Hovey and Mr. Truesdell, petitioner, did not get along. It is suggested that the only reason the fraud penalty has been asserted in this case is out of a personal vendetta initiated by Special Agent Hovey and directed to petitioner in retaliation for petitioner's refusal to wholeheartedly give up his constitutional rights to his privacy and freedom of unreasonable searches and seizures."Nothing in the record supports petitioner's allegations, and we find his arguments on this issue frivolous.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619705/	CEREAL PRODUCTS REFINING CORPORATION (NOW KNOWN AS ACME BREWERIES), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cereal Products Refining Corp. v. CommissionerDocket No. 86538.United States Board of Tax Appeals39 B.T.A. 92; 1939 BTA LEXIS 1068; January 17, 1939, Promulgated 1068 Petitioner and its subsidiary corporation made consolidated income tax return for the year 1932 upon exercise of an election under section 141(a) of Revenue Act of 1932 and consented to Regulations 78 prescribed by Commissioner under section 141(b) on May 15, 1933. On June 16, 1933, new revenue provisions were enacted in the National Industrial Recovery Act, which amended provisions of the 1932 Act relating to taxation of corporation income. Petitioner made a separate income tax return for the year 1933, claiming the right to a new election with respect to making a separate or consolidated return. Held, petitioner had a new right of election under the Revenue Act of 1933 and properly made its income tax return on the basis of a separate return. Regulations 78 were prescribed under the 1932 Act but they are not applicable to the year 1933 where no consolidated return is made. Norman A. Eisner, Esq., and Myrtile Cerf, C.P.A., for the petitioner. H. D. Thomas, Esq., for the respondent. HARRON 92 In 1932 petitioner filed a consolidated return for itself and an affiliated corporation, under the provisions of section 141 of the Revenue1069 Act of 1932. Petitioner and its affiliate corporation, the California Brewing Association, filed separate returns for the calendar year 1933. Respondent determined that, under article 11(a) of Regulations 78, a consolidated return was required for the taxable year 1933, since a consolidated return had been made for the taxable year 1932. Therefore, pursuant to article 11(b) of Regulations 78, respondent computed the tax liability of petitioner and its subsidiary in the same manner as if a consolidated return had been made and determined a deficiency of $29,657.43 for the taxable year 1933. Notice of this deficiency was mailed to petitioner as the common parent corporation. Pursuant to article 15 of Regulations 78, the petitioner and its affiliate are severally liable for the tax computed on the consolidated net income of the group. The petitioner corporation has filed a petition with this Board on its own behalf and its affiliate, the California Brewing Association, has filed a separate petition. The question in issue involves both corporations, but neither has moved to have the two proceedings consolidated. The proceedings have not been consolidated. The parties1070 have entered into a stipulation which disposes of certain adjustments made by respondent in the taxable net income of petitioner corporation and of its affiliate. The only question remaining in this proceeding is whether a consolidated return is required by law 93 for petitioner and its affiliate for the year 1933 so that the tax liability of the affiliated corporations should be computed as if a consolidated return had been made, even though separate returns were made. FINDINGS OF FACT. Petitioner, Cereal Products Refining Corporation, is a California corporation with principal office in San Francisco. For the calendar year 1933 petitioner filed with the collector for the first district of California a separate corporation income tax return, reporting its separate net taxable income. It paid the total tax shown to be due on this separate return. It attached to the return a letter to the Commissioner which called his attention to amendments made to the Revenue Act of 1932 by adoption of the National Industrial Recovery Act of June 16, 1933, and claimed a right to elect to file a separate income tax return for the calendar year 1933 instead of a consolidated return1071 with its affiliate. On or about April 1, 1936, petitioner changed its name to Acme Breweries. For the calendar year 1933 the California Brewing Association filed a separate income tax return, reporting its own separate taxable net income. It paid the total tax shown to be due on its return. It notified the Commissioner of its election to file a separate return for the same reasons as given by petitioner. During the years 1932, 1933, and until dissolution in 1936, all (100 percent) of the capital stock of the California Brewing Association, a California corporation, was owned by petitioner. On or about March 31, 1936, the California Brewing Association was dissolved. In 1932 the California Brewing Association was known as the California Bottling Association. On May 15, 1933, a consolidated return was made and filed by the Cereal Products Refining Corporation, parent corporation, for the calendar year 1932. The California Bottling Association (later known as California Brewing Association) on May 15, 1933, executed and filed form 1122, entitled "Authorization and Consent of Subsidiary Corporation Included in a Consolidated Income Tax Return and Return of Information1072 * * For the Calendar Year 1932." This form, among other statements, contains the following, all of which the California Bottling Association subscribed to: The above-named subsidiary corporation hereby authorizes the above-named parent corporation (or in the event of its failure, the Commissioner or the Collector) to make a consolidated return on its behalf for the taxable year for which this form is filed, and for each taxable year thereafter that a consolidated return must be made under the provisions of Article 11(a) of Regulations 75. The above-named subsidiary corporation, in consideration of the privilege of joining in the making of a consolidated return with the above-named parent 94 corporation, hereby consents to and agrees to be bound by the provisions of Regulations 75 prescribed prior to the making of this return. This consent is applicable to the taxable year for which this form is filed and to each taxable year thereafter that a consolidated return must be made under the provisions of Article 11(a) of Regulations 75. Regulations 78, promulgated under section 141(b) of the Revenue Act of 1932, were approved by the Secretary of the Treasury on December 7, 1932. 1073 7, 1932. The National Industrial Recovery Act was enacted June 16, 1933. Respondent computed the income tax liability of petitioner and the California Brewing Association in the same manner as if a consolidated return had been made for the year 1933, even though separate returns for 1933 had been filed by the two corporations. Respondent thereby determined a deficiency of $29,657.43. This computation was made in the following way: The net income of California Brewing Association was increased by $17,730.90 (depreciation disallowed), from $429,713.96 to $447,444.86 (respondent now concedes error in this adjustment); the net income of petitioner, the parent corporation, was increased by $147,612.68, from $327,966.79 to $475,579.47; the resulting consolidated net income was $923,024.33; and income tax computed at the rate of 14 1/2 percent resulted in a tax of $133,838.53, which gave rise to deficiency of $29,657.43 over the respective taxes reported due and paid by petitioner and its subsidiary on their separate returns. A notice of this deficiency was duly mailed by the Commissioner to petitioner on June 19, 1936. The following appears in the statement attached to the deficiency1074 letter: For the taxable year 1932, you filed a consolidated return under the provisions of section 141 of the Revenue Act of 1932. For the taxable year 1933, you and your affiliated company filed separate returns. You contend that the right of election to file separate returns for the year 1933 exists by amendments of the Revenue Act of 1932 contained in section 218 of the National Industrial Recovery Act. In I.T. 2753, C.B. XIII-1, page 90, it has been held that the amendments made to the Revenue Act of 1932 by section 218 of the National Industrial Recovery Act do not require the amendment of Regulations 78 insofar as the provisions of those regulations apply to the taxable year 1933. Under the provisions of article 11, Regulations 78, you do not have the election to file separate returns for the year 1933 after having exercised the election to file a consolidated return for the year 1932. INCOME TAX LIABILITY Tax liability of Cereal Products Refining Corporation and subsidiary company above named as provided for in article 15(a) of Regulations 78 prescribed under section 141(b) of the Revenue Act of 1932. YearTax LiabilityTax AssessedDeficiency1933$133,838.53$104,181.10$29,657.431075 There was also attached to the deficiency letter a detailed schedule setting out the manner of arriving at the deficiency. 95 The parties have stipulated that respondent erred in increasing taxable income by $73,510.05 (part of the amount of $83,510.05) which petitioner had added to its reserve for bad debts; that respondent erred in increasing taxable income by $17,745.84, an amount which the California Brewing Association claimed for depreciation; that respondent properly disallowed a deduction in the amount of $58,388.32 which petitioner claimed as a loss from the sale of Remar Co. preferred stock. OPINION. HARRON: The deficiency in this proceeding results from respondent's determination that the petitioner corporation's income tax liability for 1933 should be computed, assessed, and collected on the basis of the consolidated income of petitioner and an affiliated corporation. Respondent has made this determination by application to the year 1933 of article 11(a) of Regulations 78. 1 Regulations 78 were prescribed under section 141(b) of the Revenue Act of 1932, and were approved by the Secretary of the Treasury on December 7, 1932. If article 11(a)1076 of the regulations is properly applied to the year 1933, article 15 of the regulations, which imposed upon members of an affiliated group of corporations several liability for tax and any deficiency in respect thereof computed upon the consolidated net income of the group, is also applicable. Petitioner has been assessed the full amount of the deficiency, $29,657, under article 15 of Regulations 78. The only question for decision is whether petitioner's income tax liability for 1933 should be computed on the basis of the separate income tax return which it made for itself, or upon the basis of consolidated income of petitioner and an affiliated corporation. It is respondent's contention that, since a consolidated return was made by petitioner under Regulations 78, for the year 1932, a consolidated return must be made for the year 1933, during which time the two corporations remained affiliated. It is the contention of petitioner that, even though it made a consolidated return for the taxable year 1932, availing itself of the option afforded to it by the terms of section 141(a) of the Revenue Act of 1932, it had, nevertheless, a new election for the year 1933 with respect to the1077 method of making income tax return because changes were made in the Revenue Act of 96 1932 by enactment of certain revenue provisions in the National Industrial Recovery Act, enacted June 16, 1933. In substance, the petitioner contends that the Commissioner may not apply article 11(a) of Regulations 78 to the taxable year 1933 in such way as to deny petitioner a new election under section 141(a) for the year 1933. 1078 Since the issue in this proceeding arises out of application of an administrative regulation, it is pertinent to comment first upon the recognized limitations upon the application of the administrative regulations. We refer to a decision of the Supreme Court in Manhattan General Equipment Co. v. Commissioner,297 U.S. 129">297 U.S. 129, in which the Court stated as follows: The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law, for no such power can be delegated by Congress, but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity. Lynch v. Tilden Produce Co.,265 U.S. 315">265 U.S. 315, 320-322, 44 S. Ct. 488">44 S.Ct. 488, 68 L. Ed. 1034">68 L.Ed. 1034; Miller v. United States,294 U.S. 435">294 U.S. 435, 439, 440, 55 S. Ct. 440">55 S.Ct. 440, 79 L. Ed. 977">79 L.Ed. 977, and cases cited. And not only must a regulation, in order to be valid, be consistent with the statute, but it must be reasonable. 1079 International R. Co. v. Davidson,257 U.S. 506">257 U.S. 506, 514, 42 S. Ct. 179">42 S.Ct. 179, 66 L. Ed. 341">66 L.Ed. 341. The matter of requiring or allowing consolidated returns has long been in controversy, as clearly appears in reports of the Committee on Ways and Means and the Committee on Finance. Since the Revenue Act of 1918, there have been various provisions enacted by Congress relating to the method by which affiliated corporations should or could report income. In the 1918 Act, section 240(a), Congress enacted a mandatory provision requiring affiliated corporations to make a consolidated return of net income. In the Revenue Act of 1921, section 240(a) was amended so as to permit affiliated corporations to make either separate returns or, within their election, a consolidated return. But it was prescribed in the statute that if a return was made on either of such bases all returns thereafter should be made upon the same basis unless permission to change the basis was granted by the Commissioner. The consolidated returns provision in the revenue act remained the same in this particular respect until the Revenue Act of 1928, when it was considerably revised, and section 141 of that act extended1080 to affiliated groups of corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year. Under the 1928 Act, a special provision was adopted, section 142, which required keeping the basis of income tax return the same for the year 1928 as had been adopted by the taxpayer for the year 1927. In the Revenue Act of 1932, section 141 remained unchanged, excepting for insertion of a parenthetical clause. 97 There was not enacted any provision similar to section 142 of the 1928 Act. In the Revenue Act of 1934, Congress limited the privilege of filing consolidated returns to affiliated groups of railroad corporations (section 141(a), (d)). Throughout this history of the consolidated returns provisions in the various revenue acts, it is clear that the requirement that consolidated returns must be made by affiliated corporations has been relaxed. Review of reports of the two Finance Committees of Congress shows that the consolidated returns provision was first enacted in the Revenue Act of 1918 because of the excess profits tax then in effect. With the repeal of the excess profits tax and the adoption of net loss provisions in1081 the revenue acts, it has appeared to the Congressional finance committees that the advantages to corporations in making consolidated income tax returns have diminished and that there was less reason for allowing consolidated returns. The Ways and Means Committee has, from time to time, recommended abolition of the consolidated return provision, but the Treasury has consistently recommended to Congress that abolition of the consolidated returns provision was undesirable. The consolidated returns provision, revised, has been reenacted from time to time as a compromise measure. It is not material to explore the legislative history of the consolidated returns provisions in the various revenue acts excepting to point out that it is clear that Congress has allowed corporations a new election from time to time as the law has been changed and that when Congress intended that there should not be a new election under a new act it has so stated in the new act. Cf. section 142, 1928 Act. This is brought out in the report of the hearings before the Ways and Means Committee considering the proposed Revenue Act of 1934 (hearings December 15 to 21, 1933, and January 9 to 11, 1934, pp. 86, 87). 1082 Roswell Magill, representing the Treasury Department, was asked by a member of the Committee if it was not true that affiliated corporations had the option of making separate returns or consolidated returns. The answer was in the affirmative. The further question was asked whether an affiliated group of corporations having once elected, then "must proceed along the line of their election." To this question Magill replied in the affirmative and stated, "but a new election has been given them, from time to time, as the law has been changed." Thus, we understand that whatever may have been the requirement under a specific revenue act and under approved regulations of the Commissioner, it has been recognized that there is a new election when the revenue act is changed, unless the new revenue act specifies otherwise. (Cf. section 142 of the 1928 Act.) We believe Congress has intended that this should be the procedure. Congress gave to an affiliated group of corporations the privilege of making a consolidated return for a taxable year in lieu of separate 98 returns under the provisions contained in section 141(a) of the Revenue Act of 1932. Section 141 is set forth in the1083 margin. 2 The privilege of making a consolidated return was conditioned upon consent to regulations prescribed by the Commissioner under section 141(b) and the making of the consolidated return constitutes such consent. The statute itself is silent on whether the election to make a consolidated return for one year is a binding election with respect to the method of making income tax returns for subsequent years. The Commissioner prescribed article 11(a) as part of Regulations 78. This requirement may have been reasonable and valid under section 141(b) of the Revenue Act of 1932 at the time the regulations were approved. We do not decide that question. However, the Revenue Act of 1932 underwent material revision by the enactment of revenue provisions in the National Industrial Recovery Act on June 16, 1933. The reason for amending the Revenue Act of 1932 in the Recovery Act was to provide additional taxes sufficient to pay interest and sinking fund charges on an appropriation made by Congress in the National Industrial Recovery Act. The amendments to the 1932 Act were extensive and, in particular, the income tax provisions relating to domestic corporations were materially1084 changed. It was expected that there would be a general increase in taxes as a result of the amendments. We come now to consideration of the changes in the Revenue Act of 1932 enacted in June 1933 that affected taxation of corporations for the years 1933, 1934, and 1935. 1085 Taxation of corporation income was affected by sections 215(a), (f); 216(a); 218(e) of the National Industrial Recovery Act, as 99 well as by other provisions of the Recovery Act. Briefly, a new capital stock and excess profits tax was enacted and the net loss provisions of the 1932 Act, sections 117; 23(i); 169, 187, and 287, were repealed. Section 141(c) was amended. 3 It is clear from these amendments that taxation of corporation income was materially changed in the direction of increasing taxes, because under the Revenue Act of 1932 domestic corporations were not subject to capital stock or excess profits taxes and they had the benefit of the net loss provisions. Also, under section 141(c) of the 1932 Act, the differential in tax upon consolidated income, where consolidated return was made, added to the normal rate of tax on corporations a rate of 3/4 of 1 percent, which operated to make corporation income taxable at the rate of 14 1/2 percent in cases where consolidated returns were made, as compared with 13 3/4 percent where separate returns were made. (See section 13(a)). This differential in tax favored the making of separate returns as against consolidated1086 returns and corporations electing to make consolidated return understood and accepted the increase in the tax rate. The amendment to section 141(c) made by section 218(e) of the National Industrial Recovery Act increased the differential in corporate tax to an added rate of 1 percent for the years 1934 and 1935, so that the tax on consolidated corporation income of corporations making consolidated return was increased to 14 3/4 percent under the National Industrial Recovery Act as compared with 14 1/2 percent under the 1932 Act. 1087 It is not material to the decision of the question before us to explore the comparative advantages or disadvantages to groups of affiliated corporations, after amendment of the 1932 Act, to make consolidated returns instead of separate returns. The fact is that there was a new revenue act for the year 1933 affecting taxation of corporations. The petitioner corporation in this proceeding considered it preferable to make income tax returns on the basis of a separate return for the year 1933. Where there are two methods of making income tax return available to corporations which involve a choice between two possibly different tax liabilities, it is reasonable that corporations should consider the practical aspects of the election to make separate returns or consolidated returns. Certainly, since the 1928 Act, Congress has allowed affiliated corporations freedom to entertain such considerations. From the comparison made above of the Revenue 100 Act of 1932 as it stood at the time petitioner elected to make a consolidated return for the year 1932 and as it was amended in 1933 and stood on March 15, 1934, when income tax return for the year 1933 became due, we think it clear1088 that there were two entirely different tax situations for the years 1932 and 1933 and that the factors to be considered when petitioner elected to make a consolidated return for the year 1932 were different when the time arrived to make income tax return for 1933. The new factors appeared to be destined to apply to the years 1933, 1934, and 1935. Of course, taxpayers could not on March 15, 1934, anticipate that a new revenue act would be adopted for the year 1934 on May 10 of that year. It obviously became of practical importance for affiliated corporations to consider anew the method of making income tax return for the year 1933 and to consider anew the increased rate of tax upon corporations making consolidated returns. The new taxes on capital stock and excess profits, the repeal of the net loss provisions, the increase in the tax differential applicable to consolidated income for 1934 and 1935, all constituted changes in the law affecting tax liability. We point out that after the enactment of the excess profits tax in 1916 corporations generally resorted to making separate returns. (Hearings before the Committee on Ways and Means, 73d Cong., Dec. 15-21, 1933, Jan. 9-11, 1934, 1089 pp. 86, 88, 94.) We think that when an excess profits tax was enacted in 1933 Congress must have been cognizant of the possibility that affiliated corporations might elect to make separate returns for 1933, and that, if Congress had intended that separate returns should not be made for 1933 where consolidated returns were made for 1932, Congress would have so provided in the amendments to the 1932 Act as it had so provided by section 142 of the 1928 Act. In the absence of any clear expression in the statute, as it applied to the year 1933, that Congress intended that corporation income tax returns for 1933 should be made on the same basis as for the year 1932, even though changes in the law were made (cf. section 142, Revenue Act of 1928), we must conclude that petitioner had a new election for the year 1933 because the law was changed. Under the circumstances reviewed above, and upon our opinion that Congress intended that a new election as to the method of making corporation income tax returns should be given, from time to time, as the revenue act is changed, we must conclude that the Commissioner's application of article 11(a) of Regulations 78 to the taxable year 1933 was1090 not reasonable and was not consistent with the new revenue act for 1933. The application of article 11(a) to the year 1933 does not carry out any intent of Congress that we are able to discover but, in fact, contravenes the apparent intent of Congress that there should be a new election when the law is changed. 101 The determination of the Commissioner in this proceeding imposes an unreasonable restriction upon the petitioner. The determination is reversed. Petitioner has paid the full amount of the tax reported on its separate return. However, the parties have stipulated that certain adjustments should be made. Consequently, there must be recomputation of the tax under Rule 50. Reviewed by the Board. Decision will be entered under Rule 50.OPPER concurs only in the result. MELLOTT dissents. Footnotes1. ART. 11. Consolidated Returns for Subsequent Years. (a) Consolidated Returns Required for Subsequent Years.If a consolidated return is made under these regulations for the taxable year 1932 or any taxable year thereafter, a consolidated return must be made for each subsequent taxable year during which the affiliated group remains in existence unless (1) a corporation (other than a corporation created or organized, directly or indirectly, by a member of the affiliated group) has become a member of the group during such subsequent taxable year, or (2) one or more provisions of these regulations, which have previously been consented to, have been amended, or (3) the Commissioner, prior to the time of making the return, upon application made by the common parent corporation and for good cause shown, grants permission to change. ↩2. SEC. 141. CONSOLIDATED RETURNS OF CORPORATIONS. (a) PRIVILEGE TO FILE CONSOLIDATED RETURNS. - An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141(b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group. (b) REGULATIONS. - The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability. (c) COMPUTATION AND PAYMENT OF TAX. - In any case in which a consolidated return is made the tax shall be determined, computed, assessed, collected and adjusted in accordance with the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141(b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the date on which such return is made; except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13(a), 201(b), and 204(a), a rate of 3/4 of 1 per centum. ↩3. [Sec. 218(e), National Industrial Recovery Act.] Effective as of January 1, 1933, section 141(c) of the Revenue Act of 1932 is amended by striking out "except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13(a), 201(b), and 204(a), a rate of three-fourths of 1 per centum" and inserting in lieu thereof the following: "except that for the taxable years 1932 there shall be added to the rate of tax prescribed by sections 13(a), 201(b), and 204(a), a rate of three-fourths of 1 percentum and except that for the taxable years 1934 and 1935 there shall be added to the rate of tax prescribed by sections 13(a), 201(b), and 204(a), a rate of 1 per centum." ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619706/	SAWYER MILLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. E. B. SAWYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. N. B. SAWYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. N. B. SAWYER, EXECUTOR, ESTATE OF H. A. SAWYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sawyer Milling Co. v. CommissionerDocket Nos. 20924, 24485, 24987, 24988.United States Board of Tax Appeals17 B.T.A. 160; 1929 BTA LEXIS 2346; August 27, 1929, Promulgated 2346 1. The parties having stipulated or proved all the facts necessary to determine the gain, if any, which the petitioner in Docket No. 20924 realized from the collection of the proceeds of certain fire insurance policies, such gain, and any additional tax liability resulting therefrom should be recomputed under Rule 50, in conformity with the stipulation and findings of fact. 2. Petitioners in Docket Nos. 24485, 24987, and 24988 having admitted liability as transferees for the unpaid taxes due by petitioner in Docket No. 20924, are each subject to assessment therefor, not in excess of the value of the property received. H. L. Washington, Esq., and Ray G. Ransom, C.P.A., for the petitioners. Arthur H. Murray, Esq., for the respondent. LANSDON 160 In Docket No. 20924 the respondent asserts a deficiency in income tax for the year 1922 against the Sawyer Milling Co. in the amount 161 of $4,675.76. In Docket Nos. 24495, 24987, and 24988, he asserts liability under section 280 of the Revenue Act of 1926 against each of the petitioners therein in the amount of $4,675.76. The only issue involved in Docket No. 20924 is whether the2347 Commissioner erred in his determination that the petitioner realized profit in 1922 from the receipt of $69,000 paid to it by five insurance companies on account of the practically total destruction of its property by fire in that year. FINDINGS OF FACT. The parties filed the following stipulation of facts, which the Board accepts: (a) That the petitioner sustained a net loss from operations during the calendar year 1921 in the amount of $16,249.84, which amount is allowable as a deduction from the gross income of the year 1922. (b) That, exclusive of any gain or loss on account of the destruction of its plant by fire, the petitioner sustained a net loss from operations during the calendar year 1922 in the amount of $20,755.60. (c) That the petitioner received during the year 1922 the sum of $69,000 proceeds from insurance on mill buildings and machinery destroyed by fire within the year. That the salvage value of the property was $2,345.12. (d) That the cost of the mill building to the petitioner on September 12, 1905, was $7,000. (e) That the following additions to mill buildings were made by the petitioner: YearAmount1911$2,425.001912151.6219145,625.401915$62.201916500.0019172,998.231918$95.111919181.7219212,494.862348 (f) That the cost of the mill machinery to the petitioner at acquisition on September 12, 1905, was $22,000. (g) That the petitioner made the following additions to mill machinery: YearAmount1911$350.361912175.00191428,874.60191575.001916$20.001917261.32191899.901919512.501920$569.541921160.401922748.30In Docket Nos. 24485, 24987, and 24988, the parties in each proceeding filed the following stipulation, which is accepted by the Board: It is stipulated and agreed between the respective parties hereto, by their Counsel, that petitioner is a transferee of the assets of the Sawyer Milling Company of Hutchinson, Kansas, and is liable for any deficiency in tax in 162 respect to the calendar year 1922, which may be determined by the Board of Tax Appeals in connection with the appeal of the Sawyer Milling Company, Docket No. 20924. The buildings and machinery of the Sawyer Milling Co. had a useful life of 40 years and 20 years, respectively. OPINION. LANSDON: The parties herein have stipulated that the Sawyer Milling Co. acquired certain tangible depreciable property at certain dates and costs; 2349 that such property was almost totally destroyed by fire in 1922; that the salvage value of the undestroyed property was $2,345.12; that the Sawyer Milling Co. received insurance money on account of such destruction in the amount of $69,000; that such company sustained a net operating loss in 1921 in the amount of $16,249.84, which is allowable as a deduction from its gross income for 1922; that exclusive of the gain or loss resulting from the receipt of $69,000 from certain insurance companies in 1922 it sustained a net operating loss in such year in the amount of $20,755.60; and that each of the petitioners in Docket Nos. 24485, 24987, and 24988 is liable as the transferee of the assets of the Sawyer Milling Co. for any additional tax due the Government by that company for the year 1922. It remains, therefore, only for the Board to determine the gain, if any, realized by the Sawyer Milling Co. from the receipt of the proceeds of the insurance policies which it collected in the taxable year, and this question is narrowed by the stipulation to a mere computation of the accrued depreciation sustained upon the tangible property of such company prior to the destruction thereof by fire. 2350 All the data for such computation, except the useful life of the property in question, is stipulated in express terms. We have found from the evidence that the buildings and machinery in question had a useful life of 40 years and 20 years, respectively. The income of the Sawyer Milling Co. for 1922 and the additional tax due should be recomputed in conformity with the stipulation and our findings of the useful life of the tangible property destroyed by fire. Each of the petitioners in Docket Nos. 24485, 24987, and 24988 has by stipulation admitted his liability for any tax found to be due the Government on account of the income of the Sawyer Milling Co. for the year 1922. Any tax found upon recomputation to be due by such company for the year 1922 may be assessed against each of such petitioners, but not in an amount greater than the value of the assets received by transfer from the taxpayer. . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619708/	APPEAL OF ASBES-TILE COMPANY, INC.Asbes-Tile Co. v. CommissionerDocket No. 6404.United States Board of Tax Appeals5 B.T.A. 195; 1926 BTA LEXIS 2911; October 27, 1926, Decided 2911 For lack of evidence, the action of the Commissioner in disallowing as a deduction certain amounts claimed by the taxpayer as compensation to officers is approved. Abraham I. Mayer, C.P.A., for the petitioner. Bruce A. Low, Esq., for the Commissioner. TRAMMELL 195 This is an appeal from the determination of deficiencies in income tax for 1919 and 1920 in the amounts of $384.81 and $2,050.72, respectively, and arises from the disallowance of part of the salaries paid officers of the taxpayer corporation. FINDINGS OF FACT. The taxpayer is a New York corporation with its principal office at Brooklyn, and is engaged in the business of selling and applying asbestors, asphalt, and slate shingles, slate and tile roofing, and various kinds of roofing materials. The taxpayer was organized under the laws of New York in June, 1918, under the name of J. Levenson Co., Inc., with an authorized capital of $5,000, consisting of 50 shares of the par value of $100 each, of which 20 shares were issued and outstanding as follows: Shares.Max B. Gollin10Alexander Hirsch9Joseph Levenson120In June, 1919, the corporate2912 name was changed to Asbes-Tile Co., Inc., and the authorized capital was increased to $15,000. In January, 1919, Daniel McKenzie became a stockholder, officer and director 196 of J. Levenson Co., Inc., by the purchase of 11 shares of stock, and after the change of name and increase in capitalization Alexander Hirsch and Daniel McKenzie purchased additional stock. The stockholders of the corporation and the number of shares held by each were then as follows: Shares.Alexander Hirsch, director74Joseph Levenson, president and director1Daniel McKenzie, secretary, treasurer and director75Total150At an informal meeting of the stockholders, officers, and directors held in January, 1919, it was agreed that Joseph Levenson and Daniel McKenzie should each receive for their services during the current year a commission at the rate of 15 per cent on all business brought in by each, but not in excess of $100 per week to each. In the early part of 1920 another informal meeting of the officers and directors of the company was held and the same arrangement with regard to compensation to be paid to Joseph Levenson and Daniel McKenzie was made as in the2913 preceding year, except that the maximum allowance which each of them was to receive should not be in excess of $200 per week. The taxpayer in the preparation of its income and profits-tax returns for 1919 and 1920 used Form 1065 (partnership and personal service corporation) instead of Form 1120 (corporation). The amounts paid to and earned by Joseph Levenson and Daniel McKenzie were shown in Item 14 (compensation of members) in the return, and the profits of the corporation were shown in Schedule C, which is headed "Members' Share of Income, etc." The Commissioner has disallowed as a deduction that part of the compensation of Joseph Levenson and Daniel McKenzie shown in Schedule C of the return under the head of "Members' Share of Income." The following is the amount reported under each item: Stockholders.Share held.Time devoted.Item 14.Schedule C.1919.J. Levenson1Entire$1,620.00$2,008.57D. McKenzie75Entire1,669.642,008.57A. Hirsch74NoneNone.None.1503,289.644,017.141920.J. Levenson1Entire4,150.005,998.97D. McKenzie75Entire6,181.073,967.90A. Hirsch74NoneNone.None.15010,331.079,966.872914 Both of the officers in question were men of about ten years' experience in this line of work and they could have received from other concerns compensation equal to the amount agreed upon. 197 OPINION. TRAMMELL: There are two questions presented for decision. (1) Whether the amount agreed to be paid to the officers was reasonable compensation for services, and (2) whether it was paid or was an obligation incurred during the respective years. The officers were to receive a commission of 15 per cent on the sales as compensation, but were not to draw out in excess of $100 per week each, in 1919, and $200 per week each, in 1920. We have no evidence as to the amount of sales made by either of the officers or the amount of commission they were entitled to. There is no evidence as to whether it equaled the amount they were permitted to draw out or not, nor is there any evidence as to the amounts actually drawn by the officers. The Commissioner has allowed as a deduction the amount shown by the return as the compensation of the members. We can not, on this evidence, find that the determination of the Commissioner was not correct, although the amount of the commission2915 agreed to be paid the officers was reasonable compensation. Judgment will be entered for the Commissioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619709/	SEATRAIN LINES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Seatrain Lines v. CommissionerDocket No. 102561.United States Board of Tax Appeals46 B.T.A. 1076; 1942 BTA LEXIS 779; May 6, 1942, Promulgated 779 The tax imposed by article XV of the Cuban Law of July 6, 1928, amending Military Order No. 463 of 1900, on gross income obtained for freight and passengers shipped in national ports of Cuba, is an income tax and may be claimed as a credit under section 131(a)(1) of the Revenue Act of 1936. H. Maurice Fridlund, Esq., and James Ragan Roberts, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. VAN FOSSAN 1076 OPINION. VAN FOSSAN: The Commissioner determined a deficiency of $834.30 in the petitioner's income tax for the year 1936. The petitioner claims an overpayment of $11,117.51 for that year. The sole issue is whether or not the petitioner is entitled to a credit under section 131(a)(1) of the Revenue Act of 1936 for a tax of 3 percent of the gross income obtained for freight and passenger transportation, paid under Cuban law. The facts were stipulated and we adopt them as our findings of fact. Based on such stipulation and the translations of Cuban law attached thereto, the facts material to the issue may be summarised as follows: 1077 The petitioner is a domestic corporation, whith its office780 in New Orleans, Louisiana. Its income tax return for 1936 was filed with the collector of internal revenue for the district of Louisiana, and was made on the accrual basis. The petitioner is a steamship company engaged in the business of carrying freight and passengers from ports in the United States to ports in the United States and in the Republic of Cuba, and from ports in Cuba to ports in the United States. The Republic of Cuba imposes a tax of 3 percent on the freights and passage money received by foreign shipping companies for cargoes and passengers taken aboard in Cuban ports. This tax is imposed by reason of certain provisions in the Law of July 6, 1928, which amended article III of the Cuban Law known as "Military Order No. 463 of 1900", hereinafter referred to as Order No. 463. Order No. 463 provided that certain "entities" should pay to the state "8 per cent tax on their profits" and that companies engaged in navigation should contribute 6 percent to the state (article III, b). Article X is as follows: X. There shall be considered as net profits for the collection of the Tax that balance which may result after reduction of the proven expense of operation781 and maintenance of the business in which the Banks, Companies and enterprises are engaged. There shall be credited the amount of industrial and territorial taxes that may be paid for the assessable industries which they may exercise and the properties which they may own. (The amount of these taxes is not to be deducted from the quota to be paid to the State, but shall be accredited or included among the expense of the Companies in accordance to resolutions [Rulings] made or taken in the matter.) Prior to July 6, 1928, continual controversy arose between the shipping companies and the tax authorities of the Cuban Government on the question of what proportion of expenses should be allowed against revenues derived from Cuban sources in determining "net profits." The taxpayers and the Cuban Government were never able to reach an agreement on the apportionment of expenses. Ultimately, however, the Cuban Government offered to compromise the difficult question by a decrease of 50 percent in the rate of the tax, making it 3 percent, and applicable to gross income from Cuban sources rather than on "net profits." The Law of July 6, 1928, in article XV, amended Order No. 463 as follows: 782 "ARTICLE III. The following shall pay six per cent of their net profits as Tax to the State: "a) General service railroads, that is, those engaged in public exploitation of transport of passengers and merchandise, that belong either to companies or to individuals, in accordance with those laws which are in force governing same. 1078 "b) National shipping companies and those foreign ones authorized to engage in coastwise traffic. "Foreign shipping companies which engaged in transporting freight and passengers between national and foreign ports shall be exempt from the Tax on Profits and shall, in lieu thereof, pay a tax of 3% of the gross income obtained for freight and passengers which they may ship in national ports, without prejudice of their continuing to pay tax for other reasons (conceptos) according to the legislation in force. "The tax is to be paid precisely by said shipping companies or their Agents; and they shall not charge same to the shippers nor passengers." The Tax due according to Paragraph (b) of Article III of Order No. 463 of 1900 by the Companies which, according to that Article, are subject to tax in accordance with their income, is remitted. 783 and in article XXI it also amended article X of Order No. 463, as follows: "Article X: For the purpose of determining the net profits on which the individuals or companies obligated to pay the tax on profits must pay the corresponding proportion of tax, the following shall be deducted from the gross income which they may obtain, whatever their source: "a) The amount of all ordinary and necessary expenses paid or incurred during the year in the exploitation of the business; and "b) The amount of the ordinary losses suffered by the Company during the normal course of business. "For the purposes of application of this Law, income shall be understood to be everything received, whether in cash, in securities or in credits, which modify the wealth of the taxpayer and of which he may freely dispose of without restoring their amount. "There shall be accepted as ordinary expense of exploitation of the business the amount of contributions and taxes paid to the State, to the Province or to the Municipalities, with exception of those paid as tax on profits." Pursuant to the above laws, during the calendar year 1936 there were accrued and the petitioner duly paid to the Republic784 of Cuba as and for taxes on freight revenues the amounts hereinbelow set forth for each of the three-month periods indicated: Quarter ended - Gross revenues for freights and passengers to U.S. ports, taken aboard in Cuban portsTax at 3 percent3/31/36$80,172.48$2,284.916/30/36136,969.393,903.639/30/36118,208.453,368.9412/31/3654,737.971,560.03Total390,088.2911,117.51In its Federal income tax return for the calendar year 1936, the petitioner signified its desire to have the benefit of section 131 of the Revenue Act of 1936. For the period here involved, the Republic of Cuba also imposed a tax of 1 1/2 percent (subsequently increased to 2 percent) on sales 1079 and gross receipts. The material parts of the law, known as Decree-Law No. 393, imposing such tax, are substantially as follows: The Decree-Law recited prior laws establishing a tax on the sale, exchange, or transfer of merchandise and gross receipts, and stated that such taxes henceforth would be governed by the present Decree-Law. It then provided that all merchants, manufacturers, or industrialists, not expressly exempt, should pay a tax equivalent to 1 1/2 percent785 of the price or value of the articles sold, exchanged, or transferred. Article IX is as follows: ARTICLE IX: To the effects of this Decree-Law, the following natural or juridical persons shall be considered as merchants and therefore subject to the payment of the 1 1/2 percent tax on gross receipts: * * 12. Those who directly or indirectly transport passengers or freight in any manner, whether by land, sea, or air, it being understood that in case of transportation by sea or air that the tax shall be paid on freight, whether collected in Cuba or abroad, on that portion of the transportation which begins in Cuban territory, which act shall be determined by the fact of loading, in whole or in part, a vessel or an aeroplane. In regard to the transportation of passengers by sea or air, tax shall be paid on the amount of the passages, whether collected in Cuba or abroad, covering the transportation which begins in Cuban territory, which act shall be determined by the fact of the departure of the passenger from same. * * * [The article specifies 18 other classes of merchants.] The petitioner paid to the Republic of Cuba various amounts as taxes on sales and gross receipts786 accrued during 1936. It filed its 1936 Cuban tax returns pursuant to the Law of July 6, 1928, and the Decree-Law No. 393. The returns filed by the petitioner recite that it is obligated to contribute the "3 per cent tax on the income obtained from cargo and passengers leaving Cuba, created by the Law of July 6, 1928," and declare that the "income subject to payment" is as set forth. The receipt issued by the Treasurer of Cuba describes the tax as being "3 per cent of $ income received for freights." The returns of the 1 1/2 percent sales tax are made on a different form and under other laws and refer to "gross sales and income." The returns of the 3 percent tax were made quarterly while the returns of the 1 1/2 percent tax were made monthly. The question presented by the above facts is: Was the 3 percent Cuban tax an income tax or an excise tax? If the former, section 131(a)(1), Revenue Act of 1936, 1 allowing a credit of the amount 1080 paid or accrued, is controlling; if the latter, the petitioner is entitled only to a deduction of the amount so paid or accrued. 787 We have no doubt that the tax in controversy was considered and treated by the taxing authorities of Cuba as strictly an income tax. The forms for returns, the references to the underlying Law of July 6, 1928, the receipts issued by the Treasurer, and other facts in the record all point unmistakably to this conclusion. The historical setting and development of the tax also confirm this view. In short, the tax originated and remained wholly within the scope of the Cuban income tax legislation. Contemporaneously, a sales or gross receipts tax, admittedly an excise tax, was in force in Cuba and the petitioner paid taxes under the law establishing it. Returns, reports, receipts, and other administrative details of the two types of taxes were kept separate and distinct in the Treasury Department of the Republic of Cuba. The petitioner's tax payments followed this routine of segregation and differentiation. The respondent contends that while the answer to the question before us "must depend in considerable part on the Cuban law * * it is more important that the facts be analysed in the light of our own concepts." He then argues that it is a well established principle of law788 that taxes based on gross receipts constitute a tax on business and "are generally held to be an excise tax." He advances the theory that the modification of Order No. 463 by the provisions of the Law of July 6, 1928, with no further legislation or words of description, transformed the tax from an income tax to an excise tax. It will be noted that respondent's contention is directed to a gross receipts tax, not a gross income tax. The two concepts are not synonymous. Paul & Mertens, Law of Federal Income Taxation, vol. 1, § 5.09. In the cases cited by the respondent to support his theory that a tax based upon gross receipts is an excise tax, the privilege of exercising a franchise or the privilege of doing business is the controlling factor. The 3 percent tax here involved is not levied on the privilege of doing business but on the gross income derived from the petitioner's functions of carrying passengers and freight. In no provisions of the Cuban Law of July 6, 1928, is the privilege of carrying on the petitioner's business made the basis of the tax. The 3 percent by which the original 6 percent rate was reduced was apparently an approximation of the deductions789 allowed in arriving at net income and was adopted as a compromise measure in order to avoid the complex and vexatious allocation and calculation of the deductible items peculiar to the petitioner's business. 1081 Therefore, it appears that as to petitioner's business the present 3 percent tax is but the successor of the 6 percent income tax, took its place in the tax structure of Cuba, and preserved its character as an income tax. Not only is respondent's position not supported by the Cuban law, it finds no basis in our own tax interpretations. Section 1400 of chapter 9 (entitled "Employment Taxes"), Internal Revenue Code, requires the payment of certain taxes on the wages received by every individual after December 31, 1936, (with exceptions named in section 1426(b)), but section 1402 provides that such tax is not deductible in computing income taxes imposed by chapter 1. The Senate Finance Committee Report states that the deduction was not allowed because the tax is an income tax. 2 Likewise, the optional Form 1040A, used so widely in the current income tax returns, is based on a gross income of $3,000 and less. The respondent has ruled that Canadian dividend790 taxes, Canadian copyright taxes, French rental value taxes, Mexican interest taxes, and Argentine dividend taxes are all income taxes and are allowable as a credit under section 131. See also Herbert Ide Keen,15 B.T.A. 1243">15 B.T.A. 1243; and Havana Electric Railway, Light & Power Co.,34 B.T.A. 782">34 B.T.A. 782. There can be no doubt of the right of Congress to impose a tax on gross income under the Sixteenth Amendment to the Constitution. The allowance of deductions from gross income in computing the proper income tax due is solely a matter of legislative grace. Deputy v. duPont,308 U.S. 488">308 U.S. 488. In New Colonial Ice Co. v. Helvering,292 U.S. 345">292 U.S. 345, the Supreme Court said: The power to tax income like that of the new corporation is plain and extends to the gross income. Whether and to what extent deductions shall be allowed depends upon legislative grace; and only if there is clear provision therefor can any particular deduction be allowed. Thus, although deductions may be allowed, the tax remains an income tax because it is levied on income and not on the privilege of791 doing business. If no deductions were permitted by statute the tax would still be an income tax. In so far as I.T. 2596, CB X-2, 184 (1931), cited and relied upon by the respondent, is not in accord with our decision, it must be disregarded. Attention is directed to the fact that in the translation of the Cuban statutes quoted in I.T. 2596 the crucial phrase is rendered as "3 per cent on the gross revenues received * " while the translation stipulated by the parties in the present case is "3 per cent of the gross income obtained * ." Reviewed by the Board. Decision will be entered under Rule 50.Footnotes1. SEC. 131. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES. (a) ALLOWANCE OF CREDIT. - If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with: (1) CITIZEN AND DOMESTIC CORPORATION. - In the case of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; * * ↩2. 74th Cong., 1st sess., S. Rept. No. 628, p. 42. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4619712/	Minnie Viles, administratrix of the Estate of Cloyd H. Viles, deceased v. Commissioner. Harvey Viles v. Commissioner. Inez Viles Whaley v. Commissioner. Minnie Viles v. Commissioner.Viles v. CommissionerDocket Nos. 41737-41739, 43933.United States Tax CourtT.C. Memo 1955-142; 1955 Tax Ct. Memo LEXIS 199; 14 T.C.M. (CCH) 525; T.C.M. (RIA) 55142; May 31, 1955L. C. Ely, Esq., Myron Ray Ely, Esq., 406 West Church Street, Knoxville, Tenn., and Harold B. Stone, Esq., for the petitioners. Lester R. Uretz, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent has determined deficiencies in the income tax of Cloyd H. Viles, deceased, and additions to tax under sections 291(a) and 293(a) of the Internal Revenue Code of 1939 as follows: AdditionAdditionDocketto tax sec.to tax sec.No.YearDeficiency293(a)291(a)Minnie Viles,Administratrix of theEstate of Cloyd H. Viles,417371947$4,102.84$205.14Deceased19485,531.85276.5919493,677.49183.87$919.37The respondent200 further has determined that Minnie Viles (Docket No. 43933) as fiduciary of the Estate of Cloyd H. Viles, deceased, is personally liable under section 3467, Revised Statutes, to the extent of the amount of the deficiencies in tax and additions to tax, plus interest as provided by law. The respondent also determined that Harvey Viles (Docket No. 41738) is liable as transferee of property of the Estate of Cloyd H. Viles, deceased, for the above-mentioned deficiencies and additions to tax to the extent of $3,773.86. The respondent made a like determination with respect to Inez Viles Whaley. Issues presented for determination are the correctness of the respondent's action (1) in failing to determine that Cloyd H. Viles, deceased, had no income in 1947 and 1948 in excess of that reported for those years and that he had no taxable income in 1949, (2) in determining that Minnie Viles is personally liable under section 3467, Revised Statutes, to the extent of the deficiencies in tax and additions to tax of Cloyd H. Viles, deceased, for the years 1947, 1948 and 1949, and (3) in determining that Harvey Viles and Inez Viles Whaley are liable as transferees of property of the Estate of Cloyd201 H. Viles, deceased, for portions of the deficiencies in tax and additions to tax for 1947, 1948 and 1949. Findings of Fact Cloyd H. Viles resided in Knoxville, Knox County, Tennessee, during 1947 through 1949 and died intestate and a resident of that city and county on January 8, 1950. He filed individual income tax returns for 1947 and 1948 with the collector at Nashville, Tennessee. An income tax return for 1949 was not filed by or on behalf of the decedent. On January 15, 1950, letters of administration were issued to Charles A. Maner and Norma Viles by the County Court for Knox County, Tennessee, naming them as administrators of the estate of the decedent. By order of the same court, dated April 4, 1950, Charles A. Maner and Norma Viles were discharged as administrators of the estate and petitioner Minnie Viles, mother of the decedent, was appointed successor administratrix. None of the assets of the estate had been distributed by the discharged administrators. In October 1935 the decedent married Edith Christian and in May 1945 she divorced him. By the last part of 1947 she had married one Hyder and the decedent had married Norma Jean Davis. In 1948 the decedent and Norma202 Jean Davis Viles were either divorced or their marriage annulled. Thereafter in 1948 they were remarried. Although Norma Jean Davis Viles originally was appointed as an administrator of the decedent's estate, she was removed because she was unable to establish that after having been divorced from decedent in August 1949 she subsequently was remarried to him and was his lawful widow. Petitioner Harvey Viles is a brother of the decedent and petitioner Inez Viles Whaley (now Tavui) is a sister of the decedent. Harvey Viles and Inez Viles Whaley are the children of Minnie Viles. From February 23, 1938 until October 8, 1942, the decedent was incarcerated in the Federal penitentiary, Atlanta, Georgia. He was released conditionally from the penitentiary on October 8, 1942, and placed on probation until February 22, 1945. Upon being so released the decedent returned to live with his then wife, Edith. During the period the decedent was on probation he filed monthly supervision reports. Since decedent was unable to read or write, Edith assisted him in the preparation of the reports. In these reports, with the exception of the first two in which he stated that he was unemployed, the decedent203 reported that he was employed as a truck driver. The wages reported as having been received ranged from a low of $35.20 for the month of January 1943 to a high of $97.59 for the month of November 1944. The expenditures reported as having been made for food and other items for the various months equalled the amounts reported as having been received for the same months except for the month of November 1943 for which $20 was reported as having been saved. The records of the office of the collector for the district of Tennessee do not disclose that the decedent filed an income tax return for 1942. For 1943 he filed a return showing no tax liability. For 1944 he filed a return showing a tax liability of $57 of which $51.83 was paid by withholding from his wages. For 1945 he filed a return showing no tax liability and with respect to which he was refunded $27.70 which had been withheld. There is no record of a return having been filed by him for 1946. For 1947 and 1948 the decedent filed returns in which he stated that his occupation was that of "Retail Whiskey Dealer" and the only income reported for either year was shown as having been derived from that business. For 1947 an adjusted204 gross income of $1,480 was reported and a tax liability of $91.20 was entered on the return. For 1948 an adjusted gross income of $4,680 was reported and a tax liability of $133 was entered on the return. Howard Thomas, a revenue agent, was assigned to investigate the income tax liability of the decedent for 1947 and 1948. After a letter addressed to the decedent, dated January 10, 1950, was returned to him undelivered and after learning of the death of the decedent and the appointment of Charles A. Maner as one of the administrators of decedent's estate, Thomas contacted Maner for the purpose of examining any books and records maintained by the decedent with respect to his income. Maner advised Thomas that he had no books or records of the decedent. In May 1950 and subsequent to her appointment as administratrix, Thomas contacted Minnie Viles with respect to the tax liability of the decedent and examining his books or records but, so far as could be ascertained, the decedent maintained no books or records. In view of this and since no return had been filed for 1949, Thomas extended his investigation to decedent's income tax liability for that year. In the absence of books or records, 205 Thomas determined the decedent's income for the years in question on the basis of cash disbursements. In so doing, he computed unreported income for the respective years as follows: 194719481949Cash expended in automobilepurchases: 1947 Cadillac Sedanette$ 3,315.00purchased December 19471947 Chrysler New Yorker$ 2,000.00purchased April 26, 19481949 Ford Buster Club Coupe$ 742.56purchased July 5, 1949Real estate purchased, cash$26,125.00expended in 1948Deduct cost price of property3,500.00sold in 1948 for $3,700Increase$22,625.00Allocated increase of$22,625.00 to 1947 and 1948on basis of grossreceipts reported in 1947 and8,514.3214,110.681948 income tax returnsFurniture purchased7,221.84Cash paid to divorced wife in3,000.00property settlementEstimated living expenses4,000.004,680.004,500.00Adjusted gross income$15,829.32$20,790.68$15,464.40Adjusted gross income1,480.004,680.00NonereportedIncome not reported$14,349.32$16,110.68$15,464.40On or about July 15, 1950, and prior to the submission to his superior of his report206 in which he proposed a determination of the decedent's tax liability on the basis of unreported income computed as set out above, Thomas had a conference with Minnie Viles and L. C. Ely, her attorney. During the conference, Thomas showed them the report, discussed with them the adjustments made therein and the resulting tax liability, and advised Minnie Viles that no distribution should be made of the remaining assets of the estate of the decedent until the tax liability of the estate was settled. On July 3, 1951, the County Court for Knox County, Tennessee, approved the final settlement of the estate of the decedent and discharged Minnie Viles as administratrix. The final settlement as approved by the county court shows receipts and disbursements by Minnie Viles as administratrix of the decedent's estate as follows: RECEIPTSSale of furniture$ 2,000.00Sale of Ford automobile1,300.00Sale of real estate18,006.08Interest from Home Federal Sav-ings & Loan95.64Refund on inheritance tax31.41$21,433.13DISBURSEMENTSRose Funeral Home, paid by Har-vey Viles$ 2,126.83Harvey Viles4,203.54Dr. David H. Waterman1,000.00Lum Reeder, trustee, 1949 taxes163.79Mrs. Carrie Lee Downey, nurse50.00Mrs. Mary Armstrong, nurse53.50Mrs. Marie Hartman, nurse50.00South Knoxville Monument Co. formonument400.00South Knoxville Monument Co. taxon monument8.00Dept. of Finance & Taxation inh.tax700.00East Tennessee Baptist Hospital683.00Acuff Clinic58.00Dr. William Forrest Powell65.00Rogers & Company66.47Watson Plumbing & Heating Com-pany15.75Dr. Dan Thomas25.00Hurley, Wright & Powell - bond60.00Mrs. Minnie Viles, administratrixfee1,000.00Ely & Ely, attorneys - fee1,500.00Jack W. Dance, clerk9.50Inez Viles Whaley, sister - partialdist.3,000.00Harvey Viles, brother, partial dist.3,000.00Ethel Viles Warren, child of de-ceased brother, 1/5 of 1/3600.00Louise Viles Lowe, child of de-ceased brother, 1/5 of 1/3600.00Juanita Joyce Moore, child of de-ceased brother, 1/5 of 1/3600.00Floyd W. Viles, child of deceasedbrother, 1/5 of 1/3600.00Roy K. Viles, child of deceasedbrother, 1/5 or 1/3600.00Inez Viles Whaley - final distribu-tion773.86Harvey Viles - final distribution773.86Ethel Viles Warren - final distribu-tion154.78Louise Viles Lowe - final distribu-tion154.77Juanita Joyce Moore - final distri-bution154.77Floyd W. Viles - final distribution154.77Roy K. Viles - final distribution154.77[$23559.96]1 $21,433.13207 Minnie Viles, as administratrix of the estate of the decedent, completed distribution of all the assets of the estate on July 3, 1951. The distribution of the assets of the estate by Minnie Viles rendered the estate without assets and unable to pay the deficiencies in tax and208 additions to tax involved here. Such deficiencies in tax and additions to tax have never been paid. Petitioner Inez Viles Whaley, as beneficiary of the estate of the decedent, received distributions of property from the estate in the total amount of $3,773.86. Petitioner Harvey Viles, as beneficiary of the estate of the decedent, received distributions of property from the estate in the total amount of $3,773.86. In determining the deficiencies in tax and additions to tax in controversy here, the respondent determined that the decedent, during the respective taxable years, had unreported income in the amounts computed by revenue agent Thomas. Opinion The petitioners take the position that the decedent reported the full amount of his taxable income, if any he had, for each of the taxable years 1947 through 1949. In support of their position they contend that on January 1, 1947, the decedent had on deposit with other persons money and property in the total amount of $44,000, composed of $24,000 cash on deposit with Edith Hyder, $15,000 cash on deposit with Inez Viles Whaley, and $5,000 represented by real estate owned by decedent and title standing in the name of Minnie Viles, 209 which when added to the adjusted gross income of $1,480 reported for 1947 and the $4,680 reported for 1948 gives a total of $50,160 which by the end of 1948 the decedent had available for expenditures; that during the years 1947 through 1949 the decedent expended a total of $38,904.40 with respect to automobiles, real estate, and settlement with divorced wife, as determined by respondent, and in addition to the foregoing expended $1,200 a year or $3,600 for the three years for living expenses, or total expenditures of $42,504.40; that, therefore, it is apparent that the funds and property on hand on January 1, 1947, plus the income reported for 1947 and 1948 was $7,656.60 in excess of the total expenditures for the years 1947 through 1949; and that, accordingly, we should find that the respondent's determination of the deficiencies in tax and additions to tax for those years was erroneous, arbitrary and excessive. In support of their contention that on January 1, 1947, the decedent had on deposit with other persons money and property in the total amount of $44,000, the petitioners rely on the testimony of Edith Hyder, petitioner Inez Viles Whaley, her son-in-law, Charles Chesney, 210 and petitioner Harvey Viles. Edith Hyder, who married decedent in October 1935 and divorced him in May 1945, testified that at the time the decedent was sent to the penitentiary on February 23, 1938, he deposited with her $10,000 in currency in denominations of $1, $5, $10, $20, $50, $100 and $1,000, with instructions to keep it until his return but for her to use such of it as she needed; that she thereafter kept the money in a cedar chest; that from the time of the decedent's departure to the penitentiary until his return therefrom about October 8, 1942, she stayed variously with her mother, with Minnie Viles, the decedent's mother, and with her (Edith Hyder's) sister; that during such time she had no source of income, did not work anywhere, and her brothers and sisters provided her support; that Minnie Viles had no source of income, applied for public relief but did not get it, and obtained help from her daughter. Edith Hyder further testified that she never used any of the $10,000 and never gave any of it to Minnie Viles; that her (Edith Hyder's) parents and brothers and sisters knew she had the money as did Minnie Viles and her daughter. She further testified that she assisted211 in preparing the decedent's probation reports while he was on probation during the period from October 1942 to February 1945 and that during such period the decedent had income other than his wages as a truck driver and brought her money obtained from sources other than his wages. Although the probation reports contain spaces for reporting money received as wages, or from borrowings, or from relief agency, or from investment, or from other source, the reports filed by decedent show wages received by decedent as a truck driver as the only source from which the decedent had received any money. The amounts of wages shown in the reports range from $35.20 per month for the month of January 1943 to $97.59 per month for the month of November 1944. Edith Hyder also testified that from the time the decedent returned from the penitentiary in October 1942 until the last part of 1946, or January or February 1947, the decedent deposited further sums of money with her sufficient with the $10,000 heretofore mentioned to total $24,000; that she continued to keep the $24,000 until decedent called for it in 1948; that in 1948 she gave him $4,000 at one time, $19,300 a few months later and $700 a day212 or so after that. In this connection it is to be observed that for the years 1942 through 1946 the decedent paid an income tax for only one year, 1944, and that was in the amount of $57. For the other years he either filed no returns or filed returns disclosing no tax liability. Charles Chesney testified that during the spring or summer of 1948, and at the request of decedent, he accompanied him to the home of Edith Hyder for the purpose of counting some money; that while there he (Chesney) counted $19,300 in currency in denominations of $1,000, $100, $20, $10, $5 and "a lot of" $1's; that after the money was counted the decedent took it away with him. Chesney did not know to whom the money belonged, how it came to be at the Hyder home, or how long it had been there, or what the decedent did with it after he took it away. Chesney also stated that he, pursuant to an understanding reached by decedent and Edith Hyder at the time the $19,300 was counted, returned to the Hyder home a few days later; that on the latter occasion he was accompanied by Harvey Viles to whom Edith Hyder paid $700, which he (Chesney) understood was to be turned over to the decedent. Petitioner Inez Viles Whaley, 213 sister of the decedent, testified that at the time the decedent went to the penitentiary he deposited with her $10,000 in currency, consisting of ten $1,000 bills, to keep for him until his return from the penitentiary and that she carried the money in her bosom day and night; that after his return from the penitentiary decedent at various times during the years 1944, 1945 and 1946 deposited with her additional sums of money, totaling $5,000, in denominations of $20, $50 and $100 and that she kept this money in the light globe in the hall of her house; that she continued to keep the $10,000 and the $5,000 until some time in 1947 prior to Thanksgiving Day of that year when at her request the decedent took back the money. She also testified that the decedent, prior to his departure to the penitentiary, deposited $10,000 with Edith Hyder, which the latter took from a shoe box in a clothes closet and showed her on one occasion. In contrast with her foregoing testimony as to money left with her by decedent, in an affidavit executed in 1951 Inez Viles Whaley stated that in 1945 and 1946 the decedent left with her on different occasions various sums of money and that he continued to do so214 until he had deposited with her $15,000 and that she delivered the last of the money to him in November 1947. At the hearing herein she admitted to having engaged in the business of selling whiskey at retail contrary to law since April 1944. Aside from a statement by the decedent before going to the penitentiary in 1938 that "he had some money" and aside from having received $700 from Edith Hyder for the decedent, Harvey Viles, who had been convicted for conspiracy and counterfeiting and incarcerated in the penitentiary at Atlanta, Georgia, in 1938, had no knowledge of the above-mentioned $24,000 testified to by Edith Hyder or the $15,000 testified to by Inez Viles Whaley. Edith Hyder testified that prior to the time the decedent went to the penitentiary he purchased a five-room house at 235 Leslie Street in Knoxville; that title to the property was taken in the name of decedent's mother; that the decedent owned the property in 1945 when she divorced him; that later the property was sold by decedent's mother and decedent got $5,000 for it. Inez Viles Whaley testified that the decedent owned the Leslie Street property prior to going to the penitentiary; that title to the property215 was in the name of the decedent's mother; that the decedent sold the property in 1947, 1948 or 1949 and said he received $5,000 for it. Harvey Viles testified that decedent prior to going to the penitentiary gave his mother about $1,800 with which she bought the Leslie Street property; that she kept it in her possession until the decedent's return from the penitentiary; that about 1947 or 1948 the decedent sold the property and said that he received $5,000 for it. The decedent's mother, Minnie Viles, did not appear as a witness at the hearing herein and we have not been given the benefit of her testimony respecting the ownership of the Leslie Street property or its cost or selling price. Apparently as an explanation of her absence at the hearing, Inez Viles Whaley testified that Minnie Viles is 74 or 75 years of age; that she was under the care of a physician; that she had kidney and gall bladder trouble; that she could not see well; that she has had a stroke (the time of which was not stated) which has affected her mind, and that she gets upset "at the least little thing." Harvey Viles testified on direct examination that Minnie Viles has had a stroke (the time of which was not stated) 216 which has affected her mind and also her speech. However, on cross examination, he stated that "she runs a dance hall" in a property which she owns and which is situated just across the street from where she lives. He also stated that at the time of the hearing he had no employment but stayed with his mother who provided him with support from money obtained from her conduct of the dance hall. No explanation was offered as to how one, who was so infirm as pictured by the above testimony, was able to run a dance hall business. Apparently Minnie Viles was not as infirm as some of the testimony would indicate. Respecting the decedent's physical condition during the later years of his life, the following testimony was given by Edith Hyder on direct examination: "Q. Then after that, in '46 and '47 and '48, do you know what his physical condition was, whether he was well or sick? "A. Well, in the last part of that, I'll say he was a sick man, in the last part of '47 and '48, because he was married at that time to another woman, and I was married to another man." Inez Viles Whaley testified that decedent had cancer of the lung and that during the last three years before he died he217 did not do anything and that he finally died of cancern of the lung. Harvey Viles testified that decedent, during the last two or three years before his death, had cancer of the lungs and was not able to work at all. In contrast to the foregoing testimony the decedent filed income tax returns for 1947 and 1948 in which he reported adjusted gross incomes of $1,480 and $4,680, respectively, from his business as a retail whisky dealer. While in the return for 1947 an expense deduction of $2,600 was taken for labor, no expense deduction was taken in the 1948 return for labor or anything else except for goods or merchandise sold. After having carefully considered all of the evidence of record bearing on the question and particularly the testimony of Edith Hyder, Inez Viles Whaley, Charles Chesney and Harvey Viles referred to above, we are unable to find that at the beginning of 1947 the decedent had on deposit with Edith Hyder $24,000 or any other sum or that he had on deposit with Inez Viles Whaley $15,000 or any other sum. Whatever may have been the situation with respect to the ownership, cost, selling price or year of sale of the property at 235 Leslie Street, the fact remains that218 the decedent did not report any income from the sale of real estate in either his return for 1947 or his return for 1948. However, the respondent has determined that during 1948 the decedent sold an undesignated parcel of real estate for $3,700 which had cost him $3,500. By respondent's treatment of the cost of $3,500, he has allowed such amount for property the decedent had on hand at the beginning of 1947. The record is silent as to whether the above-mentioned undesignated property was the Leslie Street property. In view of the state of the record, and since the burden was upon the petitioners to show that the properties were different, if in fact they were different, we conclude that they were the same property, that the respondent's treatment of the cost of $3,500 was proper; and that the petitioners have failed to show that the decedent at any time had on deposit with Minnie Viles property of a greater amount than $3,500. The respondent has determined that decedent's living expenses were $4,000, $4,680 and $4,500 for 1947, 1948 and 1949, respectively. In support of their contention, that the decedent's living expenses were only $1,200 a year for the respective years, the petitioners219 rely on the testimony of Harvey Viles. Although stating that he did not remember where the decedent lived during the years in question and that decedent's family consisted of himself and wife, Harvey Viles estimated that the decedent's living expenses during the years in question were about the same as his and that his living expenses were about $100 a month. Since the record is silent as to what, if any, family Harvey Viles had during the years in question, or where he lived, or what, if any, employment or business he had, his testimony affords no basis for a finding that the respondent's determination of the decedent's living expenses was erroneous. In view of what had been said above, we hold that the petitioners have failed to show that the respondent erred in determining that the decedent had unreported income of $14,349.32, $16,110.68 and $15,464.40 for 1947, 1948 and 1949, respectively, and in determining the deficiencies in tax accordingly. Although the petitioners have assigned error as to the respondent's determination of additions to tax for the years in question, which was denied by respondent, they have submitted no evidence and make no contention with respect to such220 determination other than that the decedent did not have any unreported income for such years. In view of this, and since petitioners have not shown that the decedent did not have unreported income as determined by respondent, the determination of the additions to tax is sustained. Respecting the liability of Minnie Viles personally for the deficiencies in tax and additions to tax here involved, section 3466 of the Revised Statutes provides, in part, as follows: "Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors of administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied;" * * Section 3467 of the Revised Statutes provides as follows: "Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, 221 or for so much thereof as may remain due and unpaid." Section 3466 of the Revised Statutes gives priority to debts due to the United States over debts due to other creditors of the estate of an insolvent debtor. Section 3467 imposes personal liability upon an administrator who distributes the debtor's property to other creditors before satisfying the debts due the United States. Lillia L. Morris, 36 B.T.A. 516">36 B.T.A. 516; John H. Beasley, 42 B.T.A. 275">42 B.T.A. 275. The word "debt" as used in section 3466 of the Revised Statutes includes Federal income taxes. Price v. United States, 269 U.S. 492">269 U.S. 492; Stripe v. United States, 269 U.S. 503">269 U.S. 503. Under section 3467 of the Revised Statutes, one, who while an administrator of an estate pays other debts of the estate without satisfying the estate's debt for income tax due to the United States of which he has knowledge, despite his discharge by the probate court, is liable in his own person and estate to the extent of such unpaid tax. John H. Beasley, supra.Likewise, under section 3467 of the Revised Statutes, one, who while an administratrix of an estate pays other debts of the estate without satisfying222 the estate's debt for income tax due to the United States of which she has knowledge and thereafter distributes the remainder to persons otherwise entitled to receive the same, is personally liable to the extent of such unpaid taxes. Lillia L. Morris, supra. In Irving Trust Co., 36 B.T.A. 146">36 B.T.A. 146, it was held that a trustee in bankruptcy which distributed the assets of the bankrupt without first providing for the payment of a debt (income tax) due to the United States was not personally liable under section 3467 of the Revised Statutes where it appeared that the trustee was not chargeable with knowledge of the debt. It was there said: "'It is only when the assignee has notice of the claim of the government that he incurs personal liability for making distribution of the estate without providing for the claim.' United States v. Barns, 31 Fed. 705. The claim may be listed in the schedules of the bankrupt, notice may be given to the trustee, or the trustee may learn of the debt in some other way. If the trustee has knowledge of the debt, it matters not how that knowledge was obtained. The trustee can not disregard or ignore the debt, and if he223 does, his breach of duty renders him liable personally. United States v. Kaplan, 74 Fed. (2d) 664. 'It is enough if the trustee be in possession of such facts as that a faithful and fair discharge of his duty would put him on inquiry.' United States v. Clark, 25 Fed. Cases 447, 451. But he is not personally liable for a tax without notice which should put a reasonably prudent man upon inquiry. Livingston v. Becker, 40 Fed. (2d) 673; United States v. Eyges, 286 Fed. 683. No case is cited which holds a fiduciary personally liable where he was not chargeable with knowledge of the debt due to the United States." The foregoing was quoted with approval in Lillia L. Morris, supra, respecting the chargeability of an administratrix with knowledge of a debt (income tax) owing by the decedent. In view of the foregoing the immediate question is whether, for the purposes of section 3467 of the Revised Statutes, Minnie Viles is chargeable with knowledge of the deficiencies in tax and additions to tax here involved. In May 1950 revenue agent Thomas contacted Minnie Viles with respect to the tax liability of the decedent and224 examining his books or records, but so far as could be ascertained the decedent maintained no books or records. In his answers in the proceedings of Harvey Viles and Edith Viles Whaley, the respondent affirmatively alleged that distributions of property from the decedent's estate were made on June 13, 1950, and on July 2, 1951, to those petitioners as beneficiaries of the estate of the decedent. The allegations were admitted in the respective replies filed in those proceedings. Nothing was stated, either in the answers or in the replies, as to the amounts distributed on either of the stated dates. A copy of "CLAIMS FILED IN THE OFFICE OF THE COUNTY COURT CLERK and ORDER FIXING FEES, APPROVING FINAL SETTLEMENT AND DISCHARGING ADMINISTRATRIX" in the matter of the decedent's estate was placed in evidence. That instrument discloses that two distributions - partial and final - were made to beneficiaries of the estate. Although the dates of the distributions are not shown in the instrument, the affirmative allegations in the respondent's answers and the admissions in the replies thereto in the proceedings of Harvey Viles and Edith Viles Whaley place the dates of the distributions to those225 petitioners as June 13, 1950 and July 2, 1951. Accordingly, we conclude that the partial distributions to them, in the amount of $3,000 each, were made on June 13, 1950, and the final distributions, in the amount of $773.86 each, were made to them on July 2, 1951. Other than showing that distribution of the decedent's estate was completed on July 3, 1951, the record is silent as to when the partial distributions and final distributions were made to the five children of a deceased brother of the decedent. Aside from the county court's allowance on July 3, 1951, of a fee of $1,000 to Minnie Viles as administratrix and a fee of $1,500 to her attorneys, claims filed against the estate totaled $8,397.09 of which claims totaling $3,168.55 were filed during the period February 17, 1950 through March 23, 1950, and claims totaling $5,228.54 were filed during the period July 1950 through October 13, 1950. Other than indicating that all allowable claims against the estate were settled by July 3, 1951, the record is silent as to when any of the claims were paid. From the foregoing it appears that shortly after the revenue agent contacted her about the tax liability of the decedent and his books226 and records, Minnie Viles distributed a total of $6,000 to Inez Viles Whaley and Harvey Viles. Subtracting that amount from the amount of the total assets of the estate leaves assets amounting to $15,433.13 which were in the hands of Minnie Viles on or about July 15, 1950, when the revenue agent informed her of the deficiencies in tax and additions to tax involved herein and advised her that no distribution should be made of the remaining assets of the decedent's estate until the estate's liability therefor had been settled. Despite the fact that no settlement or payment of the deficiencies in tax and additions to tax had been made, Minnie Viles completed distribution of the decedent's estate on July 3, 1951. In view of the foregoing, it is apparent that before she completed distribution of the estate Minnie Viles had actual knowledge of the deficiencies totaling $14,897.15 here in controversy. Since at the time she acquired knowledge of the deficiencies she held assets of the estate in an amount in excess of the total deficiencies, she is liable under section 3467 of the Revised Statutes in an amount equal to the total deficiencies in controversy, namely, $14,897.15. The respondent's*227 determination with respect to this issue is sustained. Since the record shows that Inez Viles Whaley and Harvey Viles each received distributions of property from the decedent's estate in the amount of $3,773.86, thus rendering the estate unable to pay the deficiencies in controversy, they are liable as transferees of the assets of the estate of the decedent for the deficiencies in question to the extent of the amount of property so received. Accordingly, the respondent's determination on this issue is sustained. Decisions will be entered for the respondent. Footnotes1. The correct total of disbursements as listed is $23,559.96 or $2,126.83 in excess of the $21,433.13 shown as total receipts. Since disbursements could not exceed receipts, it is apparent that the disbursements contain duplication of an item or items. Claims filed against the estate as listed in an exhibit placed in evidence total $8,397.09, of which claims totaling $3,168.55 were filed during the period February 17, 1950, through March 23, 1950, and claims totaling $5,228.54 were filed during the period July 19, 1950, through October 13, 1950. The total of claims filed $8,397.09, administratrix fee $1,000, attorneys' fee $1,500 and distributions to beneficiaries of the estate $11,321.58 is $22,218.67 or $785.54 in excess of total receipts shown as $21,433.13, thus indicating that some claim or claims were disallowed in whole or in part or that there was duplication in listing claims, or possibly both.↩	01-04-2023	11-21-2020

Subsets and Splits

No community queries yet

The top public SQL queries from the community will appear here once available.